Keynes Archives - The Automatic Earth

The echo chamber is highly profitable. Gossip sells. It’s not personal. It’s only business. And in many boardrooms the question these days is: Why are we not more like the New York TImes?

• Trump Bump for President’s Media Archenemies Eludes Local Papers (BBG)

President Donald Trump loves to hurl his Twitter-ready insult at the New York Times: #failingnytimes. But in the stock market, the New York Times Co. has been looking like a roaring success lately, particularly by the standards of the beleaguered newspaper industry. Since Trump won the presidency in November, the publisher’s share price has soared 57%. Online subscriptions are up, bigly – about 19% in the first quarter alone. Scrutinizing the president turns out to be good business, at least for top national papers like the Times and the Washington Post. A different story is playing out for local publications, which are still suffering through the industry’s long decline and need to retain subscribers who are sympathetic to Trump.

Consider McClatchy Co., which owns about 30 papers, including the Miami Herald. Its shares have plummeted 31% since Election Day. Subscriptions have barely budged. The diverging fortunes in the industry have underscored what many in the traditional news business know only too well: Famous titles can lumber on as they grope for a digital future, but most local papers are fighting for survival. “For us in Texas, the bump has definitely been more muted because we’re not the primary source of news out of the White House,” said Mike Wilson, editor of the Dallas Morning News. “We serve a community with many deeply conservative pockets. That may be a different demographic from the New York Times and Washington Post audience.”

[..] The Washington Post, owned by Amazon.com founder Jeff Bezos, has more than 900,000 digital subscribers, including hundreds of thousands who signed up in the first quarter, according to a person familiar with the matter who asked not to be identified discussing private information. The newspaper declined to comment on its subscriber figures. The Post and the Times have been competing for scoops on the biggest story of the year: the Trump administration’s alleged ties to Russia. On several occasions, they’ve published blockbuster stories within hours of each other. Trump often attacks their coverage on Twitter, which seems to drive even more readers to subscribe.

We adhere to the school of economics that suits the powerful best.

• How Economics Became A Religion (Rapley)

Although Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy. Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment.

For a long time, they seemed to deliver on that promise, succeeding in a way few other religions had ever done, our incomes rising thousands of times over and delivering a cornucopia bursting with new inventions, cures and delights. This was our heaven, and richly did we reward the economic priesthood, with status, wealth and power to shape our societies according to their vision. At the end of the 20th century, amid an economic boom that saw the western economies become richer than humanity had ever known, economics seemed to have conquered the globe. With nearly every country on the planet adhering to the same free-market playbook, and with university students flocking to do degrees in the subject, economics seemed to be attaining the goal that had eluded every other religious doctrine in history: converting the entire planet to its creed.

Yet if history teaches anything, it’s that whenever economists feel certain that they have found the holy grail of endless peace and prosperity, the end of the present regime is nigh. On the eve of the 1929 Wall Street crash, the American economist Irving Fisher advised people to go out and buy shares; in the 1960s, Keynesian economists said there would never be another recession because they had perfected the tools of demand management. The 2008 crash was no different. Five years earlier, on 4 January 2003, the Nobel laureate Robert Lucas had delivered a triumphal presidential address to the American Economics Association. Reminding his colleagues that macroeconomics had been born in the depression precisely to try to prevent another such disaster ever recurring, he declared that he and his colleagues had reached their own end of history:

“Macroeconomics in this original sense has succeeded,” he instructed the conclave. “Its central problem of depression prevention has been solved.”

Will the last days of our economics coincide with the last days of our economic model? Will Keynes die in a collapse?

• The Breaking Point & Death Of Keynes (Roberts)

Keynes contended that “a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.” In other words, when there is a lack of demand from consumers due to high unemployment then the contraction in demand would, therefore, force producers to take defensive, or react, actions to reduce output. In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth.

The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment. Unfortunately, as shown below, monetary interventions and the Keynesian economic theory of deficit spending has failed to produce a rising trend of economic growth.

Take a look at the chart above. Beginning in the 1950’s, and continuing through the late 1970’s, interest rates were in a generally rising trend along with economic growth. Consequently, despite recessions, budget deficits were non-existent allowing for the productive use of capital. When the economy went through its natural and inevitable slowdowns, or recessions, the Federal Reserve could lower interest rates which in turn would incentivize producers to borrow at cheaper rates, refinance activities, etc. which spurred production and ultimately hiring and consumption.

However, beginning in 1980 the trend changed with what I have called the “Breaking Point.” It’s hard to identify the exact culprit which ranged from the Reagan Administration’s launch into massive deficit spending, deregulation, exportation of manufacturing, a shift to a serviced based economy, or a myriad of other possibilities or even a combination of all of them. Whatever the specific reason; the policies that have been followed since the “breaking point” have continued to work at odds with the “American Dream,” and economic models.

Central banks focus on their member banks.

• Central Banks’ Focus on Financial Stability Has Unintended Consequences (BBG)

Central bankers are spending a lot of time talking about financial stability. So much so that many economists, strategists and investors are saying financial stability has become a de facto third mandate for policy makers along with price stability and full employment. This development, however, has the potential to bring about some unintended consequences such as central banks adopting a much shallower tightening path than they currently envision. It’s important to understand two things. First, in highly levered economies, like those we currently see in developed nations around the world, interest rates and financial stability are closely linked. That was evident in the recent “synchronized” global sell-off in the rates markets triggered by central banks signaling concern about relatively high asset prices brought on by artificially low borrowing costs, and their potential to foster financial instability.

Second, central banks have, perhaps paradoxically, contributed to financial instability by employing so-called forward guidance that provided investors with a sense of how long they would be keeping rates at record-low levels. So, with economies gradually recovering and employment generally robust, it’s understandable that investors would behave in a manner that suggests they expect favorable financial conditions to seemingly last in perpetuity. Consider the dollar. Its weakness against both developed and emerging-market currencies this year occurred even though expectations for stronger economic growth and fiscal stimulus rose. The decline in the value of the dollar value means the cost to borrow in the currency has dropped despite the Federal Reserve’s three interest-rate increases since mid-December.

It also means hedging costs in currencies ranging from the euro to the South Korean won are rising at a less-than-ideal time. That can be seen in cross-currency basis swap rates, which are essentially the cost to exchange a fixed-rate obligation for a floating-rate obligation. In the case of the won, the swap rate has turned more negative, suggesting a possible “shortage” of the currency to borrow in the interbank market as geopolitical tensions in the region reach levels not seen in years. And, the almost 8% appreciation in the euro in both nominal and real effective exchange rate terms has driven the cost to borrow in the shared currency higher as European Central Bank officials surprise markets by starting to talk about pulling back from unprecedented monetary easing measures.

