Arthur Rothstein Texas Panhandle Dust Bowl Mar 1936
“Mom and pop are running for the hills.”
• Fed Up Investors Yank Cash From Almost Everything Just Like 2008 (Bloomberg)
Mom and pop are running for the hills. Since July, American households – which account for almost all mutual fund investors – have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse. Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.“Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said.
“It may be that this is an interesting oddity but if we continue to see this it could reflect a more broad-based nervousness on the part of household investors.” Withdrawals from equity funds are usually accompanied by an influx of money to bonds, and an exit from both at the same time suggests investors aren’t willing to take on risk in any form. While retail investor sentiment isn’t the best predictor of market moves, their reluctance could have significance, Saporta said. “It might suggest households are getting nervous about holding investments, and that could lead to some real economic implications including cutting back on spending,” she said. “Should the market turn lower again, it will be interesting to see if we have the traditional move back into bonds or if households move to cash.”
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No punched pulled, other than that silly 7% GDP number.
• Everything You’ve Heard About China’s Stock Market Crash Is Wrong (Quartz)
This week’s Chinese stock market implosion has been widely viewed as a reaction to the Chinese government’s devaluing the yuan on Aug. 11—a move many presume was a frenzied bid to lower export prices and strengthen the economy. This interpretation doesn’t stand up to scrutiny. First, Chinese investors haven’t been investing based on how the economy is doing, but rather, based on what they think the government will do to prop up the market. The crash, termed “Black Monday,” was more likely a reaction to the central bank’s failure over the weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in February and April had boosted stock prices.
The government eventually caved and announced a cut on Tuesday (Aug. 25). Second, the crash happened nearly two weeks after the devaluation, and the government only let the yuan depreciate by about 3% before swooping in and propping up its value again—which hardly helps exporters since the currency’s value effectively rose some 14% in the last year.
The devaluation probably had more to do with breaking the yuan’s tightly managed peg to the US dollar, an obligation that has been draining the economy of scarce liquidity as capital outflows swell. Both moves—the government pulling back from its market bailout and the currency devaluation—stem from the same ominous problem: China’s leaders are scrambling to find the money to keep its economy running. To understand the broader forces that led to this predicament, here’s a chart-based explainer tracing its origins:
China used its exchange rate to stoke growth
China has long pegged its currency to the US dollar at an artificially cheap rate. Keeping the yuan cheaper than it should be, even as export revenues and foreign investment gushed in, allowed China to amass huge foreign exchange reserves, as we explain in more detail here:
A cheap currency has also powered China’s investment-driven growth model (more on this here). By paying more yuan than the market would demand for each dollar, the People’s Bank of China (PBoC) created extra money out of thin air, sending it sloshing around in the economy. (Meanwhile, the PBoC prevented this from driving up inflation by setting its bank reserve requirements unusually high, as we explain here.)
Easy money, easy lending, easy growth. This was especially true after the global financial crisis hit, when China pumped 4 trillion yuan ($586 billion in 2008 US dollars) into its economy to protect it from the fallout. The resulting double-digit growth attracted foreign investment and hot money inflows, raising demand for yuan. To buoy its faltering export industry, the PBoC had to buy even more dollars to prevent surging yuan demand from driving up the local currency’s value.
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“..investment spending as a percentage of GDP is unprecedented in history, creating massive overcapacity.”
• President Xi Had Too Much Riding On China’s Stock Market Boom (Satyajit Das)
The real damage in China’s stock market crash is subtle, bringing into question the fundamental economic model, the reform agenda and the political authority of its leadership. Over three millennia, China’s leaders have ruled by the mandate of heaven. Each new dynasty, like that of current president Xi Jinping, must establish a new dynasty, consolidating power and authority. This requires ensuring general prosperity, especially for key groups whose support is essential. The officially sanctioned “state bull market”, or “Uncle Xi bull market”, was enthusiastically cheered by state media and brokers – encouraging participation. But instead of diverting attention from other existing challenges, the stock market correction has drawn attention to challenges such as the end of the property boom.
Chinese real estate represents 23% of GDP – a proportion around three times that in the US at the height of its property bubble. Prices appear inflated relative to incomes and rental yields. Despite vacancy rates of more than 20% and inventories equivalent to five years’ demand in some cities, new housing starts are around 12% above sales. In China, investment spending as a percentage of GDP is unprecedented in history, creating massive overcapacity. The accompanying credit bubble is an immediate concern. By 2014, total Chinese debt was $28trn, or 282% of GDP – up from $7trn (158% of GDP) in 2007 and $2trn (121%) in 2000. The $20trn-plus increase since 2007 represents one-third of the rise in global debt over the period.
