DPC Wall Street and Trinity Church, New York 1903
Shenzhen down 6.7%.
• China Stocks Decline Most in Three Weeks (Bloomberg)
China’s stocks slumped the most in three weeks as data over the weekend added to concern the economic slowdown is deepening and traders gauged the level of state support for equities. The Shanghai Composite Index slid 2.7% to 3,114.80 at the close, paring earlier declines of 4.7%. About 12 stocks fell for each that rose on the gauge, led by technology and consumer companies. The Hang Seng China Enterprises Index trimmed a 1.4% gain to 0.1% at 3:03 p.m. in Hong Kong. Industrial output missed economists’ forecasts, while investment in the first eight months increased at the slowest pace since 2000. The Shanghai Composite has tumbled 40% from its June high to erase almost $5 trillion in value on mainland bourses as leveraged investors fled amid concerns valuations weren’t justified given dimming growth outlook.
China’s government spent 1.5 trillion yuan ($246 billion) trying to shore up its stock market since the rout began three months ago through August, according to Goldman Sachs. “Investors continue to be nervous and are trying to avoid being caught in another correction,” said Gerry Alfonso at Shenwan Hongyuan in Shanghai. Government funds appear to be “staying out” of equities to try to discourage investors from relying on interventions, he said. Industrial output rose 6.1% in August from a year earlier, missing the 6.5% estimate. Fixed asset investment excluding rural households climbed 10.9% in the first eight months versus the 11.2% median projection of economists surveyed by Bloomberg. Five interest-rate cuts since November and plans to boost government spending have yet to revive an economy mired in a property slump, overcapacity and factory deflation.
We never presumed as much.
• China’s Not The Only One Selling FX Reserves (CNBC)
Look out world—China’s not the only central bank in town selling its currency reserves to cope with a tumultuous global economy. With crude prices having shed more than half their value over the past year, oil producing economies are feeling the sting of cheaper oil. More importantly, Saudi Arabia—OPEC’s largest member and the world’s top oil producer—bears watching as oil stays below $50 and a global glut depresses oil prices, analysts say. Even before China surprised markets by announcing a record drawdown of its foreign currency denominated assets, Saudi Arabia had already begun selling its reserves to plug a hole in its budget and support its flagging currency, the riyal. In February and March, the world’s largest oil exporter saw net foreign assets drop by more than $30 billion, the biggest two- month drop on record.
These asset sales are important because Saudi holds one of the world’s largest reserve caches—and such sales put downward pressure on the U.S. dollar and upward pressure on Treasury bond rates. “The drop in oil prices, more so than volatility per se, have contributed to a decline in oil exporters’ reserves globally,” said Rachel Ziemba at Roubini Global Economics, including members of the Gulf Cooperation Council (GCC) and other Middle East economies. “Across the 11 oil exporters I track, reserves fell by over $200 billion over the last year,” she added, even adjusting for changes in other FX holdings such as euros. According to Ziemba, Libya, Algeria and Iraq are also likely to eventually sell some FX assets, as are Bahrain and Oman. Wealthier Gulf nations have sizable FX assets, thus allowing them more time.
“France has suffered the worst deterioration of any major country in the developed world, with total non-financial debt levels spiralling upwards by 75 percentage points to 291pc, overtaking Britain at 269pc for the first time in decades. ”
• BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)
Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world’s top financial watchdog has warned. The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events. “We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist. The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis.
Combined public and private debt has jumped by 36 percentage points since then to 265pc of GDP in the the developed economies. This time emerging markets have been drawn into the credit spree as well. Total debt has spiked 50 points to 167pc, and even higher to 235pc in China, a pace of credit growth that has almost always preceded major financial crises in the past. Adding to the toxic mix, off-shore borrowing in US dollars has reached a record $9.6 trillion, chiefly due to leakage effects of zero interest rates and quantitative easing (QE) in the US. This has set the stage for a worldwide dollar squeeze as the Fed reverses course and starts to drain dollar liquidity from global markets. Dollar loans to emerging markets (EM) have doubled since the Lehman crisis to $3 trillion, and much of it has been borrowed at abnormally low real interest rates of 1pc. Roughly 80pc of the dollar debt in China is on short-term maturities.