Looks like the world would have been much better off without central banks.

• Janet Yellen’s Complacency Is Criminal (Bill Black)

[..] her inaction as Fed chairman has encouraged criminal behaviour. First, Yellen’s “lifetime” pronouncement in 2017 ignored Yellen’s pronouncements in 1996 – and how disastrously they fared in the most recent financial crisis. In 1996, Yellen gave a talk at a conference at the Levy Institute at Bard College, which Minsky attended. The Minneapolis Fed published her speech as an article entitled “The New Science of Credit Risk Management.” The speech was an ode to financial securitization and credit derivatives. The Minneapolis Fed, particularly in this era, was ultra-right wing in its economic and social views. Yellen’s piece is memorable for several themes. With the exception of two passages, it reads as gushing propaganda for the largest banks. It is relentlessly optimistic. Securitization and credit derivatives will reduce individual and systematic risk.

Yellen assures the reader that finance is highly competitive and that the banks will pass on the savings from reducing risk to even unsophisticated borrowers in the form of lower interest rates. The regulators should reduce capital requirements, particularly for credit instruments with high credit ratings. Banks now have a vastly more sophisticated understanding of their credit risks and manage them prudently. There is no discussion of perverse incentives even though bank CEOs were making them ever more perverse at an increasing rate. There is no discussion of the fate of the first collateralized debt obligations (CDOs). Michael Milken, a confessed felon, devised and sold the first CDO – backed by junk bonds. That disaster blew up five years before she gave her speech. At the time Yellen published her article the second generation of CDOs was becoming common.

That generation of CDOs was backed by a hodgepodge of risky loans. They blew up about four years after she gave her speech. The third wave of CDOs was backed by toxic mortgages, particularly endemically fraudulent “liar’s” loans. They blew up in 2008. Securitization contributed to the disaster. The Fed championed vastly lower capital requirements for banks – particularly he largest banks. Fortunately, the Federal Deposit Insurance Corporation (FDIC) fought a ferocious rearguard opposition that blocked this effort. The Fed succeeded, however, in allowing the largest banks to calculate their own capital requirements through proprietary risk models that (shock) massively understated actual risk. Bank CEOs used the lower capital requirements, the biased risk models, and the opaque CDOs to massively increase risk and predate on black and Latino home borrowers.

We have a hard time remembering and learning.

• ‘We’re Flowing Toward The Path Of 1928-29’ – Yusko (CNBC)

Although the economy has been steady this year, at least one analyst has dire predictions, comparing the current period to the buildup to the Great Depression and warning that this fall is when things will come to a head. Mark Yusko, CEO of Morgan Creek Capital, has been predicting bad news for the economy since January and he is sticking by that, saying Monday on CNBC’s “Power Lunch” that he believes too much stimulus and quantitative easing has resulted in a “huge” bubble in U.S. stocks. “I have this belief that we’re flowing toward the path of 1928-29 when Hoover was president,” Yusko said. “Now Trump is president. Both were presidents with no experience who come in with a Congress that is all Republican, lots of big promises, lots of things that don’t happen and the fall is when people realize, ‘Wait, it hasn’t played out the way we thought.'”

He points to evidence of declining growth as well as that fall is a weak time traditionally for the U.S. economy as people return from vacation. “[By the fall], we’ll have a lot more evidence of declining growth. Growth has been slipping,” he said. However, it was not all gloom and doom as Yusko said the emerging markets were still strong places to invest. “Growth is where you want to invest,” he said. “All the growth is in the emerging markets, the developing world. It’s really tough if you look around the developed world.” he said profits in the United States are the same as they were in 2012. Yusko said at the beginning of the year “every single analyst” said emerging markets were going to underperform the U.S. “That hasn’t been the case,” he said. Indeed, in 2017 the iShares MSCI Emerging Markets ETF (EEM) has been up more than 18% while the S&P 500 index has risen more than 8%.

“..the number of homes sold in May for less than the asking price rose to 77%.”

• Fresh Fears Of UK Housing Market Collapse (Sun)

New signs of the housing market slipping are expected this week when one of the best lead indicators of house price movement is released. The UK Residential Market Survey from the Royal Institution of Chartered Surveyors is expected to show a decrease in the number of members reporting house price rises. It comes after last weekend, it was reported is on the edge of a property price crash which could be as bad as the collapse in the 1990s according to experts who are also warning property value could plunge by 40%. Ahead of this week’s survey, Howard Archer, chief economic adviser to consultancy EY Item Club, told the Mail on Sunday: ‘It may well be that heightened uncertainty after the General Election weighed down on an already fragile housing market in June.’

The expectation of a crash has raised alarms about whether we could see a return of “negative equity” which is when a house falls so much in value it is worth less than the mortgage. Around one million people were hit with negative equity in the 1990s, the Mail on Sunday has reported. Paul Cheshire, professor of Economic Geography at the London School of Economics, said: “We are due a significant correction in house prices. “I think we are beginning to see signs that correction may be starting.” Prices plunged by 37% in 1989 when the price boom fell apart. In its most recent figures, The National Association of Estate Agents reported the number of homes sold in May for less than the asking price rose to 77%. Prof Chesire added that falls in real incomes is also likely to spark for a fall in house prices.

The EU has a power problem. Germany dictates all important decisions, and in its favor.

• The European Union Has a Currency Problem (NI)

Donald Trump, for all his rhetorical clumsiness and intellectual limitations, still sometimes makes a valid point. He does when he says that Germany is “very bad on trade.” However much Berlin claims innocence and good intentions, the fact remains that the euro heavily stacks the deck in favor of German exporters and against others, in Europe and further afield. It is surely no coincidence that the country’s trade has gone from about balance when the euro was created to a huge surplus amounting at last measure to over 8% of the economy—while at the same time every other major EU economy has fallen into deficit. Nor could an honest observer deny that the bias distorts economic structures in Europe and beyond, perhaps most especially in Germany, a point Berlin also seems to have missed.

