Oct 122017
 
 October 12, 2017  Posted by at 2:26 pm Finance Tagged with: , , , , , , , ,  5 Responses »
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Fan Ho East meets west 1963

 

For those of you who don’t know Andy Xie, he’s an MIT-educated former IMF economist and was once Morgan Stanley’s chief Asia-Pacific economist. Xie is known for a bearish view of China, and not Beijing’s favorite person. He’s now an ‘independent’ economist based in Shanghai. He gained respect for multiple bubble predictions, including the 1997 Asian crisis and the 2008 US subprime crisis.

Andy Xie posted an article in the South China Morning Post a few days ago that warrants attention. Quite a lot of it, actually. In it, he mentions some pretty stunning numbers and predictions. Perhaps most significant are:

“only China can restore stability in the global economy”

and

“The festering political tension [in the West] could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.”

Here are some highlights.

 

The bubble economy is set to burst, and US elections may well be the trigger

Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising inequality and made mass consumer inflation less likely. Since the 2008 financial crisis, asset inflation has fully recovered, and then some.

The US household net worth is 34% above the peak in 2007, versus 30% for nominal GDP. China’s property value may have surpassed the total in the rest of the world combined. The world is stuck in a vicious cycle of asset bubbles, low consumer inflation, stagnant productivity and low wage growth.

Let that sink in. If Xie is right, and I would put my money on that, despite all the housing bubbles elsewhere in the world, the Chinese, who make a lot less money than westerners, have pushed up the ‘value’ of Chinese residential real estate so massively that their homes are now ‘worth’ more than all other houses on the planet. Xie returns to this point later in the article, and says: “In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. “.

We’ll get back to that. But it suggests that Chinese, if they spend half their income on housing, which is probably not that crazy an assumption, must work 100 to 200 years to pay off their mortgages. Again, let that sink in.

The US Federal Reserve has indicated that it will begin to unwind its QE assets this month and raise the interest rate by another 25 basis points to 1.5%. China has been clipping the debt wings of grey rhinos and pouring cold water on property speculation. They are worried about asset bubbles. But, if recent history is any guide, when asset markets begin to tumble, they will reverse their actions and encourage debt binges again. [..] most powerful people in the world operate on flimsy assumptions.

Despite low unemployment and widespread labour shortages, wage increases and inflation in Japan have been around zero for a quarter of a century. Western central bankers assumed that the same wouldn’t happen to them, without understanding the underlying reasons. The loss of competitiveness changes how macro policy works.

The mistaken stimulus has the unintended consequences of dissipating real wealth and increasing inequality. American household net worth is at an all-time high of 5 times GDP, significantly higher than the bubble peaks of 4.1 times in 2000 and 4.7 in 2007, and far higher than the historical norm of three times GDP. On the other hand, US capital formation has stagnated for decades. The outlandish paper wealth is just the same asset at ever higher prices.

That is the very definition of a bubble: “The outlandish paper wealth is just the same asset at ever higher prices.” American household net ‘worth’ is in a huge bubble, some 66% higher than the historical average. And that’s in a time when for many their net worth is way below that average, a time when more than half live paycheck to paycheck and can’t afford medical bills and/or car repair bills without borrowing. And that is the very definition of inequality:

The inflation of paper wealth has a serious impact on inequality. The top 1% in the US owns one-third of the wealth and the top 10% owns three-quarters. Half of the people don’t even own stocks. Asset inflation will increase inequality by definition. Moreover, 90% of the income growth since 2008 has gone to the top 1%, partly due to their ability to cash out in the inflated asset market.

An economy that depends on asset inflation always disproportionately benefits the asset-rich top 1%. [..] Germany and Japan do not have significant asset bubbles. Their inequality is far less than in the Anglo-Saxon economies that have succumbed to the allure of financial speculation.

True, largely, but Japan both has major economic troubles today (deflation), and will have worse ones going forward (demographics). While Germany can unload its losses on the EU periphery (and does). Japan can’t ‘afford’ a housing bubble, its people have refused to raise spending for many years, scared as they are through stagnant wages and falling prices. While Germany doesn’t need a housing bubble to keep its economy growing: it exports whatever’s negative about it to its neighbors. China, however, DOES need bubbles, and blows them with abandon:

While Western central bankers can stop making things worse, only China can restore stability in the global economy. Consider that 800 million Chinese workers have become as productive as their Western counterparts, but are not even close in terms of consumption. This is the fundamental reason for the global imbalance.

Note: as we saw before, while the Chinese may not consume as much as Westerners when it comes to consumer products, they DO -on average- put a far higher percentage of their wages into real estate. And that is because Beijing encourages such behavior. The politburo needs the bubbles to keep things moving. And therefore creates them on purpose. Presumably with the idea that incomes will come up so much that all these homes become more affordable compared to wages. That looks like a big gamble.

Property costs of between 50 and 100 years of household income are not manageable, and rising rates and/or an outright crisis will expose that. And then on top of that, the government wants, needs, an ever bigger take of people’s incomes. Because its whole model is based on its investing in the economy, even if a large part of it is not efficient or profitable.

China’s model is to subsidise investment. The resulting overcapacity inevitably devalues whatever its workers produce. That slows down wage rises and prolongs the deflationary pull. [..] Overinvestment means destroying capital. The model can only be sustained through taxing the household sector to fill the gap.

In addition to taking nearly half of the business labour outlay, China has invented the unique model of taxing the household sector through asset bubbles. The stock market was started with the explicit intention to subsidise state-owned enterprises. The most important asset bubble is the property market. It redistributes about 10% of GDP to the government sector from the household sector. The levies for subsidising investment keep consumption down and make the economy more dependent on investment and export.

In order to prevent a huge real estate crash, Beijing will have to make sure wages rise, across the board, and substantially, for hundreds of millions of people. And there we get back to what Xie said above:

The government finds an ever-increasing need to raise levies and, hence, make the property bubble bigger. In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. China’s residential property value may have surpassed the total in the rest of the world combined.

The 800 million pound elephant here is that what Beijing pushes its citizens to put in real estate, they can no longer spend on other things. Their consumption will flatline or even fall. Unless the Party manages to raise their wages, but it would have to raise them by a lot, because it needs more and more taxes to be paid by the same wages.

And here’s where Andy Xie gets most interesting:

How is this all going to end? Rising interest rates are usually the trigger. But we know the current bubble economy tends to keep inflation low through suppressing mass consumption and increasing overcapacity. It gives central bankers the excuse to keep the printing press on.

In 1929, Joseph Kennedy thought that, when a shoeshine boy was giving stock tips, the market had run out of fools. Today, that shoeshine boy would be a genius. In today’s bubble, central bankers and governments are fools. They can mobilise more resources to become bigger fools. In 2000, the dotcom bubble burst because some firms were caught making up numbers. Today, you don’t need to make up numbers. What one needs is stories.

Those are some pretty impressive insights, and they go way beyond China. Today’s fools are not yesterday’s fools. Only, today’s fools have been given the rights, and the tools, to keep blowing ever larger bubbles. The only conclusion can be that when the bubbles burst, it’ll be much much worse than the Great Depression. And this time, China will blow up along with the west. Take cover!

Hot stocks or property are sold like Hollywood stars. Rumour and innuendo will do the job. Nothing real is necessary. In 2007, structured mortgage products exposed cash-short borrowers. The defaults snowballed. But, in China, leverage is always rolled over. Default is usually considered a political act. And it never snowballs: the government makes sure of it.

Can China continue to roll over its leveraged debt when the west is in crisis, is forced to heavily cut its imports, just as Beijing needs more tax revenue to keep its miracle model alive? WIll it be able to export its over-leverage and over-capacity through the new Silk Road project? It looks very doubtful. And we shouldn’t expect the Party Congress this month to address these issues. They know better.

Xie finishes with most original predictions. Class struggle in the US. It sounds like something straight out of Karl Marx, but perhaps we are already seeing the first signs today.

In the US, the leverage is mostly in the government. It won’t default, because it can print money. The most likely cause for the bubble to burst would be the rising political tension in the West. The bubble economy keeps squeezing the middle class, with more debt and less wages. The festering political tension could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.

Maybe class struggle is something we’ll see first in Europe, both at a national and at a pan-European level. Too many countries keep their systems humming not by being productive, but by encouraging their citizens to sink deeper into debt. Low interest rates may be attractive for signing up to new loans, but the ‘trajectory’ gets shorter all the time, because those same low rates absolutely murder savings and pensions.

The only thing that can keep the whole caboodle from exploding would be absolutely stunning economic growth at least somewhere in the world, but every single somewhere is far too deep in debt for that to happen.

Take cover.

 

 

Aug 122017
 
 August 12, 2017  Posted by at 8:39 am Finance Tagged with: , , , , , , , , ,  4 Responses »
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Giorgio de Chirico The Enigma of the Hour 1910

 

The Logic of War (Jim Rickards)
Russia Says Bellicose Rhetoric On North Korea Is ‘Over The Top’ (R.)
US ‘Volatility Index’ Spikes To Highest Level Since Election (G.)
Chinese Foreign Real-Estate Spending Plunges 82% (ZH)
Battle of the Behemoths (Jim Kunstler)
US Poised To Become World’s Largest Public-Private Partnership Market (IBT)
The Fed Has 6,200 Tons of Gold in a Manhattan Basement—Or Does It? (WSJ)
UK Risks International Court Case Over Theresa May’s Brexit Plans (Ind.)
Greenspan’s Legacy Explains Current Conundrums (DDMB)
Social Security Requires Bailout 60x Greater Than 2008 Bank Bailout (Black)
All Is Not As It Seems In Venezuela (Ren.)
Asylum Seekers At Canada Border Tents Unfazed By Delays, Uncertainty (R.)
People Smugglers Pushing Refugees To Their Deaths At Sea Off Yemen (Ind.)

 

 

There are different kinds of logic. I hope for once Rickards is wrong.

The Logic of War (Jim Rickards)

This was the week that the logic of war collided with the illogic of bubbles. So far, the bubble is winning, but that’s about to change. The “logic of war” is an English translation of a French phrase, la logique de la guerre, which refers to the dynamic of how wars begin despite the fact that the war itself will be horrendous, counterproductive, and possibly end in complete defeat. [..] Given these outcomes, “logic” says that war should be prevented. This would not be difficult to do. If North Korea verifiably stopped its weapons testing and engaged in some dialogue, the U.S. would meet the regime more than halfway with sanctions relief and some expanded trade and investment opportunities.

The problem is that the logic of war proceeds differently than the logic of optimization. It relies on imperfect assessments of the intentions and capabilities of an adversary in an existential situation that offers little time to react. North Korea believes that the U.S. is bluffing based in part on the prior failures of the U.S. to back up “red line” declarations in Syria, and based on the horrendous damage that would be inflicted upon America’s key ally, South Korea. North Korea also looks at regimes like Libya and Iraq that gave up nuclear weapons programs and were overthrown. It looks at regimes like Iran that did not give up nuclear weapons programs and were not overthrown.

It concludes that in dealing with the U.S., the best path is not to give up your nuclear weapons programs. That’s not entirely irrational given the history of U.S. foreign policy over the past thirty years. But, the U.S. is not bluffing. Trump is not Obama, he does not use rhetoric for show, he means what he says. Trump’s cabinet officials, generals and admirals also mean what they say. No flag officer wants to lose an American city like Los Angeles on his or her watch. They won’t take even a small chance of letting that happen. The Trump administration will end the North Korean threat now before the stakes are raised to the nuclear level. Despite the logic of diplomacy and negotiation, the war with North Korea is coming. That’s the logic of war.

Read more …

It is crucial that Trump communicate with Putin and Lavrov. And Washington does all it can to prevent it. Let’s hope they’ve found a back channel.

Russia Says Bellicose Rhetoric On North Korea Is ‘Over The Top’ (R.)

Russian Foreign Minister Sergei Lavrov said on Friday the risks of a military conflict over North Korea’s nuclear program are very high, and Moscow is deeply worried by the mutual threats being traded by Washington and Pyongyang. “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top,” Lavrov said. “We still hope and believe that common sense will prevail.” Asked at a forum for Russian students about the risks of the stand-off escalating into armed conflict, he said: “The risks are very high, especially taking into account the rhetoric.” “Direct threats of using force are heard… The talk (in Washington) is that there must be a preventive strike made on North Korea, while Pyongyang is threatening to carry out a missile strike on the U.S. base in Guam. These (threats) continue non-stop, and they worry us a lot.”

“I won’t get into guessing what happens ‘if’. We will do whatever we can to prevent this ‘if’.” “My personal opinion is that when you get close to the point of a fight breaking out, the side that is stronger and cleverer should take the first step away from the threshold of danger,” said Lavrov, in remarks broadcast on state television. He encouraged Pyongyang and Washington to sign up to a joint Russian-Chinese plan, under which North Korea would freeze its missile tests and the United States and South Korea would impose a moratorium on large-scale military exercises. “If this double freezing finally takes place, then we can sit down and start from the very beginning – to sign a paper which will stress respect for the sovereignty of all those parties involved, including North Korea,” Lavrov said.

Read more …

And that’s a good thing. Ultra low VIX means no price discovery.

US ‘Volatility Index’ Spikes To Highest Level Since Election (G.)

A US stock market gauge known as the “fear index” has spiked to its highest level since Donald Trump was elected president in a sign that his brinkmanship with North Korea is starting to unnerve investors. The Vix index has been at record lows in recent weeks but has been rattled by the remarks Trump has been making about North Korea. A breakthrough in Pyongyang’s weapons programme prompted Trump to warn on Tuesday that he would unleash “fire and fury like the world has never seen” on North Korea if the regime continued to threaten the US. On Friday the US president tweeted that US military options were “locked and loaded” for use if Pyongyang “acted unwisely”. The Vix index measures expectations of volatility on the S&P 500 index of the US’s largest publicly quoted companies.

Its rise in the early hours of Friday prompted Neil Wilson, a senior market analyst at financial firm ETX Capital, to comment: “Volatility is back.” “The Vix just popped to its highest since the election of Donald Trump as jitters about North Korea roil risk sentiment. It’s about time the market woke up – nothing like the prospect of a nuclear standoff to sharpen mind of investors who had become a tad complacent,” said Wilson. oshua Mahony, a market analyst at IG, said: “For a week that has been largely devoid of major economic releases, Donald Trump’s confrontational stance with North Korea has raised volatility across the board, pushing the Vix from a rock-bottom reading on Tuesday, to the highest level in almost a year. “This has been a week of two halves, with complaints over a lack of volatility giving way to complaints over unpredictable volatility,” he added.

Read more …

Does that cover all housing bubbles? Well, not Holland and Scandinavia, probably.

Chinese Foreign Real-Estate Spending Plunges 82% (ZH)

Earlier this month, Morgan Stanley warned that commercial real estate prices in New York City, Sydney and London would likely take a hit over the next two years as Chinese investors pull out of foreign property markets. The pullback, they said, would be driven by China’s latest crackdown on capital outflows and corporate leverage, which they argued would lead to an 84% drop in overseas property investment by Chinese corporations during 2017, and another 18% in 2018. Sure enough, official data released by China’s Ministry of Commerce have proven the first part of Morgan Stanley’s thesis correct. Data showed that outbound investment in real estate was particularly hard hit during the first half of the year, plunging 82%. “According to official data, outbound investment by China’s real estate sector fell 82% year-on-year in the first half, to comprise just 2% of all outbound investment for the period.”

Overall, outbound direct investment to 145 countries declined to $48.19 billion, an annualized drop of 45.8%, according to China Banking News. The decline is a result of a crackdown by Chinese authorities after corporations went on a foreign-acquisition spree that saw them spend nearly $300 billion buying foreign companies and assets, with China’s four most acquisitive firms accounting for $55 billion, or 18%, of the country’s total. The acquisitions aggravated capital outflows, creating a mountain of debt and making regulators uneasy. Late last month, Chinese authorities ordered Anbang Insurance Group to liquidate its overseas holdings. In June, authorities asked local banks to evaluate whether Anbang and three of its peers posed a “systemic risk” to the country’s financial system. As Morgan Stanley noted, these firms were responsible for billions of dollars of commercial real-estate investments in the US, UK, Australia and Hong Kong.

Read more …

“..a great deal of American suburbia will have to be abandoned..”

Battle of the Behemoths (Jim Kunstler)

This has been a sensational year for retail failure so far with a record number of brick-and-mortar store closings. But it is hardly due solely to Internet shopping. The nation was vastly over-stored by big chain operations. Their replication was based on a suicidal business model that demanded constant expansion, and was nourished by a regime of ultra-low interest rates promulgated by the Federal Reserve (and its cheerleaders in the academic econ departments). The goal of the business model was to enrich the executives and shareholders as rapidly as possible, not to build sustainable enterprise. As the companies march off the cliff of bankruptcy, these individuals will be left with enormous fortunes — and the American landscape will be left with empty, flat-roofed, throwaway buildings unsuited to adaptive re-use. Eventually, the empty Walmarts will be among them.

Just about everybody yakking in the public arena assumes that commerce will just migrate to the web. Think again. What you’re seeing now is a very short term aberration, the terminal expression of the cheap oil economy that is fumbling to a close. Apart from Amazon’s failure so far to ever show a corporate profit, Internet shopping requires every purchase to make a journey in a truck to the customer. In theory, it might not seem all that different from the Monkey Ward model of a hundred years ago. But things have changed in this land. We made the unfortunate decision to suburbanize the nation, and now we’re stuck with the results: a living arrangement that can’t be serviced or maintained going forward, a living arrangement with no future. This includes the home delivery of every product under sun to every farflung housing subdivision from Rancho Cucamonga to Hackensack.

Of course, the Big Box model, like Walmart, has also recruited every householder in his or her SUV into the company’s distribution network, and that’s going to become a big problem, too, as the beleaguered middle-class finds itself incrementally foreclosed from Happy Motoring and sinking into conditions of overt peonage. The actual destination of retail in America is to be severely downscaled and reorganized locally. Main Street will be the new mall, and it will be a whole lot less glitzy than the failed gallerias of yore, but it will represent a range of activities that will put a lot of people back to work at the community level. It will necessarily entail the rebuilding of local and regional wholesale networks and means of distribution that don’t require trucking.

Read more …

But then combine Jim Kunstler’s piece with this:

US Poised To Become World’s Largest Public-Private Partnership Market (IBT)

As the debate over infrastructure policy intensifies, there is no dispute that the Trump administration’s initiative could open up a huge new market for financial firms on Wall Street. The American Society of Civil Engineers estimates that there are $4.6 trillion worth of needed investments to maintain and upgrade infrastructure throughout the U.S. In light of that, recent reports from Moody’s and AIG project a financial jackpot for private investors, with the latter predicting that America “is poised to become the largest public-private partnership market in the world for infrastructure projects.” That market appears to be a ripe profit opportunity for politically connected firms. On top of Pence’s overtures to investors in Australia, a country that has aggressively embraced privatization, Trump recently secured a pledge from Saudi Arabia’s government to invest billions in American infrastructure.

The Saudi money is slated to flow through the private equity firm Blackstone, which has been eyeing opportunities to profit from American infrastructure privatization since its CEO, Stephen Schwarzman, was named by Trump to run a White House economic advisory panel shaping federal infrastructure policy. At the same time, Cohn’s former employer, Goldman Sachs, has said in its financial filings that it too has plans to expand investment in privatized infrastructure. (Neither Schwarzman or Cohn have recused themselves from working on White House infrastructure policy that could benefit the firms, even though both own stakes in the companies.)

In the United States, the recent enthusiasm for public-private partnerships has stemmed from the visible success of several late-1990s toll road projects such as California’s State Route 91, the first fully-automated toll road with electronic transponders in the U.S., and Virginia’s Dulles Greenway, according to Robert Poole, the director of transportation policy at the libertarian Reason Foundation. More recently, he noted, states like Florida have enacted laws streamlining the legislative approval process for public-private partnership transportation projects. Both the GOP and Democratic Party listed infrastructure spending as objectives in their 2016 platforms. The Republican platform explicitly embraced public-private partnerships and “outside investment.” Prominent Democrats from former President Barack Obama to Bill and Hillary Clinton have also warmed to the idea of public-private partnerships — and the party’s officials have led some of America’s earliest precedent-setting privatization projects.

Read more …

Do we send in Dan Brown and Tom Hanks?

The Fed Has 6,200 Tons of Gold in a Manhattan Basement—Or Does It? (WSJ)

Eighty feet below the streets of lower Manhattan, a Federal Reserve vault protected by armed guards contains about 6,200 tons of gold. Or doesn’t. The Fed tells visitors its basement vault holds the world’s biggest official gold stash and values it at $240 billion to $260 billion. But “no one at all can be sure the gold is really there except Fed employees with access,” said Ronan Manly, a precious-metals analyst at gold dealer BullionStar in Singapore. If it is all there, he said, the central bank has “never in its history provided any proof.” Mr. Manly is among gold aficionados who wonder if the bank is hiding something about what it’s hiding. Other theorists suspect the gold beneath the New York Fed’s headquarters at 33 Liberty St. may be gold-plated fakes. Some conspiracy-minded investors think the Fed has been secretly leasing out the gold to manipulate prices.

“There has to have been a central bank spewing their gold into the market,” said John Embry, an investment strategist for Sprott Asset Management in Toronto until 2014 who once managed its gold fund. “The gold price didn’t act right” during the time he was watching it and the likely explanation for the movement was Fed action, said Mr. Embry. Fed officials have heard theories about their gold holdings for many years and don’t think much of them. After this article was published, a Fed spokeswoman said the Fed doesn’t own any of the gold housed at the New York Fed, which “does not use it in any way for any purposes including loaning or leasing it out.” The Fed has been selective in giving details about the contents of the vault and in the past has said it can’t comment on individual customer accounts due to confidentiality agreements.

[..] The Fed gives some information about the vault on a website and offers tours. A guide on one tour gave some details: Inside is enough oxygen for a person to survive 72 hours, should someone get trapped; custodians wear magnesium shoe covers to help prevent injuries, should they drop 27-pound bars; the Fed charges $1.75 a bar to move gold but nothing to store it; most of the gold is owned by foreign governments. [..] Visitors on vault tours see only a display sample and can’t verify bars up close. “All you see is the front row of gold bars,” said James Turk, co-founder of Goldmoney, a gold custodian. “There’s no way of knowing how deep the chamber is or how many rows there are.” Mr. Turk, based in London, believes much of the gold has been “hypothecated,” or lent out to other parties, and then rehypothecated, or lent to multiple parties at once. In doing so, he says, “central banks actually own less gold than people believe.”

