Economics Archives - Page 2 of 3 - The Automatic Earth

Status quo, as our generation know it, established in 1945 has plodded along ever since. It is true that it have had near death experiences several times, especially in August 1971 when the world almost lost faith in the global reserve currency and in 2008 when the fractional reserve Ponzi nearly consumed itself. While the recent Brexit vote seem to be just another near death experience we believe it says something more fundamental about the world. When the 1945 new world order came into existence, its architects built it on a shaky foundation based on statists Keynesian principles. It was clearly unsustainable from the get-go, but as long as living standards rose, no one seemed to notice or care. The global elite managed to resurrect a dying system in the 1970s by giving its people something for nothing.

Debt accumulation collateralized by rising asset values became a substitute for productivity and wage increases. While people could no longer afford to pay for their health care, education, house or car through savings they kept on voting for the incumbents (no, there is no difference between center left and right) since friendly bankers were more than willing to make up the difference. It is clear for all to see but the Ph.Ds. that frequent elitist policy circles that the massive misallocation and consumption of capital such a perverted system enables will eventually collapse on itself. Debt used to be productive, id est. self-liquidating, but now it is used for consumption backed by future income projections based on historical experience.

However, one should not extrapolate future income streams from a historical regime when the new one is fundamentally different. The promised incomes obviously never materialized and the world reached peak debt. The credit Ponzi is dead. Consider the following chart that depicts decennial change in average real earnings for the UK worker. It shows an unprecedented development. Not since the 1860s have the UK worker experienced falling real earnings over a ten-year period. Such dramatic change obviously does something to the so-called social contract people have been tricked into. People no longer believe in a brighter future and there is nothing more detrimental to a human being than that.

No longer vested in the status quo, people opt for radical change, hence; Brexit, Trump, Le Pen, Lega Nord, M5S. Old rules does not apply anymore. Over the next couple of years, we will experience a torrent of sea change, a lot of it unpleasant, but it will come nonetheless. In the social contract, immigration is OK when jobs are plentiful and people’s houses are worth more every year. Not so much when they are unemployed and without a house or even prospects of ever owning one. Corruption in the higher echelons of society is grudgingly accepted when the elite allegedly runs a system where incomes and productivity constantly moves upwards, but will not be tolerated as blue collar jobs are moved offshore.

[..] So what does this mean for the UK specifically? Few have lived as high on the hog as the brits have. Their current account deficit at 6 per cent of GDP is reminiscent of countries heading into depressions. In the mid-1970s, the IMF had to bail them out and in the early 1990s, the infamous ERM regime collapsed as Soros made his billion. The pound got a pounding on the Brexit vote, but it was destined to fall anyways. The adjustment needed to correct this imbalance is not over and we should all expect a far weaker pound in the months and years ahead. Brexit only triggered what was already baked into the cake in the first place.

Stuck in BAU.

• BOE Chief Economist Haldane Calls For Big Post-Brexit Stimulus (G.)

The Bank of England’s chief economist has called for a big package of measures to support the UK’s post-Brexit economy, stressing the need for a prompt and robust response to the uncertainty. Andy Haldane made it clear the Bank’s monetary policy committee would do more than merely cut interest rates from their already record low of 0.5% when it meets in August. The Bank’s chief economist used a speech to warn that decisive action was required at a time when confidence had been dented by the shock referendum result. “In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn.

“Given the scale of insurance required, a package of mutually complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August inflation report round.” The Bank surprised the City when it left interest rates on hold at its July meeting held this week, but the minutes of the MPC’s discussions said most of its nine members thought an easing of policy would be required in August.

The tone and content of Haldane’s speech suggest that the MPC will use public appearances to make the case for strong action in August. Options include cutting interest rates to 0.25% or lower, restarting the Bank’s £375bn quantitative easing scheme and providing cut price loans to banks under the funding for lending scheme. [..] In a reference to the prison movie The Shawshank Redemption Haldane said: “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same ‘luxury’.”

This headline somehow seems to perfectly capture UK politics today. Whatever.

• Philip Hammond Promises ‘Whatever Measures’ To Stabilise Economy (Ind.)

Philip Hammond, the UK’s newly appointed chancellor of the exchequer, said the vote to leave the EU had “rattled confidence” and that he will take “whatever measures” needed to shore up the British economy. “The number one challenge is to stabilise the economy, send signals of confidence about the future, the plans we have for the future to the markets, to business, to international investors,” Hammond said in a Sky News interview. Hammond’s comments came ahead of a meeting later on Thursday of Bank of England policy makers who will debate whether to reduce the key interest rate for the first time since 2009.

The Bank’s governor, Mark Carney, is seeking to stave off further turmoil after the pound plunged and consumer confidence dropped to a 21-year low in the wake of last month’s decision to quit the EU. The chancellor, appointed to the role late on Wednesday by new prime minister, Theresa May, will meet Carney on Thursday morning “to make an assessment of where the economy is,” he said in a BBC TV interview. He added: “I think the governor of the Bank of England is doing an excellent job.”

It’s embarrassing to watch.

• Dow Extends Record Streak as US Stocks Post Weekly Gains (WSJ)

The Dow Jones Industrial Average hit its fourth consecutive closing high on Friday, rising 10.14 points, or less than 0.1%, to 18516.55. For the week, it gained 2%. The S&P 500’s rally put the index above the mean average of year-end targets from 18 analysts tracked by Birinyi Associates. Collectively, those analysts predicted, as of July 6, that the S&P 500 would finish this year at 2153. The index closed above that level on Friday, at 2161.74, despite slipping 0.1% after four record closes in a row. Analysts revise their year-end targets throughout the year. In mid-January, the average year-end target was 2198, according to Birinyi Associates.

Markets elsewhere rallied for the week. Japan’s Nikkei Stock Average rose 9.2% over five sessions, its best performance in 6 1/2 years. The Stoxx Europe 600 rose 3.2% in the week. “The market is showing us, if nothing else, its resilience,” said Jason Browne, chief investment officer of FundX Investment Group in San Francisco. Investors began to put money back into riskier assets such as stocks, an encouraging sign to those who had worried about the stream of money leaving equity funds this year. In the seven days to July 13, investors poured a net $7.8 billion into U.S. equity funds, according to data provider Lipper. It was the first weekly inflow since late April.

I could see Brexit having a role here.

• EU Plays Catch-Up on Swaps Collateral Under US Pressure (BBG)

European Union regulators are considering ways to speed the implementation of collateral requirements for derivatives as the bloc’s failure to meet a global deadline threatens to fracture the $493 trillion market. The European Commission said last month it wouldn’t meet a Sept. 1 global deadline. In a draft letter addressed to the main EU regulators, the bloc’s executive arm is now proposing to adapt its plans to “align with the internationally agreed timelines as closely as possible.” Previously, the commission said it would finish EU technical rules on margins for non-centrally cleared over-the-counter derivatives by year-end and have them take effect before mid-2017. That prompted a backlash from regulators in Washington and Tokyo, who said they intended to impose the rules on schedule, while leaving the door open to a delay.

The regulations will apply billions of dollars in collateral demands to swaps traded by the world’s largest banks, including JPMorgan Chase, Barclays and Deutsche Bank. The financial industry has called for global regulators to enforce the requirements at the same time to avoid creating the potential for regulatory arbitrage between jurisdictions. The Basel Committee on Banking Supervision, which includes regulators from around the world, helped set the international deadlines that start taking effect for the biggest banks in September and ratchet up starting in March 2017. The over-the-counter swap market is estimated at $493 trillion by the Bank for International Settlements. In the undated draft letter seen by Bloomberg, the commission proposed that the requirements would take effect one month after the EU’s technical rules enter into force.

The age of the strongman is upon us. This one takes pensions.

• $35 Billion Pension Bomb Shows Who Really Has Power in Poland (BBG)

It took up less than a minute of a one-hour speech, but led to an unexpectedly busy weekend for the Polish Ministry of Development in Warsaw. At the governing Law & Justice Party’s congress on the first Saturday of this month, leader Jaroslaw Kaczynski spelled out his vision for the country. He mentioned briefly that Poland should do more with the money parked in its retirement funds. At Kaczynski’s ministry of choice for economic policy, senior officials swiftly rounded up colleagues to work through Sunday so that at 8:30 a.m. the next day – before financial markets opened – an overhaul of the $35 billion pension industry could be unveiled. Investment companies were incredulous and the stock market dropped, though it came as little surprise to the people close to the real power in Poland.

Kaczynski, 67, holds no office beyond his role as lawmaker – he’s not the prime minister, president and doesn’t even run a department. His drumbeat of mistrust for both Russia and western Europe, the them-and-us attacks on Poland’s post-communist elite and his courting of the Catholic church give him enough of a devoted following that he needs no title. “Politically, he’s a sort of commander in chief or a first secretary we knew from the times of communism,” said Marek Migalski at Silesian University in Katowice. A former Law & Justice lawmaker in the European Parliament, he was ostracized by the party for criticizing Kaczynski in 2010. “I’d say that for his supporters, he’s even more than Moses. It’s not just a notion that Kaczynski is doing only good things, it’s the conviction that things that are done by Kaczynski are good.”

Anyone ever doubted this?

• EU Commission Has Known for Years about Diesel Manipulation (Spiegel)

Since at least 2010, the European Commission has been in possession of concrete evidence that automobile manufacturers were cheating on emissions values of diesel vehicles, according to a number of internal documents that SPIEGEL ONLINE has obtained. The papers show that emissions cheating had been under discussion for years both within the Commission and the EU member state governments. The documents also show that the German government was informed of a 2012 meeting on the issue. The scandal first hit the headlines in 2015 when it became known that Volkswagen had manipulated the emissions of its diesel vehicles. The records provide a rough chronology of the scandal, which reaches back to the middle of the 2000s.

Back then, European Commission experts noticed an odd phenomenon: Air quality in European cities was improving much more slowly than was to be expected in light of stricter emissions regulations. The Commission charged the Joint Research Centre (JRC) – an organization that carries out studies on behalf of the Commission – with measuring emissions in real-life conditions. To do so, JRC used a portable device known as the Freeway Performance Measurement System (PeMS), which measures the temperature and chemical makeup of emissions in addition to vehicle data such as speed and acceleration. This technology, which was later used to reveal VW emissions manipulation in the United States, was largely developed by the JRC.

JRC launched their PeMS tests in 2007 and quickly discovered that nitrogen oxide emissions from diesel vehicles were much higher under road conditions than in the laboratory. The initial results were published in a journal in 2008 and they came to the attention of the Commission. On Oct. 8, 2010 – roughly three years after the JRC tests – an internal memo noted that it was “well known” that there was a discrepancy between diesel vehicle emissions during the type approval stage (when new vehicle models are approved for use on European roads) and real-world driving conditions. The document also makes the origin of this discrepancy clear: It is the product of “an extended use of certain abatement technologies in diesel vehicles.”

Wow. A feast for the eye and the mind. Don’t miss it.

• Economics Is For Everyone! (Chang)

‘Economics is for everyone’, argues legendary economist Ha-Joon Chang in our latest mind-blowing RSA Animate. This is the video economists don’t want you to see! Chang explains why every single person can and SHOULD get their head around basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. Arm yourself with some facts, and get involved in discussions about the fundamentals that underpin our day-to-day lives.

Britain Can’t Stand On Its Own Two Legs

Jun 292016

June 29, 2016 Posted by Raúl Ilargi Meijer at 12:46 pm Finance Tagged with: Brexit, Corbyn, Economics, EU, Guardian, Juncker, Osborne, physics 15 Responses »

Marion Post Wolcott Coal miner waiting for lift home, Capels, West Virginia 1938

George Osborne declared on Monday that the UK “is in a position of strength” (he meant the economy, not the football team). No, it is not. That’s why he and his ilk lost the vote. But Osborne’s actually thick enough to look in the mirror and tell himself he did a good job. Utterly blind to the people he keelhauled over the past 6 years.