These countries are now being forced to repay money, though they do not yet face the sort of ‘sudden stop’ in funding that typically leads to a violent crisis. The BIS said cross-border loans fell by $52bn in the first quarter, chiefly due to deleveraging by Chinese companies. It estimated that capital outflows from China reached $109bn in the first quarter, a foretaste of what may have happened in August after the dollar-peg was broken. China and the emerging economies were able to crank up credit after the Lehman crisis and act as a shock absorber, but there is no region left in the world with much scope for stimulus if anything goes wrong now. The venerable BIS – the so-called ‘bank of central bankers’ – was the only global body to warn repeatedly and loudly before the Lehman crisis that the system was becoming dangerously unstable.
It has acquired a magisterial authority, frequently clashing with the IMF and the big central banks over the wisdom of super-easy money. Mr Borio said investors have come to count on central banks to keep the game going but engenders moral hazard and is ultimately wishful thinking. “Financial markets have worryingly come to depend on central banks’ every word and deed,” he said. A disturbing feature of the latest scare over China is a “shift in perceptions in the power of policy”, a polite way of saying that investors have suddenly begun to question whether the emperor is wearing any clothes after all following the botched intervention in the Shanghai stock market and the severing of the dollar exchange peg in August.
The BIS ‘house-view’ is that the global authorities may have put off the day of reckoning by holding interest rates below their ‘natural’ or Wicksellian rate with each successive cycle but this merely stores up greater imbalances, drawing down prosperity from the future and stretching the elastic further until it snaps back. At some point, you have to take your bitter medicine.
Will they have any choice?
• BIS Sees Central Banks Following Fed’s Lead (WSJ)
When officials at the U.S. Federal Reserve decide to raise interest rates, they will likely be setting in train a sequence of events that will lead to higher borrowing costs around the world, according to research published Sunday by the Bank for International Settlements. Economists at the consortium of central banks looked at the relationship between the short-term interest rates set by the Fed and policy rates in 22 developing economies, as well as eight smaller developed countries since 2000. The economies studied by the BIS economists were chosen partly because they are “well integrated in the global financial system,” and therefore would be more likely to be affected by Fed policy than a broader sample. They found a very close correlation between changes in policy rates, up to 63%.
Using statistical techniques, they then established that much of that had nothing to do with the fact that central banks were facing similar circumstances, that is to say, either a strengthening or weakening of the global economy. “We find that interest rates in the U.S. affect interest rates elsewhere beyond what similarities in business cycles or global risk factors would justify,” they wrote. They speculated that central banks in the countries surveyed change their policies to adjust to Fed moves for two possible reasons. In the years following the financial crisis, the BIS economists hypothesize that other central banks may have eased policy even when their domestic economies didn’t need additional stimulus to avoid an appreciation of the national currency, which could have damaged exporters.
Alternatively, they may have cut their own interest rates to avoid large inflows of short-term capital searching for higher returns than those available in the U.S., which could have threatened financial stability. “In both cases, monetary authorities would aim to avoid large interest rate differentials against the rates prevailing in the U.S.,” the economists wrote. While the Fed was easing policy during much of the period covered by the study, the BIS economists concluded there is evidence of similar “spillovers” when the Fed tightens policy, although it cautioned the scale of the response could be smaller or larger when the Fed does start to raise its short-term interest rate. “It might well be that spillovers are not fully symmetrical: for instance, policy makers might tolerate exchange rate depreciations or short-term capital outflows better than appreciations and inflows,” they wrote. “Or they might be even more sensitive about them.”
“If you wait that long, you will be waiting too long.”
• Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week (Bloomberg)
Stanley Fischer offered a word to the wise in 2014 that resonates today as he and other Federal Reserve officials face their toughest decision in years – the benefits of waiting can be overrated. Slowing economic growth abroad and volatile stock prices at home are prompting some U.S. central bankers to rethink whether now is the best time for the first interest-rate increase since 2006. One option, says former Fed Vice Chairman Donald Kohn, would be to put off a move at this week’s meeting to get a clearer view of the outlook. Investors seem to agree, putting a 70% chance of no move on Sept. 17. Yet Fischer cautioned in a speech just three months before taking over as the Fed’s No. 2 official in June 2014 that waiting carries its own difficulties.