The euro was supposed to help all who joined it. When it was introduced at the very end of the last century, the EU provided the world with white papers and policy briefings itemizing the common currency’s universal benefits. Politically, Europe, as a single entity with a single currency, could, they argued, at last stand as a peer to other powerful economies, such as the United States, Japan and China. The euro would also share the benefits of seigniorage more equally throughout the union. Because business holds currency, issuing nations get the benefit of acquiring real goods and services in return for the paper that the sellers hold. But since business prefers to hold the currencies of larger, stronger economies, it is these countries that tend to get the greatest benefit. The euro, its creators argued, would give seigniorage advantages to the union as a whole and not just its strongest members.

All, the EU argued further, would benefit from the increase in trade that would develop as people worried less over currency fluctuations. With little risk of a currency loss, interest rates would fall, giving especially smaller, weaker members the advantage of cheaper credit and encouraging more investment and economic development than would otherwise occur. Greater trade would also deepen economic integration, allow residents of the union to choose from a greater diversity of goods and services, and offer the more unified European economy greater resilience in the face of economic cycles, whether they had their origins internally or from abroad. It was a pretty picture, but it did not quite work as planned. Instead of giving all greater general advantages, the common currency, it is now clear, locked in distorting and inequitable currency mispricings.

Those rules only last until they get in the way of some greater good anyway.

• Schaeuble Says Italy Bank-Liquidation Aid Shows Rule Discord (BBG)

German Finance Minister Wolfgang Schaeuble joined his counterparts from the Netherlands and Austria in calling for a review of European Union bank-failure rules after Italy won approval to pour as much as €17 billion ($19.4 billion) of taxpayers’ cash into liquidating two regional lenders. Schaeuble said Italy’s disposal of Banca Popolare di Vicenza and Veneto Banca revealed differences between the EU’s bank-resolution rules and national insolvency laws that are “difficult to explain.” That’s why finance ministers convening in Brussels on Monday have to discuss the Italian cases and consider “how this can be changed with a view to the future,” he told reporters in Brussels before the meeting.

Dutch Finance Minister Jeroen Dijsselbloem said the focus should be on EU state-aid rules for banks that date from 2013, before the resolution framework was put in place. Italy relied on these rules for its state-funded liquidation of the two Veneto banks and its plan to inject €5.4 billion into Banca Monte dei Paschi di Siena SpA. The EU laid down new bank-failure rules in the 2014 Bank Recovery and Resolution Directive after member states provided almost €2 trillion to prop up lenders during the financial crisis. The BRRD foresees small banks going insolvent like non-financial companies. Big ones that could cause mayhem would be restructured and recapitalized under a separate procedure called resolution, in which losses are borne by owners and creditors, including senior bondholders if necessary.

Elke Koenig, head of the euro area’s Single Resolution Board, said last week that the framework for failing lenders needs to be reviewed to “see how to align the rules better.” The EU commissioner in charge of financial-services policy, Valdis Dombrovskis, said that this could only happen once banks have built up sufficient buffers of loss-absorbing debt. The EU’s handling of the Italian banks was held up by U.S. Federal Reserve Bank of Minneapolis President Neel Kashkari as evidence that requiring banks to have “bail-in debt” doesn’t prevent bailouts. The idea that rules on loss-absorbing liabilities that can be converted to equity or written down to cover the costs of a bank collapse “rarely works this way in real life,” he wrote in an op-ed in the Wall Street Journal.

“..the average Chinese would have had to spend more than 160 times his annual income to purchase an average housing unit at the end of 2016.”

• Is This the End of China’s Second Housing Bubble? (ET)

When the economy started to cool in the beginning of 2016, China opened up the debt spigots again to stimulate the economy. After the failed initiative with the stock market in 2015, Chinese central planners chose residential real estate again. And it worked. As mortgages made up 40.5% of new bank loans in 2016, house prices were rising at more than 10% year over year for most of 2016 and the beginning of 2017. Overall, they got so expensive that the average Chinese would have had to spend more than 160 times his annual income to purchase an average housing unit at the end of 2016. Because housing uses a lot of human resources and raw material inputs, the economy also stabilized and has been doing rather well in 2017, according to both the official numbers and unofficial reports from organizations like the China Beige Book (CBB), which collects independent, on-the-ground data about the Chinese economy.

“China Beige Book’s new Q2 results show an economy that improved again, compared to both last quarter and a year ago, with retail and services each bouncing back from underwhelming Q1 performances,” states the most recent CBB report. However, because Beijing’s central planners must walk a tightrope between stimulating the economy and exacerbating a financial bubble, they tightened housing regulations as well as lending in the beginning of 2017. Research by TS Lombard now suggests the housing bubble may have burst for the second time after 2014. “We expect the latest round of policy tightening in the property sector to drive down housing sales significantly over the next six months,” states the research firm, in its latest “China Watch” report. One of the major reasons for the concern is increased regulation. Out of the 55 cities measured in the national property price index, 25 have increased regulation on housing purchases.

The most tragic species.

“..Earth’s capacity to support life, including human life, has been shaped by life itself..”

• The World Is Facing A ‘Biological Annihilation’ Of Species (Ind.)

The world is experiencing a “biological annihilation” of its animal species because of humans’ effect on the Earth, a new study has found. Researchers mapped 27,600 species of birds, amphibians, mammals and reptiles – nearly half of known terrestrial vertebrate species – and concluded the planet’s sixth mass extinction even was much worse than previously thought. They found the number of individual animals that once lived alongside humans had now fallen by as much as 50%, according to a paper in the journal Proceedings of the National Academy of Sciences. The study’s authors, Rodolfo Dirzo and Paul Ehrlich from the Stanford Woods Institute for the Environment, and Gerardo Ceballos, of the National Autonomous University of Mexico, said this amounted to “a massive erosion of the greatest biological diversity in the history of the Earth”.

The authors argued that the world cannot wait to address damage to biodiversity and that the window of time for effective action was very short, “probably two or three decades at most”. Mr Dirzo said the study’s results showed “a biological annihilation occurring globally, even if the species these populations belong to are still present somewhere on Earth”. The research also found more that 30% of vertebrate species were declining in size or territorial range. Looking at 177 well-studied mammal species, the authors found that all had lost at least 30% of the geographical area they used to inhabit between 1990 and 2015. And more than 40% of these species had lost more than 80% of their range. The authors concluded that population extinction were more frequent than previously believed and a “prelude” to extinction.

“So Earth’s sixth mass extinction episode has proceeded further than most assume,” the study said. About 41% of all amphibians are threatened with extinction and 26% of all mammals, according to the International Union for Conservation of Nature (IUCN), which keeps a list of threatened and extinct species. [..] “When considering the frightening assault on the foundations of human civilisation, one must never forget that Earth’s capacity to support life, including human life, has been shaped by life itself,” the paper stated.