The stock market falls raise the risk of significant problems within the financial system. This will ultimately affect China’s potential growth, which has, since 2009, contributed greatly to global economic activity. The episode may slow down or defer necessary economic reforms. A liquid and well-functioning stock market is essential for appropriate pricing of capital and reducing excessive reliance on bank loans. It is important in any possible privatisation of state-owned enterprises, and attracting foreign investors and long-term, stable capital inflows. The fear is that China’s proposals are rhetoric, primarily for foreign consumption. In 2013 the Communist Party stated that market forces must play a “decisive role” in allocating resources. But the market crash and the response suggest that the Chinese authorities are likely to rely more on Communist dogma than market forces when events develop in an unwanted way.
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Not very useful experts here.
• Chinese President Xi Jinping Amasses Power, Hits ‘Perfect Storm (CNBC)
The yuan, China’s market, and global confidence in Beijing are all dropping. It’s not an easy time to be the leader of the world’s second-biggest economy. President Xi Jinping has consolidated more power within his country than any other Chinese leader since the early ’90s, just in time for a major economic slowdown and financial markets turmoil. Now, Chinese leadership is under “immense” pressure from within and without, John Minnich, East Asia analyst at geopolitical intelligence firm Stratfor, told CNBC. “It’s kind of a perfect storm where a lot of these things are hitting,” he said. “None of these issues by themselves would be enough to apply pressure, but together….”
A deadly industrial explosion in Tianjin earlier this month cast further doubt on Xi’s capability to control local officials, a politically inopportune event during a key moment in his campaign to reform China’s economy and environmental practices at the same time. “We’re approaching a moment where, in the next couple months, if there is going to be resistance from within the leadership against Xi, we’re going to see (it) emerging more strongly,” Minnich said. And as this moment has approached, Beijing’s handling of the stock market crash—which saw everything from liquidity interventions to arrests for allegedly malicious selling—represented the first big stumble for the Xi administration, said Nicholas Consonery, Asia director for the Eurasia Group.
But even with this “perfect storm” of resistance forming, Xi appears to have already consolidated sufficient power to achieve his reform goals, experts told CNBC. While Eurasia Group’s Consonery said the equity market interventions were “definitely” counterproductive, he’s still optimistic about Xi’s plans to manage broader economic headwinds. “I’m not overly panicked about their ability to manage through these problems,” he said, adding that it’s unlikely there will be any changes at the top of the country’s leadership. Minnich agreed that Xi and his close allies won’t lose control of the situation—especially given his continuing popularity with the regular citizenry—but his capacity to institute reforms may be limited by political resistance. “Xi is not all-powerful,” Minnich said.
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“..the growth strategy for the Euro and the Eurozone is based on a downward adjustment of costs (mainly labour costs) and prices..”
• The Chinese Bubble (Marco Zanni, M5S in Europe)
“What’s happening in China? Many people are asking this question, given the sequence of happenings in the Far East. In brief, what’s happening now is what I have been predicting for some time now: the bursting of a financial and property bubble that will have an impact on the whole world by the end of the year 2015. These are the effects of “laissez-faire” capitalism with a fictitious economy based on finance, with a development model that has been prevalent throughout the 20th century and in the first part of the 21st century. This is what has dragged us into the abyss. China has not understood its error. This is the same mistake made by Italy at the end of the 1970s. It’s the same mistake made by Gorbachev in the middle of the 1980s. If you open your borders to foreign capital and you liberalise finance, this is the result.
You will no longer have control over the macroeconomic, economic and financial variables of your own country and of your financial system. These things will no longer be guided by choices relating to the growth in the living standards of the population, in its wealth and in the real economy, but they will be guided by speculation by the few to the detriment of all the others. And China’s response to this error seems to be going in the direction of “more reliance on the free market and “more liberlisation”, a choice that will drag them into the abyss along with the rest of the world. But coming back to what’s happening here today, the biggest crisis is not in the Eurozone, with the situation in Greece still fresh in the inside pages of the newspapers, but it’s what’s happening in China, with the collapse of the Stock Market in Shanghai and the bursting of the financial bubble.
The events in China have set off a global wave of share market collapses, and these will surely be the cause of a further worsening of the conditions in the Eurozone. And what’s the cause? The cause is the model underlying the single European currency, as I’ll explain. As we’ve been taught (or has this just been imposed on us?) by Merkel, Draghi, Juncker and the like, the growth strategy for the Euro and the Eurozone is based on a downward adjustment of costs (mainly labour costs) and prices, that’s the well-loved internal devaluation, to increase competitiveness and thus making European products more attractive abroad. But the obvious error in this strategy, that the knowing and criminal short-sightedness of the European leaders didn’t want to see in 2009, is that this strategy depends exclusively on external demand, because it’s a growth strategy based solely on exports.