And no doubt while he’s at it, he’s at least tempted to label all 17 million Britons who voted ‘Leave’, uneducated racists. George’s well-to-do friends may be in “a position of strength”, but the British people who paid for these friends of George’s to be comfortable, are nowhere near “a position of strength”.

The only way to protest the wringer they have been put through was to vote against anything Osborne and Cameron represent. And so they did.

Most of the “Brexit is the end of the world” claims that have followed Friday’s referendum result are as stunning as Osborne’s blind spot for this own people (who he doesn’t even see as ‘his own’). And most of them come from people who until recently claimed to detest ‘Gideon’.

In the eyes of a vast majority of commentators, all hell is busy imminently breaking loose in UK society and its economy because those 17 million dumb racists voted No to the EU, which was in reality simply a No to Osborne and Cameron -and Juncker et al-, and all they stand for, something just about entirely overlooked; for most of these voters, it was not a Yes to anyone else, just a NO!.

At the same time the Leave campaign claims endless streams of milk and honey are in the offing, an equally unlikely proposition (is it perhaps an idea to not only talk about money or race; how about physics?).

Fact is nobody knows where Brexit will lead, for the simple reason that there are no precedents or other comparisons. Everybody on all sides just makes things up. Since most of the media outlets that have any pretense left of serious journalism are on the Remain train, it would be easy to be fooled by them.

The whole ‘discussion’ -it’s more an endless parade of monologues- has turned into the metaphorical hammer looking for a nail in embarrassing ways.

Who do all these people have to blame but themselves? Weren’t they the ones who felt up to the very last moment that there would be no Brexit? And isn’t that why they decided to keep calm and carry on? Let’s see some denials of that, please.

The “I was asleep but that’s not really my fault, is it?” kind of thing. Bring it on. The Guardian has the audacity to ask for donations from those who “appreciate their Brexit coverage”. Granted, they publish some 826 pieces a day on the topic. But I’d consider paying them just to stop doing that.

Hillary Clinton’s reaction to Brexit was to call for ‘steady, experienced leadership’. Which sounds sort of reasonable but is in reality just another way of saying ‘more of the same’. And that in turn happens to be exactly what Brexit was a reaction against.

Clinton’s simply and obviously aiming for those Americans who are afraid of change. But that doesn’t mean she has the power to prevent it. Nor that it’s a wise track to be on, given that Trump is where he is because so many people clearly want change, not ‘more of the same’.

European Parliament president Martin Schulz was quoted as saying: “The British have violated the rules. It is not the EU philosophy that the crowd can decide its fate.” Still wondering what the source of that quote is. Saw Prof. Richard Werner quote it, but without the source.

Jean-Claude -‘You have to lie’- Juncker told European Parliament members yesterday that he has imposed a ‘Presidential’ ban on EU commissioners holding informal or secret talks with the British about the country’s exit from the EU, until the UK government formally invokes Article 50. I bet you he’s holding secret talks right now.

A Bloomberg headline: “EU Chiefs ‘Held Hostage’ by UK Tell Cameron to Spell Out Goals”. Err, guys and dolls, Cameron resigned. He’s in no position to spell out anything, and he wants it even less; Georgy ain’t even touching that hot potato just to pass it on. He’ll take a pig’s head any day.

As Jeremy Corbyn faces a Labour Party rebellion, George Monbiot says “I fear that may be the end of the Labour party. Just when we need it most.“ No, that’s not what you need, George, you need a party or other organization that stands up for you and ‘yours’. And when’s the last time Labour has done that for the majority of British people?

Also, beware of economists who talk politics; they think these are separate fields. Some even think there’s science involved. Brexit is not “Britain’s democratic failure”, as economist Kenneth Rogoff suggests, that failure came a long time ago, when corporatism fascism came in, first through Labour’s own Tony Blair, and was subsequently perfected by Cameron and Osborne.

If anything, it’s the opposite, that is to say, Brexit is Britain’s democratic resurgence, though it has arguably come in a repulsively distorted shape. But perhaps that is inevitable once real democracy has had its head held underwater for so many years.

Through all the insistence that Britain must stay inside the EU, I can’t help wondering when ‘Britain can’t stand on its own two legs’, which is what all these commentaries come down to, came to be perceived as a winning argument, but all but a few ‘expert voices’ insist this is true.

‘Britain faces an uncertain future’. How awful is that? Still, I bet you, when next time it sounds even halfway convenient, uncertainty will get to mean ‘opportunity’. Oh, and don’t you, too, hate the implications of a word like ‘nervousness’, as in: “everyone’s nervous”? Well, unless one’s favorite musician or athlete talks about the ‘healthy nervousness‘ necessary to perform well.

Much respected economist/writer Edward Harrison says on Twitter: “.. this is the part I HATE. We are, what, 5 days into this. No one knows how severe the Market reaction will be. It’s ludicrous..”

And I’m like, chill, mate, why is it ludicrous that you can’t predict what ‘The Markets’ reaction to something, anything will be? If that’s something you HATE, maybe you should not be in the game, or in the kitchen for that matter.

The markets are not supposed to be predictable, and when they are, it means someone is manipulating them, and someone else is paying for that predictability, and that second someone is invariably not in on ‘the game’.

Kids say the darndest things. So do investors and economists.

Just because you want want certainty, doesn’t mean you have a right to it, democratic or not. And neither does anyone else. But if you want some regardless, here goes: you can be certain the economy will collapse at some point. That’s not the certainty you were looking for, is it? So what would you prefer, accepting that certainty, or to let someone tell you that this negative prediction is still uncertain? I’ll give you a few minutes to think about it.

Mariana Mazzucato, another economist, says:

The third challenge is green growth. EU legislation has improved the quality of British beaches and the air we breathe. But green policies will also form the next industrial wave that will lead to future prosperity. Today green spending is an option for governments and businesses; soon it will be a necessity. Those who have chosen to invest will be in a strong position.

And I’m thinking: where to begin? A wave of future prosperity? You mean as in Elon Musk prosperity? Using public money to blow pipe dreams? Green spending is a big ruse meant to allow the formerly rich -yeah, that’s you- lay their worried consciences to rest, and pay for it through their noses.

But there is so much debt burying us all, inside our own societies, that we will never be able to afford any transition to a green economy, even if it were possible from a physics point of view. Which it is definitely not. All the rest is just propaganda.

Our future consists of using a lot less energy -try 90% on for size-; how we get there is partly up to us -but only partly-, we can do it wisely and voluntarily or stupidly through hard set limitations, but that’s the only choice we have. We will never replace even a fraction of fossil fuels with wind or sun or algea or project X.

That same species of certainty applies to the European Union, even if it may appear -even- less obvious. The grandiose EU project of an ever closer union is running into the limits of economics as well as physics. European nations can work together, but not when they’re forced to give up their sovereignty, their independence and their livelihoods.

That will lead them to turn on each other. There’s no escaping it. The EU is the sack the cats will fight in.

The EU is a monstrosity with no parallel in modern times, as evidenced in how it bulldozed the Greek economy, and in how it allowed many hundreds of promising young lives to drown in the Mediterranean, and you Britons want to not just belong to that monstrosity, you’re willing to fight one another over the privilege?

I’m afraid I don’t get it.

Debt Rattle March 19 2016

Mar 192016

March 19, 2016 Posted by Raúl Ilargi Meijer at 9:08 am Finance Tagged with: Caterpillar, disability, Economics, Fed, Greece, oil, refugees, TTIP, Turkey 3 Responses »

Jack Delano Union Station, Chicago, Illinois 1943

• Foreign Governments Dump US Debt At Record Rate (CNN)

• If Caterpillar Data Is Right, The Industrial Depression Was Never Worse (ZH)

• Shades of Plaza Accord Seen in Barrage of Stimulus After G-20 (BBG)

• The Yellen Fed Risks Faustian Pact With Inflation (AEP)

• The End of the Chinese Miracle (FT)

• Traditional Economics Failed. Here’s a New Blueprint. (Evo.)

• UK Minister Resigns From Cabinet Over Disability Cuts (Guardian)

• Struggling US Oil And Gas Companies Eye Unusual Financing Deals (Reuters)

• TTIP: Big Business And US To Have Major Say In EU Trade Deals (Ind.)

• Refugees Will Be Sent Back Across Aegean In EU-Turkey Deal (Guardian)

• Amnesty Hits Out At EU Over Turkey Deal (BBC)

• Migration Is A Fact Of Life – Yet Our Deluded Leaders Try To Stop It (G.)

• This EU-Turkey Refugee Deal Is Exactly What The People Traffickers Want (Ind.)

Desperation in motion. Sellers of US debt must need money badly. And at the same time: “..total foreign holdings of U.S. debt actually rose in January to $6.18 trillion.”

• Foreign Governments Dump US Debt At Record Rate (CNN)

Foreign governments are dumping U.S. debt like never before. In a bid to raise cash, foreign central banks and government institutions sold $57.2 billion of U.S. Treasury debt and other notes in January, according to figures released on Tuesday. That is up from $48 billion in December and the highest monthly tally on record going back to 1978. It’s part of a broader trend that gathered steam last year when central banks sold a record $225 billion of U.S. debt. “Foreigners have no longer been our BFF when it comes to buying U.S. Treasuries,” Peter Boockvar at The Lindsey Group wrote. So what are foreign central bankers doing with these piles of cash? They’re mostly using the funds to stimulate their own economies as the global growth slowdown and crash in oil prices continue to take their toll.

For instance, China has been liquidating its holdings of foreign debt to pump money into its slowing economy, plummeting currency and extremely volatile stock market. China, the largest owner of U.S. debt, trimmed its Treasury holdings by $8.2 billion in January, the Treasury Department said. The actual decline was likely larger considering China reported selling $100 billion of foreign-exchange reserves in January. Countries exposed to the oil price crash are using the cash to fill giant holes in their budget. Norway, Mexico, Canada and Colombia all cut their Treasury holdings in January as oil plunged below $30 a barrel for the first time in a dozen years. Foreign sales of U.S. debt appear to be largely driven by economic necessity. “These foreign sales are not fundamentally driven. The U.S. economy seems to be on better footing,” said Sharon Stark at D.A. Davidson.

That’s why total foreign holdings of U.S. debt actually rose in January to $6.18 trillion. That’s because demand from global investors continues to be high. Besides, some foreign governments added to their piles of Treasury bonds, including Japan, Brazil and Belgium. Despite all these foreign government sales, demand for U.S. Treasuries remains high. In fact, the U.S. can borrow money at a lower rate now than at the beginning of the year. The benchmark 10-year Treasury yield is sitting at 1.99%. That’s down from nearly 3% two years ago. Demand is driven by the relative strength of the American economy, which continues to add jobs at a healthy pace despite the global headwinds. The diminished appetite from overseas is being offset by a number of factors. First, the turmoil in global financial markets has boosted appetite for safe-haven assets like U.S. government debt.

Caterpillar has historically been the single share perceived as most reflecting the entire US economy.

• If Caterpillar Data Is Right, The Industrial Depression Was Never Worse (ZH)

It has been over half a year since we first downgraded the industrial recession to an all-out global depression by using Caterpillar retail sales data, which have been so counterintuitive to what the company’s earnings have been reporting that last September we had to ask “What On Earth Is Going On With Caterpillar Sales?.” Today, we must admit that something simply does not compute. On one hand, CAT stock has soared by over 30% from its 2016 lows….

… despite warning just yesterday that the pain will continue after the company guided even lower to already depressed expectations. But what makes no sense at all is that according to the just released CAT retail sales data, the industrial recession since downgraded to a depression, just fell out of the bottom, when the heavy industrial equipment company reported that February world sales crashed by 21%, after falling “only” 15% in January, led by double digit drops in every single market:

US down 11% after sliding 7% in January

China and Asia/PAC down 26% after being down 22%

EAME down 23% after sliding 14% the month before

Latin Marica imploding by 45% after a 36% drop one month ago, and one of the worst monthly drops on record.

Visually, this is as follows:

And what is more confusing is that CAT has not only not had a positive monthly increase in retail sales in a record 39 months, or more than double the length of the Financial Crisis’ 19 months and the longest in history, but the February drop was the biggest one month decline in 5 years!