Debt Rattle March 31 2017

Mar 312017

March 31, 2017 Posted by Raúl Ilargi Meijer at 8:59 am Finance Tagged with: crash, deep subprime, ECB, Flynn, Juncker, Keynes, neo-liberalism, recession, refugees, reshuffle, wildlife Comments Off

Rene Magritte Memory 1944

• Last Two Times After US Reported Data Like This, Stocks Crashed (WS)

• One Third Of US Car Loans Is Deep Subprime (Roberts)

• The Fed Is Bedeviled by Keynes’s Paradox (DiMartino Booth)

• Flynn Lawyer: Client Wants Assurances Against ‘Witch-Hunt’ Prosecution (USAT)

• Who Gains When Income Grows? (Tcherneva)

• Puerto Rico Is Starting To Look An Awful Lot Like Greece (Setser)

• Former Australia PM: Neo-Liberalism Has Run Into A Dead End (SMH)

• Why Australia Hasn’t Had a Recession in Over 25 Years (BBG)

• Why Australia Is Addicted To Interest-Only Loans (AFR)

• Juncker In Jaw-Dropping Threat To Trump Over Support For Brexit (Exp.)

• The European Central Bank Doesn’t Understand The Economy (Steve Keen)

• Why Italy’s Banking Crisis Has Gone Off the Radar (DQ)

• Global Reshuffle Of Wildlife Will Have Huge Impacts On Humanity (G.)

• More Than 5 Million Syrian Refugees In Neighbouring Countries Now (G.)

Many scary graphs today. Let’s start here.

• Last Two Times After US Reported Data Like This, Stocks Crashed (WS)

The BEA offers various measures of corporate profits, slicing and dicing them in different ways. One of them is its headline number: “Corporate profits with inventory valuation and capital consumption adjustments.” It estimates “profits from current production,” based on profits before taxes, not adjusted for inflation, but with adjustments for inventory valuation (IVA) and capital consumption (CCAdj).These adjustments convert inventory withdrawals and depreciation of fixed assets (as they appear on tax returns) to the current-cost economic measures used in GDP calculations. It’s a broad measure, taking into account profits by all corporations, not just the S&P 500 companies. This measure is reflected in the first chart below.

Later, we’ll get into after-tax measures without those adjustments. They look even worse. In Q4, profits rose to $2.15 trillion seasonally adjusted annual rate. That’s what the annual profit would be after four quarters at this rate. But profits in the prior three quarters were lower. And so Q4 brought the year total to $2.085 trillion. This was down from 2015, and it was down from 2014, and it was up only 2.6% from 2013, not adjusted for inflation. This 20-year chart shows that measure. Note that the profits are not adjusted for inflation, and there was a lot of inflation over those 20 years:

Things get even more interesting when we look at after-tax profits on a quarterly basis. The chart below shows two measures: Dark blue line: Corporate Profits after tax without adjustments for inventory valuation and capital consumption (so without IVA & CCAdj). Light blue line: Corporate Profits after tax with adjustments for inventory valuation and capital consumption (so with IVA & CCAdj). Q4 profits, at a seasonally adjusted annual rate, but not adjusted for inflation, were back where they’d been in Q1 2012:

By this measure, corporate profits have been in a volatile five-year stagnation. However, during that time – since Q1 2012 – the S&P 500 index has soared 70%. [..] The chart also shows that there were two prior multi-year periods of profit stagnation and even decline while the stock market experienced a massive run-up: from 1996 through 2000, leading to the dotcom crash; and from 2005 through 2008, which ended in the Financial Crisis. This peculiar phenomenon – soaring stock prices during years of flat or declining profits – is now repeating itself. The end point of the prior two episodes was a lot of bloodletting in the markets that then refocused companies – the survivors – on what they needed to do to make money. For a little while at least, it focused executives on productive activities, rather than on financial engineering, M&A, and similar lofty projects. And it showed in their profits.

People have no money to spend. But they do need a car in the US.

• One Third Of US Car Loans Is Deep Subprime (Roberts)

Given the lack of wage growth, consumers are needing to get payments down to levels where they can afford them. Furthermore, about 1/3rd of the loans are going to individuals with credit scores averaging 550 which carry much higher rates up to 20%. In fact, since 2010, the share of sub-prime Auto ABS origination has come from deep subprime deals which have increased from just 5.1% in 2010 to 32.5% currently. That growth has been augmented by the emergence of new deep sub-prime lenders which are lenders who did not issue loans prior to 2012. While there has been much touting of the strength of the consumer in recent years, it has been a credit driven mirage.

With income growth weak, debt levels elevated and rent and health care costs chipping away at disposable incomes, in order to make payments even remotely possible, terms are often stretched to 84 months. The eventual issue is that since cars are typically turned over every 3-5 years on average, borrowers are typically upside down in their vehicle when it comes time to trade it in. Between the negative equity of their trade-in, along with title, taxes, and license fees, and a hefty dealer profit rolled into the original loan, there is going to be a substantial problem down the road. [..] Auto loans, in general, have been in a huge boom that reached $1.11 trillion in the fourth quarter 2016. As noted above, 33.5% of those loans are sub-prime, or $371.85 billion.

And that’s in a country in crisis. People are scared. “Some $11.7 trillion is sitting in bank deposits, up from $7.23 trillion at the start of 2009..”

• The Fed Is Bedeviled by Keynes’s Paradox (DiMartino Booth)

The economist John Maynard Keynes warned that ultra-low interest rates would backfire on central banks seeking to spur borrowing and spending, yet they seemed surprised that the current recovery is the weakest in postwar history after cutting rates to near zero, or even below in some cases. Keynes is credited with popularizing the “paradox of thrift,” which is the economic theory that posits people tend to save more during recessions as rates fall to offset the income their savings is not generating. Of course it is the case that when you save more, you spend less. Since the U.S. economy is fueled by consumption, it also stands to reason that growth suffers as a result.

It’s been two years since Swiss Re produced a report that calculated U.S. savers had foregone some $470 billion in interest income. The analysis was based on what rates would have been had the Federal Reserve followed the Taylor Rule, which would have put rates, then at zero, at 1.7%. Even as the Fed has begun to raise rates, it is clear that hundreds of billions of dollars have been squirreled away as savers play defense to counteract the Fed’s ultraloose monetary policy. Some $11.7 trillion is sitting in bank deposits, up from $7.23 trillion at the start of 2009 shortly after the Fed cut rates to near zero, central bank data show.