Read more …

A phenomenal mess lies in your future. Wait till various courts get involved, representing entirely different jurisdictions, different laws.

UK Risks International Court Case Over Theresa May’s Brexit Plans (Ind.)

Britain risks a new Brexit fight in international courts if it tries to quit the EU’s single market without giving other countries official notice, The Independent can reveal. Legal experts, including one who advised the Treasury, agree Theresa May will leave the UK open to legal action in The Hague if she pulls out of the European Economic Area (EEA) without formally telling its other members 12 months in advance, to avoid disrupting their trade. The notice is demanded by an international agreement, but ministers do not intend to follow the process because, insiders believe, they want to avoid a Commons vote on staying in the EEA – and, therefore, the single market – that they might lose. As well as the a court battle, experts warn the stigma from breaking the agreement could also make it harder for Britain to secure the trade deals it desperately needs to secure the economy after Brexit.

Pro-EU MPs hope the legal opinion will help persuade the Commons to force and win the vote on staying in the EEA planned for the autumn. The Government has insisted EEA membership will end automatically with EU withdrawal but former Treasury legal adviser Charles Marquand, said: “A failure by the UK to give notice of its intention to leave would, I think, be a breach of the EEA Agreement, which is an international treaty.” The barrister said it was difficult to predict how another EEA states might seek to take action, if it believed its single market rights had been removed wrongly. But he added: “I believe there is a potential for international proceedings. One possibility is the Permanent Court of Arbitration in The Hague.”

Read more …

Are we going to lock him up?

Greenspan’s Legacy Explains Current Conundrums (DDMB)

On Aug. 11, 1987, the U.S. Senate confirmed Alan Greenspan as chairman of the Board of Governors of the Federal Reserve System. Thirty years later, the fallout from that occasion is still being felt around the world as the central bank’s focus shifted under Greenspan from economics and the banking system to the financial industry. Greenspan’s first speech as Fed chairman took place less than a month into his tenure when he dedicated the Jacksonville, Florida, branch of the Atlanta Fed. Some 73 miles north of where he stood was Jekyll Island, Georgia, where the foundations of the Fed were first laid in November 1910. Rather than look back at the Fed’s roots, however, Greenspan peered into its future: “We have entered the age of the truly global marketplace. Today the monetary policy decisions of our nation reverberate around the globe.”

Those words resonate today as policy makers worldwide struggle to extricate themselves from extraordinary levels of market intervention. How did we get to the point where central bankers endeavor to resolve structural issues with the power of the printing press? Greenspan’s legacy provides the answers. It is notable that in the days before the Senate vote, President Ronald Reagan cited the “banking system” as one of the Fed’s primary responsibilities. While Greenspan included banking system stability as one of the “instrumentalities” of the government’s designs of the Fed, he emphasized that the Fed was “NOT just another federal agency.” The Fed was also a leader “within the financial industry.” It wouldn’t take long for the financial system to stress test Greenspan’s resolve. On Oct. 19, 1987, the Dow Jones Industrial Average dropped 22.6% in what remains the steepest one-day loss on record. From his first day in office to that October closing low, the Dow was down by 35%.

Few recall that Greenspan was in the air on his way to Dallas during the worst of Black Monday’s selloff, where he was scheduled to address the American Bankers Association convention the next morning. It wasn’t until he landed that he learned of the day’s events. Against his wishes, Greenspan never made it to the podium; he thought the better way to communicate calm was by maintaining his scheduled appearance. Compelled back to Washington due to the gravity of the situation, Greenspan issued the following statement in his name at 8:41 a.m. that Tuesday, less than an hour before stocks opened for trading: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

Read more …

Best reason ever for a Universal Basic Income.

Social Security Requires Bailout 60x Greater Than 2008 Bank Bailout (Black)

A few weeks ago the Board of Trustees of Social Security sent a formal letter to the United States Senate and House of Representatives to issue a dire warning: Social Security is running out of money. Given that tens of millions of Americans depend on this public pension program as their sole source of retirement income, you’d think this would have been front page news… and that every newspaper in the country would have reprinted this ominous projection out of a basic journalistic duty to keep the public informed about an issue that will affect nearly everyone. But that didn’t happen. The story was hardly picked up. It’s astonishing how little attention this issue receives considering it will end up being one of the biggest financial crises in US history. That’s not hyperbole either– the numbers are very clear.

The US government itself calculates that the long-term Social Security shortfall exceeds $46 TRILLION. In other words, in order to be able to pay the benefits they’ve promised, Social Security needs a $46 trillion bailout. Fat chance. That amount is over TWICE the national debt, and nearly THREE times the size of the entire US economy. Moreover, it’s nearly SIXTY times the size of the bailout that the banking system received back in 2008. So this is a pretty big deal. More importantly, even though the Social Security Trustees acknowledge that the fund is running out of money, their projections are still wildly optimistic. In order to build their long-term financial models, Social Security’s administrators have to make certain assumptions about the future. What will interest rates be in the future? What will the population growth rate be? How high (or low) will inflation be?

These variables can dramatically impact the outcome for Social Security. For example, Social Security assumes that productivity growth in the US economy will average between 1.7% and 2% per year. This is an important assumption: the higher US productivity growth, the faster the economy will grow. And this ultimately means more tax revenue (and more income) for the program. But -actual- US productivity growth is WAY below their assumption. Over the past ten years productivity growth has been about 25% below their expectations. And in 2016 US productivity growth was actually NEGATIVE.

Read more …

Venezuela is dead simple. It has the largest oil reserves on the planet. Chavez kept Exxon and CIA out. Now they’re moving back in.

All Is Not As It Seems In Venezuela (Ren.)

An opposition backed by Exxon Mobil, a failed military coup that killed 40 people, staged photo-propaganda designed to create the perception of a failed state: Foreign powers have conspired to create the perfect conditions for yet another western ‘humanitarian’ intervention, this time in Venezuela. Former US Army solider turned documentary-maker, Mike Prysner, says the reality of Venezuela is very different from what we are being fed by the western press. [..] When I heard that Jeremy Corbyn had condemned violence on both sides in Venezuela, I was angry at first – because 80% or more of the violence is being committed by anti-government protesters. Their violence has far surpassed anything committed against them – and what has been done to them has been deliberately provoked. But then I began to recognise the skill in his statement – forcing everyone to confront the reality of what’s happening on the ground there. The reality bears little resemblance to what’s being presented to people.

The BBC is responsible for some of the most disingenuous portrayals. They’re showing violent protesters as if they’re some kind of defenders of peaceful protesters against a repressive police force, but in reality peaceful protests have been untouched by police. What happens is that the Guarimbas (violent, armed opposition groups) follow the peaceful protests and when they come near police, they insert themselves in between the two. They then push and push and push until there’s a reaction – and they have cameras and journalists on hand to record the reaction, so it looks like the police are being aggressive. We were once filming a protest and a group of Guarimbas challenged us. If we’d said we were with teleSur, at the very least they’d have beaten us and taken our equipment. But we told them we were American freelance journalists – they need Americans to film them and publicise them, so we were accepted.

The battles with police are actually quite small, but they’re planned, co-ordinated to disrupt different area each day to maximise their impact – but in most places life is pretty normal. It’s all about the portrayal. The US media mobilise everything for Guarimbas – there will be maybe 150 people but it’s made to look bigger and tactics are 100% violent – trying to provoke a response. And the level of police restraint is remarkable – the government knows the world is watching. One evening protesters were burning buildings for around two hours, with no intervention by the police. They only react when the protesters start throwing petrol bombs at the police or military, or their bases – but as soon as they do react, the Guarimbas film as if they’re victims of an unprovoked attack.

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Over 200 a day into Québec alone.

Asylum Seekers At Canada Border Tents Unfazed By Delays, Uncertainty (R.)

Asylum seekers, mainly from Haiti, clambering over a gully from upstate New York into Canada on Friday were undeterred by the prospect of days in border tents, months of uncertainty and signs of a right-wing backlash in Quebec. More than 200 people a day are illegally walking across the U.S. border into Quebec to seek asylum, government officials said. Army tents have been erected near the border to house up to 500 people as they undergo security screenings. Over 4,000 asylum seekers have walked into Canada in the first half of this year, with some citing U.S. President Donald Trump’s tougher stance on immigration. The cars carrying the latest asylum seekers begin arriving at dawn in Champlain, New York, across from the Canadian border.

On Friday, the first groups included two young Haitian men, a family of five from Yemen and a Haitian family with young twins. “We have no house. We have no family. If we return we have nowhere to sleep, no money to eat,” said a Haitian mother of a 2-year-old boy, who declined to give her name. Each family pauses a moment when a Royal Canadian Mounted police officer warns them they will be arrested if they cross the border illegally, before walking a well-trodden path across the narrow gully into Canada. Asylum seekers are crossing the border illegally because a loophole in a U.S. pact allows anyone who manages to enter Canada to file an asylum claim and stay in Canada while they await their application outcome.

Because the pact requires refugees to claim asylum in whatever country they first arrive, they would be turned back to the United States at legal border crossings. They Haitian family is arrested immediately and bussed to the makeshift camp. Border agents led a line of about two dozen asylum seekers on Friday into a government building at Saint-Bernard-de-Lacolle to be processed. The Red Cross is providing food, hygiene items and telephone access, spokesman Carl Boisvert said. He estimated the fenced-off camp, which has been separated into sections for families and single migrants, is about half full. Border staff and settlement agencies are straining to accommodate the influx, which has been partly spurred by false rumors of guaranteed residency permits.

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The values of our own lives are set by how we value other people’s lives.

People Smugglers Pushing Refugees To Their Deaths At Sea Off Yemen (Ind.)

At least 19 migrants are presumed to have drowned after 160 people were forced from a boat into rough seas off the coast of Yemen by smugglers in what may be a worrying new trend, the UN migration agency has said. The report from the International Organisation for Migration came less than a day after it said up to 50 migrants from Ethiopia and Somalia were “deliberately drowned” by smugglers who pushed them from a separate boat off the coast of Shabwa province in southern Yemen. “We’re wondering if this is a new trend,” Olivia Headon, an IOM spokesperson, told The Independent. “The smugglers are well aware of what’s happening in Yemen, so it may just be they’re trying to protect their own neck while putting other people’s lives at risk.” Six bodies were found on the beach, while 13 remain missing, presumed dead, Ms Headon said.

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Jul 182017
 
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Piet Mondriaan The Flowering Apple Tree 1912

 

US Senate Will Vote To Repeal Obamacare Without Replacement (G.)
There Has Been Just One Buyer Of Stocks Since The Financial Crisis (ZH)
People Buy Payments – Not Houses (Roberts)
Student Debt Is a Major Reason Millennials Aren’t Buying Homes (BBG)
US Student Loans Worth Billions Are Getting Erased On A Technicality (ZH)
UK Students Should Not Try To Pay Off Loans Early (G.)
Fears Mount Over a New US Subprime Boom – Cars (BBG)
When A “Black Swan” Will No Longer Do: China Warns Beware The “Gray Rhino” (ZH)
Half of China’s Rich Plan To Move Overseas (CNBC)
Household Debt: A Tale of Three Countries (Hail)
Boomerangski (Jim Kunstler)
Staving Off the Coming Global Overshoot Collapse (Rees)

 

 

If they would stick their heads together, they could hammer out a single payer plan for less than what this competition in incompetence costs. But they won’t.

US Senate Will Vote To Repeal Obamacare Without Replacement (G.)

Senate majority leader Mitch McConnell has announced that the Senate will vote on a clean repeal of Obamacare without any replacement, after two Republican senators broke ranks to torpedo the current Senate healthcare bill. Senators Mike Lee of Utah and Jerry Moran of Kansas came out on Monday night in opposition to McConnell’s Better Care Reconciliation Act (BCRA), the Senate version of the controversial healthcare reform bill that passed the House in May. Senate Republicans hold a bare 52-48 majority in the Senate and two members of the GOP caucus, the moderate Susan Collins of Maine and the libertarian Rand Paul of Kentucky, already opposed the bill, along with all 48 Democrats. The announcement from Moran and Lee made it impossible for Republicans to muster the 50 votes needed to bring the BCRA bill to the floor.

Instead, McConnell announced late on Monday night that the Senate would vote on a bill to simply repeal Obamacare without any replacement in the coming days. The Kentucky Republican said in a statement: “Regretfully, it is now apparent that the effort to repeal and immediately replace the failure of Obamacare will not be successful.” He added that “in the coming days” the Senate would vote on repealing the Affordable Care Act with a two-year-delay. The Senate passed a similar bill in 2015, which was promptly vetoed by Barack Obama. McConnell’s plan echoes a statement made by Donald Trump in a tweet on Monday night, in which the president urged a repeal of Obamacare with any replacement to come in the future. “Republicans should just REPEAL failing ObamaCare now & work on a new Healthcare Plan that will start from a clean slate. Dems will join in!” Trump wrote.

In January, an analysis by the nonpartisan Congressional Budget Office (CBO) estimated that repealing Obamacare without a replacement would result in 32 million people losing insurance by 2026, including 19 million who would lose Medicaid coverage. It would also cause premiums to rise by as much as 50% in the year following the elimination of key planks of the healthcare law, including the repeal of Medicaid expansion and cost-sharing subsidies. Premiums would nearly double over a decade.

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This is your entire economy. Companies refusing to invest in themselves. Why do anything useful if you can simply borrow your share price higher?

There Has Been Just One Buyer Of Stocks Since The Financial Crisis (ZH)

When discussing Blackrock’s latest quarterly earnings (in which the company missed on both the top and bottom line, reporting Adj. EPS of $5.24, below the $5.40 exp), CEO Larry Fink made an interesting observation: “While significant cash remains on the sidelines, investors have begun to put more of their assets to work. The strength and breadth of BlackRock’s platform generated a record $94 billion of long-term net inflows in the quarter, positive across all client and product types, and investment styles. The organic growth that BlackRock is experiencing is a direct result of the investments we’ve made over time to build our platform.”

While the intention behind the statement was obvious: to pitch Blackrock’s juggernaut ETF product platform which continues to steamroll over the active management community, leading to billions in fund flow from active to passive management every week, if not day, he made an interesting point: cash remains on the sidelines even with the S&P at record highs. In fact, according to a chart from Credit Suisse, Fink may be more correct than he even knows. As CS’ strategist Andrew Garthwaite writes, “one of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought 18% of market cap, while institutions have sold 7% of market cap.” What this means is that since the financial crisis, there has been only one buyer of stock: the companies themselves, who have engaged in the greatest debt-funded buyback spree in history.

Why this rush by companies to buyback their own stock, and in the process artificially boost their Eearning per Share? There is one very simple reason: as Reuters explained some time ago, “Stock buybacks enrich the bosses even when business sags.” And since bond investor are rushing over themselves to fund these buyback plans with “yielding” paper at a time when central banks have eliminated risk, who is to fault them. More concerning than the unprecedented coordinated buybacks, however, is not only the relentless selling by institutions, but the persistent unwillingness by “households” to put any new money into the market which suggests that the financial crisis has left an entire generation of investors scarred with “crash” PTSD, and no matter what the market does, they will simply not put any further capital at risk.

As to Fink’s conclusion that “investors have begun to put more of their assets to work”, we will wait until such time as central banks, who have pumped nearly $2 trillion into capital markets in 2017 alone, finally stop doing so before passing judgment.

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Real estate across the globe is on the edge of a cliff. Entire economies will follow it down.

People Buy Payments – Not Houses (Roberts)

When the average American family sits down to discuss buying a home they do not discuss buying a $125,000 house. What they do discuss is what type of house they “need” such as a three bedroom house with two baths, a two car garage, and a yard. That is the dream part. The reality of it smacks them in the face, however, when they start reconciling their monthly budget. Here is a statement I have not heard discussed by the media. People do not buy houses – they buy a payment. The payment is ultimately what drives how much house they buy. Why is this important? Because it is all about interest rates. Over the last 30-years, a big driver of home prices has been the unabated decline of interest rates. When declining interest rates were combined with lax lending standards – home prices soared off the chart. No money down, ultra low interest rates and easy qualification gave individuals the ability to buy much more home for their money.

[..] With this in mind let’s review how home buyers are affected. If we assume a stagnant purchase price of $125,000, as interest rates rise from 4% to 8% by 2027 (no particular reason for the date – in 2034 the effect is the same), the cost of the monthly payment for that same priced house rises from $600 a month to more than $900 a month – more than a 50% increase. However, this is not just a solitary effect. ALL home prices are affected at the margin by those willing and able to buy and those that have “For Sale” signs in their front yard. Therefore, if the average American family living on $55,000 a year sees their monthly mortgage payment rise by 50% it is a VERY big issue.

Assume an average American family of four (Ward, June, Wally and The Beaver) are looking for the traditional home with the white picket fence. Since they are the average American family their median family income is approximately $55,000. After taxes, expenses, etc. they realize they can afford roughly a $600 monthly mortgage payment. They contact their realtor and begin shopping for their slice of the “American Dream.” At a 4% interest rate, they can afford to purchase a $125,000 home. However, as rates rise that purchasing power quickly diminishes. At 5% they are looking for $111,000 home. As rates rise to 6% it is a $100,000 property and at 7%, just back to 2006 levels mind you, their $600 monthly payment will only purchase a $90,000 shack. See what I mean about interest rates?

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Home prices will have to come down enormously to cover this issue. And therefore they will. The losses will be crippling.

Student Debt Is a Major Reason Millennials Aren’t Buying Homes (BBG)

College tuition hikes and the resulting increase in student debt burdens in recent years have caused a significant drop in homeownership among young Americans, according to new research by the Federal Reserve Bank of New York. The study is the first to quantify the impact of the recent and significant rise in college-related borrowing—student debt has doubled since 2009 to more than $1.4 trillion—on the decline in homeownership among Americans ages 28 to 30. The news has negative implications for local economies where debt loads have swelled and workers’ paychecks aren’t big enough to counter the impact. Homebuying typically leads to additional spending—on furniture, and gardening equipment, and repairs—so the drop is likely affecting the economy in other ways.

As much as 35% of the decline in young American homeownership from 2007 to 2015 is due to higher student debt loads, the researchers estimate. The study looked at all 28- to 30-year-olds, regardless of whether they pursued higher education, suggesting that the fall in homeownership among college-goers is likely even greater (close to half of young Americans never attend college). Had tuition stayed at 2001 levels, the New York Fed paper suggests, about 360,000 additional young Americans would’ve owned a home in 2015, bringing the total to roughly 2.9 million 28- to 30-year-old homeowners. The estimate doesn’t include younger or older millennials, who presumably have also been affected by rising tuition and greater student debt levels.

There’s a good chance the number of millennials kept from buying homes because of their student loans has only grown since the period the economists studied. As tuition has risen, total student debt has increased 13%, and every new class graduates with more student debt than the preceding one. The consequences could reverberate for decades as more young Americans are locked out of purchasing property, the primary way that U.S. households build wealth. With less wealth, millennials could cut their spending as they attempt to build up their net worth. The U.S. economy has historically depended on household spending for roughly 70% of its growth.

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Who gets stuck with the empty bag here? The piper must be paid.

US Student Loans Worth Billions Are Getting Erased On A Technicality (ZH)

National Collegiate Funding (NCF) is an umbrella name for 15 trusts that collectively hold 800,000 private student loans, totaling some $12 billion in outstanding obligations. The only problem is that roughly $5 billion worth of those loans, or over 40%, are currently in default (and you thought auto delinquencies were bad). Now, ordinarily when a student defaults on their loan, NCF simply files a lawsuit in local or state court as a means for negotiating a settlement or payment plan with the borrower. Often times, NCF wins these cases automatically as the borrowers don’t even bother to show up for their court date. In cases like that, NCF can use their court victory to garnish wages and/or federal benefits from entitlement programs like Social Security which can haunt borrowers for decades.

That said, NCF is increasingly finding that, much like the subprime mortgage debacle from 10 years ago, student lending institutions apparently had a really hard time keeping tracking of paperwork over the years and/or processed deeply flawed contracts with incomplete ownership records and mass-produced documentation (who can forget that whole robo-signing catastrophe). As the New York Times points out today, student loans, much like mortgages, are often originated at large commercial banks before being sold to numerous other financial institutions and ultimately ending up in a securitization owned by some unsuspecting European pension funds. And while pooling these student loans in such a complicated way into securitizations apparently magically eradicates all default risk associated with the underlying loans (just ask any 22 year old on the JPM securitization desk and he/she will confirm the same), it also makes it extremely difficult to prove ownership.

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Shouldn’t try to pay them off at all. But a millstone around your neck for 30 years is no fun.

UK Students Should Not Try To Pay Off Loans Early (G.)

Students should not try to pay off their loans early despite the controversial interest rate rise to 6.1% in September, according to research by money expert Martin Lewis. Lewis says his moneysavingexpert.com website has been “swamped” by graduates terrified by new statements that show their debt spiralling in size after interest is added. He believes most graduates will never repay their debt. Lewis said: “Many graduates are starting to panic. First they look in shock at their student loan statements after noticing interest totalling thousands has been added. Then they read the headline interest rate for the 2017-18 academic year will increase from 4.6% to 6.1%. It’s no surprise I’ve been swamped with people asking if they should be trying to overpay the loans to reduce the interest.”

But after crunching the numbers, Lewis estimates that “overpaying is just throwing money away” unless the graduate is likely to be in very high-paid employment all their lives. Only if the student lands a job earning £40,000 a year on graduation, and then enjoys big pay rises after, should they consider repaying their loan early, said Lewis. A graduate earning £36,000 a year will repay £40,500 of a £55,000 total student loan over 30 years, said Lewis, at the current repayment rates. The remaining debt will be wiped clean after 30 years. If the same graduate cuts the total £55,000 balance to £45,000 with an overpayment of £10,000, they will still have to repay the same amount of student loan over 30 years, making the overpayment entirely pointless.

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A Spanish bank doing US subprime liar car loans. What a world.

Fears Mount Over a New US Subprime Boom – Cars (BBG)

It’s classic subprime: hasty loans, rapid defaults, and, at times, outright fraud. Only this isn’t the U.S. housing market circa 2007. It’s the U.S. auto industry circa 2017. A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide. Subprime car loans have been around for ages, and no one is suggesting they’ll unleash the next crisis. But since the Great Recession, business has exploded. In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo. Few things capture this phenomenon like the partnership between Fiat Chrysler and Banco Santander.