Of course, on its face, this data would explain why over the past month first the BOJ, then the PBOC, then the ECB and finally the Fed all surprised with not only more dovishness but much more outright easing as central banks panic to halt what at least according to this one indicator confirms the global economy has not been worse in nearly half a decade.

As I wrote before.

• Shades of Plaza Accord Seen in Barrage of Stimulus After G-20 (BBG)

Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.

Behind the suspected agreement, according to Joachim Fels of Pimco and David Zervos of Jefferies is a belief that a further major dollar rise against the euro and the yen would be bad for the global economy. “There seems to be some kind of tacit Shanghai Accord in place,” said Fels, who is global economic adviser for Pimco. “The agreement is to roughly stabilize the dollar versus the major currencies through appropriate monetary policy action, not through intervention.” Many other analysts are skeptical. “I don’t think there is a coordinated agreement among central banks to follow the policies they have,” said Charles Collyns, chief economist for the Institute of International Finance in Washington and a former U.S. Treasury official. “But clearly central banks do talk with each other and are aware of each other’s strategies.”

At the Plaza Hotel in 1985, the U.S. and its four industrial-nation allies struck a deal to bring down the sky-high dollar through concerted selling on the currency market. They came together a year and half later in Paris with the aim of stabilizing the greenback after successfully engineering its decline.

Do we need to explain we see the world differently from Ambrose?

• The Yellen Fed Risks Faustian Pact With Inflation (AEP)

Interest rates in the United States have fallen to minus 2pc in real terms and are dropping into deeper negative territory with each passing month. This is a remarkable state of affairs. It is clear that the US Federal Reserve is now trapped. The FOMC dares not tighten despite core inflation reaching 2.3pc because it is so worried about tantrums in financial markets and about that other Sword of Damocles – some $11 trillion of offshore debt denominated in dollars, up from $2 trillion in 2000. The Fed has been forced by circumstances to act as the world’s central bank, nursing a fragile and treacherous financial system struggling with unprecedented leverage. Average debt ratios are 36 percentage points of GDP higher than they were at the top of the pre-Lehman bubble in 2008, and this time emerging markets have been drawn into the quagmire as well by the spill-over effects of quantitative easing.

Like it or not, the Fed is stuck with the task of cleaning up a global mess that is arguably of its own making. You can certainly make a case that the Fed was right to hold rates steady this week and – crucially – to signal just two more rises over the rest of the year. The risks are not symmetric. It would be fatal if the US economy failed to achieve “escape velocity” and then slid back into deflation, leaving no margin of safety before the next downturn. Yet however well-intentioned, the Fed’s policy is fast becoming untenable. The Cleveland Fed’s median index of underlying inflation is already up to 2.8pc. Healthcare costs, car insurance, rents, restaurant bills, hotels, and women’s clothing are all soaring. Marc Ostwald from ADM said the Fed’s governors have effectively told the world that “they will remain forcefully ‘behind the curve’, and ignore their own forecasts of a very tight labour market”.

They are searching for excuses not to tighten, either by discovering yet more “slack” in the shadows of the penumbras of the remotest corners of the jobs market, or by dismissing the inflation data as spikey, transient, and unreliable. Fed chief Janet Yellen was asked twice in her press conference whether the institution’s credibility was at stake if it continues to drag its feet, and this time the warnings are coming from people who know what they are talking about. She admitted that the US economy is “close to our maximum employment objective”, meaning that it is near the inflexion point of NAIRU (non-accelerating inflation rate of unemployment), where unemployment is so low that wage pressures start to gather steam. She admitted too that headline inflation will pick up briskly as the effects of the oil price crash fade from the data. Yet she shrank from her own insights.

Cool video!

• The End of the Chinese Miracle (FT)

China’s economic miracle is under threat from a slowing economy and a dwindling labour force. The FT investigates how the world’s most populous country has reached a critical new chapter in its history.

Try it on.

• Traditional Economics Failed. Here’s a New Blueprint. (Evo.)

In traditional economic theory, as in politics, we Americans are taught to believe that selfishness is next to godliness. We are taught that the market is at its most efficient when individuals act rationally to maximize their own self-interest without regard to the effects on anyone else. We are taught that democracy is at its most functional when individuals and factions pursue their own self-interest aggressively. In both instances, we are taught that an invisible hand converts this relentless clash and competition of self-seekers into a greater good. These teachings are half right: most people indeed are looking out for themselves. We have no illusions about that. But the teachings are half wrong in that they enshrine a particular, and particularly narrow, notion of what it means to look out for oneself.

Conventional wisdom conflates self-interest and selfishness. It makes sense to be self-interested in the long run. It does not make sense to be reflexively selfish in every transaction. And that, unfortunately, is what market fundamentalism and libertarian politics promote: a brand of selfishness that is profoundly against our actual interest. Let’s back up a step. When Thomas Jefferson wrote in the Declaration of Independence that certain truths were held to be “self-evident,” he was not recording a timeless fact; he was asserting one into being. Today we read his words through the filter of modernity. We assume that those truths had always been self-evident. But they weren’t. They most certainly were not a generation before Jefferson wrote.

In the quarter century between 1750 and 1775, in a confluence of dramatic changes in science, politics, religion, and economics, a group of enlightened British colonists in America grew gradually more open to the idea that all men are created equal and are endowed by their Creator with certain unalienable rights. It took Jefferson’s assertion, and the Revolution that followed, to make those truths self-evident. We point this out as a simple reminder. Every so often in history, new truths about human nature and the nature of human societies crystallize. Such paradigmatic shifts build gradually but cascade suddenly. This has certainly been the case with prevailing ideas about what constitutes self-interest. Self-interest, it turns out, is not a fixed entity that can be objectively defined and held constant. It is a malleable, culturally embodied notion.

Think about it. Before the Enlightenment, the average serf believed that his destiny was foreordained. He fatalistically understood the scope of life’s possibility to be circumscribed by his status at birth. His concept of self-interest extended only as far as that of his nobleman. His station was fixed, and reinforced by tradition and social ritual. His hopes for betterment were pinned on the afterlife. Post-Enlightenment, that all changed. The average European now believed he was master of his own destiny. Instead of worrying about his odds of a good afterlife, he worried about improving his lot here and now. He was motivated to advance beyond what had seemed fated. He was inclined to be skeptical about received notions of what was possible in life.

Pro and con EU jockeying for position.

• UK Minister Resigns From Cabinet Over Disability Cuts (Guardian)

Iain Duncan Smith has resigned as work and pensions secretary over cuts to disability benefits, in the most dramatic cabinet departure of David Cameron’s leadership. In a sign that divisions over Europe have heightened tensions in the Conservatives, the former party leader stormed out of his job, saying he thought the cuts to welfare for disabled people known as personal independence payments (PIP) were a “compromise too far”. Duncan Smith, who is campaigning to leave the EU in opposition to Downing Street, said he had too often felt under pressure to make huge welfare savings before a budget in a stinging critique of George Osborne’s entire approach to reducing the deficit.

In a direct attack on Osborne and a blow to the chancellor’s hopes of becoming the next Tory leader, Duncan Smith said the disability cuts were defensible in narrow terms of deficit reduction but not “in the way they were placed in a budget that benefits higher earning taxpayers”. He said he was stepping down because Osborne’s cuts were for self-imposed political reasons rather than in the national economic interest. “I am unable to watch passively while certain policies are enacted in order to meet the fiscal self-imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest,” Duncan Smith wrote in a resignation letter to Cameron.

“Too often my team and I will have been pressured in the immediate run-up to a budget or fiscal event to deliver yet more reductions to the working age benefit bill. There has been too much emphasis on money saving exercises and not enough awareness from the Treasury, in particular, that the government’s vision of a new welfare-to-work system could not repeatedly be salami-sliced.”

Accountants are such creative souls, aren’t they?

• Struggling US Oil And Gas Companies Eye Unusual Financing Deals (Reuters)

Some cash-strapped U.S. oil and gas companies are considering creating an unusual layer of debt as a way of surviving the rout in oil and gas prices, according to restructuring advisors. Chesapeake Energy for example is considering the strategy to swap some of its roughly $9 billion debt. Severely distressed companies may issue so-called 1.5 lien debt, sandwiched between the first and second liens, to raise new capital. Investors with a stomach for risk would get a better yield than for the top debt, and have a stronger claim than junior creditors if the company filed for bankruptcy. Companies could also create a new, middle layer of debt to swap with existing bondholders, offering them the option of giving up principal to jump the queue for repayment in the event of a bankruptcy.

But 1.5 liens, which often have longer maturities that help companies buy time to pay existing bondholders in full, are a sign of desperation that would anger junior creditors, restructuring experts said. Only six companies have done 1.5 lien deals over the past several years, according to Moody’s. The swap would make sense for Chesapeake because its bonds maturing in 2017 and 2018 are trading at depressed levels, analysts said. “This happens when the market kind of constricts,” said John Rogers, senior vice president at Moody’s. “(You) see it in deals where the company is overlevered and has a maturity coming up.” However, some credit rating agencies view the exchange of new 1.5 lien secured notes for existing senior unsecured and 2nd lien secured notes as a distressed exchange and a limited default depending on their definition of default.

This is your world being sold up sh*t creek.

• TTIP: Big Business And US To Have Major Say In EU Trade Deals (Ind.)

The European Commission will be obliged to consult with US authorities before adopting new legislative proposals following passage of a controversial series of trade negotiations being carried out mostly in secret. A leaked document obtained by campaign group the Independent and Corporate Europe Observatory (CEO) from the ongoing EU-US Transatlantic Trade and Investment Partnership (TTIP) negotiations reveals the unelected Commission will have authority to decide in which areas there should be cooperation with the US – leaving EU member states and the European Parliament further sidelined. The main objective of TTIP is to harmonise transatlantic rules in a range of areas – including food and consumer product safety, environmental protection, financial services and banking.

The leaked document concerns the “regulatory cooperation” chapter of the talks, which the European Union says will result in “cutting red tape for EU firms without cutting corners”. It shows a labyrinth of procedures that could tie up any EU proposals that go against US interests, according to analysis by CEO. The campaign group said the document also reveals the extent to which major corporations and industry groups will be able to influence the development of regulatory cooperation by making what is referred to as a “substantial proposal” to the working agenda of the Commission and US agencies. The plans revealed by the document will give the US regulatory authorities a “questionable role” in Brussels lawmaking and weaken the European Parliament, CEO argues.

Kenneth Haar, researcher for CEO, said: “EU and US determination to put big business at the heart of decision-making is a direct threat to democratic principles. This document shows how TTIP’s regulatory cooperation will facilitate big business influence – and US influence – on lawmaking before a proposal is even presented to parliaments.” Nick Dearden, director of the Global Justice Now campaign group, said: “The leak absolutely confirms our fears about TTIP. It’s all about giving big business more power over a very wide range of laws and regulations. In fact, business lobbies are on record as saying they want to co-write laws with governments – this gets them a step closer. This isn’t an ‘add on’ or a small part of TTIP – it’s absolutely central.”

Mr Dearden said it was “scary” that the US could get the power to challenge and amend European regulations before elected European politicians have had the chance to debate them. Referring to the imminent EU referendum, he said: “We’re talking about sovereignty at the moment in this country – it’s difficult to imagine a more serious threat to our sovereignty than this trade deal.”

“This is a dark day for the refugee convention, a dark day for Europe and a dark day for humanity..”

• Refugees Will Be Sent Back Across Aegean In EU-Turkey Deal (Guardian)

Refugees and migrants arriving in Europe will be sent back across the Aegean sea under the terms of a deal between the EU and Turkey that has been criticised by aid agencies as inhumane. In an agreement that raises the prospect of a desperate last-minute rush to Greek shores by refugees and migrants hoping to beat the deadline of midnight on Saturday, the European council president, Donald Tusk, resolved sticking points with Turkey’s prime minister, Ahmet Davatoglu, before all of the EU’s 28 leaders approved the deal at talks in Brussels. Anyone arriving after Saturday midnight can expect to be returned to Turkey in the coming weeks. The UN’s refugee agency said big questions remained about how the deal would work in practice and called for urgent improvements to Greece’s system for assessing refugees.