By now, the failure of this approach is clear to everyone, whether they are technically qualified or just lay people, but the criminals in Brussels are going ahead unperturbed. Even a child would understand that in a world affected by crises, a world in which China with a market of 1.5 billion consumers, is collapsing under the blows resulting from the explosion of the financial and real estate bubble, it’s just foolish to base one’s growth on internal devaluation and external demand. A startling example of this failure is surely seen in Finland, a country that is perceived to be one of the virtuous ones in the Eurozone. It is falling to pieces with each useless internal devaluation. The touch paper has been lit. We must prepare for the worst. And perhaps in September the Federal Reserve will increase interest rates thus definitively causing the explosion of another running sore: the debt in Emerging Markets.”
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China’s car market is imploding at the very time investments are set to hugely increase production.
• There Can Be No Denying China’s Economy Is Slowing Down (Guardian)
The China slowdown is real and central banks pumping up stock markets with cash and confidence is not going to reverse that situation. At some point, investors from Shanghai to New York, via London, will need to recognise that China is no longer a powerhouse for global growth. Unfortunately, it looks as if the Jackson Hole meeting of central bankers in Wyoming this weekend will be an exercise in denial. Monday’s crash and the worst month for the FTSE 100 since 2012 will be considered bumps on the road that can be massaged away with some positive talk and extra dollops of cheap borrowing. The Bank of England governor, Mark Carney, is intent on raising interest rates next year. His talk at Jackson Hole is expected to be a study in calm with an emphasis on the positives messages from the UK economy, which is growing robustly, in the words of most City economists.
At the moment, the spotlight is on the Federal Reserve, which is the first in the queue to start raising rates. The US central bank’s message is much the same. Yes, there will be a short delay to the expected date for a first interest rate increase, but all the signals are still pointing towards a normalisation of global growth, wages, inflation and interest rates. There are other signals to consider, however. A shrug is not the appropriate reaction when Ford says it expects annual car sales in China to decline for the first time in 17 years. Likewise when Volkswagen recently revealed its first slide in deliveries to China in a decade. China is the world’s largest car market and a bellwether for the financial health and confidence of most consumers. Chinese car production in June was down 5.3% compared with the previous month, and sales slumped 6.1% over the same period.
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Fiscal stimulus in China? More debt? Really?
• Citigroup Braces For World Recession, Calls For Corbynomics QE In China (AEP)
China has bungled its attempt to slow the economy gently and is sliding into “imminent recession”, threatening to take the world with it over coming months, Citigroup has warned. Willem Buiter, the bank’s chief economist, said the country needs a major blast of fiscal spending financed by outright “helicopter” money from the bank to avert a deepening crisis. Speaking on a panel at the Council of Foreign Relations in New York, Mr Buiter said the dollar will “go through the roof” if the US Federal Reserve lifts interest rates this year, compounding the crisis for emerging markets. Professor Zhiwu Chen from Yale University told the same event that China will be doing well if it can contain its slow-motion crisis to mere stagnation for the next 10 years, given the dangerous levels of debt in the system.
“If the Chinese government is able to manage a Lost Decade with very low growth – or no growth – without an economic crisis, it will be a policy achievement,” he said. Prof Chen said a Western-style financial collapse in China is “highly unlikely” since the banks are largely government-owned and losses will be absorbed by the state. There is a loose parallel with Japan, where the economy slid into a deflationary quagmire and lost its economic dynamism but never suffered a full-blown financial crash. In Japan’s case the denouement was averted by keeping “zombie banks” on life-support. The colourful Mr Buiter – a former UK rate-setter – said China has bungled both fiscal and monetary policy, and is now “sliding into recession”. This would be fall in growth to less than 4pc on the “mendacious” figures published by Beijing, but in reality lower.
“They will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2pc, which is in my definition a global recession,” he said. “The only thing likely to stop it going into recession is a large consumption-oriented fiscal stimulus funded through the central government, preferably monetized by the People’s Bank of China. Despite the economy crying out for it, the Chinese leadership is not ready for this,” he said. This appears to be a call for “Corbynomics” in China. A similar policy was implemented by Takahashi Korekiyo in Japan in the early 1930s, with some success. Whether China really is in such dire straits is hotly contested, even within Citigroup itself. The bank’s equity team said the August sell-off on global markets is a typical late-cycle correction rather than the onset of a major downturn.
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• Lies You Will Hear As The Economic Collapse Progresses (Brandon Smith)
It is undeniable; the final collapse triggers are upon us, triggers alternative economists have been warning about since the initial implosion of 2008. In the years since the derivatives disaster, there has been no end to the absurd and ludicrous propaganda coming out of mainstream financial outlets and as the situation in markets becomes worse, the propaganda will only increase. This might seem counter-intuitive to many. You would think that the more obvious the economic collapse becomes, the more alternative analysts will be vindicated and the more awake and aware the average person will be. Not necessarily…
In fact, the mainstream spin machine is going into high speed the more negative data is exposed and absorbed into the markets. If you know your history, then you know that this is a common tactic by the establishment elite to string the public along with false hopes so that they do not prepare or take alternative measures while the system crumbles around their ears. At the onset of the Great Depression the same strategies were used. Consider if you’ve heard similar quotes to these in the mainstream news over the past couple months:
• John Maynard Keynes in 1927: “We will not have any more crashes in our time.”