Since 2013, as U.S. car sales soared, the two have built one of the industry’s most powerful subprime machines. Details of that relationship, pieced together from court documents, regulatory filings and interviews with industry insiders, lay bare some of the excesses of today’s subprime auto boom. Wall Street has rewarded lax lending standards that let people get loans without anyone verifying incomes or job histories. For instance, Santander recently vetted incomes on fewer than one out of every 10 loans packaged into $1 billion of bonds, according to Moody’s. The largest portion were for Chrysler vehicles.

Some of their dealers, meantime, gamed the loan application process so low-income borrowers could drive off in new cars, state prosecutors said in court documents. Through it all, Wall Street’s appetite for high-yield investments has kept the loans – and the bonds – coming. Santander says it has cut ties with hundreds of dealerships that were pushing unsound loans, some of which defaulted as soon as the first payment. At the same time, Santander plans to increase control over its U.S. subprime auto unit, Santander Consumer USA Holdings, people familiar with the matter said.

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Xi is toying with his credibility.

When A “Black Swan” Will No Longer Do: China Warns Beware The “Gray Rhino” (ZH)

Perhaps the biggest outcome from the weekend Conference was the creation of a financial “super-regultor” meant to tackle the growing threat of a financial crisis, and among its broad conclusions were i) To make finance better serve the real economy; ii) To contain financial risks; and iii) To deepen financial reforms. The proposed reforms are the result of the unprecedented increase in overall Chinese debt, which while promoting growth – in this case China’s latest 6.9% GDP print – is also leading to a relentless buildup of risks. And while until now Chinese regulators had homed in on financial-sector excesses, the latest probe – Bloomberg notes – is now widening to debt in the broader economy, “a shift that prompted a sell-off in domestic stocks.”

There was another reason for the market’s swoon. Earlier on Monday China People’s Daily newspaper warned of potential “gray rhinos” which it defined as “highly probable, high-impact threats that people should see coming, but often don’t.” So in a surprising case of forward-looking prudence, the Chinese government is doing what numerous Fed members have also done in recent weeks, by setting a surprisingly wary tone about risk, demonstrated best by the front page commentary in the People’s Daily, which said China should not only be alert to “black swan” risks that catch people off guard but also more obvious threats, citing cited a term popularized by author Michele Wucker’s book “The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore.”

Noting that with the economy still on a slowing-growth trend, the People’s Daily commentary said that China should “strictly prevent risks from liquidity, credit, shadow banking and abnormal capital market fluctuations, as well as insurance market and property bubbles.” And, as Bloomberg adds, the new focus on “deleveraging in the economy” suggests that local-government and state-owned enterprise debt is now very much in the spotlight. In other words, this time Beijing’s crackdown on excess debt may actually be real. Of course, by now it is widely understood that China’s strong (credit-driven) momentum has fueled global economic expansion and boosted sentiment in international markets, and served as the springboard for the global economic rebound in the depths of the financial crisis (when China’s debt load was roughly half the current one).

[..] In a separate commentary by China Daily, the official English-language newspaper added that fending off risks is one of the country’s top priorities, with corporate debt running high, the property market being overheated and excess capacity in some sectors lingering, adding that “only through guarding against financial risks can a sound and stable financial sector better fulfill its duty and purpose of serving the real economy.” While it is admirable that China continues to push for deleveraging, it faces an uphill battle, not least of all because as the IIF recently calculated, China’s debt is not only the biggest contributor to global debt growth, currently at a record $217 trillion, but as of 2017 is at just over 300% debt/GDP. Meanwhile, the marginal benefit of all this debt continues to shrink, with the Chinese economy growing at levels just shy of all time lows.

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Cash in your monopoly money before they find out what it’s worth.

Half of China’s Rich Plan To Move Overseas (CNBC)

Half of Chinese millionaires are considering moving overseas, and the U.S. remains their favorite destination, according to a new survey. Among Chinese millionaires with a net worth of more than $1.5 million, half either plan to or are considering moving abroad, according to a survey from Hurun Report in association with Visas Consulting Group. The survey suggests that the flow of wealthy Chinese and Chinese fortunes into U.S. homes and buildings is likely to continue, helping demand and prices in certain real estate markets — especially in the U.S. The U.S. remains the most popular destination for wealthy Chinese moving their families and fortunes abroad, according to the report. Canada ranks second, overtaking the U.K., which had ranked second but now ranks third. Australia comes in at fourth.

The favorite city for wealthy Chinese moving to the U.S. is Los Angeles, while Seattle ranks second followed by San Francisco. New York ranked fourth. When asked for their main reasons for moving abroad, education was the top reason, followed by the “living environment.” “Education and pollution are driving China’s rich to emigrate,” said Rupert Hoogewerf, chairman and chief researcher of Hurun Report. “If China can solve these issues, then the primary incentive to emigrate will have been taken away.” Yet the fear of a falling Chinese currency is also driving many rich Chinese — and their money — abroad. Fully 84% of Chinese millionaires are concerned about the devaluation of the yuan, up from 50% last year. Half are worried about the exchange rate of the dollar, foreign exchange controls and property bubbles in China.

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Australia almost makes America look good. But let’s not make it look like Japan has no problems.

Household Debt: A Tale of Three Countries (Hail)

In the year 2000, Japan, the USA and Australia all had about the same ratio of household debt to GDP – in each country, this figure was about 70%. In Japan, the ratio fell gradually from 70% to the low 60%, and has remained at about 62% for a while. In the US, household debt surged as financial fragility grew, with the ratio peaking at 98% in the first quarter of 2008. Households deleveraged post GFC, and the ratio fell back to about 80%. Till way too high for another surge in private debt to be allowed to persist, but at least well below its level at the peak of the bubble. What about Australia? Like Japan and the US, our household debt to GDP stood at about 70% at the millennium – well above the levels of previous years. It then grew and grew, mainly due to increasing mortgage debt, standing at 108% in mid-2008.

Well above the level in the US when the crash happened there. As we know, Australia missed the worst of the GFC, and propped up its housing market, and household debt just kept growing. By the end of last year it was above 123%, placing Australia very near the top of the global league table. Bound to lead to a crash? Many would say so – Steve Keen and Philip Soos amongst them, and who am I to disagree? Unwise? On that we should all agree. And done at the urging of successive governments which have failed to run appropriate fiscal policies; with the approval, for most of this period, of the RBA; and with the acquiescence of what until quite recently was a very relaxed APRA. Who has the debt problem? Not Japan. Since around 2013, The Bank of Japan began buying up government debt, to become a monopoly supplier of bank reserves, denominated in Yen.

In September 2016 it took the decision to buy unlimited amounts of Japanese government bonds at a fixed-yield, meaning it could control yields across bond maturities from a two-to-40-year output and sets them at whatever level they choose. It also implemented $80 trillion worth of quantitative and qualitative easing while introducing a negative interest rate of minus 0.1% to current accounts held by financial institutions at the bank, driving the bond yield rate down. Bond market dealers queued up to get their hands on as much Japanese government debt as they could, with the promise it would mature within 40 years. To quote Economist Bill Mitchell: “The bond markets do not have the power to set yields unless the government allows them that flexibility. The government rules, not the markets.” Moreover, Japan’s government doesn’t need to issue debt in primary markets in order to spend. Because monetary sovereign government debt is not the problem. Household debt is the problem.

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“..any contact between Russians and Americans is ipso facto nefarious vectors into the very beating heart of the “Resistance” itself..”

Boomerangski (Jim Kunstler)

[..] this blog might be described as anti-Trump, too, in the sense that I did not vote for him and regularly inveigh against his antics as President — but neither is Clusterfuck Nation a friend of the Hillary-haunted Dem-Prog “Resistance,” in case there’s any confusion about where we stand. If anything, we oppose the entirety of the current political regime in our nation’s capital, the matrix of rackets that is driving the aforementioned Limousine-of-State off the cliff of economic collapse. Just sayin’. “Resistance” law professors, such as Lawrence Tribe at Harvard, were quick to holler “treason” over Junior’s meet-up with Russian lawyer Natalia Veselnitskaya and Russian-American lobbyist Rinat Akhmetshin. Well, first of all, and not to put too fine a point on it, don’t you have to be at war with another nation to regard any kind of consort as “treason?”

Last time I checked, we were not at war with Russia — though it sure seems like persons and parties inside the Beltway would dearly like to make that happen. You can’t call it espionage either, of course, because that would purport the giving of secret information, not the receiving of political gossip. Remember, the “Resistance” is not going for impeachment, but rather Section 4 of the 25th Amendment. That legal nicety makes for a very neat-and-clean surgical removal of a whack-job president, without all the cumbrous evidentiary baggage and pain-in-ass due process required by impeachment. All it requires is a consensus among a very small number of high officials, who then send a note to the leaders in both houses of congress stating that said whack-job president is a menace to the polity — and out he goes, snippety-snip like a colorectal polyp, into the hazardous waste bag of history.

And you’re left with a nice clean asshole, namely Vice President Mike Pence. Insofar as Pence appears to be a kind of booby-prize for the “Resistance,” that fateful reach for the 25th Amendment hasn’t happened quite yet. It is hoped, I’m sure, that the incessant piling on of new allegations about “collusion” with the Russians will get the 25thers over the finish line and into the longed-for end zone dance. More interestingly, though, the meme that has led people to believe that any contact between Russians and Americans is ipso facto nefarious vectors into the very beating heart of the “Resistance” itself: the Clintons.

How come the Clintons have not been asked to explain why — as reported on The Hill blog — Bill Clinton was paid half a million dollars to give speech in Russia (surely he offered them something of value in exchange, pending the sure thing Hillary inaugural), or what about the $2.35 million “contribution” that the Clinton Foundation received after Secretary of State Hillary allowed the Russians to buy a controlling stake in the Uranium One company, which owns 20% of US uranium supplies, with mines and refineries in Wyoming, Utah, and other states, as well as assets in Kazakhstan, the world’s largest uranium producer? Incidentally, the Clinton Foundation did not “shut down,” as erroneously reported early this year. It was only its Global Initiative program that got shuttered. The $2.35 million is probably still rattling around in the Clinton Foundation’s bank account. Don’t you kind of wonder what they did with it? I hope Special Prosecutor Robert Mueller wants to know.

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“..techno-industrial society consumed more energy and resources during the most recent doubling (the past 35 years or so) than in all previous history..”

Staving Off the Coming Global Overshoot Collapse (Rees)

Humans have a virtually unlimited capacity for self-delusion, even when self-preservation is at stake. The scariest example is the simplistic, growth-oriented, market-based economic thinking that is all but running the world today. Prevailing neoliberal economic models make no useful reference to the dynamics of the ecosystems or social systems with which the economy interacts in the real world. What truly intelligent species would attempt to fly spaceship Earth, with all its mind-boggling complexity, using the conceptual equivalent of a 1955 Volkswagen Beetle driver’s manual? Consider economists’ (and therefore society’s) near-universal obsession with continuous economic growth on a finite planet.

A recent ringing example is Kaushik Basu’s glowing prediction that “in 50 years, the world economy is likely (though not guaranteed) to be thriving, with global GDP growing by as much as 20% per year, and income and consumption doubling every four years or so.” Basu is the former chief economist of the World Bank, senior fellow at the Brookings Institution and professor of economics at Cornell University, so he is no flake in the economics department. But this does not prevent a display of alarming ignorance of both the power of exponential growth and the state of the ecosphere. Income and consumption doubling every four years? After just 20 years and five doublings, the economy would be larger by a factor of 32; in 50 years it will have multiplied more than 5000-fold! Basu must inhabit some infinite parallel universe.

In fairness, he does recognize that if the number of cars, airplane journeys and the like double every four years with overall consumption, “we will quickly exceed the planet’s limits.” But here’s the thing — it’s 50 years before Basu’s prediction even takes hold and we’ve already shot past several important planetary boundaries. Little wonder. Propelled by neoliberal economic thinking and fossil fuels, techno-industrial society consumed more energy and resources during the most recent doubling (the past 35 years or so) than in all previous history. Humanity is now in dangerous ecological overshoot, using even renewable and replenishable resources faster than ecosystems can regenerate and filling waste sinks beyond capacity. (Even climate change is a waste management problem — carbon dioxide is the single greatest waste by weight in all industrial economies.)

Meanwhile, wild nature is in desperate retreat. One example: from less than one% at the dawn of agriculture, humans and their domestic animals had ballooned to comprise 97% of the total weight of terrestrial mammals by the year 2000. That number is closer to 98.5% today, with wild mammals barely clinging to the margins. The “competitive displacement” of other species is an inevitable byproduct of continuous growth on a finite planet. The expansion of humans and their artefacts necessarily means the contraction of everything else. [..] Ignoring overshoot is dangerously stupid — we are financing growth, in part, by irreversibly liquidating natural resources essential to our own long-term survival.

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Jul 132015
 
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NPC Fordson tractor exposition at Camp Meigs, Washington DC 1922

The World’s Awash In $5 Trillion In Excess Liquidity (Bloomberg)
Greece Capitulates to Creditors’ Demands to Cling to Euro (Bloomberg)
Greek Fury Meets Resignation at Demands for Concessions
Greece Wins Euro Debt Deal – But Democracy Is The Loser (Paul Mason)
How The Greeks Could Have The Last Laugh: Adopt The Renminbi (David McWilliams)
The Euro – A Fatal Conceit (MM)
A Greek Exit Could Not Be More Costly Than The Current Path (Mitchell)
Dr Schäuble’s Plan for Europe: Do Europeans Approve? (Yanis Varoufakis)
Killing the European Project (Paul Krugman)
Germany Showing ‘Lack Of Solidarity’ Over Greece: Stiglitz (AFP)
How Fascist Capitalism Functions: The Case Of Greece (Zuesse)
Russia Considering Direct Fuel Deliveries To Help Greece (AFP)
Greek Government’s Majority In Question, Says Labor Minister (Reuters)
Was This Humiliation Of Greeks Really Necessary? (Helena Smith)
Greek Deal Makes Versailles Look Like A Picnic – Steve Keen (BallsRadio)
Greece Today, America Tomorrow? (Ron Paul)
Chinese Buyers Turn Kiwis Into Renters In Their Own Country (NZ Herald)
China’s Rich Seek Shelter From Stock Market Storm In Foreign Property (Guardian)
How China’s Stock-Market Muddle May Spread (MarketWatch)
China’s Market-Tracking ETFs Roiled By Share Suspensions (FT)

Zombie money.

The World’s Awash In $5 Trillion In Excess Liquidity (Bloomberg)

If you’re worried the Federal Reserve will topple the debt markets, consider this: there’s rarely been so much cash available in the world to buy assets such as bonds. While the prospect of higher U.S. interest rates sent bonds worldwide to the biggest-ever quarterly loss, JPMorgan Chase says the excess money in the global economy – about $5 trillion – will support demand and bolster asset prices. Since 1990, there have been four periods when households, companies and investors held such a surplus. Each time, markets rallied. “The world is awash with unprecedented excess liquidity,” said Nikolaos Panigirtzoglou, a strategist at JPMorgan, the top-ranked firm for U.S. fixed-income research by Institutional Investor magazine. “Fed tightening won’t change that.”

The cash cushion has surged in recent years as the world’s central banks injected trillions of dollars into the financial system to jump-start demand after the credit crisis. Now all the extra money that’s sloshing around may help extend the three-decade bull market in bonds even as a stronger U.S. economy pushes the Fed closer to boosting rates from rock-bottom levels. Bonds suffered a setback last quarter as signs of inflation in both the U.S. and Europe sparked an exodus after yields fell to historical lows. They lost 2.23%, the most since at least 1996, index data compiled by Bank of America show. This month, worries over Greece’s financial ruin and China’s stock-market meltdown have pushed investors back into the safety of debt securities. Yet Wall Street is still bracing for a selloff, especially in U.S. Treasuries, once the Fed moves to raise rates that it’s held near zero since 2008.

The U.S. 10-year note, the benchmark used to determine borrowing costs for governments, businesses and consumers, yielded 2.45% as of 9:12 a.m. Monday in London. Forecasters surveyed by Bloomberg say the yield will approach 3% within a year. Although JPMorgan provided plenty of caveats, the company’s analysis suggests it might not play out that way. Helped by bond-buying stimulus in the U.S., Japan and Europe, and increased bank lending in emerging markets, the amount of cash in circulation now totals $67 trillion globally, compared with about $62 trillion of estimated demand, data compiled by the bank show. That happens when the amount of money in the world exceeds the value of the global economy, financial assets and the cash that individuals hoard in response to risk.

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How real is the deal?

Greece Capitulates to Creditors’ Demands to Cling to Euro (Bloomberg)

Prime Minister Alexis Tsipras surrendered to European demands for immediate action to qualify for up to €86 billion euros ($95 billion) of aid Greece needs to stay in the euro. After a six-month offensive against German-inspired austerity succeeded only in deepening his country’s economic mess and antagonizing his European counterparts, there was no face-saving compromise on offer for Tsipras at a rancorous summit that ran for more than 17 hours. “Trust has to be rebuilt, the Greek authorities have to take on responsibility for what they agreed to,” German Chancellor Angela Merkel said after the meeting ended just before 9 a.m. in Brussels Monday. “It now hinges on step-by-step implementation of what we agreed.”

The agreement shifts the spotlight to the parliament in Athens, where lawmakers from Tsipras’s Syriza party mutinied when he sought their endorsement two days ago for spending cuts, pensions savings and tax increases. They have until Wednesday to pass into law key creditor demands, including streamling value-added taxes, broadening the tax base to increase revenue and curbing pension costs. While the summit agreement averted a worst-case outcome for Greece, it only established the basis for negotiations on an aid package, which would also include €25 billion to recapitalize its weakened financial system.

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“The government is trying to get the least bad, the least catastrophic deal..”

Greek Fury Meets Resignation at Demands for Concessions

Greek officials and media reacted with fury to the latest European demands for spending cuts and tax hikes, with some resorting to imagery from World War II and the U.S.- led war on terror to describe their predicament. Greece is being “waterboarded” by euro-area leaders, Nikos Filis, the parliamentary spokesman for the ruling Coalition of the Radical Left, or Syriza, said on ANT1 TV Monday morning. He accused Germany of “tearing Europe apart” for the third time in the past century. Newspapers leveled similar allegations at Germany, which led the hard-line camp at all-night talks that ended with an agreement on the terms needed to open a third bailout for Europe’s most-indebted country. EC President Donald Tusk, announcing the deal after 17 hours of negotiations, said it would entail “strict conditions” and end the threat of Greece exiting the euro.

“The government is trying to get the least bad, the least catastrophic deal,” Labor Minister Panos Skourletis said on ERT TV. “Talk of a Grexit shouldn’t take place when Greece has its back to the wall.” The tone of Greek reaction illustrates the obstacles for Prime Minister Alexis Tsipras as he seeks domestic approval for a deal that creditors called the country’s last chance to stay in the euro. European leaders insisted Greece’s parliament now approve measures including placing state assets in a dedicated fund in exchange for as much as €86 billion in new financing. “The agreement is difficult, but we averted the transfer of public property abroad, we averted the plan to cause a credit crunch and the collapse of the financial system,” Tsipras said after the summit.

“We put up a hard fight for the past six months and we fought to the end in order to get the best out of it, to get a deal which will allow the country to stand on its feet and the Greek people to keep fighting.” According to the initial text for a deal presented to European leaders, Greece needs to pass laws by July 15 to raise sales taxes, cut pension payments, alter the bankruptcy code and enforce automatic spending cuts if the next budget misses its targets. A key sticking point was the involvement of the IMF, which Tsipras at one point called “criminal.” Those measures will be difficult for Tsipras to sell to a public that voted decisively in a July 5 referendum to reject an earlier austerity package that was less onerous than the measures under discussion now. The premier, who was elected on an anti-austerity platform in January, also faces the challenge of keeping Syriza together through upcoming parliamentary votes.

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“Everybody on earth with a smartphone understands what happened to democracy last night.”

Greece Wins Euro Debt Deal – But Democracy Is The Loser (Paul Mason)

The eurozone took itself to the brink last night, and we will only know for certain later whether its reputation and cohesion can survive this. The big powers of Europe demonstrated an appetite to change the micro-laws of a smaller country: its bakery regulations, the funding of its state TV service, what can be privatised and how. Whether inside or outside the euro, many small countries and regions will draw long-term negative lessons from this. And from the apparently cavalier throwing of a last-minute Grexit option into the mix by Germany, in defiance of half the government’s own MPs. It would be logical now for every country in the EU to make contingency plans against getting the same treatment – either over fiscal policy or any of the other issues where Brussels and Frankfurt enjoy sovereignty.

Parallels abound with other historic debacles: Munich (1938), where peace was won by sacrificing the Czechs; or Versailles (1919), where the creditors got their money, only to create the conditions for the collapse of German democracy 10 years later, and their own diplomatic unity long before that. But the debacles of yesteryear were different. They were committed by statesmen. People who knew what they wanted and miscalculated. It was hard to see last night what the rulers of Europe wanted. What they’ve arguably got is a global reputational disaster: the crushing of a left-wing government elected on a landslide, the flouting of a 61 per cent referendum result. The EU – a project founded to avoid conflict and deliver social justice – found itself transformed into the conveyor of relentless financial logic and nothing else.

Ordinary people don’t know enough about the financial logic to understand why this was always likely to happen: bonds, haircuts and currency mechanisms are distant concepts. Democracy is not. Everybody on earth with a smartphone understands what happened to democracy last night.

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Nice!

How The Greeks Could Have The Last Laugh: Adopt The Renminbi (David McWilliams)

The other day Enda Kenny speculated aloud that Greece should follow Ireland. Michael Noonan thinks that too. Apparently, they should do what we did and, if Greece did, there’d be no problems. Maybe we should examine this proposal because what is on the table for Greece right now makes little sense. Is there an alternative for an inventive Greece – one that might follow Ireland’s blueprint? Before we answer that, let’s examine what’s on the table for Greece right now. The German/EU offer maintains that the price for staying in the Euro is possibly 10 to 15 years of austerity with no alternative industrial model. There should be no debt forgiveness and there should be years of low to zero growth as the Greeks grind out a meagre existence largely from tourist euros.