But thousands of refugees who have already made it to Greece will be resettled in Europe, although they cannot choose where. The German chancellor, Angela Merkel, urged refugees at Idomeni to move to other accommodation being offered by the Greek authorities. Some 14,000 people are waiting at the border village in the hope of travelling north. “I want to take the opportunity to tell the refugees at Idomeni that they should trust the Greek government and move to other accommodation where the conditions will be significantly better,” Merkel said. She added that “from there, Greece will put asylum procedures in motion or redistribution to other European countries will take place”.

In exchange for taking in refugees, Turkey can expect “re-energised” talks on its EU membership, with the promise of negotiations on one policy area to be opened before July. Although this is a climbdown by Turkey, after Cyprus blocked a more ambitious restart of accession talks, Davatoglu said it was “a historic day” for EU-Turkey relations. But the head of the UN high commissioner for human rights in Europe raised concerns that safeguards intended to protect vulnerable asylum seekers would not be in place in time. Vincent Cochetel, director of the UNHCR for Europe, said the agreement was legal on paper, but questions remained on how it was implemented. “For us the proof is in the pudding. Clearly the deal on paper is consistent with international law and standards. The worry is that the safeguards will not be in place on 20 March.”

People claiming asylum needed access to interpreters and the right of appeal, he said, vital elements of a functioning asylum system that Greece has struggled to put in place until now. Implementation “is a big question mark, it is a big challenge”. Aid agencies accused the EU of failing to respect the spirit of EU and international laws. “This is a dark day for the refugee convention, a dark day for Europe and a dark day for humanity,” said Kate Allen of Amnesty International. Action Aid’s Mike Noyes claimed the deal would “effectively turn the Greek islands … into prison camps where terrified people are held against their will before being deported back to Turkey”.

“Guarantees to scrupulously respect international law are incompatible with the touted return to Turkey of all irregular migrants arriving on the Greek islands as of Sunday.”

• Amnesty Hits Out At EU Over Turkey Deal (BBC)

Amnesty International has accused European leaders of “double speak” over a deal which will see Europe-bound migrants returned to Turkey. The leading human rights charity said the deal failed to hide the EU’s “dogged determination to turn its back on a global refugee crisis”. Under the plan, migrants arriving in Greece will be sent back to Turkey if their asylum claim is rejected. In return, Turkey will receive aid and political concessions. John Dalhuisen, Amnesty International’s Director for Europe and Central Asia, said promises by the EU to respect international and European law “appear suspiciously like sugar-coating the cyanide pill that refugee protection in Europe has just been forced to swallow”. He added: “Guarantees to scrupulously respect international law are incompatible with the touted return to Turkey of all irregular migrants arriving on the Greek islands as of Sunday.”

Scepticism hangs heavy in the air about a host of legal issues, and about whether the agreement can actually work in practice. The idea at the heart of the deal – sending virtually all irregular migrants back to Turkey from the Greek islands – is the most controversial.
European leaders insist that everything will be in compliance with the law. “It excludes any kind of collective expulsions,” emphasised European Council President Donald Tusk. The UN refugee agency (UNHCR) will take part in the scheme, but it is clearly uncomfortable with what has been agreed. Turkey is “not a safe country for refugees and migrants”, Mr Dalhuisen said, adding that any deal to return migrants based on claims it was would be “flawed, illegal and immoral”. It is hoped the plan, agreed at a summit in Brussels, will deter people from taking the often dangerous sea crossing from Turkey to Greece.

As part of the arrangement, EU countries will resettle Syrian migrants already living in Turkey. EU leaders have welcomed the agreement, but German Chancellor Angela Merkel warned of legal challenges to come. Some of the initial concessions offered to Turkey have been watered down and some EU members expressed disquiet over Turkey’s human rights record. Turkish Prime Minister Ahmet Davutoglu hailed it as a “historic” day. European Council President Donald Tusk said there had been unanimous agreement between Turkey and the 28 EU members. The UN warned that Greece’s capacity to assess asylum claims needed to be strengthened for the deal. Implementation was “crucial”, the organisation said. An EU source told the BBC up to 72,000 Syrian migrants living in Turkey would be settled in the EU under the agreement. They added that the mechanism would be abandoned if the numbers returned to Turkey exceeded that figure.

“Migration is a fact of history.”

• Migration Is A Fact Of Life – Yet Our Deluded Leaders Try To Stop It (G.)

It is all for show. The EU plan to limit migrants flowing into Europe might cut numbers by a few thousand. Subsidising Turkey’s refugee camps might hold a few back. David Cameron’s “Australia” plan to seize and return migrant boats might cut a few more. News of horrors on the Macedonian border might deter some from making the desperate bid to escape present danger in hope of a safer future. But it won’t make much difference. One force greater than all the state power in the world is that of human beings fleeing for their lives. So what is the point of yet another “EU summit” on refugees? It is done to pretend to people back home that “something is being done”. It is to allay fear with an appearance of tough measures, that in turn might deter the marginal refugee, the economic migrant, the hanger-on.

But it is hard to see any meaningful change when it comes to separating Syrians and Iraqis from Afghans and Pakistanis on a Greek island, and manhandling them into a ferry back to Turkey or Libya. It is all for show. The reality is that once a refugee has established a foothold in a particular country, he or she is that country’s problem. It is both humanity and the law. We can build fences and fortresses to keep people out, but even the sophisticated regimes of western Europe can only watch as a tide of wretchedness ebbs back and forth. Sooner or later desperate people get through. Look at America’s Mexican population. Australia’s draconian policy of turning back boats and imprisoning migrants has slackened its flow, but these are not refugees, and neighbouring Indonesia is not Libya or Syria.

The current wave of newcomers to Europe’s shores is a tiny addition to the continent’s stagnant populations. That was one reason why Germany initially welcomed half a million well-qualified Syrians. As the Indian subcontinent, the Arabian Peninsula and even Africa grow and prosper, the outflow should ease. The west’s dreadful interventions in the Middle East – the prime cause of the present anarchy – must surely end. When order returns to Afghanistan, Syria and Iraq, these once-stable countries will be repopulated. But other conflicts will take their place.

While economists love to chart the impact of globalisation on trade flows, no one charts its impact on flow of people. Come what may, migration will be a theme of the 21st century. No one can underestimate the stress that inflows from Asia and Africa will place on European societies. America is still wrestling to absorb its one-time black and Hispanic migrations. But absorb we must. Migration is a fact of history. We should learn to handle it, not pretend to stop it.

There’s always another route.

• This EU-Turkey Refugee Deal Is Exactly What The People Traffickers Want (Ind.)

By any measure, the war waged by the EU against the people smugglers blamed for the refugee crisis has been an abject failure. If sabre-rattling, barbed wire, and naval flotillas and other barriers could disrupt the trade in transporting migrants, this is a war would have been won long ago. Yet the EU-Turkey deal offers more of the same. Rounding up people smuggled into Greece and trading them for refugees registered in Turkey is not just unethical, it’s also unworkable. Earlier this month, David Cameron declared that despatching the Royal Navy to the Aegean to intercept and return refugees would help “break the business model of the criminal smugglers.” That outcome is unlikely. The “business model” of people smugglers is built on an imbalance in supply and demand.

Simply stated, the number of asylum seekers and other migrants driven to Europe by fear, hope and aspiration greatly exceeds the number allowed in, creating a market for intermediation served by trafficking. If there is one pervasive theme linking the diverse stories of migrants, it is a generalised indifference to the risks associated with strengthened border defences, perilous sea journeys, and strictures from EU leaders warning them not to travel. Whatever its military prowess, the Royal Navy is powerless to suspend the laws of economics. Refugees will continue to head for Europe – and the people smugglers will be there to facilitate their transit.

The overwhelming focus on strengthening borders and maritime patrolling is ultimately self-defeating. As migration and people smuggling become more risky – and more criminalised – the profits to be made from trafficking will rise. Europol estimates that a market now generating a turnover of some $6.6bn annually could triple in size over the next few years. With the risks and rewards associated with smuggling increasing, more organised criminal groups will enter the market. The Turkish mafia, assorted jihadi groups in Libya, and networked crime networks linking Europe to the Sahel are already strengthening their grip on people smuggling routes, eroding the already porous borders between people-smuggling, drugs-trafficking, gun-running and money-laundering.

Apparently immune to evidence, Europe’s policy makers appear hell-bent on repeating the mistakes of the war on drugs. That war has created extraordinary profits for organised crime, hurt vulnerable people, and supported the rise of institutions like the great Mexican drug cartels. So how should European leaders respond to the migrant crisis? They should start by pulling out of the cattle-market in refugee trading underpinning the proposed deal with Turkey. The way to defeat people smuggling is to suck the oxygen out of the market through a large-scale global resettlement programme, safe transit and orderly processing of asylum claims.

Debt Rattle January 24 2016

Jan 242016

January 24, 2016 Posted by Raúl Ilargi Meijer at 7:56 am Finance Tagged with: default, Economics, Iraq, oil, primary dealers, refugees, Schengen, Shale, Varoufakis 5 Responses »

Harris&Ewing “Street scene with snow, F STreet Washington, DC” 1918

• Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)

• American Oil Companies Are Starting To Scream “Mayday” (CNN)

• US Shale’s Big Squeeze (FT)

• Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)

• US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)

• Ideological Divisions Undermine Economics (Economist)

• A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)

• Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)

• Germany Scolds Austria For Greek Schengen Threats (AFP)

• EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The battle gets ugly.

• Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)

Prime Minister Haidar al-Abadi said the plunge in oil prices means Iraq needs IMF support to continue its fight against Islamic State, a battle he says his country is winning despite little support from its neighbors. “We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said of the oil collapse in an interview at the World Economic Forum in Davos, Switzerland. “We can defeat Daesh but with this fiscal problem, we need the support” of the IMF, he said. “We have to sustain the economy, we have to sustain our fight.” The conflict with Islamic State, which swept through swaths of northern Iraq in the summer of 2014, has destroyed economic infrastructure, disrupted trade and discouraged investment.

Iraq is now facing the “double shock” of war as well as the crude-oil price drop, and has “urgent” balance-of-payment and budget needs, the IMF said in January as it approved a staff-monitored program to pave the way for a possible loan. Under the program, Iraq will seek to reduce its non-oil primary deficit. “We have cut a lot of our expenditures, government expenditures,” Abadi said in the interview. But the war brings its own costs. “We are paying salaries for the uniformed armies, for our fighters” and their weapons, Abadi said in Davos. Speaking later in a panel session in the Swiss resort, Abadi said Iraqi oil sold on Thursday for $22 a barrel, and after paying costs the country is left with $13 per barrel.

He called for neighbors to do more to help. The only country to have provided financial assistance is Kuwait, he said, which gave Iraq $200 million. “Daesh is on the retreat and it is collapsing but somebody is sending a life line to them,” Abadi said, citing victories for his forces in the key western city of Ramadi and using an Arabic acronym for Islamic State. “Neighbors are fighting for supremacy, using sectarianism.” Shiite Iran supports several of the biggest militias aiding Iraqi forces in the fight against Islamic State. Its rivalry with the Middle East’s biggest Sunni power, Saudi Arabia, has flared in recent weeks, complicating efforts to end conflicts in Iraq, Syria and Yemen. Iraq has managed to stop the advance of Islamic State in Iraq but if neighbors continue to inflame sectarianism, successes can be reversed, he said. “We are supposed to be in the same boat,” Abadi said. “In reality, we aren’t.”

“..42nd driller to file for bankruptcy in this commodity crunch..”