In his view, the situation is always unclear and monetary policy takes time to affect the economy. “Don’t overestimate the benefits of waiting for the situation to clarify,” he said. Harking back to his time as head of Israel’s central bank from 2005 to 2013, Fischer recalled telling his advisers he had put off a “very difficult” decision on rates until the following month when the situation would be less uncertain. His then deputy, Meir Sokoler, commented, “It is never clear next time; it is just unclear in a different way.” Fischer, whom Fed Chair Janet Yellen has said she relies on in mapping out policy, made a similar point much more recently. “There is always uncertainty and we just have to recognize it,” he told CNBC television on Aug. 28. Asked if the Fed should delay an increase until it had an “unimpeachable case” that a move was warranted, Fischer replied, “If you wait that long, you will be waiting too long.”.
One of many silly theories out there. One thing’s clear: nobody knows. But they’re afraid to say it out loud.
• Why Asia Shouldn’t Fear the Fed (Pesek)
In 2008, Asian economies had good reason to race to decouple from the struggling West. The collapse of Lehman Brothers and subsequent contagion sent export-dependent countries in search of a more reliable customer. Not surprisingly, they latched onto China. That switch now looks like a bad bet. China’s economy is sputtering, its stocks are nose-diving and officials in Beijing appear ill-equipped to maintain the world’s second-biggest economy as a stable, dependable trading partner. There’s an obvious contradiction in developing nations relying so overwhelmingly on another emerging economy, and a highly unbalanced one at that. No doubt many in the region are now wishing they could decouple from China, too.
Asia may be able to do just that soon, argues Bloomberg Industries economist Tamara Henderson, thanks to the approach of the Federal Reserve’s first tightening cycle in a decade. “Just as Asia decoupled from the U.S. in the wake of the global financial crisis, benefiting from China’s extraordinary stimulus at the time, Fed hikes may allow Asia to decouple from China,” she writes in a recent report. However contrarian, the idea that the dreaded taper may be good for Asia has merit. It’s hard to remember a moment since 2008 when markets were more panicked and central bankers so on edge. The conventional wisdom is that a Fed rate hike will send shockwaves around the world, sucking money back to the U.S. and driving fragile nations to the IMF for help. Such fears, however, lack perspective.
For all the risks, Asia’s fundamentals are comparatively sound. Financial systems are stronger, transparency greater and currency reserve hoards big enough to avoid another 1997-like meltdown. At the same time, higher U.S. rates are an indication that the world’s biggest economy – and customer – is humming again. “The start of a rate hike cycle sends an important signal: it is time to be confident about the world’s largest economy,” Henderson argues. “The Fed appreciates this and global investors will eventually, too.”
The blind arrogance of unelected power threatening entire countries.
• Eurogroup President: Greece Can Choose to be Either North or South Korea (GR)
On Friday, during an interview with a Dutch TV network ,Eurogroup President Jeroen Dijsselbloem presented the choice he believes Greece must make. “Ultimately, it is up to Greece whether it will become North or South Korea: absolute poverty or one of the richest countries in the world,” he said. The Eurogroup president spoke on the corrupt and inefficient Greek governments that have ruled for decades and noted that it will take a different and honest government for Greece to recover. Dijsselbloem also recognized that the implementation of the third bailout’s agreed reforms will be very tough.
Dijsselbloem also issued a warning to all the sides involved in the Greek bailout. Prior to Saturday’s unofficial Eurogroup meeting on Greece, he noted that the work of the third Greek bailout must continue. Greek politics are currently captivated by the September 20 elections. The Eurogroup President noted that both the international creditors and Greece must move forward with the necessary actions, despite the elections. Creditors should prepare the evaluation of the bailout, which according to reports will take place in October, while Greece must continue to prepare for the implementation of the program.
Bye bye Mama Merkel. The troubles start now.
• Germany Reinstates Controls At Austrian Border (Guardian)
Germany introduced border controls on Sunday, and dramatically halted all train traffic with Austria, after the country’s regions said they could no longer cope with the overwhelming number of refugees entering the country. Interior minister, Thomas de Maizière, announced the measures after German officials said record numbers of refugees, most of them from Syria, had stretched the system to breaking point. “This step has become necessary,” he told a press conference in Berlin, adding it would cause disruption. Asylum seekers must understand “they cannot chose the states where they are seeking protection,” he told reporters.
All trains between Austria and Bavaria, the principal conduit through which 450,000 refugees have arrived in Germany this year, ceased at 5pm Berlin time. Only EU citizens and others with valid documents would be allowed to pass through Germany’s borders, de Maizière said. The decision means that Germany has effectively exited temporarily from the Schengen system. It is likely to lead to chaotic scenes on the Austrian-German border, as tens of thousands of refugees try to enter Germany by any means possible and set up camp next to it. German police began patrolling road crossing points with Austria at 5.30pm on Sunday. These checks may be rolled out to the borders with Poland and the Czech Republic.