Because there is no capital, this will occur at a time when Greek tourist assets will plummet and those that are worth something, such as tourist hotels, will be bought off by German and other investors for half nothing. In time, the Greeks will end up as workers in the tourist industry, working for foreign owners of the assets. The profits from these assets will be repatriated back to Germany, boosting the German current account surplus, while the wages for this labour will be spent in Greece on imported goods, which may or may not be made in Germany. Basically Jamaica with ouzo! Over time, the Greek standard of living will remain low and Greek people with talent will have no choice but to emigrate. There may be some pick-up in the economy but as long as there is huge debt-servicing costs, this pick-up will largely go to servicing past debts.

If there is some new EU loan made available to Greece, this will simply be borrowing from tomorrow not to pay for today but to pay for yesterday. The Greeks should do all this in order to have the privilege of paying for this stuff in the Euro. It seems a high price to pay for a currency, don’t you think? But the alternative is, according to the EU, to revert to the drachma, watch the currency fall, watch the drachma value of Greece euro debts rise, allow the national balance sheet to implode and ensure that the banks collapse. In other words, flirt with short-term Armageddon.

[..] Okay, but how can Greece get lots and lots of foreign investment into the country while still using a currency that is strong and in so doing, change irrevocably their economy? How can they move onto a higher productivity level without all these debt repayments? They can do it by adopting the Chinese Renminbi! Yes, you read it right. There’s no point for the Greeks in going back to the drachma if that will destroy its banking system. Why not do what Ireland has done over the years and adopt some other country’s currency? What’s in it for China? Everything!

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“Imagine that the euro had never been introduced … do you seriously think that we would have a crisis as deep as what we have seen over the past seven years in Europe?”

The Euro – A Fatal Conceit (MM)

Imagine that the euro had never been introduced and we instead had had freely floating European currencies and each country would have been free to choose their own monetary policy and fiscal policy. Some countries would have been doing well; others would have been doing bad, but do you seriously think that we would have a crisis as deep as what we have seen over the past seven years in Europe? Do you think Greek GDP would have dropped 30%? Do you think Finland would have seen a bigger accumulated drop in GDP than during the Great Depression or during the banking crisis of 1990s? Do you think that European taxpayers would have had to pour billions of euros into bailing out Southern European and Eastern European governments? And German and French banks!

Do you think that Europe would have been as disunited as we are seeing it now? Do you think we would have seen the kind of hostilities among European nations as we are seeing now? Do you think we would have seen the rise of political parties like Golden Dawn and Syriza in Greece or Podemos in Spain? Do you think anti-immigrant sentiment and protectionist ideas would have been rising across Europe to the extent it has? Do you think that the European banking sector would have been quasi paralyzed for seven years? And most importantly do you think we would have had 23 million unemployed Europeans? The answer to all of these questions is NO!

We would have been much better off without the euro. The euro is a major economic, financial, political and social fiasco. It is disgusting and I blame the politicians of Europe and the Eurocrats for this and I blame the economists who failed to speak out against the dangers of introducing the euro and instead gave their support to a project so economically insane that it only could have been envisioned by the type of people the British historian Paul Johnson called “Intellectuals”.

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It’ll happen yet anyway.

A Greek Exit Could Not Be More Costly Than The Current Path (Mitchell)

It appears the Germans (with their Finish and Slovak cronies) have lost all sense of reason, if they ever had any. Germany has the socio-pathological excuse of having suffered from an irrational inflation angst since the 1930s and has forgotten its disastrous conduct during the 1930s and 1940s and also the generosity shown it by allied nations who had destroyed its demonic martial ambitions. Finland and Slovakia have no such excuse. They are just behaving as jumped-up, vindictive show ponies who are not that far from being in Greece’s situation themselves. Sure the Finns have a national guilt about their own notorious complicity with the Nazis in the 1940s but what makes them such a nasty conservative allies to the Germans is an interesting question.

It also seems to be hard keeping track with the latest negotiating offer from either side. But the trend seems obvious. The Greeks offer to bend over further and are met by a barrage of it is going to be hard to accept this , followed by a Troika offer (now generalised as the Eurogroup minus Greece which is harsher than the last. And so it goes from ridiculous to absurd or to quote a headline over the weekend. From the Absurd to the Tragic, which I thought was an understatement. There are also a plethora of plans for Greece being circulated by all and sundry, most of which hang on to the need for the nation to run primary fiscal surpluses, with no reference to the scale of the disaster before us (or rather the Greek people). It is surreal that this daily farce and public humiliation (like the medieval parading of recalitrants in stocks) is being clothed as “governance”. Only in Europe really.

We now know that the Eurogroup is not content to destroy the credibility of the Greek government and have the Greek prime minister come cap in hand begging for money and agreeing to turn his back on the sentiments of his own people, expressed so strongly last Sunday. The latest document from the Recession Cult has demanded even deeper measures from Athens, which Euclid Tsakalotos has apparently acceded to.

They now want a primary surplus target of 3.5% of GDP by 20183 , much deeper pension cuts, widespread product market deregulation, a more comprehensive privatisation program (so that the northern capital owners can get their hands on Greek assets for cheap), massive deregulation of the labour market, wind-back legislation since the beginning of 2015 which have not been agreed with the institutions and run counter to the program commitments and put all of that on top the harsh austerity that has already been pushed leading into the referendum. The sentiment is that Germany is not going for an exit for Greece but total submission and probably a new government by the end of the week .

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One man has not given up.

Dr Schäuble’s Plan for Europe: Do Europeans Approve? (Yanis Varoufakis)

Article to appear in Die Zeit on Thursday 16th July 2015 – Pre-publication summary: Five months of intense negotiations between Greece and the Eurogroup never had a chance of success. Condemned to lead to impasse, their purpose was to pave the ground for what Dr Schäuble had decided was ‘optimal’ well before our government was even elected: That Greece should be eased out of the Eurozone in order to discipline member-states resisting his very specific plan for re-structuring the Eurozone.

This is no theory. How do I know Grexit is an important part of Dr Schäuble’s plan for Europe? Because he told me so!

I wrote this article not as a Greek politician critical of the German press’ denigration of our sensible proposals, of Berlin’s refusal seriously to consider our moderate debt re-profiling plan, of the European Central Bank’s highly political decision to asphyxiate our government, of the Eurogroup’s decision to give the ECB the green light to shut down our banks.

I wrote this article as a European observing the unfolding of a particular Plan for Europe – Dr Schäuble’s Plan. And I am asking a simple question of Die Zeit’s informed readers:

Is this a Plan that you approve of?
Do you consider this Plan good for Europe?

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#ThisIsACoup

Killing the European Project (Paul Krugman)

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro. Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany’s good intentions after this? In a way, the economics have almost become secondary. But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line. This has no bearing at all on the underlying economics of austerity.

It’s as true as ever that imposing harsh austerity without debt relief is a doomed policy no matter how willing the country is to accept suffering. And this in turn means that even a complete Greek capitulation would be a dead end. Can Greece pull off a successful exit? Will Germany try to block a recovery? (Sorry, but that’s the kind of thing we must now ask.) The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

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“Here you have the advanced countries trying to undermine a global effort to stop tax avoidance. Can you have a better image of hypocrisy?”

Germany Showing ‘Lack Of Solidarity’ Over Greece: Stiglitz (AFP)

Prominent economist and Nobel laureate Joseph Stiglitz accused Germany on Sunday of displaying a “lack of solidarity” with debt-laden Greece that has badly undermined the vision of Europe. “What has been demonstrated is a lack of solidarity by Germany. You cannot run a eurozone without a basic modicum of solidarity. It is really undermining the common sense of vision, the sense of common solidarity in Europe,” the Colombia University professor and former World Bank chief economist told AFP. “I think it s been a disaster. Clearly Germany has done a serious blow, undermining Europe,” he said.

“Asking even more from Greece would be unconscionable. If the ECB allows Greek banks to open up and they renegotiate whatever agreement, then wounds can heal. But if they succeed in using this as a trick to get Greece out, I think the damage is going to be very very deep.” Stiglitz is in the Ethiopian capital Addis Ababa for this week s international development financing summit, which is presented as crucial for United Nations efforts to end global poverty and manage climate change by 2030. He is supporting the creation of an international tax organisation within the UN to fight against tax evasion by multinationals, although this has yet to win Western agreement.

International tax rules that allow large companies to avoid tax end up costing developing countries $100 billion every year, according to Oxfam. “European leaders and the West in general are criticising Greece for failure to collect taxes,” Stiglitz said. “The West has created a framework for global tax avoidance… Here you have the advanced countries trying to undermine a global effort to stop tax avoidance. Can you have a better image of hypocrisy?”

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Very strong from Zuesse.

How Fascist Capitalism Functions: The Case Of Greece (Zuesse)

There is democratic capitalism, and there is fascist capitalism. What we have today is fascist capitalism; and the following will explain how it works, using as an example the case of Greece. Mark Whitehouse at Bloomberg headlined on 27 June 2015, “If Greece Defaults, Europe’s Taxpayers Lose,” and presented his ‘news’ report, which simply assumed that, perhaps someday, Greece will be able to get out of debt without defaulting on it. Other than his unfounded assumption there (which assumption is even in his headline), his report was accurate. Here is what he reported that’s accurate: He presented two graphs, the first of which shows Greece’s governmental debt to private investors (bondholders) as of, first, December 2009; and, then, five years later, December 2014.

This graph shows that, in almost all countries, private investors either eliminated or steeply reduced their holdings of Greek government bonds during that 5-year period. (Overall, it was reduced by 83%; but, in countries such as France, Portugal, Ireland, Austria, and Belgium, it was reduced closer to 100% — all of it.) In other words: by the time of December 2009, word was out, amongst the aristocracy, that only suckers would want to buy it from them, so they needed suckers and took advantage of the system that the aristocracy had set up for governments to buy aristocrats’ bad bets — for governments to be suckers when private individuals won’t.

Not all of it was sold directly to governments; much of it went instead indirectly, to agencies that the aristocracy has set up as basically transfer-agencies for passing junk to governments; in other words, as middlemen, to transfer unpayable debt-obligations to various governments’ taxpayers. Whitehouse presented no indication as to whom those investors sold that debt to, but almost all of it was sold, either directly or indirectly, to Western governments, via those middlemen-agencies, so that, when Greece will default (which it inevitably will), the taxpayers of those Western governments will suffer the losses. The aristocracy will already have wrung what they could out of it.

Who were these governments and middlemen-agencies? As of January 2015, they were: 62% Euro-member governments (including the European Financial Stability Facility); 10% IMF, and 8% ECB; then, 17% still remained with private investors; and 3% was owned by “other.” Whitehouse says: “Ever since the region’s sovereign-debt crisis first flared in 2010, European nations have been stepping in for Greece’s private creditors – largely German and French banks — by lending the country [Greece] the money to pay them off. Thanks to this bailout [of ‘largely German and French banks’], banks and [other private] investors have much less at stake than before.”

So: what got bailed-out was private investors, not ‘the Greek people’ (such as the ‘news’ media assert, or try to suggest). For example, a reader’s comment to Whitehouse’s article says: “A reasonable assumption is that a large part of the Greek debt to the Germans was the result of Greek consumption of German goods and services bought with the German provided credit. In that case, the Germans have lost the Greek goods and services that could have potentially been bought with the money that is owed to them.” But this is entirely false: that “consumption” was by the aristocracy, not by the public, anywhere or at any time. After all: It’s the aristocracy that get bailed-out — not the public, anywhere.

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“..we are studying the possibility of organising direct deliveries of energy resources to Greece, starting shortly.”

Russia Considering Direct Fuel Deliveries To Help Greece (AFP)

Russia is considering direct deliveries of fuel to Greece to help prop up its economy, Energy Minister Alexander Novak said Sunday, quoted by Russian news agencies. “Russia intends to support the revival of Greece’s economy by broadening cooperation in the energy sector,” Novak told journalists, quoted by RIA Novosti news agency. “Accordingly we are studying the possibility of organising direct deliveries of energy resources to Greece, starting shortly.”

Novak said that the energy ministry expected “to come to an agreement within a few weeks,” but did not specify what type of fuel Russia would supply. Greece’s left-wing leadership has made a show of drawing closer to Moscow in recent months as the spat with its international creditors has grown more ugly. In June, Greek Prime Minister Alexis Tsipras during a visit to Russia sealed a preliminary agreement for Russia to build a €2 billion gas pipeline through Greece, extending the TurkStream project, which is intended to supply Russian gas to Turkey.

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Greek politics will get a shake-up. But only Syriza can govern.

Greek Government’s Majority In Question, Says Labor Minister (Reuters)

The strength of the Greek government’s majority is in question and no-one can blame lawmakers who won’t agree to the terms of a cash-for-reforms deal with the country’s creditors, Labor Minister Panos Skourletis said on Monday. Eurozone leaders argued late into the night with near-bankrupt Greece at an emergency summit, demanding that Athens enact key reforms this week to restore trust before they will open talks on a financial rescue. “Right now there is an issue of a governmental majority (in parliament),” Skourletis told state TV ERT. “I cannot easily blame anyone who cannot say ‘yes’ to this deal.” “We aren’t trying to make this deal look better, and we are saying it clearly: this deal is not us,” he added.

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This is a question?

Was This Humiliation Of Greeks Really Necessary? (Helena Smith)

In return for a third bailout – this time staggered over three years and amounting to €53bn – Greeks essentially have been told to walk through the valley of the shadow of death. And that is the good scenario. The alternative – Grexit – would have bypassed purgatory but taken crisis train passengers straight to hell. Greeks know that the next 48 hours will define them and Europe, too. But whatever happens, they also know the choice is one between a complete march into the unknown or a conscious decision to take measures that – for a time, at least – will inflict further damage on a country already hollowed out by the eviscerating effects of austerity. Either way, the future is bleak.

In this, Tsipras’s brinkmanship has not helped: trust is so eroded between the leadership in Athens and creditors abroad that aid, if given, will not be handed magnanimously. Almost everyone I know now fears that Greece will be left to rot in the eurozone. Politically, there is tumult on the horizon. That, in the early hours of Saturday, so many government MPs refused to give their vote to the proposed package of pension and budget cuts, tax rises and administrative reform does not portend well. Many Greeks may now credit Tsipras for convincing Europe’s fiscally obsessed creditors that the country’s debt burden remains the cause of its woes (as indeed it does), but that will not cut much ice with hardliners in his party.

Events have moved at such giddying speed that ironically most Greeks do not appear to blame Tsipras for ignoring the resounding rejection that he himself had urged when the economic demands of lenders were put to popular vote last weekend. The referendum, like so much else, has become part of the blanket of crisis. That the measures were less severe than the ones the government ultimately accepted has, in a further irony, been similarly played down. Greece, in truth, has skated so close to the edge – apocalyptic scenarios more real than ever before – that Tsipras’s spectacular U-turn has come as a welcome relief. Across an ever-fractious political spectrum, he has been applauded for putting his country before his party.

In the event of financial rescue, the hope is that Tsipras finally tackles the maladies that have so pervasively held back the country’s potential. Like no other party in power, Syriza is well placed to tackle the age-old malignancies of tax evasion, cronyism and corruption. But the leader will also face conflict on the streets. In the back alleys of Athens, where activists work in dark offices stacked with freshly painted placards and banners – the ammunition of the war against austerity – the battle is already on. “There will be demonstrations every day,” vowed Petros Papakonstantinou of the anti-capitalist bloc Antarsya. “And we will press for a general strike. That won’t be easy when the left is in power.”

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In fine form.

Greek Deal Makes Versailles Look Like A Picnic – Steve Keen (BallsRadio)

This interviewed was recorded before the deal was supposedly struck, but the sentiment still stands. Just how much does Greece have to give away. Too much says economist Steve Keen.

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“Even as its economy collapses and the government makes cuts in welfare spending, Greece’s military budget remains among the largest in the European Union..”

Greece Today, America Tomorrow? (Ron Paul)

The drama over Greece’s financial crisis continues to dominate the headlines. As this column is being written, a deal may have been reached providing Greece with yet another bailout if the Greek government adopts new “austerity” measures. The deal will allow all sides to brag about how they came together to save the Greek economy and the European Monetary Union. However, this deal is merely a Band-Aid, not a permanent fix to Greece’s problems. So another crisis is inevitable. The Greek crisis provides a look into what awaits us unless we stop overspending on warfare and welfare and restore a sound monetary system. While most commentators have focused on Greece’s welfare state, much of Greece’s deficit was caused by excessive military spending.

Even as its economy collapses and the government makes (minor) cuts in welfare spending, Greece’s military budget remains among the largest in the European Union. Despite all the handwringing over how the phony sequestration cuts have weakened America’s defenses, the United States military budget remains larger than the combined budgets of the world’s next 15 highest spending militaries. Little, if any, of the military budget is spent defending the American people from foreign threats. Instead, the American government wastes billions of dollars on an imperial foreign policy that makes Americans less safe. America will never get its fiscal house in order until we change our foreign policy and stop wasting trillions on unnecessary and unconstitutional wars.

Excessive military spending is not the sole cause of America’s problems. Like Greece, America suffers from excessive welfare and entitlement spending. Reducing military spending and corporate welfare will allow the government to transition away from the welfare state without hurting those dependent on government programs. Supporting an orderly transition away from the welfare state should not be confused with denying the need to reduce welfare and entitlement spending.

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New Zealand better beware. Wait till housing collapses on top of the logging and dairy crashes.

Chinese Buyers Turn Kiwis Into Renters In Their Own Country (NZ Herald)

Mainland Chinese money snapped up at least 80% of residential sales in parts of Auckland in March but were nearer 90% in May, a whistle blower from the industry says. The Herald reported at the weekend Labour data that showed people of Chinese descent accounted for 39.5% of the almost 4000 Auckland transactions between February and April. Yet Census 2013 data showed ethnic Chinese who are New Zealand residents or citizens account for only 9% of Auckland’s population. The property insider – who wanted to protect their identity because they feared for their job – said the situation was much more serious than the Labour data suggested. The numbers should be more than doubled due to the weight of capital coming out of Mainland China, the whistle blower said.

One big Auckland real estate agency, where many salespeople are of Chinese ethnicity, was selling almost every single property throughout many suburban areas to people living in China, the insider said. In some cases, those buyers had a New Zealand connection “but it’s one group disenfranchising the other. It’s really taken off in the last 18 months. I’ve been studying the figures since October.” “The Kiwis, South Africans and British have dropped out of the market because they just can’t compete with the Chinese. The people living in China buy the places the Kiwis are trying to get, then those places are rented out the next day,” the insider said. That showed the person is in an important position in the property sector with extensive access to information unavailable to the public revealing who the buyers really are.

“We’re becoming tenants in our own country. It’s utterly outrageous. The Chinese are interested in Panmure, Ellerslie, Greenlane, Epsom, Remuera, the North Shore – not so much the west.” In some cases, a single Chinese resident was spending up to $15 million on Auckland properties and the higher the bidding at auctions went, the happier they were. “They simply don’t care how much they pay. It’s not related to the CV. If they pay another $400,000 more, that’s $400,000 they’re better off as it’s $400,000 they have shifted out of Mainland China. If they continue vacuuming up all the existing properties at the current rate of consumption, what will that do? The Chinese will outbid everyone at the auction. I’m sick of the phone bidder from Guangzhou. I’m relieved that someone at last is talking about this,” the insider said of Twyford’s data.

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“..it implies that this is a capital movement rather than just individuals looking to park money.“

China’s Rich Seek Shelter From Stock Market Storm In Foreign Property (Guardian)

Real estate agents in Australia, Britain and Canada are bracing for a surge of new interest in their already hot property markets, with early signs that wealthy Chinese investors are seeking a safe haven from the turmoil in Shanghai’s stock markets. Sydney agent Michael Pallier said in the past week alone he has sold two new apartments and shown a A$13.8m (US$10.3m) house in the harbourside city to Chinese buyers looking for an alternative to stocks. “A lot of high-net-worth individuals had already taken money out of the stock market because it was getting just too hot,” Pallier, the principal of Sydney Sotheby’s International Realty, said. “There’s a huge amount of cash sitting in China and I think you’ll find a lot of that comes to the Australian property market.”

Around 20% has been knocked off the value of Chinese shares since mid-June, although attempts by authorities to stem the bleeding are having some effect. Many wealthy Chinese investors had already cashed out. Major shareholders sold 360bn yuan (US$58bn) in the first five months of 2015 alone, compared with 190bn yuan in all of 2014 and an average of 100bn yuan in prior years, according to Bank of America Merrill Lynch. While much of that money may initially be parked in more liquid assets like US Treasury bonds and safe-haven currencies such as the Swiss franc, there is growing evidence that foreign property sales may receive a boost.

“There is anecdotal evidence that Chinese buyers have intensified their interest in safe-haven global property markets, including London, as a result of the recent stock market volatility,” said Tom Bill, head of London residential research at Knight Frank. Ed Mead, executive director of realtor Douglas & Gordon in London, said his firm had seen two buyers from China looking to buy whole blocks of flats. “It is unusual to see the Chinese block buying, it implies that this is a capital movement rather than just individuals looking to park money.“

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“../Beijing’s panicky policy actions may reveal that the economy is in worse shape than is being let on.”

How China’s Stock-Market Muddle May Spread (MarketWatch)

Despite China’s troubled stock markets finding a floor last week, do not expect any quick return to normality. The dramatic stock rout and subsequent heavy-handed interference by authorities will not be easily forgotten. It has not just rattled investor confidence, but also damaged the political credibility of President Xi Jinping. For China’s legions of retail investors, the heavy losses have been compounded by wholesale stock suspensions — with half of Shenzhen and Shanghai stocks still not trading. This is a likely to fuel anxiety so long as investors are trapped in stock positions with no liquidity. It is also likely to lead to a sea change in investor mood from only weeks earlier, when some were even selling the roof over their head to buy equities.

There may be a nasty surprise when the first post-suspension bid prices come in. Albert Edwards at Société Générale highlights the experience in 2008, when Pakistan suspended trading on the Karachi Stock Exchange to try to “put a floor” under stocks after a share-price slump. This episode left authorities’ reputation in tatters, and when the market reopened, it quickly lost another 52%. For foreign investors, many of the bizarre interventions by Beijing last week will have raised a number of other, more fundamental questions about the competence of China’s leadership and the true state of the economy. One area of renewed uncertainty is the ongoing policy commitment to allowing market forces to play a larger role in the economy, a part of Beijing’s larger reform program.