The WSJ was first, then all the media ran with it. But Flynn did NOT ask for immunity. At least not that we know. Both Nunes and Schiff deny it’s been discussed. Flyn’s lawyer doesn’t mention it. Smells like fake news. There’s so much wrong with the man, why make things up? Everyone’s salivating over potential problems he could cause for Trump, but we’ll get to that when it’s time.

• Flynn Lawyer: Client Wants Assurances Against ‘Witch-Hunt’ Prosecution (USAT)

The attorney representing President Trump’s former National Security Adviser Michael Flynn said late Thursday that his client would not submit to questioning in the ongoing investigations into Russian interference in the 2016 election without protection against possible prosecution. “No reasonable person, who has the benefit of advice from counsel, would submit to questioning in such a highly politicized, witch-hunt environment without assurances against unfair prosecution,” attorney Robert Kelner said in a written statement. Describing his client as the target of “unsubstantiated public demands by members of congress and other political critics that he be criminally investigated,” Kelner confirmed that there have been “discussions” regarding Flynn’s possible appearances before the House and Senate Intelligence committees now conducting formal inquires into Russia’s attempts to disrupt the American political system.

“Gen. Flynn certainly has a story to tell, and he very much wants to tell it, should the circumstances permit,” Kelner said. “Out of respect for the committees, we will not comment right now on the details of discussions between counsel for Gen. Flynn and the . . . committees.” Jack Langer, spokesman for the House Intelligence Committee Chairman Devin Nunes, R-Calif., said a deal for immunity has not been discussed. An aide to California Rep. Adam Schiff, the panel’s ranking Democrat, also said there had been no discussions about an immunity deal for Flynn. Earlier this week, Senate Intelligence Committee Chairman Richard Burr, R-N.C., signaled that the committee was seeking testimony from Flynn. “You would think less of us if Gen. Flynn wasn’t on that list’’ of potential witnesses, Burr told reporters Wednesday.

It’s gotten so out of hand you’d almost think it would be easy to mitigate.

• Who Gains When Income Grows? (Tcherneva)

Growth in the US increasingly brings income inequality. A striking deterioration in this trend has occurred since the 80s, when economic recoveries delivered the vast majority of income growth to the wealthiest US households. The chart illustrates that with every postwar expansion, as the economy grew, the bottom 90% of households received a smaller and smaller share of that growth. Even though their share was falling, the majority of families still captured the majority of the income growth until the 70s. Starting in the 80s, the trend reverses sharply: as the economy recovers from recessions, the lion’s share of income growth goes to the wealthiest 10% of families. Notably, the entire 2001-2007 recovery produced almost no income growth for the bottom 90% of households and, in the first years of recovery since the 2008 Great Financial Crisis, their incomes kept falling during the expansion, delivering all benefits from growth to the wealthiest 10%. A similar trend is observed when one considers the bottom 99% and top 1%% of households.

Figure 1: bottom 90% vs. top 10%, 1949-2012 expansions (incl. capital gains)

[..] Finally, Figure 6 shows how income growth has been distributed over the different business cycles (peak to peak, i.e., including both contractions and expansions). The data for the latest cycle is incomplete, as we are still in it. The graph indicates that in the current cycle, incomes for all groups are still lower than their previous peak in 2007, however the loss is disproportionately borne by the bottom 90% of households.

Figure 6: bottom 90% vs. top 10%, 1953-2015 business cycles, (incl. capital gains)

I made the same comparison a while back.

• Puerto Rico Is Starting To Look An Awful Lot Like Greece (Setser)

About two weeks ago, Puerto Rico’s oversight board approved Puerto Rico’s revised fiscal plan. The fiscal plan is roughly the equivalent in Puerto Rico’s case of an IMF program—it sets out Puerto Rico’s plan for fiscal adjustment. Hopefully it will make Puerto Rico’s finances a bit easier to understand.* I have been a bit slow to comment on the updated fiscal plan, but wanted to offer my own take:

1) Best I can tell, the new plan has roughly 2 percentage points of GNP in fiscal adjustment in 2018 and 2019, and then a percentage point a year in 2020 and 2021. The total consolidation is close to 6% of GNP (using a GNP of around $65 billion, and netting out the impact of replacing Act 154 revenues with new tax).

2) The board adopted a more conservative baseline. Puerto Rico’s real economy is projected to contract by between 3 and 4% in 2018 and 2019 and by 1 to 2% in 2020 and 2021. I applaud the board for recognizing that the large fiscal consolidation required in 2018 and 2019 will be painful. The risks to the growth baseline—and thus to future tax revenues—should be balanced. There though is a risk that the board may still be understating the drag from consolidation. If Puerto Rico is currently shrinking by 1.5% a year without any fiscal drag, and if the multiplier is 1.5, then growth might contract by 2 to 3% in 2020 or 2021.

3) While creditors have complained that Puerto Rico isn’t doing enough, I worry that there is still too much consolidation too fast: Puerto Rico’s output is projected to fall by another 10 percentage points over the next five years, which would make Puerto Rico’s ten year economic contraction as deep as that experienced by Greece.

“We have a comatose world economy held together by debt and central bank money..”

• Former Australia PM: Neo-Liberalism Has Run Into A Dead End (SMH)

Former prime minister Paul Keating – architect of some of the most profound economic reforms in the country’s history during the 1980s – has launched a surprise critique of the liberal economic philosophy he once championed, declaring it has “run into a dead end”. Mr Keating made his remarks in response to a speech delivered by the new leader of the ACTU, Sally McManus, at the National Press Club in Canberra on Wednesday. Ms McManus declared that “neo-liberalism” had run its course, and that experiments in privatisation had failed, slamming the government over mooted penalty rate cuts, accusing many employers of adopting “wage theft” as a business model, and declaring war on growing inequality.

“We are not saying that the people who introduced some of the policies that you could name as being neo-liberal were bad people, we are saying the experiment has run its course,” Ms McManus said, in response to questions. Earlier in her speech she had declared that “the Keating years created vast wealth for Australia but it has not been shared”. While many saw her remarks as a partial slapdown of the economic reforms of the Hawke/Keating years, Mr Keating told Fairfax Media he supported some of her assessments. “Liberal economics had [in the past] dramatically increased wealth around the world, as it had in Australia – for instance a 50% increase in real wages and a huge lift in personal wealth,” Mr Keating said.