Chancellor Angela Merkel agreed the details in a conference call on Saturday with her Social Democrat coalition partners. The Czech Republic said separately that it would boost controls on its border with Austria. The emergency measures are designed to give respite to Germany’s federal states who are responsible for looking after refugees. There is also discussion inside the government about sending troops to the road and rail borders with Austria to reinforce security, Der Spiegel reported.
It will not recover in its present shape.
• Germany Border Crackdown Deals Blow To Schengen System (Guardian)
Germany’s decision to re-establish national border controls on its southern frontier with Austria deals a telling blow to two decades of open travel in the 26-nation bloc known as the Schengen area. The abrupt move to suspend Schengen arrangements along the 500-mile border with Austria will shock the rest of the EU and may spur it towards a more coherent strategy to deal with its migration crisis. Yet there will be little sympathy for Berlin from Hungary, Italy or Greece, which are bearing the brunt of the mass arrivals of people from Syria, Iraq, Eritrea and Afghanistan. The German decision came as EU interior ministers prepared to meet for a crucial session on the issue. There are deep splits over Brussels’ campaign, backed by Berlin, to establish a new compulsory quota system to distribute asylum seekers across the EU on a more equitable basis.
Thomas de Maizière, the German interior minister, announced that while Austria was the focus of the new border controls, all of Germany’s borders would be affected. As the EU’s biggest country straddling the union’s geographical centre, Germany is the lynchpin of the Schengen system. It borders nine countries. Without Germany’s participation, Schengen faces collapse. It was the second unilateral decision by the German government in a fortnight. Previously, without telling Brussels, Budapest or Vienna in advance, Berlin announced that given the concentration of refugees in Hungary it was waiving European rules known as the Dublin regulations, which stipulate that people must be registered and lodge their asylum applications in the first EU country they enter.
The decision prompted a sudden surge into German of Syrians looking for safe haven. It elicited huge praise for Germany’s humane approach, but ultimately it has proven unmanageable. Sunday’s decision to suspend the open borders reverses that move. It will create a backlog of people in Austria and Hungary, with the latter also introducing a stiff new closed-borders regime, effectively criminalising most new arrivals as illegal migrants. Reports from a camp on the Hungarian-Serbian border at the weekend described a military operation, with helicopters constantly buzzing overhead and police and dogs patrolling a razor-wire border fence. A lack of running water and lavatories in the camp made for wretched conditions.
It’ll get worst, first, in Hungary. But let’s hope the media will be on all of it. Don’t allow the cops and soldiers and politicians to hide.
• German Border Controls Cause Traffic Jams (AP)
Controls on Germany’s border with Austria have led to traffic jams at crossings. Authorities in Bavaria said there was a roughly 3-kilometer (2-mile) tailback Monday on the A8 highway at Bad Reichenhall, near the Austrian city of Salzburg, news agency dpa reported. Regional broadcaster Bayerischer Rundfunk reported a 6-kilometer (nearly 4-mile) queue on the A3 highway near Passau. Germany introduced temporary border controls on Sunday evening to slow the influx of immigrants arriving from Hungary via Austria. Train services from Austria to Germany resumed Monday morning after being halted Sunday. The section between Salzburg and the German border town of Freilassing initially remained closed because of reports of people on the track, but police said they found no one.
European Union interior ministers meet for emergency migration talks on Monday a day Germany reintroduced controls at its border with Austria to stem the continuing flow of refugees. The ministers will try to narrow a yawning divide over how to share responsibility for thousands of migrants arriving daily and ease the burden on frontline states Italy, Greece and Hungary. Their talks in Brussels will focus on distributing 160,000 refugees over the next two years. The arrival of around 500,000 migrants so far this year has taken the EU by surprise and it has responded slowly. The ministers will confirm the distribution of an initial 40,000 refugees, but this scheme was conceived in May and some nations still do not plan to do their full share before year’s end.
“The country has also made illegal border entry a crime punishable by prison terms.”