• H.H. Simmons, president of the New York Stock Exchange, Jan. 12, 1928: “I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise, and that prosperity in this country must necessarily diminish and recede in the near future.”
• Irving Fisher, leading U.S. economist, The New York Times, Sept. 5, 1929: “There may be a recession in stock prices, but not anything in the nature of a crash.” And on 17, 1929: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”
• W. McNeel, market analyst, as quoted in the New York Herald Tribune, Oct. 30, 1929: “This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.”
• Harvard Economic Society, Nov. 10, 1929: “… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.”
Here is the issue – as I have ALWAYS said, economic collapse is not a singular event, it is a process. The global economy has been in the process of collapse since 2008 and it never left that path. Those who were ignorant took government statistics at face value and the manipulated bull market as legitimate and refused to acknowledge the fundamentals. Now, with markets recently suffering one of the greatest freefalls since the 2008/2009 crash, they are witnessing the folly of their assumptions, but that does not mean they will accept them or apologize for them outright. If there is one lesson I have learned well during my time in the Liberty Movement, it is to never underestimate the power of normalcy bias.
There were plenty of “up days” in the markets during the Great Depression, and this kept the false dream of a quick recovery alive for a large percentage of the American population for many years. Expect numerous “stunning stock reversals” as the collapse of our era progresses, but always remember that it is the overall TREND that matters far more than any one positive or negative trading day (unless you open down 1000 points as we did on Monday), and even more important than the trends are the economic fundamentals.
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When are we going to call that 2% goal that is never ever met for what it is: stupid? How about outright mendacity?
• Ultra-Low German Inflation Keeps Pressure On ECB (Reuters)
German inflation remained close to zero in August, keeping pressure on the European Central Bank to consider additional stimulus measures as the falling cost of oil and a slowdown in China put the brakes on prices. Preliminary data for Europe’s largest economy showed on Friday that annual consumer price inflation harmonised to compare with other European countries (HICP) held steady at 0.1%. The figure, which matched a Reuters consensus forecast, remains far below the ECB’s inflation target for the broader euro zone of just below 2% over the medium term. That, along with data earlier in the day showing EU-harmonised prices fell 0.5% year-on-year in Spain, will give the central bank pause for thought as it prepares for its six-weekly policy meeting on Thursday.
Before then, policymakers will also have preliminary inflation data for the euro zone to digest. That is due on Aug. 31 and economists polled by Reuters expect the reading to hold steady at 0.2%. Economists said they did not expect the ECB to beef up next week the bond-buying programme it launched in March, though such moves were possible in time. The central bank’s chief economist Peter Praet said earlier this week that it stands ready to do more and has pledged to bolster the programme if necessary. ING economist Carsten Brzeski said the slump in commodity prices meant headline inflation in Germany could drop below zero in the coming months. “While low inflation or even negative inflation rates are a blessing for German consumers, they could become a new headache for the ECB,” he said.
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Smothered by supranationals.
• The Decades-Old Tension Threatening To Rip Europe Apart (Telegraph)
Very few arguments are only about the subject ostensibly under discussion. The volcanic bust up between Greece and its creditors was, of course, about the terms of the country’s various bailouts. But it was also a particularly dramatic venting of the tectonic tensions at the heart of the European project. Throughout the bickering, politicians of all stripes exhorted each other to be “good Europeans”, a deceptively bland phrase with a long and complicated history. Trying to untangle its nuanced meaning takes us beneath the surface of the Greek crisis and to the vast contradictions that are threatening to tear Europe apart. David Krell chose The Good European as the title of his book about Friedrich Nietzsche, the much-maligned German philosopher who first coined the phrase.
Despite being posthumously embraced by some particularly malevolent Europeans, the nineteenth century thinker was, according to Krell, “a fierce critic of nationalism, imperialism and militarism” who was concerned that the old ideas of nations and fatherlands might obstruct “the historic process of European unification”. This process was somewhat curtailed by some of Nietzsche’s most misguided fans in the second quarter of the twentieth century, which provided stark lessons about unchecked markets (which contributed to the Wall Street Crash of 1929 and the Great Depression that followed it) and excessive state power. Germany’s reaction to the turmoil was twofold – a heightened belief in the importance of European integration and the birth of a new economic orthodoxy called ordoliberalism.
This little-understood philosophy is often portrayed by critics of Germany as a kind of unbending dogma. Yanis Varoufakis, Greece’s mayfly finance minister, was having a dig at his German counterpart Wolfgang Schäuble in particular and ordoliberalism in general when he said: “To him, the rules are God-given.” But, at its root, ordoliberalism is simply a belief in shielding monetary stability and a balanced budget from political pressure; it reached its apogee in 1957 when the Bundesbank was made independent, a move that many other counties, including the UK, have belatedly copied.