“But since 2008, liberal economics has gone nowhere and to the extent that Sally McManus is saying this, she is right.” “We have a comatose world economy held together by debt and central bank money,” Mr Keating added.”Liberal economics has run into a dead end and has had no answer to the contemporary malaise.”

Simple story. China and private debt.

• Why Australia Hasn’t Had a Recession in Over 25 Years (BBG)

Australia is close to seizing the global crown for the longest streak of economic growth thanks to a mixture of policy guile and outrageous fortune. But the nation is creaking under the weight of its own success. While growth is being underpinned by population gains and resource exports to China, failure to spur productivity has meant stagnant living standards and electoral discontent; a property bubble fueled by record-low interest rates has driven household debt to levels that threaten financial stability; and a timid government facing political gridlock could lose the nation’s prized AAA rating as early as May because of spiraling budget deficits. Australia’s last recession – defined locally as two straight quarters of contraction – occurred in 1991 and was a devastating conclusion to eight years of reform designed to create an open, flexible and competitive economy. But it also proved cathartic, paving the way for a low-inflation, productivity-driven expansion.

As momentum started waning, China’s re-emergence as a pre-eminent global economic power sent demand for Australian resources skyrocketing, helping shield the nation from the worst of the global financial crisis. But the post-crisis return of the boom proved ephemeral, failing to boost government coffers and pushing the local currency higher, eroding competitiveness and driving another nail into the coffin of a fading manufacturing sector. [..] “There’s no country on Earth that’s derived more benefit from the rapid growth
and industrialization of China over the last 30-odd years than Australia,” said Saul Eslake, an independent economist who’s covered Australia for over three decades. “After the end of the mining-investment boom, high immigration is helping us avoid a statistical recession, but it’s also contributing to other problems” like soaring property prices and household debt.

[..] A record-low 1.5% cash rate designed to steer Australia from mining investment back toward services is creating problems of its own. Sydney house prices have more than doubled since 2009 and Melbourne’s have also soared, sending private debt to a record 187% of income. The RBA frets that anemic wage growth will force heavily indebted households to slash consumption, which could prove disastrous given their spending accounts for more than half of GDP. Australia’s banking regulator further tightened lending curbs Friday to try to cool investor demand for residential property that’s helped drive up prices. Data released hours later showed investor lending increased 6.7% in February from a year earlier, the fastest growth in 12 months.

[..] iron ore prices have more than halved since 2011, when the local dollar hit a post-float record of $1.10. The Aussie would hover at or above parity with the greenback for the next two years. The currency’s strength then saw off the car industry: two of the three manufacturers in 2013 said they were quitting Australia, with the last following suit the next year. While the currency would eventually retreat to the 70s, the damage had been done. Worse still, the trillion-dollar windfall from the boom had been spent, not saved, leaving no cash to plug yawning budget deficits or build much-needed infrastructure for an expanding population that would also support growth.

Right. No crisis in 25 years.

• Why Australia Is Addicted To Interest-Only Loans (AFR)

When the head of one of America’s largest real estate firms was shown a chart tracking the rising share of interest-only loans in Australia, he gasped in horror. As a man that has “seen many cycles”, he told an Australian bank investor that a rise in interest-only loans was a classic indicator of a dangerously over-heating market. Friday’s move by the prudential regulator to combat the rise of interest-only loans shows they tend to agree with that assessment. High but rising household debt levels, elevated property prices and ultra low interest rates has made Australian Prudential Regulation Authority Wayne Byres decidedly uneasy about the nation’s preference not to repay their loans but simply service the interest.

They have therefore told the banks that less than 30% of new mortgages can be “interest only” – which is substantially below the last reported figure of 38% of total loans. In fact, the percentage of interest-only loans has not been below 30% since 2008. And while many would dismiss comparisons between the rise of interest only lending in Australia and the teaser rate loans that lured in sub-prime borrowers in the US ahead of its 2008 housing crash, a market propped up by artificially low borrowing rates is a recipe for disaster. Australia is of course different and there have been unique forces that have fuelled our historic addiction to interest-only loans. The first is a hot-button issue – negative gearing. Since Australia’s tax code allows households to tax deduct interest payments on investor loans, the incentive is to opt for interest only loans.

It’s in the investment lending area where interest only loans are most prevalent. The banks are also aware that most interest only loans are to investors that own two or more properties and are managing their overall cash flows by servicing the interest. In fact, interest only loans reached a peak of 45% of new loans in 2014 before APRA’s 10% cap on investor lending was introduced. That coincided with a decline to an average of around 35%. The other driver behind the rise of interest only loans has been the mortgage broking industry – which intermediates about half of all loans by the big banks.

For once he’s joking and they take him serious. When Juncker says he’s “..going to promote the independence of Austin, Texas..”, He doesn’t mean he’s literally going to do it.

• Juncker In Jaw-Dropping Threat To Trump Over Support For Brexit (Exp.)

EU boss Jean-Claude Juncker this afternoon issued a jaw-dropping threat to the United States, saying he could campaign to break up the country in revenge for Donald Trump’s supportive comments about Brexit. In an extraordinary speech the EU Commission president said he would push for Ohio and Texas to split from the rest of America if the Republican president does not change his tune and become more supportive of the EU. The remarks are diplomatic dynamite at a time when relations between Washington and Brussels are already strained over Europe’s meagre contributions to NATO and the US leader’s open preference for dealing with national governments. They are by far the most outspoken intervention any senior EU figure has made about Mr Trump and are likely to dismay some European leaders who were hoping to seek a policy of rapprochement with their most important ally.

Speaking at the centre-right European People Party’s (EPP) annual conference in Malta this afternoon, the EU Commission boss did not hold back in his disdain for the White House chief’s eurosceptic views. He said: “Brexit isn’t the end. A lot of people would like it that way, even people on another continent where the newly elected US President was happy that the Brexit was taking place and has asked other countries to do the same. “If he goes on like that I am going to promote the independence of Ohio and Austin, Texas in the US.” Mr Juncker’s comments did not appear to be made in jest and were delivered in a serious tone, although one journalist did report some “chuckles” in the audience and hinted the EU boss may have been joking. The remarks came in the middle of an angry speech in which the top eurocrat railed widely against critics of the EU Commission.