• American Oil Companies Are Starting To Scream “Mayday” (CNN)

Last year, 42 North American drillers filed for bankruptcy, according to law firm Haynes and Boone. It’s only likely to get worse this year. Experts say there are a lot of parallels between today’s crisis and the last oil crash in 1986. Back then, 27% of exploration and production companies went bust. Defaults are skyrocketing again. In December, exploration and production company defaults topped 11%, up from just 0.5% the previous year, according to Fitch Ratings. That’s a 2,000%-plus jump. It’s just the beginning, says John La Forge, head of real assets strategy at Wells Fargo. If history repeats, people should prepare for the default rate to double in the next year or so. No wonder America’s biggest banks are setting aside a lot of money in anticipation that more energy companies will go belly up.

Energy companies borrowed a lot of money when oil was worth over $100 a barrel. The returns seemed almost guaranteed if they could get the oil out of the ground. But now oil is barely trading just above $30 a barrel and a growing number of companies can’t pay back their debts. “The fact that a price below $100 seemed inconceivable to so many is kind of astonishing,” says Mike Lynch, president of Strategic Energy and Economic Research. “A lot of people just threw money away thinking the price would never go down.” On the last day of 2015, Swift Energy, an “independent oil and gas company” headquartered in Houston, became the 42nd driller to file for bankruptcy in this commodity crunch. The company is trying to sort out over $1 billion in debt at a time when the firm’s earnings have declined over 70% in the past year.

Trimming costs and laying off workers can’t close that kind of gap. “In the 1980s, there was a bumper sticker that people in Texas had that said, ‘God give me one more boom and I promise not to screw it up,'” says Lynch. “People should have those bumper stickers ready again.” The last really big oil bust was in the late 1980s. The Saudis really controlled the price then, says La Forge. Now the Saudis (and other members of OPEC) are in a battle with the United States, which has become a major player again in energy production. No one wants to cut back on production and risk losing market share. “It will be the U.S. companies that go out of business,” predicts La Forge. OPEC countries don’t have a lot of smaller players like the United States does. It’s usually the government that controls oil drilling and production in OPEC nations.

La Forge predicts the governments can hold their position longer. As the smaller players run out of cash, they will get swallowed up by bigger ones. “The big boys and girls will snap up a lot of cheap assets,” predicts Lynch. There’s a lot of debate about whether oil prices have bottomed out. Crude oil hit its lowest price since 2003 this week. But even if prices have stabilized, the worst isn’t over for oil companies. “Some companies went under in 1986-’87 even when prices rebounded,” says La Forge. This week, Blackstone (BGB) CEO Stephen Schwarzman said his firm is finally taking a close look at bargains in the energy sector. One of the largest bankruptcies so far is Samson Resources of Oklahoma. In 2011, private equity firm KKR (KKR) bought it for over $7 billion. Now it’s struggling to deal with over $1 billion in debt that’s due this year alone.

Can’t read on shale without mention of default anymore.

• US Shale’s Big Squeeze (FT)

The boom years left the US oil industry deep in debt. The 60 leading US independent oil and gas companies have total net debt of $206bn, from about $100bn at the end of 2006. As of September, about a dozen had debts that were more than 20 times their earnings before interest, tax, depreciation and amortisation. Worries about the health of these companies have been rising. A Bank of America Merrill Lynch index of high-yield energy bonds, which includes many indebted oil companies, has an average yield of more than 19%. Almost a third of the 155 US oil and gas companies covered by Standard & Poor’s are rated B-minus or below, meaning they are at high risk of default.

The agency this month revised down its expectations of future oil prices, meaning that many of those companies’ ratings are likely to be cut even further. Credit ratings for the more financially secure investment grade companies are also likely to be lowered this time. Some companies under financial strain will be able to survive by selling assets. Private capital funds raised $57bn last year to invest in energy, according to Preqin, an alternative assets research service, and most of that money is still looking for a home. Companies with low-quality assets or excessive debts will not make it. Tom Watters of S&P expects “a lot more defaults this year”. Bankruptcies, a cash squeeze and poor returns on investment mean companies will continue to cut their capital spending.

The number of rigs drilling oil wells in the US has dropped 68% from the peak in October 2014 to 510 this week, and it is likely to fall further. So far, the impact on US oil production has been minimal. Output in October was down 4% from April, as hard-pressed companies squeeze as much revenue as possible out of their assets. Saudi Arabia’s strategy of allowing oil prices to fall to curb competing sources of production appears to be succeeding But Harold Hamm, chief executive of Continental Resources, one of the pioneers of the shale boom, says the downturn in activity is likely to intensify. “We’re seeing capex being slashed to almost nothing,” he says. “At low prices, people aren’t going to keep producing.” He expects US oil production to fall sharply this year, and says people may be surprised by how fast it goes.

Poor banks.

• Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)

A rise in the number of banks giving up primary dealer roles in European government bond markets threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money. Increased regulation and lower margins have seen five banks exit various countries in the last three months. Others look set to follow, further eroding the infrastructure through which governments raise debt. While these problems are for now masked by the European Central Bank buying €60 billion of debt every month to try to stimulate the euro zone economy, countries may feel the effects more sharply when the ECB scheme ends in March 2017. Since 2012, most euro zone governments have lost one or two banks as primary dealers, while Belgium – one of the bloc’s most indebted states – is down five.

Primary dealers are integral to government bond markets, buying new issues at auctions to service demand from investors and to maintain secondary trading activity. Without their support, countries would find it harder to sell debt, forcing them to offer investors higher interest rates. Over the last quarter alone, Credit Suisse pulled out of most European countries, ING quit Ireland, Commerzbank left Italy, and Belgium did not re-appoint Deutsche Bank as a primary dealer and dropped Nordea as a recognised dealer. In that time, only Danske Bank has added to its primary dealer roles in the bloc’s main markets. But even Danske is worried. “I’ve never seen it so bad,” said Soeren Moerch, head of fixed income trading at Danske Markets.

“When further banks reduce their willingness to be a primary dealer then liquidity will go even lower…we could have more failed auctions and we could see a big washout in the market.” Acting as a dealer has become increasingly expensive for banks under new regulations because of the amount of capital it requires, while trading profits that once made up for the initial spend have diminished in an era of ultra-low rates. “Shareholders would be shocked if they knew the scale of the costs that some businesses are taking,” said one banker who has worked at several major investment houses with primary dealer functions. The decline in dealers comes as many of the world’s largest financial firms, such as Morgan Stanley and Deutsche Bank, launch strategic reviews that are likely to impact their fixed income operations.

The risk that the euro zone could slide back into recession, having barely recovered from its long-running debt crisis, could exacerbate the withdrawal by prompting banks to retreat into their home markets. “It is a negative trend. The opposite that we saw in the first 10 years of the euro,” said Sergio Capaldi at Intesa SanPaolo. “For smaller countries…the fact that there are less players is something that could have a negative affect on market liquidity and borrowing costs.”

Squeezed them for all they’re worth.

• US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)

U.S. banks are cutting off a growing number of customers in Mexico, deciding that business south of the border might not be worth the risks in the wake of mounting regulatory warnings. At issue are correspondent-banking relationships that allow Mexican banks to facilitate cross-border transactions and meet their clients’ needs for dealing in dollars—in effect, giving them access to the U.S. financial system. The global firms that provide those services are increasingly wary of dealing with Mexican banks as well as their customers, according to U.S. bankers and people familiar with the matter.

The moves are consistent with a broader shift across the industry, in which banks around the world are retreating from emerging markets as regulators ramp up their scrutiny and punishment of possible money laundering. For many banks, the money they can earn in such countries isn’t worth the cost of compliance or the penalties if they step across the line. U.S. financial regulators have long warned about the risks in Mexico of money laundering tied to the drug trade. The urgency spiked more than a year ago, when the Financial Crimes Enforcement Network, a unit of the Treasury Department, sent notices warning banks of the risk that drug cartels were laundering money through correspondent accounts, people familiar with the advisories said. Earlier, the Office of the Comptroller of the Currency sent a cautionary note to some big U.S. banks about their Mexico banking activities.

But the pain Mexican firms are experiencing is relatively new. The fallout is affecting Mexican banks of various sizes such as Grupo Elektra’s Banco Azteca, Grupo Financiero Banorte and Monex Grupo Financiero, and their customers, the people said. Regulators have consistently said they don’t direct banks to cut ties with specific countries or a large swath of customers. But the advisories, which had nonpublic components that haven’t been previously reported, were interpreted by several big banks as a fresh signal that they do business in Mexico at their own peril, according to people familiar with the matter. “All they know is that sanctions are big and revenues are small,” said Luis Niño de Rivera, vice chairman of Banco Azteca, based in Mexico City. “It’s simple arithmetic: ‘I make a million dollars and they’re going to fine me a billion? I won’t do that.’”

A field of pretense.

• Ideological Divisions Undermine Economics (Economist)

Dismal may not be the most desirable of modifiers, but economists love it when people call their discipline a science. They consider themselves the most rigorous of social scientists. Yet whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Indeed, some claim that economics is based not so much on empirical observation and rational analysis as on ideology. In October Russell Roberts, a research fellow at Stanford University’s Hoover Institution, tweeted that if told an economist’s view on one issue, he could confidently predict his or her position on any number of other questions. Prominent bloggers on economics have since furiously defended the profession, citing cases when economists changed their minds in response to new facts, rather than hewing stubbornly to dogma.

Adam Ozimek, an economist at Moody’s Analytics, pointed to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, who flipped from hawkishness to dovishness when reality failed to affirm his warnings of a looming surge in inflation. Tyler Cowen, an economist at George Mason, published a list of issues on which his opinion has shifted (he is no longer sure that income from capital is best left untaxed). Paul Krugman chimed in. He changed his view on the minimum wage after research found that increases up to a certain point reduced employment only marginally (this newspaper had a similar change of heart). Economists, to be fair, are constrained in ways that many scientists are not. They cannot brew up endless recessions in test tubes to work out what causes what, for instance.

Yet the same restriction applies to many hard sciences, too: geologists did not need to recreate the Earth in the lab to get a handle on plate tectonics. The essence of science is agreeing on a shared approach for generating widely accepted knowledge. Science, wrote Paul Romer, an economist, in a paper* published last year, leads to broad consensus. Politics does not. Nor, it seems, does economics. In a paper on macroeconomics published in 2006, Gregory Mankiw of Harvard University declared: “A new consensus has emerged about the best way to understand economic fluctuations.” But after the financial crisis prompted a wrenching recession, disagreement about the causes and cures raged. “Schlock economics” was how Robert Lucas, a Nobel-prize-winning economist, described Barack Obama’s plan for a big stimulus to revive the American economy. Mr Krugman, another Nobel-winner, reckoned Mr Lucas and his sort were responsible for a “dark age of macroeconomics”.

Nice details.

• A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)

A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented. On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.

Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely. It has already been reported and discussed that a close aide of Stournaras sabotaged the government during this time by sending a memo to a financial journalist, which was very critical with the governments negotiation tactics and blamed it for the troubles of the banks, which the ECB had intensified, if not provoked.

A few days ago, Stournaras himself exposed a conspiracy. He bragged that he had convened former prime ministers and talked to the President of the Republic to raise a wall blocking Varoufakis emergency plan. In retrospect it looks as if Alexis Tsipras might have signed his capitulation to Stournaras and the ECB already in April 2015, when he replaced Varoufakis as chief negotiator by Euklid Tsakalotos, who would later become finance minister after Varoufakis resigned. In this case the nightly negotiating marathon in July, after which Tsipras publicly signed his capitulation, might just have been a show to demonstrate that he fought bravely to the end. Why would I suspect that? Because I learned in a Handelsblatt-Interview with Tsakalotos published on 15 January 2016 that he is a close friend of Stournaras. Looking around a bit more, I learned that Tsakalotos wife is ‘Director Advisor’ to the Bank of Greece.

This is the Wikipedia entry: “Heather Denise Gibson is a Scottish economist currently serving as Director-Advisor to the Bank of Greece (since 2011). She is the spouse of Euclid Tsakalotos, current Greek Minister of Finance.” At the time she entered, Stournaras was serving as Director General of a think tank of the Bank of Greece. The friendship of the trio goes back decades to their time together at a British university. They even wrote a book together in 1992. Thus: The former chief negotiator of the Greek government is and was a close friend of the central bank governor and the central bank governor was the boss of his wife. The governor of the Bank of Greece, which is part of the Eurosystem of central banks, gets his orders from the ECB, i.e. the opposing side in the negotiations. He actively sabotaged the negotiation strategy of his government. If this does not look like an inappropriate association for a chief negotiator, I don’t know what would.