• Hungary Empties Migrant Camp as Military Arrives (Bloomberg)
Hungarian police cleared a major migrant camp by the Serb border, transporting families to an unknown location on buses and making way for soldiers who arrived at the site, Index news website reported, citing its correspondent on the scene. Hungary’s government is deploying soldiers by the Serbian border starting this week to reinforce a razor-wire fence meant to keep out the tens of thousands of undocumented migrants who stream into the EU each week. The country has also made illegal border entry a crime punishable by prison terms.
Idle hopes.
• On German Moral Leadership (Yanis Varoufakis)
Kant’s practical Reason demands that we should undertake those actions which, when generalised, yield coherent outcomes. For example, lying cannot be a rational choice because, if universalised, if everyone were to lie all the time, trust in what others say would disappear and language would lose its coherence. True enough, many people refrain from lying because of the fear that they will be found out. But Kant does not consider such instrumental reasons for not lying as fully rational. In his mindset, the rational and the moral merge when we develop a capacity to act on the so-called categorical imperative: of acting in a universalisable manner independently of the consequences. For the hell of it, in plainer language.
Taking refugees in is such a universalisable act. You do not take them in because of what you expect to gain. The fact that you may end up with great gains is irrelevant. The warm inner glow of having done the ‘right’ thing, the boost to aggregate demand, the effect on productivity – all these are great repercussions of one’s Kantian rationality. They are not, however, the motivation. One’s rational acts, according to Kant, are not to be determined by expected gain, that instrumental ‘utility’ that depends on what others do and on a number of contingencies. There is no strategy here. Just the application of the deontological reasoning which requires that we should act upon ‘universalisable’ rules.
There is, of course, no way that one can prove empirically that German solidarity to the refugees was of the Kantian type, and not some instrumental attempt to feel better about themselves, to show up other Europeans, to improve the country’s demographics. Be that as it may, I do not buy these cynical, instrumental accounts. Having observed so many Germans perform countless acts of kindness toward refugees shunned by other Europeans, I am convinced that something akin to Kantian reasoning is at work. I say “something akin to Kantian reasoning” because full Kantian behaviour is neither observed in Germany nor necessarily desirable. There are times when good people need to lie (for instance when skinheads interrogate you on the whereabouts of a black person they are chasing) and there are several realms where German attitudes are far from consistent with Kantian thinking.
Indeed, this summer there was a second occasion when Europe harmed its integrity and damaged its soul: It happened on 12th and 13th July when the leader of a small European country, Greece, was threatened with expulsion from the Eurozone unless he accepted an economic reform program that no one truly believes (not even Chancellor Merkel) can alleviate my country’s long standing economic collapse, and the hopelessness that goes along with it. On that occasion no universalisable principle was in play, the result being that a proud nation was forced to surrender to an illogical economic program for which everyone in Europe, including Germany, will pay a price.
This is not the place to recount the vagaries of Greece’s never-ending crisis. And nor is there a need since its underlying cause has nothing to do with Greece: the real reason Greece has been imploding, while Berlin and the troika are insisting on a ‘reform’ program that pushes the country deeper into a black hole and keeps it hopelessly unreformed, is that the German government has not yet decided what it wants to do with the Eurozone.
“The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm.”
• Equity Markets And Credit Contraction (Macleod)
There is one class of money that is constantly being created and destroyed, and that is bank credit. Bank credit is created when a bank lends money to a customer; it becomes money because the customer draws down this credit to deposit in other bank accounts and to pay creditors. It is not money that is created by a central bank; it is money that is created out of thin air by commercial banks to lend. Its contraction comes about when it is repaid, or if a customer defaults. The recent sharp fall in equity markets is leading to two levels of contraction of bank credit. Brokers’ loans to speculating investors are being unwound from record levels, notably in China and also in the US where in July they hit an all-time record of $487bn.
Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated. This is when falling stock prices can be so destructive of bank credit, and as the US economist Irving Fisher warned in 1933, a wider cycle of collateral liquidation can ensue leading to economic depression. Fear of an escalating debt liquidation cycle is always a major concern for central bankers, so ensuring the secondary effect described above does not occur is their ultimate priority. Macroeconomic policy is centred on ensuring that bank credit grows continually, so since the Lehman crisis any tendency for bank credit to contract has been offset by central banks creating money.
The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm. For this reason many investors believe that a bear market will never be permitted, and the combined weight of central banks, exchange stabilisation funds and sovereign wealth funds will be investing to support the markets. There is some evidence that this is the direction of travel for state intervention anyway, so state-sponsored buying into equity markets is a logical next step.