The reintroduction of a ban on initial public offerings and spate of stock suspensions set a worrying precedent and will refocus attention on political risk. This, in turn, will place a cloud of doubt over plans for liberalizing interest rates, the capital account and the domestic bond market. Foreign investors are likely to think twice as they face the risk that the government may simply suspend reforms if prices start going against them. These recent actions suggest the voices of conservatives opposed to market reforms are in the ascendancy. Perhaps the more worrying take-away is that Beijing’s panicky policy actions may reveal that the economy is in worse shape than is being let on.

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More losses.

China’s Market-Tracking ETFs Roiled By Share Suspensions (FT)

A wave of stock suspensions has played havoc with exchange traded funds tracking Chinese markets, causing wild price swings and big price gaps between passive funds and the assets they track. More than 1,400 companies — more than half of all listings — are on trading halts in China, in an effort to shield themselves from the dramatic equity market sell-off that has wiped trillions of dollars off the value of Chinese stocks. The suspensions have left a number of ETFs holding frozen shares or derivatives linked to them, even as the funds themselves continue to trade. One Hong Kong-listed ETF that tracks China’s small-cap board, the ChiNext, traded every day last week, despite more than two-thirds of the underlying shares it reflects being suspended.

On Friday, the CSOP ChiNext ETF jumped by a fifth, while the index itself rose only 4.1%. Concerns have been growing globally over the potential mismatch between the liquidity of the underlying collateral that ETFs hold and that of their units. The Bank of International Settlements warned last month that the growth of passive funds may have created a “liquidity illusion” in bonds, although analysts say the problems currently facing Chinese equity ETFs are specific to the idiosyncrasies of that market. Chinese shares have tumbled in the past month, as millions of retail investors unwind leveraged bets on the market. Beijing has responded with various supportive measures, including bans on short selling, and on stock sales by large shareholders.

The central bank has also been funnelling money to brokerages to help them buy equities. Trading volumes for many China-tracker ETFs have doubled over the past two weeks, as market volatility has risen. ETFs have experienced wild daily price swings as investors use passive funds for price discovery of suspended Chinese assets. Last Thursday, the Deutsche X-Trackers Harvest CSI 300 ETF, which trades in New York, rose 20%. The extent of share suspensions has made ETFs “one of the only tradable instruments” for global investors looking to manage their exposure to Chinese stocks, said Warren Deats, head of Asia-Pacific portfolio trading at Barclays. Such funds are performing like futures contracts, he added, with investors using them to estimate the true level of the market — a view echoed by fund providers.

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Jul 122015
 
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DPC Up Sutter Street from Grant Avenue, San Francisco 1906

China’s Real Problem Isn’t Stocks – It’s Real Estate! (Harry Dent)
Greece Crisis: Europe Turns The Screw (Paul Mason)
EU Leaders’ Greece Summit Cancelled As Eurozone Talks Grind On (Guardian)
Greek Bailout Deal Remains Elusive (WSJ)
Germany Prepares ‘Temporary’ Grexit, Euro Project On Brink Of Collapse (Khan)
Germany Trying To Humiliate Greece, Says MEP Papadimoulis (Reuters)
Finland’s Parliament In Favour Of Forcing Greece Out Of The Euro (AFP)
The Problem With a Euro Fix: What’s in It for the Dutch? (NY Times)
Would Grexit Be A Disaster? Probably Not, Says History (Arends)
Angela Merkel’s Legacy At Stake As She Chooses Between Two Disasters (Guardian)
The Eurogroup Gets Mythological on Greece (Lucey)
A Union of Deflation and Unemployment (Andricopoulos)
The Great Recession and the Eurozone crisis (Wren-Lewis)
Greece Prepares Itself To Face Another Year Of Political Turmoil (Observer)
Greeks Resigned To A Hard, Bitter Future Whatever Deal Is Reached (Observer)
A Coming Era Of Civil Disobedience? (Buchanan)

China private debt is staggering.

China’s Real Problem Isn’t Stocks – It’s Real Estate! (Harry Dent)

I always say bubbles burst much faster than they grow. And after exploding up 159% in one year, Chinese stocks crashed 35% in three weeks. This all happened while the Chinese economy and exports continued to fall. And two thirds of these new trading accounts belong to investors who don’t have so much as a high school degree. How crazy is that? As Rodney wrote earlier this week, the Chinese government is taking every desperate measure to stop the slide: Artificial buying to prop up the market… Banning pension funds from selling stocks… Threatening to jail investors for shorting stocks… Allowing 1350 out of 2900 major firms to halt trading in their stocks indefinitely, and stopping trades on another 750 that fell 10% or more… It’s madness!

This second and FINAL bubble in Chinese stocks occurred precisely because real estate stopped going up. Over the last year it actually declined. So after decades of speculation, the gains stopped coming in, and rich and poor investors alike switched to stocks. But the funny thing about the Chinese is – they don’t put most of their money in stocks. Only about 7% of urban investors own stocks and half of those accounts are under $15,000. In fact, it’s estimated that the Chinese only put 15% of their assets there, and that may be on the high side. What is so unusual about the Chinese is that they save just over half their income! And the top 10% save over two-thirds! And where do those savings go? Mostly into real estate! China’s home ownership rate is 90%. It’s just 64% in the U.S. even though we’re much wealthier and credit-worthy.

That’s because home ownership is a staple of their culture. A Chinese man has no chance of getting a date or getting laid unless he owns a home – no matter how small. Just look at this simple chart:

Chinese households have 74.7% of their assets in real estate vs. 27.9% in the U.S. – which helps explain why theirs is one of the greatest real estate bubbles in modern history! But the key here is – when that bubble bursts, it will cause an unimaginable implosion of Chinese wealth. In one fell swoop, three-quarters of their assets will get crushed! And just how big of a bubble is it? In Shanghai, real estate is up 6.6 times since 2000. That’s 560%. I’ve been going on and on about the massive overbuilding of basically everything in China for years now. I’ve never once flinched from my prediction that this enormous bubble will burst. And I’ve kept saying there will be a very hard landing no matter how much the government tries to fight it.

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So there! “.. the Greeks last night revealed the true dysfunctionality of the system they are trying to stay inside.”

Greece Crisis: Europe Turns The Screw (Paul Mason)

The Greeks arrived with a set of proposals widely scorned as “more austere than the ones they rejected”. The internet burst forth with catcalls – “they’ve caved in”. By doing so, however, the Greeks last night revealed the true dysfunctionality of the system they are trying to stay inside. First, Germany put forward a proposal one could best describe as “back of envelope” for Greece to leave the Eurozone for five years. There is logic to it – because Germany was signalling that only outside the Eurozone could Greece’s debts be written off. But for the most powerful Eurozone nation to arrive with an unspecified, two-paragraph “suggestion” at this stage explains why the Italians, according to the Guardian, are about to blast them with both barrels for lack of leadership.

Then came the Finns. Their government is a coalition of centre right parties and the right-wing populist Finns Party. The latter threatened to collapse the new governing coalition if the Finns take part in a new bailout for Greece. The demand is now that the Greeks pass all the laws they signed up to in advance of any new bailout deal. This is backed up by a threat to keep the Greek banks starved of liquidity from the ECB for another week. In Greece large numbers of people – on all sides of politics – believe the Europeans are trying to force the elected government to resign before a deal is concluded. If so there will be political chaos. Syriza’s poll rating is currently 38% and rising. Without a “moderate” split from Syriza the centrist parties have no chance of forming a new government, and without Tsipras’ tacit consent there can be no interim government of unelected technocrats.

On Friday I reported, on the basis of intelligence being supplied to large corporations, that the key supply concerns are gas – because of the need for forward contracts – disposables in the healthcare system, and meat imports. The screw Europe is turning on its own supposed member state now begins to resemble a sanctions regime. Without more liquidity the banks will run out of money some time this week. To be clear, it is Europe that is in charge of the Greek banking system, not Greece. Yet after last night what many in Greece and elsewhere see is that Europe has no single understanding of what it’s trying to achieve through this enforced destruction of a modern economy.

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Got to stretch it out for dramatic effect.

EU Leaders’ Greece Summit Cancelled As Eurozone Talks Grind On (Guardian)

A meeting of all EU leaders to decide Greece’s fate has been cancelled, as ministers from the narrower eurozone group struggle to agree on a way forward to resolve the intractable debt crisis. Donald Tusk, the European council president, announced that the session of the 28 EU heads of government scheduled for Sunday had been postponed. Instead, eurozone finance ministers are meeting on Sunday morning, and a summit of eurozone heads of government will take place in the afternoon. “I have cancelled #EUCO today. #EuroSummit to start at 16h and last until we conclude talks on #Greece,” Tusk tweeted. Last-chance talks between the 19 eurozone finance ministers in Brussels ended at midnight, with deep divisions persisting over whether to extend another bailout of up to €80bn to Greece in return for fiscal reforms.

Finland rejected any more funding for the country and Germany called for Greece to be turfed out of the currency bloc for at least five years. Experts from the group of creditors known as the troika said fiscal rigour proposals from Athens were good enough to form “the basis for negotiations”. But the German finance minister, Wolfgang Schäuble, dismissed that view, supported by a number of northern and eastern European states. “These proposals cannot build the basis for a completely new, three-year [bailout] programme, as requested by Greece,” said a German finance ministry paper. It called for Greece to be expelled from the eurozone for a minimum of five years and demanded that the Greek government transfer €50bn of state assets to an outside agency for sell-off.

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Only some of the parties seem to want one.

Greek Bailout Deal Remains Elusive (WSJ)

Greek crisis talks between eurozone finance ministers on a new €74 billion loan came to an inconclusive end this morning in a sign that a deal which would secure much-needed financing for Athens and prevent a possible exit from the currency area is still far from certain. The ministers will reconvene at around 11am local time in an effort to reach consensus on whether economic overhauls and budget cuts proposed by Greece are sufficiently far-reaching to form a basis for negotiations on fresh loans to Athens. Then the baton will be handed over to European leaders, who will gather for an emergency summit. The heads of state and government will then have to determine how much money, and political goodwill, they are prepared to spend on keeping Greece in their currency union.

“It is still very difficult, but work is still in progress” said Dutch Finance Minister Jeroen Dijsselbloem, who presides over the meetings with his counterparts. “There’s always hope,” said Pierre Moscovici, the European Union’s economics commissioner, adding that he hoped for more progress. Only unanimous agreement on the amount of new rescue loans and debt relief to grant Athens will allow the country to avoid full-on bankruptcy and Greek banks to reopen on Monday with euros in their tills. The talks came after an assessment by the Troika estimated that a new bailout for Greece would cost €74 billion. In a letter requesting the loan earlier this week, Greece has estimated its financing needs at €53.5 billion.

Two weeks of capital controls have inflicted such damage on Greece’s banks that it will cost €25 billion to prop them up again, European officials said. Such costs would add to Greece’s already high debt load, creating more pressure for controversial action to be taken to make it more manageable. Over the past five months, Athens has exhausted the patience of most of its counterparts — particularly after Prime Minister Alexis Tsipras unexpectedly called for a referendum on creditors’ demands, asking voters to reject them. While Mr. Tsipras has since largely backed down on most of the overhauls and budget cuts creditors asked for, there are doubts across European capitals over whether his government can implement any deal it signs.

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If you ask me, tempexit is the craziest notion so far.

Germany Prepares ‘Temporary’ Grexit, Euro Project On Brink Of Collapse (Khan)

The German government has begun preparations for Greece to be ejected from the eurozone, as the European Union faces 24 hours to rescue the single currency project from the brink of collapse. Finance ministers failed to break the deadlock with Greece over a new bail-out package, after nine hours of acrimonious talks as creditors accused Athens of destroying their trust. It leaves the future of the eurozone in tatters only 15 years after its inception. In a weekend billed as Europe’s last chance to save the monetary union, ministers will now reconvene on Sunday morning ahead of an EU leaders’ summit later in the evening, to thrash out an agreement or decide to eject Greece from the eurozone.

Should no deal be forthcoming, the German government has made preparations to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid while it makes the transition. An incendiary plan drafted by Berlin’s finance ministry, with the backing of Angela Merkel, laid out two stark options for Greece: either the government submits to drastic measures such as placing €50bn of its assets in a trust fund to pay off its debts, and have Brussels take over its public administration, or agree to a “time-out” solution where it would be expelled from the eurozone. German vice-chancellor Sigmar Gabriel said they were Greece’s only viable options, unless Athens could come up with better alternatives. “Every possible proposal needs to be examined impartially” said Mr Gabriel, who is also Germany’s socialist party leader.

Creditors voiced grave mistrust with Athens, a week after the Leftist government held a referendum in which it urged the Greek people to reject the bail-out conditions it has now signed up to. A desperate Alexis Tsipras managed to secure parliamentary backing for a raft of spending cuts and tax rises to secure a new three-year rescue programme worth around €75bn-€100bn. But finance ministers rounded on Mr Tsipras for offering to implement measures that he had previously dubbed “humiliating” and “blackmail” only seven days ago. “We will certainly not be able to rely on promises,” said Germany’s hard-line finance minister, Wolfgang Schäuble. “In recent months, during the last few hours, the trust has been destroyed in incomprehensible ways,” he said. “We are determined to not make calculations that everyone knows can’t be trusted. We will have exceptionally difficult negotiations. I don’t think we will reach an easy decision.”

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No kidding.

Germany Trying To Humiliate Greece, Says MEP Papadimoulis (Reuters)

Germany is trying to humiliate Greece by bringing new demands for a bailout deal, Dimitrios Papadimoulis, Vice-President of the European Parliament and member of Greece’s ruling SYRIZA party, said on Sunday. Highlighting the depth of reluctance to grant another rescue to Greece, Germany’s finance ministry put forward a paper on Saturday demanding stronger Greek measures or a five-year “time-out” from the euro zone that looked like a disguised expulsion. “What is at play here is an attempt to humiliate Greece and Greeks, or to overthrow the (Prime Minister Alexis) Tsipras government,” Papadimoulis told Mega TV.

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A country with a population half the size of Greece will decide?

Finland’s Parliament In Favour Of Forcing Greece Out Of The Euro (AFP)

Finland’s parliament has decided it will not accept any new bailout deal for Greece, media reports said Saturday, piling on pressure as eurozone finance ministers tried to find a way out of the impasse. The decision to push for a so-called “Grexit” came after the eurosceptic Finns party, the second-largest in parliament, threatened to bring down the government if it backed another rescue deal for Greece, according to public broadcaster Yle. Under Finland’s parliamentary system, the country’s “grand committee” – made up of 25 of 200 MPs – gives the government a mandate to negotiate on an aid agreement for Greece. Members of the committee met for talks in Helsinki on Saturday afternoon to decide their position, YLE reported.

The finance minister, Alexander Stubb, was at the crunch eurozone talks in Brussels and tweeted that he could not reveal the mandate given to him by the grand committee so long as the negotiations were still ongoing. “The mandate is not public and the Finnish delegation will not discuss it publicly,” Kaisa Amaral, a Finnish spokesman, told AFP. The Brussels talks were set to resume on Sunday after failing to reach an agreement on Saturday but opinion among northern and eastern European countries appeared to be hardening against accepting the reform’s Greece has offered in exchange for another bailout. Finns party leader Timo Soini, who is also the country’s foreign minister, has repeatedly argued in favour a “Grexit”, saying it would be better for Greece to leave the euro.

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Holland in the role of Connecticut.

The Problem With a Euro Fix: What’s in It for the Dutch? (NY Times)

Economists agree: If the eurozone does not break up, it will have to move closer together. They’re right. But it’s easy to understand why Europeans are not eager to heed their advice. Basically, the proposition of European integration is that the Netherlands should end up like Connecticut. And even though Connecticut is a lovely place, the Dutch have good reason to be wary of that. It’s expensive to be Connecticut, because Connecticut has to pay for Mississippi and Alabama. Large, economically diverse areas can successfully share a single currency if they have deep economic links that make it possible for troubled regions to ride out crises. That means shared bank regulation and deposit insurance, so banks don’t face regional panics; a labor market that lets people move from places without jobs to places with them; and a fiscal union, which allows the government to collect taxes wherever there is money and spend it wherever there are needs.

The United States shows that this approach can work: America’s 50 economically diverse states share a currency quite comfortably, in part because of our banking union (Washington State did not have to bail out Washington Mutual on its own when it failed), our fluid labor market (as oil prices rise and fall, workers move in and out of North Dakota) and our fiscal union (states in economic pain benefit from government programs financed by all states). Nevada does not need to devalue its currency to restore its competitiveness relative to California in a severe recession; instead, Nevadans can collect federally funded unemployment insurance and, if necessary, move to California. If the Greeks had similar options available in 2008, they would be much better off today.

But the EU’s centralized budget equals only about 1% of Europe’s GDP, compared with more than 20% for the American federal government. A much more centralized E.U. budget, with much more money flowing through Brussels the way it flows through Washington, could provide similar macroeconomic stability to Europe by creating a fiscal union. But the American fiscal union is very expensive for rich states. According to calculations by The Economist, Connecticut paid out 5% of its gross domestic product in net fiscal transfers to other states between 1990 and 2009; that is, its tax payments exceeded its receipt of government services by that amount. This is typical for rich states: They pay a disproportionate share of income and payroll taxes, while government services are disproportionately collected in states where people are poor or old or infirm.

The obvious question, then, about a fiscal union is: What’s in it for the Netherlands (or Austria or Luxembourg)? Is it worth making the euro “work” if that entails devoting several%age points of your economic output to fiscal transfers to poorer countries, indefinitely, the way Connecticut does to poorer states?

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I would not rule this out. But Greece would have to start from scratch with printing a new currency.

Would Grexit Be A Disaster? Probably Not, Says History (Arends)

If Greece rejected the international “bailout” terms, defaulted on its debts and dropped out of the eurozone, would it really face economic devastation, collapse and disaster? The IMF, the ECB and most economic “news” reports about the crisis say so. But history says something completely different. Contrary to what you may have read, lots of countries have been in a similar bind to that faced by the Greeks. And those that chose the so-called nuclear option of devaluation and default did just fine. Great Britain saw a “V-shaped” economic recovery after it dropped out of the European Exchange Rate Mechanism, the forerunner to the euro, in 1992. Real economic output expanded by 14% over the next five years, IMF records show.

The East Asian “Tiger” economies boomed after dropping their pegs to the U.S. dollar and letting their currencies plunge in 1997-1998. Ditto Russia after it defaulted and devalued in 1998. Ditto Argentina after it defaulted and devalued in 2001-2002. Those countries saw huge gains in real, inflation-adjusted output per person in the years following the alleged “nuclear” option of devaluation or default. The IMF’s own data reveal that from 1998 to 2003, Russia’s output per person soared by more than 40%. So did Argentina’s from 2002 to 2007. So much for “disaster” and “collapse.” Even the U.S. has been through this. In 1933, in the depths of the Great Depression, U.S. President Franklin Roosevelt outraged bankers by abandoning the gold standard and devaluing the dollar by 70%.

Over the next five years, gross domestic product expanded by around 40% (at constant prices). If history says financial devaluation or default may turn out just fine on Main Street, the same may even be true of bank closures. Ireland suffered three massive bank strikes in the 1960s and 1970s, including one that lasted for six months. During that time, people were effectively unable to use banks or get their hands on currency. What happened? The real economy emerged largely unscathed. People coped. They circulated IOUs and endorsed checks as makeshift currencies. They understood that “money” is just an accounting system. In other words, human beings proved to be adaptable and used some common sense, even without the help of financiers. Gosh. Who knew?

Our grandparents and great-grandparents did something similar here in the U.S. in the early 1930s, at the depths of the Great Depression’s banking crisis, records Loren Gatch, a political-science professor at the University of Central Oklahoma. Towns and even employers that lacked official currency to meet payroll or pay suppliers issued IOUs or notes, he writes. In March 1933, 24 companies in the mill town of New Bedford, Mass., effectively issued their own bank notes, and those were accepted by retailers around the town and circulated at face value, Gatch wrote. It’s hardly a surprise. Only bankers or fools would think human beings are completely powerless without banks. As for currencies, whether gold or dollars or euros or drachmas: The idea that they have power in themselves is a myth. They are purely a social construct..

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Her legacy is shot.

Angela Merkel’s Legacy At Stake As She Chooses Between Two Disasters (Guardian)

Merkel has faced a decision between two potentially disastrous scenarios. As Artur Fischer, joint CEO of the Berlin stock exchange, puts it: “Either she goes for a third bailout but risks isolating herself domestically in the process – and also faces returning to the same point we’re at now six months down the line and again a year down the line. Or she agrees to a Grexit and, as Greece sinks into more misery with pictures of their plight flashed round the world, she is blamed for that.” For weeks Merkel has talked more about Greece than Germany. So familiar is she with its politics that Bernd Ulrich, chief political correspondent of the weekly Die Zeit, half-joked that “she could co-govern in Athens any time”.

The Neue Osnabrücker Zeitung summed up in an editorial what it described as the “Herculean task” that has faced her over the past few days. “This is Angela Merkel’s hour. She was the one expected to negotiate between the Greeks and the other euro partners. She was the one expected to find the compromise between the interests of 11 million Greeks and 320 million other inhabitants of the eurozone.” She will now have to bring the decision made in Brussels back to the Bundestag, where she will find an increasingly rebellious mood in her own conservative ranks, many of whom are seething that she has not pushed for a Grexit. They have also refused to even contemplate a haircut or debt restructuring, which the IMF is insisting upon if it is to remain involved.

They all say they are representing the voices of their angry constituents. And while there is not much doubt Merkel could get a bailout deal of some sort through the Bundestag if she wanted to, thanks to the backing of her junior coalition partner, the Social Democrats, the question remains: at what cost to her? A revolt within her party ranks could prove critical to her future as German chancellor. She sees her legacy at stake just as there are murmurings that she may contemplate a fourth term in 2017. In the past days an online petition by the economist Thomas Piketty, which appeals for the German government to grant Greece a debt cut like the one Germany received to help it to restructure after the second world war, has made a huge impact.

That and headlines such as the New York Times one last week: “Germans Forget Postwar History Lesson on Debt Relief in Greece Crisis”, accompanying an article that referred to “German hypocrisy” and a picture of the signing of an agreement that effectively halved West Germany’s postwar debt in 1953, has left some Germans smarting.