Someone grabbed Cameron by the nuts?

• Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)

David Cameron is considering plans to admit thousands of unaccompanied migrant children into the UK within weeks, as pressure grows on ministers to provide a haven for large numbers of young people who have fled their war-torn homelands without their parents. Amid growing expectation that an announcement is imminent, Downing Street said ministers were looking seriously at calls from charities, led by Save the Children, for the UK to admit at least 3,000 unaccompanied young people who have arrived in Europe from countries including Syria and Afghanistan, and who are judged to be at serious risk of falling prey to people traffickers. Government sources said such a humanitarian gesture would be in addition to the 20,000 refugees the UK has already agreed to accept, mainly from camps on the borders of Syria, by 2020.

Following a visit to refugee camps in Calais and Dunkirk on Saturday, Labour leader Jeremy Corbyn called on Cameron to offer children not just a refuge in the UK but proper homes and education, equivalent to the welcome received by those rescued from the Nazis and brought to the UK in 1939. “We must reach out the hand of humanity to the victims of war and brutal repression,” he said. “Along with other EU states, Britain needs to accept its share of refugees from the conflicts on Europe’s borders, including the horrific civil war in Syria. “We have to do more. As a matter of urgency, David Cameron should act to give refuge to unaccompanied refugee children now in Europe – as we did with Jewish Kindertransport children escaping from Nazi tyranny in the 1930s.

And the government must provide the resources needed for those areas accepting refugees – including in housing and education – rather than dumping them in some of Britain’s poorest communities.” Signs that the prime minister may act came after a week in which concern has risen in European capitals, and among aid agencies and charities, about the high number of migrants still pouring into the EU just as cold weather bites along the routes many are taking through the Balkans and central and eastern Europe. With one week of January to go, about 37,000 migrants and refugees have already arrived in the EU by land or sea, roughly 10 times the equivalent total for the month last year. The number of Mediterranean deaths stands at 158 this year.

It’s a free for all now.

• Germany Scolds Austria For Greek Schengen Threats (AFP)

This week Greece slammed a Financial Times report saying several European ministers and senior EU officials believed threatening suspension from Schengen could persuade Greece to protect its borders more effectively. Junior interior minister for migration Yiannis Mouzalas said the report contained ”falsehoods and distortions” but Mikl-Leitner said temporary exclusion was a real possibility. “If the Athens government does not finally do more to secure the (EU’s) external borders then one must openly discuss Greece’s temporary exclusion from the Schengen zone,” Mikl-Leitner said in an interview with German daily Die Welt. “It is a myth that the Greco-Turkish border cannot be controlled,” Mikl-Leitner said.

“When a Schengen signatory does not permanently fulfil its obligations and only hesitatingly accepts aid then we should not rule out that possibility,” she added. “The patience of many Europeans has reached its limit ... We have talked a lot, now we must act. It is about protecting stability, order and security in Europe.” Germany’s Steinmeier criticised Vienna’s warning however. “There won’t be any solution to the refugee crisis if solidarity disappears,” he said. “On the contrary, we must work together and concentrate all our efforts to fight against the causes that are pushing the refugees into flight, to reinforce the EU’s outer borders and to achieve a fair redistribution (of asylum seekers) within Europe.”

Chance of Schengen survival below zero.

• EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The Schengen system of free movement could be suspended for two years under emergency measures to be discussed by European ministers on Monday, as the French Prime Minister warned the crisis could bring down the entire European Union. Manuel Valls said that the “very idea of Europe” will be torn apart until the flows of migrants expected to surge in spring are turned away. On Monday, interior ministers from the EU will meet in Amsterdam to discuss emergency measures to allow states to reintroduce national border controls for two years. The powers are allowed under the Schengen rules, but would amount to an unprecedented abandonment of the 30-year old agreement that allows passport-free travel across 26 states. The measure could be brought in from May, when a six-month period of passport checks introduced by Germany expires.

The European Commission would have to agree that there are “persistent serious deficiencies” in the Schengen zone’s external border to activate it. “This possibility exists, it is there and the Commission is prepared to use it if need be,” said Natasha Bertaud, a spokesman for Jean-Claude Juncker. Greece has been blamed by states for failing to identify and register hundreds of thousands of people flowing over its borders. Other states that have introduced emergency controls are Sweden, Austria, France, Denmark and Norway, which is not in the EU but is in Schengen. “We’re not currently in that situation,” Ms Bertaud added. “But interior ministers will on Monday in Amsterdam have the opportunity to discuss and it’s on the agenda what steps should be taken or will need to be taken once we near the end of the maximum period in May.”

In a further blow, Mr Valls said that France would keep its state of emergency, which has included border checks, until the Islamic State of Iraq and Levant network is destroyed. “It is a total and global war that we are facing with terrorism,” he said. He warned that without proper border controls to turn away refugees, the 60-year old European project could disintegrate. “It’s Europe that could die, not the Schengen area. If Europe can’t protect its own borders, it’s the very idea of Europe that could be thrown into doubt. It could disappear, of course – the European project, not Europe itself, not our values, but the concept we have of Europe, that the founding fathers had of Europe.

Nicole Foss Talks Energy, Psychology, Collapse and The Future

Aug 312015

August 31, 2015 Posted by Raúl Ilargi Meijer at 8:41 pm Finance Tagged with: collapse, Doomstead Diner, Economics, energy, future, Nicole Foss, oil 4 Responses »

Dorothea Lange Hoe culture in the South. Poor white, North Carolina July 1936

Nicole Foss recently participated in a live Google Hangouts (not Skype. I’m told) ‘forum’ discussion at the Doomstead Diner site that also included among others, Gail Tverberg, Steve Ludlum, Norman Pagett and Ugo Bardi. Apologies for the fact that I haven’t watched the videos yet and I’m getting the details as I go, so my info will be a bit sketchy.

I’ll run this in episodes. Today’s post contains episode 4. Previously, I posted episode 2 and 1,

Nicole Foss Talks Economics At The End Of The Age Of Oil

and

Nicole Foss Talks Energy Industry Issues and Oil Price Collapse.

Episode 3 has apparently not even been recorded yet, but we’ll post it as soon as it is available,

Part IV- Futurology

The Doomstead Diner site blurb:

Renewable Energy
One of the biggest hopes as the fossil fuels run thin or become too expensive to dig up is a switch to renewable forms of energy. How can such forms of energy be utilized, and how much of our current technological society can be maintained with the renewables?

Building Community
As the larger structures of society begin to break down, a more localized organizational structure will become necessary, both on the food production and distribution level as well as new political organizations. How can communities come together and create the kind of structures necessary for a low per capita energy society of the future?

Psychology of Collapse
Collapse is creating many psychological issues and problems as it progresses and accelerates. More people are under more stress all the time, losing jobs, losing their homes to foreclosure, becoming homeless, waiting on long bread lines for food aid etc. We read daily about increasing suicide rates and the number of mass shootings is also on the increase, recently there were 142 mass shootings catalogued in 142 days, 1 every day. How can we handle these psychological problems that are cropping up, and likely will worsen as the overall economy worsens?

Prognosticating the Future
The toughest part in all of these discussions is trying to figure out what is going to occur in the future, and when it will occur. What is the timeline? Will we see a major breakdown of systems and a Fast Collapse scenario, or will it be a long slow “boiling frog” effect, the “Long Emergency” described by Jim Kunstler or the “slow catabolic collapse” described by John Greer? What can people do now to prepare for this future, especially if they are still dependent on a currently held job in a location which might not be too good in the future, like say they live currently in Las Vegas and have a well paid job in one of the casinos there?

Nicole Foss Talks Energy Industry Issues and Oil Price Collapse

Aug 302015

August 30, 2015 Posted by Raúl Ilargi Meijer at 7:24 am Finance Tagged with: collapse, Doomstead Diner, Economics, energy, Nicole Foss, oil 2 Responses »

Unknown California State Automobile Association signage 1925

Nicole Foss recently participated in a live Skype ‘forum’ discussion at the Doomstead Diner site that also included, among others, Gail Tverberg, Steve Ludlum, Norman Pagett and Ugo Bardi. Apologies for the fact that I haven’t watched the videos yet and I’m getting the details as I go, so my info may be a bit sketchy. And so is the order the episodes come in here. I understand episode 3 is not even available yet.

I’ll run this in episodes. Today’s post contains episode 1. Yesterday I posted episode 2, Nicole Foss Talks Economics At The End Of The Age Of Oil.

Part I- Energy Industry Issues

The Doomstead Diner site blurb:

Coal Industry Collapse-Carbon Sequestration
One of the biggest effects we see lately is a collapse in commodity prices, through all sectors. Most intriguing to me is the collapse in coal prices, since coal is used in so many places for the production of electricity. Several large coal mining companies have gone into bankruptcy. How will this affect electricity production as we move along here? Q2: Will the efforts for Carbon Sequestration, Carbon Credits and Taxation have any meaningful effect on this dynamic?

Oil Price Collapse
Many people thought the price collapse in Oil that came at the end of 2014 was unforseen and unknowable. In fact many people in the peak oil community believed for a long time the price of oil would spiral inexorably upward. Some of us here have argued otherwise, that credit constraints would drive the price downward. Steve did the best job of this, and actually pegged the price crash for oil to the month more than two years in advance with his infamous Triangle of Doom charts. Steve, can you tell us how you were able to pull off that stunt? Q: John Mauldin and other shills for the Oil industry assure us that better and cheaper drilling technology will bring up all the oil we need and keep the industry solvent. How realistic is this?

Nicole Foss Talks Economics At The End Of The Age Of Oil

Aug 292015

August 29, 2015 Posted by Raúl Ilargi Meijer at 12:15 pm Finance Tagged with: discussion, Doomstead Diner, Economics, Nicole Foss, oil 2 Responses »

Albert Freeman Effect of gasoline shortage in Washington, DC 1942

Nicole Foss recently participated in a live Skype ‘forum’ discussion at the Doomstead Diner site that also included among others, Gail Tverberg and Ugo Bardi. I declined to participate, too many cooks and all that, and seeing how long this thing went on, I have no doubt that was a good decision. Even if my absence obviously reduced the potential charm and entertainment value considerably.

I’ll run this in episodes. Today’s post contains the first.

Part II- Economics at the end of the Age of Oil

The site blurb:

China Currency Devaluation
Q: Perhaps the biggest mover in the credit markets these days is China. They have a huge shadow banking industry, and have been the recipients of a lot of ‘hot money’ seeking high yield returns for years. however, they are now rapidly devaluing their own currency of the Yuan or Renminbi, basically destroying the carry trade across the currency pair with the dollar. Can currency devaluation help the Chinese? What are the knock on effects across the rest of the developing world and industrialized countries?

Market Manipulation
Q:The Chinese devaluation brings up another question, that of market manipulation. The Chinese not only banned short selling on their bourses, they in fact banned selling entirely. Here on our own markets, HFT programs are regularly causing market flash crashes in various sectors, and there is constant talk of manipulation in the PMs. How pervasive is this manipulation, and how long can it work to keep the system running?

Austerity, Economics and Religion

May 272015

May 27, 2015 Posted by Raúl Ilargi Meijer at 11:38 pm Finance Tagged with: austerity, Economics, EU, euro, Greece, IMF, misery, power, union, Varoufakis 4 Responses »

Dorothea Lange Salvation Army, San Francisco, California. Unemployed young men 1939

There are many things going on in the Greece vs Institutions+Germany negotiations, and many more on the fringe of the talks, with opinions being vented left and right, not least of all in the media, often driven more by a particular agenda than by facts or know-how.

What most fail to acknowledge is to what extent the position of the creditor institutions is powered by economic religion, and that is a shame, because it makes it very difficult for the average reader and viewer to understand what happens, and why.