Ludwig Erhard, West Germany’s first finance minister who helped fashion the country’s post-war Wirtschaftswunder [economic miracle] and popularise ordoliberalism, described the role of the state as like that of a football referee who ensures that a clearly defined and constant set of rules are adhered to without personally getting involved in the game. Alexis Tsipras argued that the January election and the July referendum demonstrated that Greece had rejected the terms of the country’s bailouts. To ordoliberals, the Greek prime minister was campaigning on a promise to re-write the offside rule. There are, however, important counterpoints to the ordoliberal worldview. The German economy is often held up as an example to be followed – Yvette Cooper, one of the Labour party leadership hopefuls did that just earlier this month. But there’s as much to be concerned about as admired.
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Oh, where are the days of DSK…
• How The IMF’s Misadventure In Greece Is Changing The Fund (Reuters)
[..] The greatest angst was over the issue of debt restructuring – or lack of it, some IMF officials recall. “It was absolutely clear in the (IMF) building – not to everybody, but to the vast majority of us – that there was a need for debt restructuring,” the senior IMF economist said. In plain English, “restructuring” means that creditors forgive borrowers part of their debts, cutting deals to accept less than they are owed. But the Europeans opposed restructuring. They feared European banks loaded with Greek bonds could collapse, and argued restructuring would spread Greece’s financial woes to other parts of the eurozone, spurring other countries to ask for their own debt deals. So when the IMF developed its detailed program on Greece, it included no debt restructuring.
The initial plan assumed Greece would repay every euro it had borrowed – not because the IMF thought it could or would, but because the Europeans refused to countenance anything else. “The authorities upfront ruled out that option and no alternative options were discussed and developed,” said Poul Thomsen, head of the IMF’s Greek program, in his presentation at the board meeting of May 9, 2010, according to minutes of the session. “Fundamentally, our assumption is that we can put Greece … on a credible fiscal path.” Despite the grumblings of some board members, the IMF agreed that debt restructuring would have to wait. But the initial Greek program went off track, just as sceptical board members had feared. The economy tanked and the Greek government failed to deliver fully on reforms, such as privatizing state assets and opening up markets.
According to former Greek Finance Minister Papaconstantinou, Strauss-Kahn finally decided to get tough with Merkel and insist on debt restructuring in May 2011. Then the unexpected intervened: As Strauss-Kahn was on his way to Europe to meet the German chancellor, he was arrested in New York after a hotel maid alleged he had sexually assaulted her. Under intense media scrutiny, Strauss-Kahn quit. (In 2011 New York prosecutors dropped charges against him and he reached a settlement with the maid.) The debt meeting never happened. Some involved in the talks think the missed chance, as well as turmoil within the IMF following Strauss-Kahn’s departure, caused a fateful delay in the attempt to get Europe to embrace debt relief.
“I am not saying that Merkel would have been convinced,” Papaconstantinou said of the cancelled meeting. “But the discussion could have started much sooner.”In the eyes of Greek officials, senior figures at the IMF and in the troika did not understand the limitations of the Greek economy. As Greece repeatedly fell short of economic targets, troika officials in Athens tried to explain the realities to their bosses, according to both Greek and troika officials. Greece’s fractured politics, voters’ opposition to austerity and the vested interests of wealthy oligarchs made swift reform difficult, they said. The message did not get through. A senior IMF official who used to run policy told Reuters: “We were not fully aware that these guys (the Greeks) did not have the system, the controls, the bureaucracy to deliver.”
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He’s a tad less thick than the rest?!
• Why I Support Corbyn For UK Labour Leader (Steve Keen)
There was a time when most educated people knew that the Earth was the center of the universe. There was a sophisticated “Geocentric” model, known as the “Ptolemaic system”, that predicted to very high accuracy the observed movement of all the objects in the Heavens, as they purportedly orbited the Earth on perfect crystalline spheres. 500 years ago, anyone who proposed an alternative model—in which the Sun was the center and the Earth was just another planet orbiting it—was derided as a heretic and a madman. The core concept did require a bit of a modification to fit the data—the pesky planets (the word “planet” means “Wanderer” in ancient Greek) had to rotate on secondary crystalline spheres, which rotated on the main Earth-centric spheres in what were called “epicycles”.
But if you got the center of revolution and speed of rotation of the two classes of spheres (and a few other nuances) just right, you could predict where Mars and Venus were going to appear in the sky for centuries in advance. It was, on its own terms, a very “scientific” theory. Practicing it took intelligence, careful attention to observation, and (for its day) great mathematical sophistication. But it was fundamentally wrong. The model appeared to fit the data (except for comets, which it dismissed as “atmospheric phenomena”), but it was completely wrong about the structure of the Universe. Astronomy has evolved beyond recognition since those days. We still speak of “sunrise”, but we know that what is really happening is “earth rotate”.