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Tantalus!

The Eurogroup Gets Mythological on Greece (Lucey)

Greek myth, which is in case you missed it full of tragedies, is the cultural mine that keeps on yielding for the present crisis. Last night we had a Eurogroup meeting. Greece offered everything the Eurogroup wanted, and more. The Eurogroup demurred and the Finns, in thrall to as populist a bunch of vote grabbers as ever was in the True Finns (the hint in the name is chilling) apparently said Aye, which is apparently Finnish for yes, although as nobody speaks Finnish outside Finland, who knows. So delving into Greek myth, today we see Tantalus. Tantalus fits right on the button. He was condemned to stand in a lake of water with a grapevine over his head. If he stooped to drink the water receded, if he stretched to eat the grapes drew back.

If Greece tries to cut its way from a depression the debt burden worsens, if it seeks aid the aid is yanked out of reach. What was Tantalus’s crime? Again, it fits. He took from the gods that which they would not give, in some myths ambrosia (not the custard dish but the food of the gods), in others it was Nectar. These he distributed to humans, angering the gods who believed that these goodies were theirs to distribute and not his. Greece entered the Euro and ..well, you see it. We should also note that Tantalus had form for hiding things, notably the golden hound of Hephaestus , the smith of the gods who made all things. Greece, let us not forget, hid the true state of the finances, a well functioning state statistical apparatus being the foundation of all things in a modern economy.

Interestingly, in myth he was aided by Pandareus, who could gorge forever on the finest things and neither be satiated nor suffer. Greece was aided in its concealment of the true state of its economy by Goldman Sachs… A further crime that Tantalus committed was, in an attempt to appease the now vengeful deities, he sacrificed his son Pelops and served a Greek version of Frey Pie to the gods. They recoil and his punishment is sealed. Syriza have killed, baked and served up to the Eurozone their own mandate and policies, only to have them thrown back faceward. Mind you, in myth Pelops was revived, repaired, and taken on board by the gods, Demeter (the bountiful goddess) having eaten of the pie and wanting to turn back time. The IMF, under Lagarde, have eaten of the pie and taken on board its central spice, the need for debt relief, and are now busy with time travel experiments.

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Can’t cover all ideas in a summary. Read original.

A Union of Deflation and Unemployment (Andricopoulos)

On Twitter recently, someone posted that anyone who doesn’t understand the importance of the difference between a sovereign money supply and a non-sovereign money supply does not understand economics. I wholeheartedly agree with this. And the majority of comments I see on articles about the Greek situation confirms that most people don’t understand economics. I don’t even know where to begin with criticisms of the idea of a shared currency without shared government. There are three main problems:

Problem 1: It is very easy to get into debt: A country in the Euro has no control of its monetary policy. Therefore when Greece had negative real interest rates during the boom time, there was nothing it could do to prevent people borrowing money. When added to a government also borrowing to appease special interests, this can be disastrous. But Spain had this problem even whilst running government budget surpluses. A country in the Euro has very little control over fiscal policy due to the rules determining how much governments can borrow and save. So even if a government wanted to combat loose monetary policy with correctly tight fiscal policy, it couldn’t.

Problem 2: Once in debt is impossible to get out of debt: There are three main ways a government has historically gotten out of debt. The first is economic growth; a growing economy means that debt to GDP ratios go down as GDP rises. The second is inflation; if a government’s debt gets too large it can always resort to the printing press to help it out. The third is outright default.

Problem 3: After both of these are realised, economic growth becomes very difficult: Governments, chastened by the experience of Greece and knowing that they are effectively borrowing in a foreign currency, can not borrow much more. A sovereign nation would have no problem issuing 150 or 200% debt to GDP. The central bank would support them and they would know that real interest rates could not get too high. Not so a borrower of a foreign currency.

I think I show three things here:
• The only policy a country can follow if it wants to avoid debt crisis is to run a current account surplus.
• This leads to a policy of internal devaluation and deflation.
• This creates a positive feedback mechanism which leads to a spiral of deflation and unemployment.

This is true certainly as long as Germany insists on low inflation and trade surpluses but possibly anyway, just by the nature of the riskiness of sovereign borrowing. I would like to hereby offer my humble advice to the leaders in Europe; now is the time to give up on this unworkable idea before it becomes even more of a disaster.

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Very good. “Two crises with the same cause but very different outcomes.”

The Great Recession and the Eurozone crisis (Wren-Lewis)

The Great Recession and the Eurozone crisis are normally treated as different. Most accounts of the Great Recession see this as a consequence of a financial crisis caused by profligate lending by – in particular – US and UK banks. The crisis may have originated with US subprime mortgages, but few people blame the poor US citizens who took out those mortgages for causing a global financial crisis. With the Eurozone crisis that started in 2010, most people tend to focus on the borrowers rather than the lenders. Some ill-informed accounts say it was all the result of profligate periphery governments, but most explanations are more nuanced: in Greece government profligacy for sure, but in Ireland and other countries it was more about excessive private sector borrowing encouraged by low interest rates following adoption of the Euro.

Seeing things this way, it is a more complicated story, but still one that focuses on the borrowers. However if we see the Eurozone crisis from the point of view of the lenders, then it once again becomes a pretty simple story. French, German and other banks simply lent much too much, failing to adequately assess the viability of those they were lending to. Whether the lending was eventually to finance private sector projects that would end in default (via periphery country banks), or a particular government that would end up defaulting, becomes a detail. In this sense the Eurozone crisis was just like the global financial crisis: banks lent far too much in an indiscriminate and irresponsible way.

If borrowers get into difficulty in a way that threatens the solvency of lending banks, there are at least two ways a government or monetary union can react. One is to allow the borrowers to default, and to provide financial support to the banks. Another is to buy the problematic loans from the banks (at a price that keeps the banks solvent), so that the borrowers now borrow from the government. Perhaps the government thinks it is able to make the loans viable by forcing conditions on the borrowers that were not available to the bank.

The global financial crisis was largely dealt with the first way, while at the Eurozone level that crisis was dealt with the second way. Recall that between 2010 and 2012 the Troika lent money to Greece so it could pay off its private sector creditors (including many European banks). In 2012 there was partial private sector default, again financed by loans from the Troika to the Greek government. In this way the Troika in effect bought the problematic asset (Greek government debt) from private sector creditors that included its own banks in such a way as to protect the viability of these banks. The Troika then tried to make these assets viable in various ways, including austerity. Two crises with the same cause but very different outcomes.

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Taking Syriza apart?

Greece Prepares Itself To Face Another Year Of Political Turmoil (Observer)

Greece’s embattled prime minister is expected to come under intense fire in the coming weeks after leading figures in his own leftwing Syriza party rebelled against the adoption of further austerity as the price of keeping bankruptcy at bay. The prospect of the crisis-hit country being thrown, headlong, into political turmoil drew nearer amid speculation that Alexis Tsipras will be forced not only to reshuffle his cabinet, possibly as early as Monday, but to call fresh elections in the autumn. “I cannot support an austerity programme of neoliberal deregulation and privatisation,” said his energy minister, Panagiotis Lafazanis, after refusing to endorse further tax increases and spending cuts in an early-morning vote on Saturday.

“If accepted by the [creditor] institutions and put into practice, they will exacerbate the vicious circle of recession, poverty and misery.” The Marxist politician, who heads Syriza’s militant wing and is in effect the government’s number three, was among 17 leftist MPs who broke ranks over the proposed reforms. Other defectors included the president of the 300-seat parliament, Zoe Konstantopoulou; the deputy social security minister, Dimitris Stratoulis; and the former London University economics professor Costas Lapavitsas. All described the policies – key to securing solvency in the form of a third bailout – as ideologically incompatible with Syriza’s anti-austerity platform.

Whatever the outcome of this weekend’s emergency summit, Tsipras will face intense pressure at home when he is forced to push several of the measures through parliament. The house is expected this week to vote on tax increases and pension cuts – crucial to receiving a bridging loan that will allow Athens to honour debt payments including €3bn to the ECB on 20 July. “It is very hard to see how a government with this make-up can pass these measures,” said the political commentator Paschos Mandravelis. “Already several prime ministers have been ousted during this crisis attempting to do that very thing. The idea of a leftist trying is almost inconceivable.”

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Troika gutted the entire economy. Takes time to rebuild no matter what.

Greeks Resigned To A Hard, Bitter Future Whatever Deal Is Reached (Observer)

Greece has become so gloomy that even escapism no longer sells, the editor of the celebrity magazine OK! admits. “All celebrity magazines have to pretend everything is great, everyone is happy and relaxed, on holiday. But it is not,” says Nikos Georgiadis. Advertising has collapsed by three-quarters, the rich and famous are in hiding because no one wants to be snapped enjoying themselves – and even if OK! did have stories, a ban on spending money abroad means it is running out of the glossy Italian paper that the magazine is printed on. “We have celebrities calling and asking us not to feature them because they are afraid people will say ‘we are suffering and, look, you are having fun on the beach’,” Georgiadis says. “One did a photoshoot but then refused to do the interview. They don’t want to be in a lifestyle magazine.”

It might be easy to mock the panic of Greece’s gilded classes, if the only thing affected was the peddling of aspiration and envy. But the magazine provides jobs to many people whose lives are a world away from the ones they chronicle, and like thousands of others across Greece they are on the line as the government makes a last-ditch attempt to keep the country in the euro. “If we go back to the drachma, they told us the magazine will close. It’s possible we won’t have jobs to go to on Monday,” Georgiadis says bluntly, as negotiations with Greece’s European creditors headed towards the endgame.

Prime minister Alexis Tsipras pushed a €13bn austerity package through parliament early on Saturday, overcoming a rebellion by his own MPs and sealing a dramatic and unexpected transformation from charismatic opponent of cuts to their most dogged defender. It seemed like nothing so much as a betrayal of those he had called out in their millions less than a week earlier to reject an almost identical package of painful reforms. Greece’s creditors had soon made clear though that they were not ready to improve bailout terms, even to keep the country in the euro. And so after painful days of cash shortages, closed banks, dwindling supplies of anything imported, from medicine to cigarettes, and mounting fear, the extraordinary U-turn was met with more resignation than anger.

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In the US.

A Coming Era Of Civil Disobedience? (Buchanan)

The Oklahoma Supreme Court, in a 7-2 decision, has ordered a monument of the Ten Commandments removed from the Capitol. Calling the Commandments “religious in nature and an integral part of the Jewish and Christian faiths,” the court said the monument must go. Gov. Mary Fallin has refused. And Oklahoma lawmakers instead have filed legislation to let voters cut out of their constitution the specific article the justices invoked. Some legislators want the justices impeached. Fallin’s action seems a harbinger of what is to come in America — an era of civil disobedience like the 1960s, where court orders are defied and laws ignored in the name of conscience and a higher law. Only this time, the rebellion is likely to arise from the right.

Certainly, Americans are no strangers to lawbreaking. What else was our revolution but a rebellion to overthrow the centuries-old rule and law of king and Parliament, and establish our own? U.S. Supreme Court decisions have been defied, and those who defied them lionized by modernity. Thomas Jefferson freed all imprisoned under the sedition act, including those convicted in court trials presided over by Supreme Court justices. Jefferson then declared the law dead. Some Americans want to replace Andrew Jackson on the $20 bill with Harriet Tubman, who, defying the Dred Scott decision and fugitive slave acts, led slaves to freedom on the Underground Railroad.

New England abolitionists backed the anti-slavery fanatic John Brown, who conducted the raid on Harpers Ferry that got him hanged but helped to precipitate a Civil War. That war was fought over whether 11 Southern states had the same right to break free of Mr. Lincoln’s Union as the 13 colonies did to break free of George III’s England. Millions of Americans, with untroubled consciences, defied the Volstead Act, imbibed alcohol and brought an end to Prohibition. In the civil rights era, defying laws mandating segregation and ignoring court orders banning demonstrations became badges of honor. Rosa Parks is a heroine because she refused to give up her seat on a Birmingham bus, despite the laws segregating public transit that relegated blacks to the “back of the bus.”

In “Letter from Birmingham Jail,” Dr. King, defending civil disobedience, cited Augustine — “an unjust law is no law at all” — and Aquinas who defined an unjust law as “a human law that is not rooted in eternal law and natural law.” Said King, “one has a moral responsibility to disobey unjust laws.” But who decides what is an “unjust law”?

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Jun 152015
 
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DPC City Hall and Market Street and west from 11th, Philadelphia 1912

Tsipras Hardens Greek Stance After Collapse of Talks (Bloomberg)
Greece Has Nothing To Lose By Saying No To Creditors (Münchau)
Varoufakis: Debt Restructuring Is The Only Way Forward (Reuters)
Syriza Left Demands ‘Icelandic’ Default As Greek Defiance Stiffens (AEP)
IMF ‘Blocked EU Compromise Proposal’ To Let Greece Cut Military Spending (AFP)
Doctors At Greek State-Run Hospitals At Risk Of Burnout (Kathimerini)
Finland’s Problem Is The Same As Greece’s (Forbes)
The Futility of Our Global Monetary Experiment (David Stockman)
The Sunday Times’ Snowden Story Is Journalism At Its Worst (Glenn Greenwald)
Five Reasons the MI6 Story is a Lie (Craig Murray)
Let Me Be Clear – Edward Snowden Is A Hero (Shami Chakrabarti)
US And Poland In Talks Over Weapons Deployment In Eastern Europe (Guardian)
The Oil Cash-and-Carry Trade Does The Shipping Tanker Contango (Dizard)
China To Inject Billions Into European Infrastructure Fund (Reuters)
China’s Stock Market Value Tops $10 Trillion for First Time (Bloomberg)
China’s MSCI Reality Check Is Too Big To Ignore (MarketWatch)
Stand Back: China’s Bubble Will Burst (Clive Crook)
How Obama’s “Trade” Deals Are Designed To End Democracy (Eric Zuesse)
Inside The Crazy World Of Canada’s Peak Real Estate (MacLean’s)
Australian Banks And Real Estate: A Ponzi Scheme That Could Ruin Us? (ABC.au)
Just 16% Of Hurricane Sandy Funds Given Out By 2014 (NY Post)
‘Stop Over-The-Counter Sales of Monsanto’s Round-Up’ – French Minister (RT)
An Immigrant Is Worth More Than Drugs (Beppe Grillo’s blog)

“One can only read political motives in the creditors’ insistence on new cuts to pensions..”

Tsipras Hardens Greek Stance After Collapse of Talks (Bloomberg)

Greece and its creditors swapped recriminations over who was to blame for the breakdown of bailout talks, as each side hardened its position after the latest attempt to bridge differences collapsed in acrimony. With markets plunging in Asia and in Europe, Prime Minister Alexis Tsipras portrayed Greece as the torchbearer of democracy faced with unrealistic demands, while the caucus leader of Chancellor Angela Merkel’s parliamentary bloc said Greeks had to “finally reconcile themselves with reality.” “One can only read political motives in the creditors’ insistence on new cuts to pensions after five years of plundering them under the memorandum,” Tsipras was cited as saying in a statement in Efimerida Ton Syntakton newspaper on Monday. “We will wait patiently for the institutions to move toward realism.”

The euro dropped in early trading after the European Commission said negotiations in Brussels had broken up on Sunday after just 45 minutes with the divide between what creditors asked of Greece and what its government was prepared to do unbridged. The focus now shifts to a June 18 meeting in Luxembourg of euro-area finance ministers that may become a make-or-break session deciding Greece’s ability to avert default and its continued membership in the 19-nation euro area. “In the end, this is not the kind of situation where you can have a mechanical agreement for some kind of numbers, where you meet in the middle or something similar,” Valdis Dombrovskis, EC vice president for euro policy, said on Latvian television Monday. “To reach an agreement Greece has to do the work that is necessary.”

The latest failed attempt to find a formula to unlock as much as €7.2 billion in aid for the anti-austerity Syriza-led government brings Greece closer to the abyss. With two weeks until its euro-area bailout expires and no future financing arrangement in place, creditors had set June 14 as a deadline to allow enough time for national parliaments to approve an accord. “If some interpret the government’s honest willingness to reach compromise and the steps it has taken to bridge the differences as weakness, they should consider this: we don’t just carry a heavy history of struggles,” said Tsipras. “We’re carrying on our backs the dignity of a people, but also the hopes of the people of Europe. It’s too heavy a burden to ignore. It’s not a question of ideological stubbornness. It’s a question of democracy.”

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“Greece would default on all official creditors, and on the bilateral loans from its European creditors. But it would service all private loans with the strategic objective to regain market access a few years later.”

Greece Has Nothing To Lose By Saying No To Creditors (Münchau)

So here we are. Alexis Tsipras has been told to take it or leave it. What should he do The Greek prime minister does not face elections until January 2019. Any course of action he decides on now would have to bear fruit in three years or less. First, contrast the two extreme scenarios: accept the creditors’ final offer or leave the eurozone. By accepting the offer, he would have to agree to a fiscal adjustment of 1.7% of GDP within six months. My colleague Martin Sandbu calculated how an adjustment of such scale would affect the Greek growth rate. I have now extended that calculation to incorporate the entire four-year fiscal adjustment programme, as demanded by the creditors.

Based on the same assumptions he makes about how fiscal policy and GDP interact, a two-way process, I come to a figure of a cumulative hit on the level of GDP of 12.6% over four years. The Greek debt-to-GDP ratio would start approaching 200%. My conclusion is that the acceptance of the troika’s programme would constitute a dual suicide – for the Greek economy, and for the political career of the Greek prime minister. Would the opposite extreme, Grexit, achieve a better outcome? You bet it would, for three reasons. The most important effect is for Greece to be able to get rid of lunatic fiscal adjustments. Greece would still need to run a small primary surplus, which may require a one-off adjustment, but this is it.

Greece would default on all official creditors, and on the bilateral loans from its European creditors. But it would service all private loans with the strategic objective to regain market access a few years later. The second reason is a reduction of risk. After Grexit, nobody would need to fear a currency redenomination risk. And the chance of an outright default would be much reduced, as Greece would already have defaulted on its official creditors and would be very keen to regain trust among private investors.

The third reason is the impact on the economy’s external position. Unlike the small economies of northern Europe, Greece is a relatively closed economy. About three quarters of its GDP is domestic. Of the quarter that is not, most comes from tourism, which would benefit from devaluation. The total effect of devaluation would not be nearly as strong as it would be for an open economy such as Ireland, but it would be beneficial nonetheless. Of the three effects, the first is the most important in the short term, while the second and third will dominate in the long run.

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Always was.

Varoufakis: Debt Restructuring Is The Only Way Forward (Reuters)

Greece Finance Minister Yanis Varoufakis said he could rule out a ‘Grexit’ because it would not be a sensible solution to the Greek debt crisis and in a German newspaper interview on Monday also said a debt restructuring was the only way forward. “I rule out a ‘Grexit’ as a sensible solution,” Varoufakis told mass circulation Bild newspaper, referring to a possible Greek exit from the euro zone. “But no one can rule out everything. I can’t even rule out a comet hitting earth.” Talks on ending the deadlock between Greece and its international creditors broke up in failure, with European leaders venting frustration as Athens stumbled towards a debt default that threatens its future in the euro.

Varoufakis said he believed it could be possible for Greece to reach an agreement with creditors quickly. He said the only way Greece would be able to repay its debts was if there was a restructuring and a deal could be possible if Chancellor Angela Merkel took part in the talks. “We don’t want any more money,” he told the German daily that has been especially critical of the rescue efforts, adding Germany and the rest of the eurozone had already given Greece “far too much” money. “An agreement could be reached in one night. But the chancellor would have to take part.”

He said the austerity program had failed. “There’s no way around it: We have to start all over again. We have to make a clean sweep,” Varoufakis said. He added that his government wanted to prevent a ‘Grexit’ but needed “a restructuring. That’s the only way possible that we can guarantee and also afford to repay so much debt.”

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No, they’re not kidding.

Syriza Left Demands ‘Icelandic’ Default As Greek Defiance Stiffens (AEP)

The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers. Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma. The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum.

It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be. “This goes well beyond the Left Platform. We are talking serious numbers,” said one Syriza MP involved in the draft. “We are all horrified by the idea of surrender, and we will not allow ourselves to be throttled to death by European monetary union,” he told the Telegraph. The militant views on the Left show how difficult it could be for premier Alexis Tsipras to rally his party’s support for any deal that crosses Syriza’s electoral ‘red-lines’ on pensions, labour rights, austerity, and debt-relief. Yet they also strengthen his hand as talks with EMU creditors turn increasingly dangerous. Talks between Greece and its EU creditors fell apart once again on Sunday, leaving a final decision on a default to eurozone finance ministers.

Mr Tsipras warned over the weekend in the clearest terms to date that Greece’s creditors should not push him too far. “Our only criterion is an end to the ‘memoranda of servitude’ and an exit from the crisis,” he said. “If Europe wants the division and the perpetuation of servitude, we will take the plunge and issue a ‘big no’. We will fight for the dignity of the people and our sovereignty,” he said. It may soon be too late to push any accord through the German Bundestag and other EMU parliaments before June 30, when Greece faces a €1.6bn payment to the IMF. The interior ministry has already ordered governors and mayors to transfer their cash reserves to the central bank as a precaution, but even this is not enough to avert default without a deal. Yet an official document released this evening in Athens appeared to throw down the gauntlet.

“The government reiterates, in no uncertain terms, that no reduction in pensions and wages or increases, through VAT, in essential goods – such as electricity – will be accepted. No recessionary measure that undermines growth – the experiment has lasted long enough,” it said. European officials examined ‘war game’ scenarios of a Greek default in Bratislava on Thursday, admitting for the first time that they may need a Plan B after all. “It was a preparation for the worst case. Countries wanted to know what was going on,” said one participant to AFP. The creditors argue that ‘Grexit’ would be suicidal for Greece. They have been negotiating on the assumption that Syriza must be bluffing, and will ultimately capitulate. Little thought has gone into possibility that key figures in Athens may be thinking along entirely different lines.

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Cutting military spending is a thorny topic. The IMF knows who the paymasters are. Hilarious that they claim to be opposed to “any such “bartering”; it’s all they been doing since January.