Greek FinMin Yanis Varoufakis has often complained that he can’t get the finance ministers and others to discuss economics. As our mutual friend Steve Keen put it:

Steve Keen said the finance minister was frustrated with the progress of Greece’s talks with the euro zone, adding Varoufakis had compared the talks to dealing with “divorce lawyers”. Keen said the finance ministers of Europe refused to discuss certain euro policies, according to Varoufakis. [..] When asked what [Varoufakis and he] mainly discuss at the moment, Keen said, “Mainly his frustration, the fact that the one thing that he can’t discuss with the finance ministers of Europe is economics..”

“He goes inside, he is expected to be discussing what the economic impact of the policies of the euro are and how to get a better set of policies, living within the confines of the euro and the entire European Union system, and he said they simply won’t discuss it. He said it is like walking into a bunch of divorce lawyers, it is not anything like what you think finance ministers should be talking about..”

They won’t discuss these things because they have found religion, in the sense that there is for them only one truth, to the exclusion of all others. They toe the preconceived line, because if they didn’t they would lose their positions.

They are undoubtedly also very hesitant to discuss economics with Varoufakis because they are aware of his prowess in the field. They are much less knowledgeable, which makes it tempting to hide behind numbers, behind Germany, and behind their faith that their views are the only right ones. Which is precisely what Varoufakis challenges.

You won’t see the Pope in a muslim prayer five times daily with his face to Mecca, or an imam celebrating Holy Mass. And that’s sort of alright, there’s nothing that says everyone should have the same religion. But when it comes to a field such as economics, and certainly when multi-trillion dollar decisions are being taken, and people in the streets are already going broke and hungry, that is definitely not alright.

The number one priority under such circumstances absolutely must be to find a solution, find it fast, and alleviate the suffering. Not to push through any particular policy or vision. Now, you can accuse Greece of not doing that, and the institutions and their pundits in the press do that on a 24/7 basis, but that view lacks substance.

The institutions demand more austerity measures for Greece, whereas it’s plain to see that austerity is what has led to the misery of the people. In particular, pensions cuts are apparently still a point neither side wants to give in on. But not only have Greek pensions already been cut by 40% or so, they are the last straw for many entire families.

Which means the entire pension system would need to be thoroughly reformed, not just pensions cut, or more, and more widespread, misery is in the offing. And there simply is no time to achieve that thorough reform before Greek repayment deadlines set in. Don’t forget, the entire Syriza government hasn’t been able (allowed) to do anything but negotiate. And is then accused of not doing enough.

This inflexible insistence on more austerity, and hence more misery, for the Greek people, is a good example of how religion driven the IMF, EU and ECB are. As I’ve written many times, it’s about power, not about money; it wouldn’t cost all that much, but could achieve a lot, to let Greeks off the austerity hook for a bit. All it takes is flexibility when entering the negotiations. But there ain’t much of that, if any, on the creditors’ side.

Which is why this Bloomberg piece on the IMF’s ‘enforcer’ for Greece Poul Thomsen should bring a smile to our faces.

A former IMF colleague of Thomsen’s, Ashoka Mody, last month in a Bloomberg View column called for the fund to “recognize its responsibility for the country’s predicament” and forgive much of Greece’s debt. There’s little sign that the IMF and Thomsen might bend the rules or cross their red lines now. While some issues such as short-term budget targets may be negotiable, the fund’s position is that any Greek agreement must bring debt down to sustainable levels and include concrete commitment to reforms, especially cuts to public pensions.

“We are open to new ideas and different ways to achieve a country’s economic goals. We are a pragmatic institution,” Thomsen said in a statement to Bloomberg News. “But we also need to be mindful of economic realities. At the end of the day it needs to add up. And we need to ensure that we treat our member states equally, that we apply our rules uniformly.”

For all we know that’s even the way he sees things. But the IMF is neither a flexible nor a beneficial institution. It’s a power tool for the wealthy. The philosophy behind the institutions’ view of the negotiations, and indeed their entire view of economics in general, is constructed to follow the preferences of the wealthy, who have a strong vested interest in centralized control over just about everything, because more centralization makes it easier for them to exert this control.

Syriza getting its way on reforms doesn’t fit in that picture; before you know more parties want some say in their futures too. Most of all, though, different ideas on economics in general cannot be accepted. Everybody has to follow the IMF line of ‘reforms’, asset sales, privatizations, labor protection and austerity. Certainly everyone who owes the Fund money. That’s its ultimate power tool.

That the EU follows that line merely means it’s and immoral and amoral institution, and a union only in name. The ECB follows the IMF line on economics, which means there’s no room for aberrant views, no matter how well founded and thought through. There’s no place in there for people like Varoufakis, or Steve Keen.

It’s not about knowledge or brilliance, it’s about keeping the faith, because that keeps the power where it’s at. Yeah, there’s a hint of Galileo in there somewhere. The ‘philosophy’ is neo-liberal mixed with let’s say, Keynes-for-the-rich, aka QE.

A nice example of how the IMF operates, and how far its power tentacles reach, came in a Guardian piece on Chapter 11 bankruptcy for countries, and why Argentina took its case to the UN, not the IMF:

When Argentina tabled a motion calling for the UN to examine the issue of sovereign debt restructuring last autumn, 124 countries voted for it; 11, including the UK and the US, with their powerful financial lobbies, voted against; and there were 41 abstentions. Llorenti, who is chairing the UN “ad hoc committee” set up as a result of that vote, says the 11 countries that objected hold 45% of the voting power at the IMF. He believes they would prefer the matter to be tackled there, where they can shape the arguments: “It’s a matter of control, really.”

Another thing I‘ve said before is that the IMF is a prime example of why we should steer away from supra-national organizations. We can’t make them run for our own benefit, they invariably end up being run for the benefit of the few, because their inherent lack of transparency and democracy makes them an irresistible target for sociopathic individuals, who seek control, not democracy, and for the elites whose interests they invariably end up representing.

There’s the World Bank, NATO, the IMF, the EU. The UN is somewhat more democratic, but only somewhat. Behind the veil it’s not at all.

Amongst the European finance minsters there should still be a few who may have doubts about what’s happening to Greece, what’s being demanded of it. And who realize that the purely political decision to bail out the banks that had lent to Greece, and shove their debts into the lap of all Europeans, who in turn pushed it right back into Greece’s lap, is at best highly questionable.

If these Europeans want to save their union, they need to be told that what they’re doing right now is the exact wrong way to go about that, 180º wrong. What happens today is not holding or pulling the member states together, it’s driving them apart.

Perhaps it is indeed ultimately a choice between the banks and the people. And perhaps it scares them stiff not to choose the banks. With their limited knowledge of how economies function, they must believe the story of how everything will fall to pieces if the banks fail. Besides, if they question it, they’re out.

But economics cannot be a religion, it cannot have this inflexibility and resistance to change. And neither can politics, not if we want our unions, our countries and our societies to survive, if we want to survive, and our children. Economics is not a science, though it very much longs for that status. It shouldn’t be a religion either, however.

There is nothing that says, or proves, that bailing out banks and forcing austerity on people (note the combination) is the best, or only, way to rescue an economy in trouble. That austerity is the way to rebuild an economy. These are mere ideas, conceived by people who studied textbooks.

What Greece is asking for is a simple bottom beneath its society, lest it completely falls to bits, lest all it’s left with is some right wing movement or another. But instead, the institutions’ approach to economics, to democracy and to power look to make a true solution for the Greek problem impossible.

That in turn would seem to make a Grexit, in some shape or another, the only way left to go. Why would anyone want to live in a world dominated by religious fanatics and their henchmen?

Finally, as for what the euro, and hence the eurozone, were intended to do, here’s Greg Palast from 2012, talking about father of the euro, Robert Mundell:

Robert Mundell, Evil Genius Of The Euro

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro. The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.” He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing. [..]

The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics: “Monetary discipline forces fiscal discipline on the politicians as well.” And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greece Is Now Just A Political Issue

May 122015

May 12, 2015 Posted by Raúl Ilargi Meijer at 10:06 pm Finance Tagged with: ECB, Economics, Greece, IMF, Merkel, Nowotny, politics 5 Responses »

Arthur Rothstein Bank that failed. Kansas 1936

Greece paid off the IMF yesterday with its IMF reserves. Is that a big deal? Whatever you may want to read into this, it’s been obvious for years that Greece needs major debt restructuring if it wants to move forward and have a future as a country -let alone a member of the eurozone-. Instead, the EU/troika anno 2010 decided to bail out German and French and Wall Street banks (I know there’s an overlap)- instead of restructuring the debts they incurred with insane bets on Greece and its EU membership- and put the costs squarely on the shoulders of the Greek population.

This, as I said many times before, was not an economic decision; it was always entirely political. It’s also, by the way, therefore a decision the ECB should have fiercely protested, since it’s independent and a-political and it can’t afford to be dragged into such situations. But the ECB didn’t protest. And ever since the deed was done, Brussels presents it as if it were as unavoidable as Noah building the Ark. It’s not. It’s still just another decision to put banks before people.

And in this case the people have come out on the very short end of a very long stick. That’s what the Greek discussions have been about ever since Syriza was elected, with a substantial majority, to be the government in Athens. And no matter how many times how many people may claim Greece lived above its means for years, it’s obvious that the unemployed and the hungry children and the elderly without health care did not.

The troika says they bailed out the Greek people. The Greek people say only 8-9% of that bailout ever went to them, with the rest going to cover the losses of international systemic banks, and to the utterly corrupt previous Greek political and economic elites, which, coincidentally, the troika was only too happy to strike deals with, so much so that on the eve of the election Greeks were urged to vote the same elites into power once more, even if they were demonstrably to blame for the downfall of the Greek economy.

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

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

ECB’s Nowotny: Greece’s problem isn’t economic

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

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

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

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

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

The IMF has stated they don’t want to be part of a third Greek bailout. Hardly anyone seems to notice anymore, but that makes the IMF a party to political decisions too. Lagarde et al claim they can’t loan to countries that don’t take the ‘right’ measures, but who decides which measures are the right ones? What’s more, how does the IMF, in that vein, explain the recent loans to Ukraine? Is Kiev doing better than Athens from an economic point of view? Or is this just us sinking into a deepening political quagmire?

Moreover, if we take Mr. Nowotny on his word, why are there still finance ministers and economists involved in the Greek issue negotiations? Doesn’t that only simply lead to confusion and delay? Every single news outlet in the world has taken over German FinMin Schäuble’s comment that Greece should have a referendum if they want, and that maybe that would clarify matters.

But that is not something for Schäuble to comment on, no more than it would be for Greek FinMin Varoufakis to suggest a referendum in Germany. While everyone would consider the latter preposterous, the same everyone takes the former serious. That’s power politics for you, and a press that’s lost track of its position in the world. A press that’s turned into a propaganda mechanism for whoever’s in charge at any given moment in time.

If the Greek issue is now, or perhaps has always been, an overwhelmingly political one, as Nowotny suggests, why do we still have Varoufakis and Dijsselbloem (who only has a degree in agricultural economics, whatever that may be) and former German secret service head Schäuble, discussing matters? After all, why would you leave political issues up to your finance ministers to discuss? That’s not their field.

If it’s all political, shouldn’t it be the political leaders, Merkel and Juncker and Tsipras, talking instead? Something tells us that might not be such a bad idea in any case. Certainly by now. If the ECB itself already says it’s not about money…

The Most Elementary Question Must Not Be Asked

Dec 062014

December 6, 2014 Posted by Raúl Ilargi Meijer at 10:39 pm Finance Tagged with: Economics, failure, Growth, Keynes, puppetmasters 25 Responses »

Arthur Rothstein Interior of migratory fruit worker’s tent, Yakima, Washington Jul 1936

We’re in dire need of fresh blood and smart new ideas to clean up the mess the present ideologies and their puppets and puppetmasters have created. The present crew has made a neverending series of ‘mistakes’, intentional or not, and they are dead set on making more, if only because they refuse to change the tack that led to all these ‘mistakes’.