Anyone who actually believes that the Sun does orbit the Earth deserves the ridicule of being called a member of the Flat Earth Society. If only economics had grown up as much. Flat Earth views still abound in economics, and because of them, Jeremy Corbyn is being derided as a “deficit denier”, even by members of his own party such as Frank Field. “Deficit denier” is a nice turn of phrase. It effectively equates someone who argues that the government deficit is not a problem to “Climate Change Deniers”, whose rejection of the evidence and theory on Global Warming is clearly pseudo-scientific behavior. It implies that his opponents have science on their side, while Corbyn is the science-denier.
There is one way in which Corbyn’s critics are correct: to some extent, the science is on their side, and not his. But that “science” is closer to Ptolemy’s views of the Universe than what we know to be true about the Universe today.
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Any president anywhere with an 8% approval rating should be forced to resign.
• Brazil Falls Deep Into Recession (CNN)
Brazil is going bust. Its currency is plummeting, unemployment is rising, its stock market is down 20% from a year ago and its president, Dilma Rousseff, has an 8% approval rating — the lowest since 1992 when Brazil’s president was impeached. Once a major economic success story, Brazil sank into recession on Friday. Its economy contracted 1.9% in the second quarter compared to the first. It was the second consecutive quarter of contraction. “Pretty much everything is turning down,” says Neil Shearing, chief emerging market economist at Capital Economics. Compared with the same quarter last year, its economy shrank 2.6%, by far the worst performance in years, according to government statistics published Friday.
Here are the major reasons why Brazil, the second largest economy in the Western Hemisphere behind the U.S., is now in a recession:
1. Brazil’s exports to China had exploded over the last decade. Now that China’s economy is slowing, it needs fewer exports from Brazil.
2. Brazil’s state-run oil company, Petrobras, is in a massive corruption scandal tied to many members in Rousseff’s political party. The large money-laundering scandal spans across oil, business and political leaders in the country.
3. Prices for all of Brazil’s key commodities – oil, sugar, coffee, metals – have tanked. Commodities are the engine behind Brazil’s economy and they’ve lost value fast.
The recession comes as Brazilians are holding mass protests calling for Rousseff’s impeachment. Although corruption isn’t new in Brazil, the scale of the Petrobras corruption is large. Petrobras officials said earlier this year that the company lost $2 billion just in bribes. In July, the scandal worsened: Brazilian police arrested executives at the country’s electric utility, Electrobras, with charges related to money laundering at Petrobras. As investigators dig deeper, they’re finding more and more officials at other agencies tied to the corruption case. While it’s just one corruption scandal, it’s reach has eroded business confidence. Investment fell nearly 12% in Brazil in the second quarter compared to a year ago, according to Capital Economics. Its currency, the real, has lost 25% of its value against the dollar so far this year. Imports have fallen about 12% from a year ago. For Brazilian companies that have borrowed in U.S. dollars, a plunging currency makes paying back the debt much more expensive.
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To answer this, Nouriel, you might first want to ask why it doesn’t have one already.
• Does The World Need A Financial Early Warning System? (Roubini)
A comprehensive assessment of a country’s macro investment risk requires looking systematically at the stocks and flows of the national account to capture all dangers, including risk in the financial system and the real economy, as well as wider risk issues. As we have seen in recent crises, private risk taking and debt are socialised when a crisis occurs. So, even when public deficits and debt are low before a crisis, they can rise sharply after one erupts. Governments that looked fiscally sound suddenly appear insolvent. Using 200 quantitative variables and factors to score 174 countries on a quarterly basis, we have identified a number of countries where investors are missing risks – and opportunities.
China is a perfect example. The country’s home developers, local governments and state-owned enterprises are severely over-indebted. China has the balance-sheet strength to bail them out but the authorities would then face a choice: embrace reform or rely once again on leverage to stimulate the economy. Even if China continues on the latter course, it will fail to achieve its growth targets and will look more fragile over time. Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing economy-wide debt burden and a weak and worsening business environment. The corruption scandal at energy giant Petrobras is finally causing ratings agencies to reassess Brazil but the move comes too late, and their downgrades probably will not be sufficient to reflect the true risk.
Other emerging markets also look fragile and at risk of an eventual downgrade. In the eurozone, shadow ratings already signalled red flags in the late 2000s in Greece and the other countries on the periphery. More recently, Ireland and Spain may deserve to be upgraded, following fiscal consolidation and reforms. Greece, however, remains a mess. Even with substantial reform to improve its growth potential, it will never be able to repay its sovereign debt and needs substantial relief. An assessment of sovereign risk that is systematic and data-driven could help to spot the risks that changing global headwinds imply. To that extent, it provides exactly what the world needs now: an approach that removes the need to rely on the ad hoc and slow-moving approach of ratings agencies and the noisy and volatile signals coming from markets.