The risk to this line of reasoning is if the authorities are not yet prepared to intervene in this way. When the S&P 500 Index halved in the aftermath of the last financial crisis, the subsequent recovery appeared to occur without significant US government buying of equities. Instead the US government might continue to rely on more conventional monetary remedies: more quantitative easing, reversing current attempts to raise interest rates, and perhaps attempting to enforce negative interest rates as well. If, in the future, state jawboning accompanying these measures does not stop the bear market from running its course, the next round of quantitative easing will have to be far larger than anything seen so far.
Kept barely ailve only by the grace of an accounting time-lag.
• Write-Downs Abound for Oil Producers (WSJ)
U.S. oil-and-gas producers have written down the value of their drilling fields by more in 2015 than any full year in history, as the rout in commodity prices makes properties across the country not worth drilling. A group of 66 oil and gas producers have taken impairment charges totaling $59.8 billion through June, according to a tally by energy consultancy IHS Herold Inc. That tops the previous full-year record of $48.5 billion set in 2008, IHS says. In 2008, oil prices plummeted from above $140 a barrel at midyear to below $37 by year-end as the financial system’s near collapse sent the global economy into recession. The drop was steep but relatively short-lived as growing demand from China and other emerging economies was expected to suck up global supplies.
Now, with China’s economy sputtering and U.S. production at its highest level in decades, prices aren’t expected to return to the $100 level of recent years any time soon. Write-downs, or impairments, are taken by companies when the value of assets falls below the value on its books. For energy fields, that can mean that the price of leasing land, drilling and installing pipelines exceed the worth of whatever oil and gas is unearthed. Anadarko, Chesapeake. and Devon Energy are among the large energy companies that have taken multibillion-dollar impairments this year, while dozens of smaller companies have made proportionally large write-downs.
Writing down assets can shrink the pool of oil-and-gas reserves that are used as collateral for loans. Because many oil-and-gas producers spend more than they make selling commodities, abundant credit is crucial to them being able to keep going. These companies’ shares are often valued on forecast production growth more than current profitability. This year’s impairment tally is certain to grow, even if oil prices buck forecasts and move higher. U.S. securities regulators require exploration-and-production companies to value drilling properties and reserves according to energy prices over the previous 12 months.
That means the formulas used to calculate their value at the end of June still included prices from the second half of last year, before oil prices had made much of their descent to their current price around $45 a barrel. “There’s a disconnect between the 12-month average and reality,” said IHS analyst Paul O’Donnell. “There will be pricing impairments for the next two quarters, at least.” Prices used to determine asset values at the end of June were $71.50 a barrel for oil and $3.40 a million British thermal units for natural gas, IHS says. That compares with U.S. crude prices of $59.47 a barrel and $2.83 for natural gas on June 30. The consultancy expects the prices used at year-end to determine asset value will be around $50.50 and $2.80, respectively.
Tick tock.
• Nothing Appears To Be Breaking (Golem XIV)
Some time in the recent past we crawled inside our machine, closed the last hatch to the outside behind us, and then forget there was an outside. Our leaders are the worst of us. They are the lords of the machine and they are sure outside there is only chaos. We must all save the machine. Their power and wealth demands it. And yet they do not know how.
“Something Happened” but “Nothing appears to be breaking”. So said JPM’s chief economist Bruce Kasman. He was refering to the recent extreme ‘turbulence’ on the stock markets and the continuing drop in global market values. All I can say is that only a person who lives resolutely in a linear world, despite it being over a 100 years since we discovered that our world in not linear but non-linear, could say such a thing. In a linear world effects tend to follow their causes quickly and clearly. When things are non-linear, however, effects can surface long after and far away from their cause. Mr Kasman, I suspect, held his breath, waited for everything to fall down and after a couple of days, when they didn’t he concluded nothing had broken after all.
He looked at the on-going trend in events and saw they were much as before the inexplicable ‘turbulence’ and concluded that all was as before and the ‘turbulence’ was just ‘one of those things’. He could be right. But I doubt it. Ours is a non-linear world and we should remember that. Think back to August 9th 2007. That was the day when PNB Paribas suddenly closed three large sub-Prime mortgage finds. The world at large had not even heard of sub-prime. To little fanfare the ECB pumped €95 billion in to the markets to steady nerves. It was not enough. The next day, August 10th The ECB pumped in another €156 billion, the FED injected $43 Billion and the BoJ a trillion Yen.