I say mistakes because that’s what they are from the point of view of all those who live in the real economy, not because I think the puppetmasters are mistaken from their own point of view. After all, all they do, literally all they do, is take care of their own interests. Where they will find themselves mistaken is down the line, when there is no longer a functioning real economy, and they will of necessity end up going down with it.

However, even though you wouldn’t say it to look at America and Europe these days, we don’t need to be puppets to any masters. I know, I know, most of you don’t even recognize yourselves as puppets – yes, you -. You believe most of what you read, or at least enough to keep going on the beaten track. And they’re good at making you believe. They’ve gotten a lot better at it ever since you were born, whenever you were born.

You only need to listen to things like this week’s US jobs report, which has the media falling over each other and themselves to declare victory. But which, when you take a good look, declares no such thing. And we’ve been going on this road for many years now, a road defined by debt on one side and propaganda on the other, and we stick to it because we are promised on a 24/7 basis that it will lead to growth, which is always just around the corner. Growth is the magic word.

But why do we need growth, and do we even need it at all? That is a question which is considered blasphemous anathema by the current class of economists and leaders. Still, and maybe especially for that reason, it is a question that needs to be asked, perhaps THE question. Because the past 10, 20 or even 40 years have not actually delivered any growth, once you look beyond the propaganda, and the added debt.

And when you add that debt to the equation, they’ve brought the real economy the opposite of growth, while handing the puppet masters unequaled riches. In a nutshell, the past 40 years or so have given us added layers of gadgets at the price of unaffordable education and health care, the price of a deteriorating real economy. And that is just the start of the way down.

Growth is a topic I’ve written a lot about over the years, too much to even try and find it all back again. Here are a few samples. From November 14 2011:

The Growth Paradigm Has Become An Embarrassment

It’s high time to come clean, to stop the incessant lying. To stop pretending things are a bit hard right now, but otherwise just fine. They’re not. Extend and pretend works only so long. Then it snaps back in your face with a vengeance. That’s why the bond markets are so successful in bringing down Italy and Greece. Not because the ECB doesn’t step in, since that would only serve to cover up reality for a little bit longer, but because they’ve both lied for so long about their real predicaments.

No, just stop lying. The consequences and challenges will be formidable, but they’ll be that anyway. You can’t cover up the debt and the losses forever. And the chances of growing your economies out of the cesspit are zero, if not below.

One thing no more lying will achieve is this: it will re-establish confidence in the markets -or what’ll be left of them-. And isn’t that what you guys always say you want to accomplish? Well, I can assure you, it’s the only way to do it: cut the fairy tales. Take a breath of fresh air and get to work. Do something real and rewarding for a change, and for a living.

Oh, and one other thing that must stop something urgent: stop talking about economic growth. There ain’t none, and we need to wonder hard and loud why we still and always unquestioningly assume and accept that we need it. No, the Greek economy will not grow its way out of its misery. Neither will Italy’s, or France’s or America’s. There’s too much debt to grow out of.

But perhaps this is hard to fathom without resorting to more philosophical questions. For those of you who’ve never read or heard Professor Albert Bartlett’s work on exponential growth (since that is what we’re talking bout), get moving. Bartlett is a physicist. That means he’s an actual scientist, and capable of understanding the inevitable endgame of exponential growth. People like Papademos and Monti, as well as just about any political and economic leader on the planet, don’t understand the science involved. Either that or they’re willfully blind to it.

And there’s another layer to the question, one that goes beyond the easy to understand impossibility of endless and eternal growth. That is, when we look around our respective places on the planet, why do we think we need to grow more? Why do we feel we haven’t grown enough? And perhaps more quintessential: what is it that we want to grow into? At what point, if we do want more growth, will it be enough for us? Have we even thought about that?

We are fed the constant growth story because it is indeed a necessity in our present system. When all money issued carries interest i.e. is issued as debt, you will need to grow your GDP at least as much as that interest rate to play even. Just as easy to understand as the exponential growth conundrum. Or so you would think.

But that doesn’t mean that you can always keep issuing enough money to meet your interest payment requirements. Not when a huge part of it is issued as for instance mortgage loans, but very few people buy homes. Not when money is created when banks issue fresh credit to industries, but industries find no market for their products and instead contract.

In other words: if we don’t grow, we will shrink. And that, we are told, is the very definition of armageddon. But why couldn’t we shrink a little and still be comfortable? In theory we could perhaps, but first of all the human mind isn’t made for shrinkage, and second the money we create as credit is virtual, and can disappear as fast as it was created, and into the same nothingness.

If we would for instance consciously choose to shrink by 5%, we’d run a very real risk that we would cause 50% of the money to vanish. The system based on credit will have the tendency to go down like so many dominoes. It has very little resilience and is thus enormously fragile, something we don’t pay attention to when we have growth, and are therefore not prepared for when we no longer do.

And from April 22, 2013:

What Do We Want To Grow Into?

The only good thing about all this is that if and when it becomes clear that there is no growth left in the system, all its one-dimensional advocates, from both the Spend! and the Cut! parties, will disappear into a great void. They have no idea what to do without growth. There is no economics class that teaches them, and they don’t have the brains to come up with an answer themselves.

Indeed, perhaps it’s even true that a “not necessarily growth” situation, simply of its own accord, selects for other “leaders”. That power hungry psychopaths, in all the various degrees to which they float to the top of the dungheap, are wiped out and alienated by such a situation.

That could be a very good thing. It’s on the way there, however, that we will see unimaginable damage, mayhem and bloodshed. The forever and always growth classes have an iron grip on everyone’s lives. If only because everyone believes them. Still, just because they can’t change their ways and views doesn’t mean you can’t. You can see quite easily that, in a material sense, you have more than enough already.

And many of you have clued in to the destruction ever more growth brings to your children’s living world (not to mention their brains). Unfortunately, quite a few then fall for the “more growth, but more greener” delusion. Or some steady state one (we don’t do steady, we don’t stand still).

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

It’s a very simple discussion. You can start it today with Krugman or one of his alleged adversaries: Why do you advocate economic growth? Why do you see a period of non-growth or shrinkage as a necessary evil that needs to be brought down to its knees at – quite literally – all cost?

And what is it you want to grow into? Can you explain that? I’ve never seen that properly defined. Isn’t it perhaps true that if you don’t know the answer to that question, you are by definition blindly chasing a mirage? If you don’t know where you’re going, or why you’re going there, why go at all? Or is that still the sort of issue that can easily be swept under the carpet as “commie”?

So it’s refreshing to see this week a German economist and banker, Dr. Ulrich Salzer, thanks to Tyler Durden, going down that same line of questioning. These questions are long overdue. It’s not just one school of economics or the other failing us, it’s the entire field. Any field that refuses to ponder its most essential questions is per definition dead and useless.

Physicists can explain any time of day why we need Newton’s gravity and Einstein’s relativity in order to make sense of the world, and if anyone can prove them wrong, they’d be welcomed. Economists cannot explain we we need growth, it’s simply assumed to be a given.

Deficit Spending And Money Printing: A German Point Of View

The leading macroeconomic Nobel-Laureates, the Central Bankers as well as most Politicians have reduced their economic judgment on how to get the economies in Europe and Japan back to sustainable growth on just two recipes: public investments in infrastructure to be financed by additional public debt and, second, an expansive money market policy based on printing more money and reducing interest rates to zero or even beyond zero to negative rates!

And if the capital markets don’t swallow additional public debt, then the Central Banks will step in eagerly as Investors – regardless if this is in line with their statutes!

The expected results, backed by the leading macroeconomic wisdom, should be to kick-start economic growth, to induce private industry to invest and banks to lend to private investors, and thereby to reduce unemployment, and get deflationary tendencies back to an inflation rate that is now officially regarded as ideal if it oscillates around 2 % p.a. When and why this “two-percent” benchmark was introduced for the first time I can’t remember, but everybody today takes it for granted and repeats it like as an undisputed target of Central Bank’s money market policy. Included in this assumption is ever more public debt as the guarantor for lasting GDP-growth!

I never understood why macroeconomics should be regarded as an academic discipline if it is in practice reduced to these rather simple theories of how to handle a recession or even deflation! Maybe Alfred Nobel was just as clear-sighted as I am, and consequently never introduced a Nobel-prize for economics. That was done after his death by the Central Bank of Norway, which also contributed the required funds. It still does so, and not the Nobel foundation!

My personal advice is to stop handing out any more Nobel-prizes for economics to any more American professors on any new theory how to steer economic development and sustainable economic growth, because none of them has ever worked.

There is a lot of blame offloaded onto Maynard Keynes by critics of the present ruling opinion of more deficit spending by governments. But I don’t believe that Keynes would approve any of today’s Nobel-Laureates who saw no other way out of recession than by money printing in unlimited amounts and years of deficit spending by already over-indebted economies. According to Keynes public investment on deficit could be regarded as an “ultima ratio” to re-kick-start a slow economy, but he would never have advised any government that is already highly indebted to increase this debt even more!

In his theory, deficit-spending should be a limited action in time and amounts, and directly afterwards this debt should be repaid by the additional tax income from the stronger revenues of industry and private individuals who have profited from the intervention of the State.

But what our economists and central bankers are recommending nowadays is completely different from “short-term-kick-starts” – our systems are so full of the sweet drug of government deficit spending that (like a drug-addict) it constantly needs heavier doses of the same drug!

It was not long ago that the American Treasury Secretary publicly blamed Germany for not using its remaining credit standing for another round of deficit-spending in order to help Italy, France and other Southern European countries. As if more public debt and burning straw in Germany would have any impact on the southern countries’ economies without any serious political and economic reforms in those countries themselves to fight the weakness at its real source!

As long as our “economy doctors” don’t know anything better than to prescribe more drugs instead of getting the patient off the needle and help him to abandon the ever increasing drug doses, we will never get our economies “back to normal”!

We should never forget that at least the European economies had no real problem as long as the public debt to Gross National Product ratio remained within the Maastricht limits of 60% and before liquidity in the banking sector was multiplied without limit, thereby creating big bubbles in the financial assets of the banks which finally led to the financial crisis of 2008.

Japan is the very best example to prove that the therapy of deficit spending and money printing is dangerously wrong: it is now 25 years since Japan has adopted this cure. If anybody needs proof that the prescription was unprofessional and ineffective, he should look at the results to the Japanese economy and its public debt. Although hundreds of billions of Dollars have been spent during this period on programs to stimulate the Japanese economy the effect was that Japan fell from one recession into the next depression and the public debt ratio to GNP has meanwhile reached the astronomic bench mark of 230% (!!), which is double that of Greece and four times higher than the Maastricht criterion!

I am certain that Maynard Keynes would turn in his grave if he knew to what extent his theory was misinterpreted and misused! Of course it’s a big temptation for every politician to utilize the sweet but toxic medicine of deficit spending and more public debt rather than to introduce hard reforms on public budgets, on social spending and other benefits to their voters.

It’s also a big mistake that European governments have disregarded the traditional role of the European Central Bank as the watch-dog against inflation. In creating the ECB, Germany never consented that it should have more responsibilities and more authority than the Deutsche Bundesbank ever had.

It’s just like with deficit spending Keynes had recommended under certain conditions: it may be acceptable if the Central Bank acts as “Lender of last resort” in case of actual liquidity crisis. But this should be strictly on short-term basis. What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc. Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?

Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?

You almost have to step outside of economics, even out of the financial world as a whole, to pose what is the most elementary question about our economy today. That can’t be right.

The most elementary question is not how we can achieve growth, it’s whether we need growth, and what we would need it for that is important enough to destroy our entire societies and economies for. As Salzer says: “Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?” The most elementary question is as simple as that.

I can finish this the way I started it: we need new ideas, new paradigms, to replace the ones that have gotten us the cesspool we find ourselves in, despite the false signals debt and propaganda provide us with. We’re in dire need of fresh blood and smart new ideas to clean up the mess the present ideologies and their puppets and puppetmasters have created.

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