IMF ‘Blocked EU Compromise Proposal’ To Let Greece Cut Military Spending (AFP)

The IMF “torpedoed” a recent attempt by European Commission chief Jean-Claude Juncker to offer Athens a compromise proposal in tortuous debt talks, a German daily reported. Citing a “negotiator” as its source, the Frankfurter Allgemeine Zeitung said there had been “tensions” between the EU Commission and the IMF in recent days as Greece and its creditors race against the clock to come up with a debt deal to avert a catastrophic default by Athens. The compromise that Juncker wanted to present to Greek Prime Minister Alexis Tsipras would have allowed Athens to postpone some €400 million in pension cuts in return for making similar savings on military spending, the newspaper said in its Sunday edition.

But the IMF was opposed to any such “bartering”, the source was quoted as saying in the report. Tsipras meanwhile warned Greece on Saturday to prepare for a “difficult compromise” with its EU-IMF creditors, who are demanding tough reforms in return for unlocking the last tranche of desperately-needed bailout funds ahead of key deadlines at the end of the month. Top Eurozone officials upped the pressure on Friday, saying they were preparing the ground for an Athens default, which could see Greece crashing out of the Eurozone.

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Tragedy.

Doctors At Greek State-Run Hospitals At Risk Of Burnout (Kathimerini)

There are a number of specializations that are especially demanding. For the past four months, the recently opened thoracic surgery clinic at the Attikon Hospital in Athens has been operating with a staff of two. “I have applied for an assistant, someone who is specialized in what we do here, to be temporarily reassigned from another hospital, but what can they do when every hospital is understaffed?” noted the clinic’s director, Pericles Tomos. He has one intern when the work calls for four. Over three months, the two of them conducted 37 surgeries, and they work more than 12 hours a day. The shortage of thoracic surgeons has also hit other hospitals in the country. Over 70% of the positions for this specialization remain open as young doctors with expertise prefer to work abroad.

Similar shortages in other specializations put a greater burden on doctors working at public hospitals. At the capital’s Evangelismos Hospital, heart surgeon Panagiotis Dedeilias works more than 80 hours a week. “I have often felt completely exhausted after working for 36 hours straight,” he told Kathimerini. “I have had interns faint in the operating room because of exhaustion, while I have also seen others growing indifferent toward the job. They may not have lost their ability to diagnose a patient and do what they need to do, but they are cold toward patients’ relatives and seem to be losing their ambition.” Dedeilias has never taken a day off after being on emergency duty for 24 hours. “You can’t leave a patient behind when you know there’s no one to replace you,” said Giorgos Marinos, a doctor who is in charge of running the emergency room at the Laiko Hospital, also in Athens.

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It shouldn’t be in the eurozone.

Finland’s Problem Is The Same As Greece’s (Forbes)

Finland’s central bank governor, Erkki Liikanen, tells us that Finland is going to have to work hard to get through this current difficult economic situation. The country’s GDP is still significantly below pre-crisis levels and it’s likely to be a number of years before there’s a full recovery. But the real point behind this story is that it just doesn’t have to be this way. As Paul Krugman has been pointing out recently and as many others of us have been shouting for years. Finland simply should never have joined the euro, as Greece should not have. As, in fact, pretty much most of the current members should not have joined the single currency.

Further, none of this is a surprise. It’s inherent in the very design of said currency, indeed it was pointed to by Robert Mundell, the man who worked out the economics of single currencies. That it would all go wrong is exactly what the warning about the euro was. It is going wrong, has gone wrong, and for exactly the reason predicted:

Finland is in trouble, and in the words of the central bank this week, the situation is “grave”. While France has often been branded Europe’s “sick man” and Greece’s problems are well known, Finland’s economy is still 5pc smaller than before the financial crisis. The country will barely crawl out of a three-year recession this year, while unemployment is forecast by the OECD to grow in 2015.

Faced with a bloated state, below-par growth, and prices and costs that have risen at a much faster pace than the rest of the eurozone, the medicine is a familiar one. What Finland has to do is have an internal devaluation. That is, it’s got to force down labour prices. That’s something that is difficult and something that can only be done with considerable economic pain. It’s also what Spain, Portugal and the extreme case of Greece have all also had to do. And the reason is that they’re in the euro. As Paul Krugman points out:

What’s going on? Well, in the case of Finland we’re seeing the classic problems of asymmetric shocks in a currency area that isn’t optimal. Finland’s two main export sectors, forest products and Nokia, have tanked; this creates the need for a sharp fall in relative wages to make up for the lost markets, but because Finland doesn’t have its own currency anymore this adjustment must take the form of a slow, grinding internal devaluation (which is, by the way, why the garbled discussion of wages turns the story into nonsense).

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“It was digital money conjured out of thin air and they certainly haven’t destroyed or repealed the law of supply and demand.”

The Futility of Our Global Monetary Experiment (David Stockman)

If they don’t raise the interest rate in June — and I think all the signals now are pretty clear they’re going to find another reason to delay — that will mean seventy-eight straight months of zero rates in the money market. As I always say, the money-market price, that is the Federal Funds Rate or Overnight Money or a short term treasury bill, is the most important price in all of capitalism because that determines the cost of carry, the cost of speculation and gambling. When you conduct a monetary policy that says to the speculators, to the gamblers, “come and get it,” you are guaranteed free money to carry your positions, whether you’re buying German Bonds or you’re buying the S&P 500 Stock Index or the whole array of yielding or price gaining assets that are available in the financial market.

This monetary policy also sends the message that you can leverage and carry those positions for free and roll it day after day without worry because the central bank has pegged your cost and production, and in a sense has pledged on its solemn honor that it will not change without many months of warning. And that’s what this whole thing is about — changing the language and so forth. I think you have created a massive distortion in the very heart of capitalism in the financial system. Second, I think even though they stopped actually adding to their balance sheet in October — when QE supposedly ended in a technical sense — the Fed has put $3.5 trillion worth of basic financial fraud into the world financial system and economy.

After all, when they bought all of that treasury debt and all of those GSE securities, what did they use to pay for it with? It was digital money conjured out of thin air and they certainly haven’t destroyed or repealed the law of supply and demand. So, if you put $3.5 trillion of demand into the fixed income market at points along the yield curve all the way from two years to thirty years, that is an enormous fat sum on the scale. That is an enormous distortion of pricing because you can’t have that much demand without affecting the price. Now, with the ECB at full throttle, and with Japan being almost a lunatic in its mimicking of QE, you are creating the greatest distortion of fixed income pricing or bond market pricing in the history of the world, and the bond market is the monster of the midway.

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Essential reading.

The Sunday Times’ Snowden Story Is Journalism At Its Worst (Glenn Greenwald)

Western journalists claim that the big lesson they learned from their key role in selling the Iraq War to the public is that it’s hideous, corrupt and often dangerous journalism to give anonymity to government officials to let them propagandize the public, then uncritically accept those anonymously voiced claims as Truth. But they’ve learned no such lesson. That tactic continues to be the staple of how major US and British media outlets “report,” especially in the national security area. And journalists who read such reports continue to treat self-serving decrees by unnamed, unseen officials – laundered through their media – as gospel, no matter how dubious are the claims or factually false is the reporting.

We now have one of the purest examples of this dynamic. Last night, the Murdoch-owned Sunday Times published their lead front-page Sunday article, headlined “British Spies Betrayed to Russians and Chinese.” Just as the conventional media narrative was shifting to pro-Snowden sentiment in the wake of a key court ruling and a new surveillance law, the article claims in the first paragraph that these two adversaries “have cracked the top-secret cache of files stolen by the fugitive US whistleblower Edward Snowden, forcing MI6 to pull agents out of live operations in hostile countries, according to senior officials in Downing Street, the Home Office and the security services.” It continues:

Western intelligence agencies say they have been forced into the rescue operations after Moscow gained access to more than 1m classified files held by the former American security contractor, who fled to seek protection from Vladimir Putin, the Russian president, after mounting one of the largest leaks in US history. Senior government sources confirmed that China had also cracked the encrypted documents, which contain details of secret intelligence techniques and information that could allow British and American spies to be identified. One senior Home Office official accused Snowden of having “blood on his hands”, although Downing Street said there was “no evidence of anyone being harmed”.

Aside from the serious retraction-worthy fabrications on which this article depends – more on those in a minute – the entire report is a self-negating joke. It reads like a parody I might quickly whip up in order to illustrate the core sickness of western journalism. Unless he cooked an extra-juicy steak, how does Snowden “have blood on his hands” if there is “no evidence of anyone being harmed?” As one observer put it last night in describing the government instructions these Sunday Times journalists appear to have obeyed: “There’s no evidence anyone’s been harmed but we’d like the phrase ‘blood on his hands’ somewhere in the piece.”

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The Sunday Times may yet regret having run it. Already, a vital accusation was silently removed from the digital version.

Five Reasons the MI6 Story is a Lie (Craig Murray)

The Sunday Times has a story claiming that Snowden’s revelations have caused danger to MI6 and disrupted their operations. Here are five reasons it is a lie.

1) The alleged Downing Street source is quoted directly in italics. Yet the schoolboy mistake is made of confusing officers and agents. MI6 is staffed by officers. Their informants are agents. In real life, James Bond would not be a secret agent. He would be an MI6 officer. Those whose knowledge comes from fiction frequently confuse the two. Nobody really working with the intelligence services would do so, as the Sunday Times source does. The story is a lie.

2) The argument that MI6 officers are at danger of being killed by the Russians or Chinese is a nonsense. No MI6 officer has been killed by the Russians or Chinese for 50 years. The worst that could happen is they would be sent home. Agents’ – generally local people, as opposed to MI6 officers – identities would not be revealed in the Snowden documents. Rule No.1 in both the CIA and MI6 is that agents’ identities are never, ever written down, neither their names nor a description that would allow them to be identified. I once got very, very severely carpeted for adding an agents’ name to my copy of an intelligence report in handwriting, suggesting he was a useless gossip and MI6 should not be wasting their money on bribing him. And that was in post communist Poland, not a high risk situation.

3) MI6 officers work under diplomatic cover 99% of the time. Their alias is as members of the British Embassy, or other diplomatic status mission. A portion are declared to the host country. The truth is that Embassies of different powers very quickly identify who are the spies in other missions. MI6 have huge dossiers on the members of the Russian security services – I have seen and handled them. The Russians have the same. In past mass expulsions, the British government has expelled 20 or 30 spies from the Russian Embassy in London. The Russians retaliated by expelling the same number of British diplomats from Moscow, all of whom were not spies! As a third of our “diplomats” in Russia are spies, this was not coincidence. This was deliberate to send the message that they knew precisely who the spies were, and they did not fear them.

4) This anti Snowden non-story – even the Sunday Times admits there is no evidence anybody has been harmed – is timed precisely to coincide with the government’s new Snooper’s Charter act, enabling the security services to access all our internet activity. Remember that GCHQ already has an archive of 800,000 perfectly innocent British people engaged in sex chats online.

5) The paper publishing the story is owned by Rupert Murdoch. It is sourced to the people who brought you the dossier on Iraqi Weapons of Mass Destruction, every single “fact” in which proved to be a fabrication. Why would you believe the liars now?

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Second that.

Let Me Be Clear – Edward Snowden Is A Hero (Shami Chakrabarti)

Who needs the movies when life is full of such spectacular coincidences? On Thursday, David Anderson, the government’s reviewer of terrorism legislation, condemned snooping laws as “undemocratic, unnecessary and – in the long run – intolerable”, and called for a comprehensive new law incorporating judicial warrants – something for which my organisation, Liberty, has campaigned for many years. This thoughtful intervention brought new hope to us and others, for the rebuilding of public trust in surveillance conducted with respect for privacy, democracy and the law. And it was only possible thanks to Edward Snowden. Rumblings from No 10 immediately betrayed they were less than happy with many of Anderson’s recommendations – particularly his call for judicial oversight.

And three days later, the empire strikes back! An exclusive story in the Sunday Times saying that MI6 “is believed” to have pulled out spies because Russia and China decoded Snowden’s files. The NSA whistleblower is now a man with “blood on his hands” according to one anonymous “senior Home Office official”. Low on facts, high on assertions, this flimsy but impeccably timed story gives us a clear idea of where government spin will go in the coming weeks. It uses scare tactics to steer the debate away from Anderson’s considered recommendations – and starts setting the stage for the home secretary’s new investigatory powers bill. In his report, Anderson clearly states no operational case had yet been made for the snooper’s charter. So it is easy to see why the government isn’t keen on people paying too close attention to it.[..]

So let me be completely clear: Edward Snowden is a hero. Saying so does not make me an apologist for terror – it makes me a firm believer in democracy and the rule of law. Whether you are with or against Liberty in the debate about proportionate surveillance, Anderson must be right to say that the people and our representatives should know about capabilities and practices built and conducted in our name. For years, UK and US governments broke the law. For years, they hid the sheer scale of their spying practices not just from the British public, but from parliament. Without Snowden – and the legal challenges by Liberty and other campaigners that followed – we wouldn’t have a clue what they were up to.

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The narrative machine.

US And Poland In Talks Over Weapons Deployment In Eastern Europe (Guardian)

The US and Poland are discussing the deployment of American heavy weapons in eastern Europe in response to Russian expansionism and sabre-rattling in the region in what represents a radical break with post-cold war military planning. The Polish defence ministry said on Sunday that Washington and Warsaw were in negotiations about the permanent stationing of US battle tanks and other heavy weaponry in Poland and other countries in the region as part of Nato’s plans to develop rapid deployment “Spearhead” forces aimed at deterring Kremlin attempts to destabilise former Soviet bloc countries now entrenched inside Nato and the EU. Tomasz Siemoniak, the Polish defence minister, had talks on the issue at the Pentagon last month.

Warsaw said on Sunday that a decision whether to station heavy US equipment at warehouses in Poland would be taken soon. Nato’s former supreme commander in Europe, the American admiral James Stavridis, said the decision marked “a very meaningful policy shift”, amid eastern European complaints that western Europe and the US were lukewarm about security guarantees for countries on the frontline with Russia following Vladimir Putin’s seizure of parts of Ukraine. “It provides a reasonable level of reassurance to jittery allies, although nothing is as good as troops stationed full time on the ground, of course,” the retired admiral told the New York Times.

Nato has been accused of complacency in recent years. The Russian president’s surprise attacks on Ukraine have shocked western military planners into action. An alliance summit in Wales last year agreed quick deployments of Nato forces in Poland and the Baltic states. German mechanised infantry crossed into Poland at the weekend after thousands of Nato forces inaugurated exercises as part of the new buildup in the east. Wary of antagonising Moscow’s fears of western “encirclement” and feeding its well-oiled propaganda effort, which regularly asserts that Nato agreed at the end of the cold war not to station forces in the former Warsaw Pact countries, Nato has declined to establish permanent bases in the east.

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“..one of those phenomena you hear about in airport lounges just around the time it is nearly over.”

The Oil Cash-and-Carry Trade Does The Shipping Tanker Contango (Dizard)

The oil cash-and-carry trade is one of those phenomena you hear about in airport lounges just around the time it is nearly over. At the risk of repeating what your taxi driver told you this morning, oil cash-and-carries are about buying 2m barrels of oil with money borrowed from a “too big to fail” bank, storing it in a very large crude carrier, leaving it at anchor for, say, a year and then selling the oil at a higher price. Easy to understand, if you are the billionaire industrialists the Koch brothers. The cycles of this trade tell us a lot about macro-trade hype, the prospects for interest rates and ship owners’ financing. They can also mislead people about the prospects of the oil price.

I am not worried that the Koch brothers themselves will be tempted by the lure of fast money to overcommit their credit lines to the oil carry trade. I would be more concerned that the investing public, or the “smart money” of private equity funds, will continue to buy bits of crude or tankers, or shares in the companies that own them, in the hope of profiting from a growing market for oil storage. Even as the shares of companies owning bulk carriers have sunk to the bottom of the Mariana trench, tanker equities have steamed ahead. For example, Scorpio Bulkers is down 76% over the past year, while Nordic American Tankers is up over 56%.

No doubt some analyst could point to perceived differences in management quality, but for most investors these are commodity plays: bulkers = China raw material imports; tankers = oil contango. A contango, or a series of prices for future delivery of a commodity that increases over time, can tell a counterintuitive story, particularly for oil. For many, it appears to predict that the price is going up. Most of the time, though, crude oil prices are in backwardation, meaning near-term prices are higher than prices for future delivery. This makes sense when you consider it; if refiners only need oil a couple of months in advance, why not leave it in the ground rather than pay storage and financing costs on that position?

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Europe can’t afford to pay for its own infrastructure anymore.

China To Inject Billions Into European Infrastructure Fund (Reuters)

China will pledge a multi-billion dollar investment in Europe’s new infrastructure fund at a summit on June 29 in Brussels, according to a draft communique seen by Reuters – Beijing’s latest round of chequebook diplomacy to win greater influence. While the exact amount is still to be decided, the pledge will mark the latest step in China’s efforts to shape global economic governance at the expense of the United States, and follows major EU governments’ decision to join the Chinese-led Asian Infrastructure Investment Bank (AIIB) in defiance of Washington. It is expected to come with a request for return investment in China’s westward infrastructure drive – the “One Belt, One Road” initiative – constructing major energy and communications links across Central, West and South Asia to as far as Greece.

“China announced that it would make (X amount) available for co-financing strategic investment of common interest across the EU,” the draft final statement says, adding that agreements will be finalised at another meeting in September. An EU diplomat said the Chinese contribution was likely to be “in the billions”. EU and Chinese officials have told Reuters that Chinese banks are looking mainly at telecoms and technology projects. Chinese Premier Li Keqiang, who will attend the summit in Brussels, will agree with EU leaders that the €315 billion fund will “create opportunities for China to invest in the EU, in particular in infrastructure and innovation sectors”. If sealed, the deal will be a success for EC President Jean-Claude Juncker, who faced scepticism last year when he proposed the European Fund for Strategic Investment (EFSI), because EU governments are putting in little seed money.

France, Germany, Italy and Poland have each announced they will contribute 8 billion euros, while Spain and Luxembourg have pledged smaller contributions. The bloc is relying mainly on private investors and development banks to fund projects selected from an initial list of almost 2,000 submitted by the 28 member states, from airports to flood defenses, that are together worth 1.3 trillion euros. A big Chinese investment might raise questions about governance of the fund, which is so far strictly a European institution. An EU diplomat said it was not known whether China would seek representation commensurate with its stake. The decision to invite China into an EU fund could cause some friction with Washington, which is wary of Beijing’s rising influence and upset that Europe rebuffed its calls to stay out of the AIIB.

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What can you say to this other than ‘don’t look down’?

China’s Stock Market Value Tops $10 Trillion for First Time (Bloomberg)

The value of Chinese stocks rose above $10 trillion for the first time, the latest milestone for the nation’s world-beating rally. Companies with a primary listing in China are valued at $10.05 trillion, an increase of $6.7 trillion in 12 months, according to data compiled by Bloomberg. The gain alone is more than the $5 trillion size of Japan’s entire stock market. The U.S. is the biggest globally, at almost $25 trillion. No other stock market has grown as much in dollar terms over a 12-month period, as Chinese individuals piled into the nation’s equities using borrowed funds to bet gains will continue. Valuations are now the highest in five years and margin debt has climbed to a record, all while the economy is mired in its weakest expansion since 1990.

“This a reflection of the risk-taking attitude of the public,” Hao Hong at Bocom International in Hong Kong, said. “People are taking on an unreasonable amount of risk for deteriorating economic growth.” Outside of China, investors aren’t showing the same enthusiasm toward the nation’s equities. Funds pulled a net $6.8 billion out of Chinese stock funds in the seven days through Wednesday, Barclays Plc. said in a research note, citing EPFR Global data. Dual-listed Chinese shares cost more than twice as much on average on mainland exchanges than they do in Hong Kong. MSCI’s June 9 decision against including mainland equities in its benchmark gauge had little impact on the Shanghai Composite Index, which climbed 2.9% last week to its highest level since January 2008.

Foreigners are limited by quotas when buying shares in Shanghai via an exchange link with Hong Kong, while similar access to Shenzhen-traded stocks will likely start this year, according to the Hong Kong bourse. The Shanghai gauge has rallied 152% in the past 12 months, the most among global benchmark indexes tracked by Bloomberg, and trades at about 26 times reported earnings. Less than a year ago, the gauge was valued at about 9.6 times, the lowest since at least 1998. The Shenzhen Composite Index, tracking stocks on the smaller of China’s two exchanges, trades at 77 times profits after surging 194%.

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No confidence.

China’s MSCI Reality Check Is Too Big To Ignore (MarketWatch)

In recent weeks, much of the debate on China has centered on the idea that it is “too big to be ignored,” meaning the rest of the world would inevitably need to own its equities and currency. But now it’s set for a reality check. In the same week that Chinese A-shares failed to be included in MSCI’s emerging-market benchmark, it was also revealed that global investors pulled $7.9 billion out of Asia. This was the biggest weekly withdrawal in almost 15 years, according to data provider EPFR Global, and the majority reportedly related to China. Take this as a cue to look past China’s size and, instead, consider again its questionable fundamentals.

So far this year, concerns over a potential debt crisis have been drowned out by the roar of China’s domestic equity bull market – the best performing in the world this year by a long margin. But last week’s decision by MSCI tells us it’s too early to consider China a mainstream asset class. Despite much talk of reform, Beijing’s efforts to open its capital markets or make its financial system more transparent have been limited. Yuan internationalization might be accelerating, but a capital-account opening still looks like a distant promise. The decision against effectively forcing global fund managers to benchmark against an index they can still not freely buy and sell, in a currency that is not freely traded, is hard to take issue with.

As well as A-shares, Beijing has been angling to have the yuan recognized as one of the IMF’s benchmark currencies. This again follows the “too big to be ignored” line of thinking for the world’s second-largest economy. But this could be similarly premature when the yuan’s value is still determined by Beijing and not the market. The fact that the PBoC doesn’t issue currency notes larger than 100 yuan ($16) suggests it’s still preoccupied with the risk of capital flight. Rather than IMF technical tests, a simple one would be whether the Communist Party is willing to test its own people’s confidence in the yuan by letting it be freely exchanged? After that, it might be time to consider its merits as a global reserve currency, or whether Chinese shares should become cornerstone holdings in global equities.

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“..two-thirds of the country’s newcomers to investing left school before the age of 15..”