[..] Mr Juncker did not criticise Britain at all during his speech, and only made reference to Brexit in relation to Mr Trump and the opportunities it presents for Europe to reform itself. However his conservative colleague Antonio Tajani, the EU Parliament president, received a rapturous ovation as he launched an impassioned defence of Europe’s “Christian values”. In a series of thinly veiled comments about immigration, a major political issue in his homeland and Malta, the Italian official said Europe should do more to defend its historic identity. He said: “We shouldn’t be ashamed of saying we’re Christian. We’re Christian, it is our history. “If we leave our identity we will have in Europe all identities but not European identities. For this we need to strengthen our identity.”

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• The European Central Bank Doesn’t Understand The Economy (Steve Keen)

In 1992, Wynne Godley predicted that the Euro would amplify any future economic downturn into a crisis: ” If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation…”

It’s inconvenient with the threat of elections and Beppe Grillo surging in the polls. And even without Beppe Italy is a huge threat to the EU economy.

• Why Italy’s Banking Crisis Has Gone Off the Radar (DQ)

[..] an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves – or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.” If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%. Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy’s largest banks.

Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry. [..] almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%. But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.

“Land-based species are moving polewards by an average of 17km per decade, and marine species by 72km per decade..”

• Global Reshuffle Of Wildlife Will Have Huge Impacts On Humanity (G.)

Rising temperatures on land and sea are increasingly forcing species to migrate to cooler climes, pushing disease-carrying insects into new areas, moving the pests that attack crops and shifting the pollinators that fertilise many of them, an international team of scientists has said. They warn that some movements will damage important industries, such as forestry and tourism, and that tensions are emerging between nations over shifting natural resources, such as fish stocks. The mass migration of species now underway around the planet can also amplify climate change as, for example, darker vegetation grows to replace sun-reflecting snow fields in the Arctic. “Human survival, for urban and rural communities, depends on other life on Earth,” the experts write in their analysis published in the journal Science. “Climate change is impelling a universal redistribution of life on Earth.”

This mass movement of species is the biggest for about 25,000 years, the peak of the last ice age, say the scientists, who represent more than 40 institutions around the world. [..] “Land-based species are moving polewards by an average of 17km per decade, and marine species by 72km per decade” said Prof Gretta Pecl at the University of Tasmania in Australia, who led the new analysis. There are many documented examples of individual species migrating in response to global warming and some examples of extinctions. But Pecl said: “Our study demonstrates how these changes are affecting ecosystems, human health and culture in the process.” The most direct impact on humans is the movement of insects that carry diseases, such as the mosquitoes that transmit malaria shifting to new areas as they warm and where people may have little immunity.

Another example is the northward spread in Europe and North America of the animal ticks that spread Lyme disease: the UK has seen a tenfold rise in cases since 2001 as winters become milder. Food production is also being affected as crops have to be moved to cooler areas to survive, such as coffee, which will need to be grown at higher, cooler altitudes, causing deep disruption to a global industry. The pests of crops will also move, as will their natural predators, such as insects, birds, frogs and mammals. Other resources are being affected, with a third of the land used for forestry in Europe set to become unuseable for valuable timber trees in the coming decades. Important fish stocks are migrating towards the poles in search of cooler waters, with the mackerel caught in Iceland jumping from 1,700 tonnes in 2006 to 120,000 tonnes in 2010…

Another ‘species’ on the move.

• More Than 5 Million Syrian Refugees In Neighbouring Countries Now (G.)

The number of refugees who have fled Syria for neighbouring countries has topped five million people for the first time since the civil war began six years ago, according to the UN’s refugee agency. Half of Syria’s 22 million population has been uprooted by a conflict that has now lasted longer than the second world war, the figures released by the UNHCR show, with 6.3 million people who are still inside the country’s borders forced from their homes. The figure of five million refugees “fails to account for the 1.2 million people seeking safety in Europe”, the International Rescue Committee, an aid organisation, noted. Nearly 270,000 of these applied for asylum in Germany last year. The UN agency urged Europeans not to “put humanity on a ballot” in elections in France and Germany this year, where far-right candidates opposed to refugee arrivals could make gains.

A surge in violence in Aleppo, as government forces backed by Russian airstrikes retook Syria’s second city at the end of 2016, resulted in 47,000 people fleeing to neighbouring Turkey, it said. Camps for internally displaced people close to the Turkish border also hold those who have fled the fighting in northern Syria. The latest arrivals into Turkey mean the number of Syrians who have fled the country for neighbouring states stands at more than five million, four years after the UNHCR announced that one million people had fled. The five million figure includes refugees who have been resettled in Europe, but the UN high commissioner for refugees urged Europeans to do more to help share a burden that is still largely falling on countries bordering Syria, such as Turkey, Lebanon and Jordan, with more in Iraq and Egypt.

Turkey alone has nearly three million Syrians, the UNHCR pointed out. In Jordan, 657,000 Syrian refugees are registered with the UN, but the government says the true figure is 1.3 million. Tens of thousands of Syrians live in two large camps, Zaatari and Azraq, but the majority live in homes and flats, able to access the job market but competing for scarce employment.

Debt Rattle January 31 2015

Jan 312015

January 31, 2015 Posted by Raúl Ilargi Meijer at 11:15 am Finance Tagged with: collapse, debt, EU, GMO, Greece, IMF, Keynes, Monsanto, oil, Troika, Varoufakis 5 Responses »

DPC The Manhattan landmark Flatiron Building under construction 1902

• Crude Settles Up 8% At $48.24, Best Day Since June 2012 (Reuters)

• OPEC Oil Output Rises In January (Reuters)

• The Oil Collapse Isn’t Stopping America’s Investment in Energy (Bloomberg)

• BEA Estimates 4th Quarter 2014 US GDP Growth To Be 2.64% (CMI)

• Fed’s Bullard Warns of Asset Bubble Risk If Rates Are Kept Too Low (Bloomberg)

• Investors Wrong Not to Expect Mid-Year Rate Rise: Bullard (Bloomberg)

• Varoufakis, Keynes and the ‘Global Surplus Recycling Mechanism’ (Guardian)

• No ‘Grexit’ From Euro, EU’s Moscovici Vows (BBC)

• Eurozone Breakup Threat Reaches All-time High (Telegraph)

• Greek Finance Minister Vows To Shun Officials From Troika (Guardian)

• Germany Warns Greece Against Isolation as Tsipras Shunned (Bloomberg)

• Greek Cleaners Show Dichotomy of Tsipras as Markets Tumble (Bloomberg)

• Greece: Will Syriza Or Its Creditors Blink First?