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Europe doesn’t want to aid refugees.
• EU ‘Snubbed’ Greek Plan To Tackle Refugee Crisis (Kath.)
As Greece fends off criticism for its handling of a burgeoning refugee crisis, sources in the Hellenic Police and Coast Guard have told Kathimerini that a plan was jointly presented to the European Union’s border agency, Frontex, more than two months ago. Kathimerini understands that a team of Greek officials visited Frontex headquarters on June 18 and presented a plan for strengthening patrols at sea and on land on Greece’s porous Aegean border with Turkey, a major transit point for refugees from the Middle East trying to reach Europe. The plan called for officers to be transferred from the Greek police and other European forces to help patrol borders and process arrivals.
It also requested fingerprinting equipment and vehicles to speed up identification and transportation on the island of Lesvos, one of the islands bearing the brunt of the influx. The sources told Kathimerini that although Frontex approved the proposal, it was unable to get other European governments to endorse it. The agency is said to have told Greek officials to start implementing the plan, promising to cover the cost of the Greek police officers’ transfer. It was also suggested that Frontex has already disbursed 100,000 euros to this end, though this was refuted by government sources.
An official at the Ministry for Citizens’ Protection on Thursday said that the issue will be addressed during a visit by Frontex chief Fabrice Leggeri to Athens next week. Meanwhile in a related development, outgoing Alternate Minister for Migration Policy Tasia Christodoulopoulou on Thursday said that she expects Greece to be in a position to receive €30 million in EU funding to deal with the influx within the next few days. She said the agency required by the European Commission to manage the funds is ready but is still waiting for some decisions to be published in the Government Gazette before it can become operational.
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“The European search and rescue operation FRONTEX had saved tens of thousands of lives this year..” Oh, really? Let’s see some solid proof of that.
• Mediterranean Refugee And Migrant Numbers Pass 300,000 In 2015 (Reuters)
The number of refugees and migrants crossing the Mediterranean to reach Europe has passed 300,000 this year, up from 219,000 in the whole of 2014, the U.N. refugee agency UNHCR said on Friday. More than 2,500 people have died making the crossing this year, not including about 200 who are feared to have drowned off Libya on Thursday. That compares with 3,500 who died or went missing in the Mediterranean in 2014. “The way people are being packed onto boats is causing their deaths,” UNHCR spokeswoman Melissa Fleming told a regular U.N. briefing. People fleeing Syria had long sought refuge in neighboring countries, hoping to return home, but were increasingly opting to head straight for Europe, a choice compounded by tighter entry rules imposed by Syria’s neighbors, which already have huge refugee populations.
“In Lebanon there are now restrictions whereby you really can’t enter unless you have work or evidence that you have a long term place to stay or a plane ticket out,” Fleming said. “If you show up at the border of Lebanon, if you have a plane ticket, they let you in. You go straight to the airport, fly to Turkey, get on the boats, go to Greece, and that’s where we’re seeing a lot of the flow.” Other big refugee-hosting countries, which include Jordan, Turkey and Iraq, were “just over-full with refugees, and they are receiving far too little support from us because we’re underfunded”, Fleming said. The dangers of the sea route across the Mediterranean have been highlighted by the ever growing death toll.
A Red Crescent official said on Friday Libya had recovered 82 bodies washed ashore after a boat packed with migrants sank near the western town of Zuwara. On Thursday, 51 people suffocated in the hold of a boat. Survivors said smugglers had beaten them to force them into the hold and extorted money from anyone wanting to come out of the hold to breathe, Fleming said. One survivor, an Iraqi orthopedic surgeon, said he paid €3,000 to come up onto the top deck with his wife and two-year-old son. The European search and rescue operation FRONTEX had saved tens of thousands of lives this year, but EU countries must do more to act together to deal with the problem, which UNHCR has repeatedly said would be manageable with the right action.
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The URL includes the word refugees, the text talks about refugess, but the headline is still migrants. And still: “Europe needs a comprehensive global refugee policy..” ignores the fact that Europe doesn’t want one.
• Europe’s Halting Response to Migrant Crisis Draws Criticism as Toll Mounts (NYT)
The daily toll among refugees and migrants desperately trying to reach Europe – 71 suffocated in a truck in Austria and 150 drowned off Libya this week – has dramatically underscored the European Union’s scattered, halting response to increasing waves of asylum seekers. With tens of thousands of people leaving war-torn or impoverished countries to seek asylum or a better life in Europe, criticism of the bloc’s division and dysfunction is now accelerating, as the number of deaths mounts, crossing 2,500 this year. Chancellor Angela Merkel of Germany has said that the migration crisis is a bigger test for the European Union than even the Greek financial meltdown.