Five days later Countrywide Financial haemorrhaged 13% of it value. 16 days later Ameriquest the largest specialist sub-prime lender in the US collapsed and on September 14th there was a bank run on Norther Rock. It was a turbulent time. And then do you know what happened? Nothing. Something had happened but nothing appeared to be broken. The linear pundits went about their crooked business. Six whole months later Bear Stearns collapsed. Its a non-linear world. And I think we are going to be reminded … again.
Generational warfare just around the corner.
• No Pay Rise? Blame The Baby Boomers’ Gilded Pension Pots (Guardian)
Workers expecting Britain’s economic recovery to fill out their pay packets are in for a nasty surprise. While the UK’s collective national income is expected to grow by more than 2% a year until at least 2020, the share distributed in wages is going to be less than many hope. As much as onepercentage point could continue to be knocked off annual pay rises because firms need to plug holes in the pension pots of retired staff, according to a report. The blame lies with the retired baby boomer and their employers who failed to ensure enough funds went into their final salary schemes during their working lives. The deficit-ridden schemes must now be filled from company cashflows, denying today’s workers a proportion of the forecast wage rises.
The day that average wages regain their pre-crash peak is now expected in the middle of 2017, but the Resolution Foundation points out that the pensions effect will continue to be felt in pay packets for years to come. Economists have failed to make the connection between private pension scheme deficits and workers’ current wages, according Jon Van Reenan – an economics professor at the London School of Economics and a leading expert on the labour market. Brian Bell, an associate professor at Oxford University consulted by the report’s author, said the huge sums involved would deepen the already growing inequality between generations. Maybe this should not come as a surprise after more than a decade watching those who own assets – mostly the over 55s – ringfence their booty from anyone planning to tax it or allow the market to diminish its value.
It is well known that a major prong of the rescue operation following the banking crash – the Bank of England’s £375bn quantitative easing scheme – was designed to generate bank lending, pumping fresh money into the economy. In practice it did more to support the stock market and help stop property values tumbling. Baby boomers had successfully lobbied in the early noughties to protect their final salary pension payouts, even when it was obvious they were becoming unaffordable. It was never fair that one generation could secure its own pensions knowing everyone else would be left with a pittance in old age – as companies rushed to ditch their final salary-linked schemes – but we did not know it would also mean people sacrificing wage rises.
Land of the crazies.
• The Highwayman (Jeff Thomas)
The Highwayman has a romantic image as a bold, 18th-century scallywag who would ride up to a coachload of aristocrats on his horse, shouting, “Stand and deliver!” Having relieved the aristocrats of their purses, he would gallop off. Today, the Highwayman is being revived in a big way in the US. But, far from being a scofflaw, he is, in fact, the law. He wears a badge and the law protects him in his roadside robberies. The revival is the result, in part, of both the defunding of police departments (creating a demand for law enforcement departments to seek money from other sources) and the encouragement of the federal government for an overall expansion of the police state. The legal justification for such highway robbery is the police practice of civil forfeiture, which has been on the books for decades.
Civil forfeiture allows law enforcement to seize property (including cash, cars, and even homes) without having to prove the owners are guilty of a crime. In many cases, drivers are not charged with any crime at all, not even a traffic citation. In fact, one Florida sheriff has noted that the best targets are those who are obeying the speed law. He knows whereof he speaks, having seized over $6.5 million on the highways of Florida. (Quite an advance on the size of the purses seized by the 18th-century highwayman.) Typically, police stop a car and make the usual request to see license and registration. If the driver asks why he was stopped, a vague explanation may be offered by the officer, or he may simply ignore the question, then demand a search of the car or the driver’s person.
The officer then seizes cash and other valuables as potential “evidence” of a crime (suspected drug dealing is a common accusation). In some cases, police threaten drivers that, if they are not cooperative, their children may be taken by Child Protective Services. The burden of proof is on the driver. In order to regain his possessions, he must prove his innocence in a court. However, in most cases, no charges are made, so there is no court case to try. Whether charges are made or not, law enforcement agencies are entitled to keep 100% of the forfeiture proceeds. Although they are required to keep records on forfeiture, in many cases, police departments avoid or even refuse to provide such information when requested.
Home › Forums › Debt Rattle September 14 2015