Stand Back: China’s Bubble Will Burst (Clive Crook)

Singapore, which I’m visiting at the moment, opens your mind to the highly improbable. Rich, ethnically diverse, cheerfully efficient, globalized in the extreme, it’s a man-made economic miracle — astonishing proof of what market forces combined with superb top-down direction can achieve. Even in Singapore, though, there are limits to what you can believe. I struggle to imagine, for instance, that China’s stock market isn’t a bubble. China’s leadership has long been impressed with the Singapore model. Since Deng Xiaoping, its government has been much more interested in capitalism in the style of Lee Kuan Yew than class struggle in the style of Karl Marx. In China, the mix of markets and smart management has indisputably worked another miracle, and on a vastly larger scale than Lee’s.

It’s a record that can make investors credulous. Lately, the government has defied predictions of an economic hard landing: The economy has slowed, but hasn’t crashed. Beijing wanted a gentle slowdown – part of its effort to rebalance the economy toward consumption and away from exports and investment – so it pulled some fiscal and monetary levers and that’s what happened. Targeted growth of 7% in GDP this year, fast by any other country’s standards, looks achievable. Many investors seem to think officials can direct the stock market just as precisely. It’s only a matter of time before they’re proved wrong. You could argue, in fact, that they already have been. The government wants a strong stock market for several reasons, including to support demand as property prices sag and growth in credit and investment slow.

It has been talking up share prices. Official news outlets extoll the virtues of stock ownership. But the government surely can’t have wanted the frenzy that in recent months has pushed the valuations of many companies to preposterous levels. Manic episodes rarely end well – and in many respects, this is mania. The Shenzhen market is up almost 200% over the past year. Its price-earnings ratio stands at a little less than 80. (Standard & Poor’s 500 Index is up 9% and has a ratio of 19.) Much of the demand for Chinese shares is credit-fuelled and comes from small investors new to the game. In one week in April Chinese investors opened 4 million new brokerage accounts – and two-thirds of the country’s newcomers to investing left school before the age of 15.

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“..an international conquest of democracy, by international corporations.”

How Obama’s “Trade” Deals Are Designed To End Democracy (Eric Zuesse)

U.S. President Barack Obama has for years been negotiating with European and Asian nations — but excluding Russia and China, since he is aiming to defeat them in his war to extend the American empire (i.e, to extend the global control by America’s aristocracy) — three international ‘trade’ deals (TTP, TTIP, & TISA), each one of which contains a section (called ISDS) that would end important aspects of the sovereignty of each signatory nation, by setting up an international panel composed solely of corporate lawyers to serve as ‘arbitrators’ deciding cases brought before this panel to hear lawsuits by international corporations accusing a given signatory nation of violating that corporation’s ‘rights’ by its trying to legislate regulations that are prohibited under the ’trade’ agreement,

such as by increasing the given nation’s penalties for fraud, or by lowering the amount of a given toxic substance that the nation allows in its foods, or by increasing the percentage of the nation’s energy that comes from renewable sources, or by penalizing corporations for hiring people to kill labor union organizers — i.e., by any regulatory change that benefits the public at the expense of the given corporations’ profits. (No similar and countervailing power for nations to sue international corporations is included in this: the ‘rights’ of ‘investors’ — but really of only the top stockholders in international corporations — are placed higher than the rights of any signatory nation.)

This provision, whose full name is “Investor State Dispute Resolution” grants a one-sided benefit to the controlling stockholders in international corporations, by enabling them to bring these lawsuits to this panel of lawyers, whose careers will consist of their serving international corporations, sometimes as ‘arbitrators’ in these panels, and sometimes as lawyers who more-overtly represent one or more of those corporations, but also serving these corporations in other capacities, such as via being appointed by them to head a tax-exempt foundation to which international corporations ‘donate’ and so to turn what would otherwise be PR expenses into corporate tax-deductions. In other words: to be an ‘arbitrator’ on these panels can produce an extremely lucrative career.

These are in no way democratic legal proceedings; they’re the exact opposite, an international conquest of democracy, by international corporations.

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The harder they come.

Inside The Crazy World Of Canada’s Peak Real Estate (MacLean’s)

A huge chunk of Canadians’ assets are tied up in real estate (roughly 35% in principal residences and another 10% in second properties), and their value has exploded. Some $1.7 trillion in net new wealth has been created from Canadian real estate since 2000. In fact, a growing number of Canadians expect their home to pay for their retirement. Is it any wonder, then, that with so much at stake, emotions run high and disputes turn ugly? “Real estate is seen as a commodity in scarce supply—while there’s actually a lot of it out there, it’s scarce if we can’t afford it,” says John Andrew, an adjunct assistant professor who studies real estate at Queen’s University. “It’s inevitable that you start to see these conflicts. It tends to bring out the worst in people.”

It’s not just battles over monster homes. While bidding wars have become an unwelcome rite of passage in the quest for home ownership in Canada over the past decade, the battles have grown even more irrational and vicious of late as buyers compete for the privilege of owning dilapidated, inner-city homes that often need to be gutted to be saved. As for those priced out of the housing market altogether, there are growing calls for politicians to do something—anything—to bring down the cost of owning a home in Canada. That’s led to a NIMBYish dispute in Calgary over legal basement suites and quasi-xenophobic discussions in Vancouver about the need to clamp down on foreign property buyers—read: mainland Chinese.

One local urban planner has even dubbed Vancouver a “hedge city,” suggesting its single-family homes are little more than a place for wealthy foreigners to park their cash. With all the rage, greed and animosity, the country’s already overheated housing market has hit yet another level—one where desperate, would-be buyers clamour, wild-eyed, for a slice of the action, while existing homeowners go to extreme lengths to protect their property nest eggs. Meanwhile, the rest of the world looks on and wonders: Has Canada gone crazy?

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You betcha.

Australian Banks And Real Estate: A Ponzi Scheme That Could Ruin Us? (ABC.au)

Madness has gripped Sydney’s and parts of Melbourne’s property market; a malaise that, if allowed to continue, could have dire consequences for the nation. So far, much of the debate around the rampant real estate market has revolved around affordability and the worrying concern that we are in the process of creating a class system based upon land ownership as wealth is transferred from a generation entering the workforce to those about to exit it. But a far greater and more immediate danger lurks in the shadows. The prospect of a reversal – of a sudden decline in property values in the two major capitals – would be enough to tip the nation into a severe economic crisis.

It’s not as though it hasn’t happened elsewhere. The collapse in American property markets in 2007 sparked the worst global recession in generations. The UK endured its own crisis borne from overly exuberant real estate speculation. The same thing happened across Europe. The east coast capital city property bubble is being driven by investors who borrowed $11.5 billion in April, a 23.5% rise from a year earlier. They sidelined owner occupiers, who borrowed $9.8 billion. None of this is being fuelled by wages growth. Beneath this month’s GDP figures – which superficially showed an encouraging 0.9% lift for the March quarter – lay the real story. Nominal GDP – a much better proxy for earnings and wages – grew just 0.4% for the quarter and an anaemic 1.2% for the year.

In the past fortnight, the Prime Minister and the Treasurer have been assailed by the nation’s three most powerful economic mandarins, each of whom has directly contradicted the Government mantra on rising property prices. Treasury head John Fraser, Reserve Bank chief Glenn Stevens and financial system inquiry author David Murray have all expressed alarm at recent developments in the eastern states capital city housing markets. They have yet to detail the mechanism by which their unfolding fears could play out if the Sydney and Melbourne housing bubble is not deflated. But here is a likely scenario over how an unfettered boom could wreck the economy.

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Katrina, Sandy, big words but..

Just 16% Of Hurricane Sandy Funds Given Out By 2014 (NY Post)

Just 16% of the money given to the city for Hurricane Sandy projects was doled out in contracts by the end of 2014 even though the storm ravaged the area more than two years before, according to a new analysis. Some Sandy projects were added late in the planning process and the feds had not appropriated all the funding by that time, the Independent Budget Office found. The funding was worth a total $9.7 billion. The MTA said much of the rebuilding and strengthening of the transit system still has to be done such as work on the Cranberry Tube, used by the A and C lines, and the L train s Canarsie Tube.

Those Sandy projects which have been funded are progressing rapidly, rep Kevin Ortiz said. The IBO also said that when the MTA s last capital plan wrapped up it had spent less than half of its funds. The plan ran between 2010 and 2014, and cost $31.9 billion. Many of the projects and contracts expand beyond the four years of the last plan, according to the report. The MTA is facing a $14 billion deficit for its next plan, which funds big-ticket items like new subway cars.

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How can France sign up to the TTIP if it does this?

‘Stop Over-The-Counter Sales of Monsanto’s Round-Up’ – French Minister (RT)

French environment and energy minister Segolene Royal has asked garden centers to stop self-service sales of Monsanto’s Roundup weed killer to fight the harmful effects of pesticide. “France must be offensive on stopping pesticides,” Segolene Royal told France 3 television on Sunday. “I have asked garden shops to stop over-the-counter sales of Monsanto’s Roundup.” The US agribusiness giant’s weed killer came back under scrutiny in March, after its main active ingredient, glyphosate, was branded “probably carcinogenic to humans” by the International Agency for Research on Cancer (IARC), part of the World Health Organization (WHO).

Earlier this month, the French consumer association CLCV asked authorities to ban glyphosate herbicides, which are used domestically by amateur gardeners in France. On Thursday Royal and the Minister of Agriculture made a joint statement announcing that phytosanitary products used to control plant diseases would only be available to amateur gardeners “through an intermediary or a certified seller” from January 2018. France plans to introduce a full ban on the use of pesticides by home gardeners from 2022, according to the statement made by the environment and energy ministry in April.

In response to the minister’s statement, Monsanto said on Sunday it had no information about a change in authorization for selling Roundup. “Under the conditions recommended on the label, the product does not present any particular risk for the user,” the company said in an email sent to Reuters. Glyphosate is the most-produced weed killer in the world, with applications in agriculture, forestry, industrial weed control, as well as lawn, garden, and aquatic environments, according to the IARC. Monsanto has strongly contested IARC’s classification, saying that “relevant, scientific data was excluded from review.” In the US, the herbicide has been considered safe since 2013, when Monsanto received approval for increased tolerance levels for glyphosate from the US Environmental Protection Agency (EPA).

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Immigrants get more money than many residents.

An Immigrant Is Worth More Than Drugs (Beppe Grillo’s blog)

Giovanni Falcone said “Follow the money and you’ll find the mafia”. Every immigrant arriving in Italy has the right to €1,050 a month to live on. Of this, a percentage goes to the mafia. Judging from the wiretapped conversations that amount ranges from one to two euros a day. For the mafia, immigrants are a source of income. They’re worth more than drugs. A boatload of Africans is worth more than a boatload of cocaine. And so it’s in their interests to get as many as possible to come. The boat handlers are paid by the immigrants – about a thousand euro per person. But who’s really paying the boat handlers?

Is it really the immigrants that, back home, would get by on that amount for years? Or someone else? Is the immigrant getting into a lifetime of debt to get a place on board a boat? And to whom is he indebted? It’s not realistic to think that people who “have lost everything“, who are destitute, who don’t even have the money for a change of clothes, can easily get hold of a thousand euro or even more. Where’s this money coming from? The most obvious response is that the ones paying out are the ones that are making money – htus the mafias.

And that’s how they close the circle – with the boat handlers, the mafias and the immigrants. To be sure, there are also the political parties that create “the moments of crisis” so that they can open up “welcome centres” that can be used to cream off money for themselves and for the mafias. Mafiacapitale is just the tip of the iceberg. Where there are immigrants, there’s the smell of money. It’s a resource to be added to the GDP together with drugs and prostitution. After Rome, there’ll be other cities, other kickbacks, and other politicians. It’s just a matter of time. To resolve the imigration issue, the associated flow of money needs drying up.

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Mar 242015
 
 March 24, 2015  Posted by at 10:02 am Finance Tagged with: , , , , , , ,  9 Responses »
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William Henry Jackson Tamasopo River Canyon, San Luis Potosi, Mexico 1890

About a month ago, Japan’s giant GPIF pension fund announced it had started doing in Q4 2014, what PM Abe had long asked it to: shift a large(r) portion of its investment portfolio from bonds to stocks. No more safe assets for the world’s largest pension fund, or a lot less at least, but risky ones. For Abe this promises the advantage of an economy that looks healthier than it actually is, while for the fund it means that the returns on its investments could be higher than if it stuck to safe assets. Not a word about the dangers, not a word about why pensions funds were, for about as long as they’ve been in existence, obliged by law to only hold AAA assets. This is from February 27:

Japan’s GPIF Buys More Stocks Than Expected In Q4; Slashes JGBs

Japan’s trillion-dollar public pension fund bought nearly $15 billion worth of domestic shares in the fourth quarter, more than expected, while slashing its Japanese government bond holdings as Prime Minister Shinzo Abe prods the nation to take more risks to spur economic growth. The bullishness toward Japanese equities by the Government Pension Investment Fund, the world’s biggest pension fund, boosted hopes in the Tokyo market that stocks have momentum to add to their 15-year highs.

GPIF said on Friday its holdings of domestic shares rose to 19.8% of its portfolio by the end of December from 17.79% at the end of September. Yen bonds fell to 43.13% from 48.39%. Adjusting for factors such as the Tokyo stock market’s rise of roughly 8% during the quarter, GPIF bought a net 1.7 trillion yen ($14 billion) of stocks in the period, reckons strategist Shingo Kumazawa at Daiwa Securities. GPIF’s investment changes are closely watched by markets, as a 1 percentage-point shift in the 137 trillion yen ($1.15 trillion) fund means a transfer of about $10 billion.

What economic growth can there be in shifting from safe assets to riskier ones? Isn’t economic growth in the end exclusively a measure of how productive an economy is? And isn’t simply shifting your money around between assets a clear and pure attempt to fake growth numbers? Moreover, doesn’t Abe himself indicate very clearly that there is risk involved here, that there is now a greater risk that pension money will have to take losses on its investments? Isn’t he simply stating out loud that he wants to turn the entire nation into a casino? And that without this additional risk there will and can be no economic growth?

It’s time for the Japanese to get seriously scared now. Like many other countries, Japan – and its political class – creates a false image of enduring prosperity by letting its central bank increasingly buy up ever more of its sovereign bonds. It’s a total sleight of hand, there is nothing left that’s real. There’s no there there. This is of course the same as what happens in Europe.

And it’s precisely because central banks buy up all these bonds, that their yields scrape the gutter. It’s a blueprint for killing off the last bit of actual functionality in an economy. All you have from there on in is fake, an artificial boosting of bond prices aimed at creating the appearance of a functioning economy, which can by definition only be a mirage. That it will temporarily boost stock prices in an equally artificial way only goes to confirm that.

But, evidently, artificially high stock prices carry a much greater risk than ones that are based on a free and functioning market and economy. So not only is there a shift from safe to risky assets, there’ s a double whammy in the fact that these large scale purchases boost stocks without having anything to do with the economic performance of the companies whose stocks are bought.

It may make Shinzo Abe look better for a fleeting moment, but for Japan’s pensioners it’s the worst option that is available.

And then last week, a group of smaller rising sun pension funds said they’d follow the example. The more the merrier….

Japan Public Pensions To Follow GPIF Into Stocks From JGBs

Three Japanese public pension funds with a combined $250 billion in assets will follow the mammoth Government Pension Investment Fund and shift more of their investments out of government bonds and into stocks. The three funds and the trillion-dollar Government Pension Investment Fund, the world’s biggest pension fund, will announce on Friday a common model portfolio in line with asset allocations recently decided by the GPIF, the people told Reuters. Assuming, as expected, the three smaller mutual-aid pensions adopt the portfolio, that would mean shifting some 3.58 trillion yen ($30 billion) into Japanese stocks, a Reuters calculation shows.

The GPIF in October slashed its targeted holdings of low-yielding government bonds and doubled its target for stocks, as part of Prime Minister Shinzo Abe’s plan to boost the economy and promote risk-taking. GPIF in October slashed its targeted holdings of low-yielding government bonds and doubled its target for stocks, as part of Prime Minister Shinzo Abe’s plan to jolt Japan out of two decades of deflation and fitful growth and promote risk-taking. The shift to riskier investments by the 137 trillion yen ($1.1 trillion) GPIF has helped drive Tokyo Stocks to 15-year highs this week because of the fund’s size and because it is seen as a bellwether for other big Japanese institutional investors. The new model portfolio, part of a government plan to consolidate Japan’s pension system in October, will match the new GPIF allocations of 35% in Japanese government bonds, 25% in domestic stocks, 15% in foreign bonds and 25% in foreign stocks, the sources said.

Half of Japan’s pension money will be in stocks, domestic and foreign. And what do you think that means if and when there’s a major stock market crash – which is historically inevitable?

Never give a government any say in either your central bank or your pension fund. That’s a very sound lesson that unfortunately everyone seems to have forgotten. At their own peril. Sure, they’re looking like geniuses right now: look, the Nikkei is at a 15-year high! But it’s what’s going to come after that counts. For who believes that this situation can last forever? Or who, for that matter, believes that this head fake will the driver for real economic growth?

Sure enough, now the rest of the region has to follow suit: every pension fund in the region becomes a daredevil. But we know, don’t we, what the rising greenback is about to do to emerging markets that have huge amounts of dollar-denominated debt in their vaults. One thing this won’t do is boost stock markets; it will instead put many companies into either very bad financial straits or outright bankruptcy. And then you will have their pension funds holding a lot of empty bags. From the point of view of major banks this is ideal: this is how they get there hands on everyone’s pension funds, which I once labeled the last remaining store of real wealth.

Pension Funds Shun Bonds Just as Southeast Asia Needs Them Most

The biggest state pension funds in Thailand and the Philippines are shifting money from bonds to stocks, which could push up the cost of government stimulus programs. The Social Security Office and Government Service Insurance System said they’re increasing holdings of shares, while the head of Indonesia’s BPJS Ketenagakerjaan said he sees the nation’s stock index rising 14% by year-end. Rupiah, baht and peso notes have lost money since the end of January, after handing investors respective returns of 13%, 9.9% and 6.6% last year, Bloomberg indexes show.

“There has been frustration among domestic institutional investors about the falling returns on bonds,” Win Phromphaet, Social Security Office’s head of investment in Bangkok, said in a March 19 interview. “Large investors including SSO must quickly expand our investments in other riskier assets.” Appetite for sovereign debt is cooling just as Southeast Asian governments speed up construction plans in response to slowing growth in China and stuttering recoveries in Europe and Japan.

If Thailand and the Philippines, and many other nations in the region, want to speed up their infrastructure projects, their central banks, too, will have to buy up the vast majority of their sovereign bonds. They too will have to fake it. It’s fatally contagious.

And then a few days ago this passed by on the radar. The world’s largest sovereign wealth fund (Norway’s) joins the club. This may seem completely normal to some, either because they don’t give it much thought or because they work in this sort of field (people adopt strange ways of thinking), but for me, it just raises bright red alerts.

Biggest Wealth Fund Targets Tokyo for Next Real Estate Purchase

Norway’s sovereign wealth fund is looking at Tokyo or Singapore for its first real estate investment in Asia as the investor expands globally. “That’s where we think we’ll start,” Karsten Kallevig, the chief investment officer of real estate at the Oslo-based fund, said in an interview after a speech in the Norwegian capital. “If we’re really successful there, then maybe we can add a third and a fourth and a fifth city at some point.” After in 2010 being allowed to expand into the property market, Norway’s $870 billion wealth fund has amassed about $18 billion in real estate holdings. It has snapped up properties in major cities such as New York, London and Paris, with a main focus on office properties. The fund is focusing on specific markets rather than sectors, Kallevig said.

“When we say Singapore and Tokyo, we mean the better parts” of those cities, he said. “My guess is office properties will be the main component, because that’s what’s for sale in those parts of town. There aren’t many shopping malls in the center of Tokyo or the center of Singapore.” Just as in earlier purchases in Europe and the U.S, the fund will also buy properties with partners, Kallevig said. The next trip in that area will probably be in the second quarter, he said. The property portfolio was 141 billion kroner ($17.5 billion), or 2.2% of the fund at the end of last year, compared to 1% at the end of 2013. Real estate returned 10.4% in 2014.

Kallevig has said he seeks to invest 1% of the fund in real estate each year until the 5% goal is met. The Government Pension Fund Global returned 7.6% in 2014, its smallest gain since 2011. The fund has warned it expects diminished returns amid record low, and even negative, yields in key government bond markets combined with slow growth in developed markets. Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67% stake in Statoil ASA. Norway is western Europe’s biggest oil and gas producer. The fund invests abroad to avoid stoking domestic inflation.

Hmm. “The fund invests abroad to avoid stoking domestic inflation.” Really? In today’s zero percent world? Sounds curious. It may have been a valid objective in the past, but not today. What this is really about is chasing yield, just as in the pension fund case. Still, that was not the first thought that came to mind when reading this. That was: If Tokyo real estate were such a great investment, wouldn’t you think that Japan’s own pension funds would be buying? They’re chasing yield like crazy, but they would miss out on their own real estate assets which Norway’s fund thinks are such a great asset?

All this is not just the financial world on steroids, which is bad enough when you talk about someone’s pension, it’s the wrong kind of steroids too. The lethal kind. But then, without steroids the entire economic facade would be exposed as the zombie it has become. It’s insane for pension funds to buy stocks on a wholesale scale, because that distorts an economy beyond the point of recognition, it screws with price discovery like just about nothing else can, and it puts the pensioners’ money in grave danger. It’s equally insane for Norway to buy up property halfway around the world which giant domestic investors leave by the wayside.

Investing your pension money, and your wealth fund, into your own economy is such a more solid and soundproof thing to do, it shouldn’t even be an item up for discussion. Taking that money out of the foundation of an economy, and shifting it either to assets abroad, or into the casino all stock markets must of necessity be in the end, means abandoning and undermining the future strength of your own economy for the sake of a bit more yield today. At home, you could create infrastructure and jobs and resilience with it. All that is gone when you move it either abroad or into a casino.

Still, nothing really functions anymore the way it should. And that’s how you wind up in situations such as these. Central banks monetize debt to such extents, you could swear there’s a race going on. They do this to hide from view the debts that are out there, and that if exposed would make everything look much bleaker than it looks with various QEs and other steroid-based stimuli. In doing this, central banks kill bond yields, which chases pension- and wealth funds out of safe assets. A surefire way to create short term gains and long term losses, if not disaster. For the masses, that is. No losses in store for the few. They get only gains.