She said on Friday that European interior ministers meeting this weekend would be looking into “rapid changes to the asylum system,” and that European leaders could hold an emergency summit meeting “if the preliminary work is done.” And none too soon. There is no European Union standard for asylum; no common list of countries regarded as in conflict, and thus more likely to produce refugees; and no collective centers where asylum seekers can be met, housed, fed and screened. Instead, with much of Brussels still on vacation, a kind of free-for-all has set in, with some countries welcoming and others not, some taking legal responsibility for refugees and others flouting international law. “While Europe is squabbling, people are dying,” said Alexander Betts, a professor and director of the Refugee Studies Center at Oxford University.
“For the first time in its history, the E.U. is facing a massive influx of refugees from outside the region, and the E.U. asylum and immigration framework is poorly adapted for it.” Front-line states like Greece, Italy and now Austria and Hungary are “overwhelmed and increasingly unwilling to take more responsibility,” Mr. Betts said. “Some European states are failing to keep to international law, and there needs to be a more equitable sharing of responsibility.” In contradiction to the rules of the Dublin Regulation, formerly known as the Dublin Convention, some countries are simply allowing migrants to freely pass through their territory to richer European states without even trying to ascertain whether they are refugees entitled to asylum or economic migrants, who can be deported home.
Under the convention, the countries where migrants first enter are supposed to screen them to decide who is a legitimate asylum seeker or refugee, but those countries are overwhelmed. Some countries, like Sweden and Germany, are being generous with their acceptance of refugees, but warn that they cannot be this generous forever. Other countries, like Britain, are strictly applying regulations to dissuade migrants and asylum seekers, while opposing a European Commission proposal in June for mandatory quotas for settlement, to help share the burden. Other countries, like Slovakia and Poland, have said they want only Christian refugees.
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“.. it is illegal either to cross the border on foot or to give someone without papers a lift, a problem Syrian refugees have sidestepped by using bicycles..”
• 133 Syrian Refugees Cross Norway’s Arctic Border On Bicyles (Local.no)
More than 100 Syrian refugees have crossed the Arctic border into Norway from Russia on bicycles, exploiting a loophole in the country’s border regulations. The Storskog border station – just two hours drive from the Arctic City of Murmansk in Russia’s far north – is Norway’s only legal border crossing with Russia. According to border agreements, it is illegal either to cross the border on foot or to give someone without papers a lift, a problem Syrian refugees have sidestepped by using bicycles. “It is not news to us that tourists cross the border on bicycles, but recently we’ve also started to see some asylum seekers coming by bicycle,” Gøran Stenseth, one of the border officials, told the local Sør-Varanger Avis newspaper.
So far this year, 133 asylum seekers have entered Norway though Storskog on bicycles. According to local police, most of them are Syrian refugees. Hans Møllebakken, head of the local police in Kirkenes, said that he had already arrested several drivers who had driven asylum seekers across the border. “We have looked into the the legislation, and we have decided that from now on we will press charges against drivers who bring them across the border,” he said “We arrested someone on Thursday, and we are working on the case. It could be that people are making money off giving these lifts, and in that case, we are talking about human trafficking.”
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“..there’s the risk of a catastrophe with 200 million arrivals in the next few years (source: Corriere della Sera)”
• The Merkel Plan (Beppe Grillo’s Blog)
The migration of biblical proportions will not be stopped by tanks or barbed wire or the sinking of boats. It hasn’t just come out of the blue. The EU and the various national governments seem to have suddenly woken up to it and they are exploiting the situation as though they were not the primary cause of the problem. There’s been no whisper of any condemnation of the causes, nor of a long-term strategy to integrate these people into a Europe that is devastated by unemployment. Do we want to create massive ghettos and banlieues? There’s no action beyond a bit of fluffy charity. People are ignoring that this route will lead the Europeans to brush aside the existing political parties and bring about the rise in neonazi movements.
Now attention is focusing on the revision of the Dublin Regulation (that obliges a refugee to stay in the country of arrival). Only now is there a request to speed up the procedures to recognise the refugees (in Italy, thanks to Alfano‘s incompetence, this takes about two years). Measures that the M5S has been calling for all along, though it has been ridiculed or ignored or accused of racism. But where have Merkel and Hollande been up until now? In a black hole? On Mars? Without courageous actions, actions that are new and for the long-term, there’s the risk of a catastrophe with 200 million arrivals in the next few years (source: Corriere della Sera ).
There’s an obligation to give these people the best possible life opportunities in their own nations with targeted investment (health serices, infrastructure, delocalisation of manufacturing companies) with a new Marshall Plan that we could put into action as the “Merkel Plan“ financed with a percentage of the national GDP of each country to be devoted to Africa and monitored by a Control Committee. Other actions are the elimination of weapons production (Italy is the fifth producer in the world) and the end of western interference with peace missions and the total subordination of the Mediterranean and the Middle East to American interests. The flow of refugees from Afghanistan, Syria, Iraq and Lybia, is the result of our wars and our weapons. It’s time for us to examine our consciences.
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