• German Anti-Euro Party: ‘Pigs Might Fly; Greece Might Pay Its Debt To EU’ (RT)

• Greece Should Ice The Troika! (StealthFlation)

• The Middle-Class Voters Who Can’t Resist Karl Marx (BBC)

• Italy Vote: Why Keep It Simple When You Can Complicate It (Bloomberg)

• Brazil’s Economy Is On The Verge Of Total Collapse (Zero Hedge)

• Ukraine Chief Of Staff Admits No Russian Troops Involved in Donbass Battle (RT)

• DuPont Employees Pay Price for Monsanto’s Growth in Seed Sales (Bloomberg)

• China’s Rules Smother GMOs, Researcher Says (WSJ)

• Scientific Consensus On GMO Safety Stronger Than For Global Warming (GLP)

Grown men in shorts.

• Crude Settles Up 8% At $48.24, Best Day Since June 2012 (Reuters)

Crude oil settled up 8%, or $3.71, at $48.24 on Friday, its best day since June 2012, after data showed U.S. drillers were slamming the brakes on the shale drilling boom. The commodity still ended the month lower, for a seven-month decline. Oil spiked $3 heading into the close on Friday as products were set to expire on the last day of the month and after oil companies made further cuts to capital expenditures and took more rigs offline. Traders told CNBC they were acting on buy signals that technicals were showing heading into the weekend. The number of U.S. rigs in operation fell by another 94 in the past week through Friday, while Canadian producers took 11 rigs offline, oilfield services firm Baker Hughes reported on Friday. Rig counts have been steadily falling as the price of crude collapses. The rig count drop was the most since 1987. With drillers having idled about 24% of their oil drilling rigs since the summer, some traders may be betting that an anticipated slowdown in U.S. oil production is nearer than expected.

Two weeks of relatively stable oil prices have helped shift sentiment after months of decline, setting the stage for the violent rebound on Friday afternoon. Short traders raced to cover their positions on fears that the rout was nearing its end. “The rig count number sparked the rally late,” said Phil Flynn, analyst at Price Futures Group in Chicago. Some traders were not convinced that the selloff in oil, which has taken Brent down from a June high above $115 a barrel, was over. “There was a lot of short-covering before the month end from people wanting to take profit from the $40-odd lows, so it’s not surprising that we rallied, said Tariq Zahir at Tyche Capital Advisors. ”But this doesn’t change the fundamental outlook in oil. We are still about 2 million barrels oversupplied.”

“Supply from OPEC has averaged 30.37 million barrels per day (bpd) in January, up from a revised 30.24 million bpd in December,”

• OPEC Oil Output Rises In January (Reuters)

OPEC’s oil supply has risen this month due to more Angolan exports and steady to higher output in Saudi Arabia and other Gulf producers, a Reuters survey showed, a sign key members are standing firm in refusing to prop up prices. OPEC at a November meeting decided to focus on market share rather than cutting output, despite concerns from members such as Iran and Venezuela about falling oil revenue. Supply from OPEC has averaged 30.37 million barrels per day (bpd) in January, up from a revised 30.24 million bpd in December, according to the survey based on shipping data and information from sources at oil companies, OPEC and consultants. At the Nov. 27 meeting, OPEC retained its output target of 30 million bpd, sending oil prices to a four-year low close to $71 a barrel. Crude since fell to a near six-year low of $45.19 on Jan. 13 and was trading above $49 on Friday.

OPEC Secretary General Abdulla al-Badri, speaking in London on Monday, defended the no-cut strategy and said prices may have reached a floor, despite oversupply. Other OPEC delegates have since echoed this message. “Prices are stabilising,” said a delegate from a Gulf producer. “But the world economy is not very strong and stocks are too high.” The largest boost this month has come from Angola, which pumped 1.80 million bpd and exported about 57 cargoes, up 160,000 bpd from December. Output would have been higher without some cargo delays, including of new crude Sangos. OPEC’s other West African producer, Nigeria, also managed to boost exports, the survey showed, although the increase was restrained by outages of the Forcados and Nembe Creek pipelines. Smaller increases have come from Kuwait, Qatar, and the United Arab Emirates.

“So if the epic slump in crude isn’t enough to stop American oil companies, what might?”

• The Oil Collapse Isn’t Stopping America’s Investment in Energy (Bloomberg)

After an epic collapse in crude prices, U.S. oil companies still aren’t blinking. Investment in drilling rigs and wells actually improved in the closing months of 2014. Outlays for rigs and wells climbed at an 8.9% pace in the fourth quarter after an 8.3% increase from July through September, today’s Commerce Department report on gross domestic product showed. Those figures are a slight slowdown from numbers in the first half of 2014, but are definitely no halt. That increase is even more impressive when you look at what happened to equipment spending across all businesses in the world’s largest economy.

That fell by the most since the recession, taking some of the luster off the consumer-driven economy. Spending on oilfield machinery is more difficult to decipher. That’s because the figures are included in the “other equipment” category in the government’s breakdown of non-residential investment. The Commerce Department lumps together equipment such as drill pipes and bits with agriculture, construction and service-industry machinery. Purchases of “other equipment” fell at a 0.1% rate in fourth quarter after a decline of 4.1% in the previous three months – not exactly a big hit to GDP. So if the epic slump in crude isn’t enough to stop American oil companies, what might?

Prices could slide even further, or fail to rebound the way the industry’s executives are surely hoping. Crude has already dropped another 14% since the end of last year. “Business investment is the trickiest” component of GDP to predict right now, said Aneta Markowska, Societe Generale’s chief economist. “Obviously the low oil prices are likely to depress investment among energy producers,” she said. “This is at least partly offset by a better outlook for investment from those non-energy producing companies,” she said. In the end, “I wouldn’t completely throw in the towel on business investment on the back of this energy story – it’s very mixed.”

5% was just a blip.

• BEA Estimates 4th Quarter 2014 US GDP Growth To Be 2.64% (CMI)

In their first estimate of the US GDP for the fourth quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +2.64% annualized rate, down -2.32% from the much celebrated +4.96% growth rate reported for the prior quarter. The growth was nearly halved by substantial changes in a number of its components: imports took -1.55% from the quarter’s growth rate, exports pulled another -0.24% from the number, contracting governmental spending took another -1.20% off the top, and plunging fixed investment removed yet another -0.84% from the headline. Inventories and consumer spending were the only bright spots. Inventory growth added +0.85% to the headline. Increased spending on goods added +0.14% to the headline number, while spending on household services added 0.52% to the headline. The increased consumer spending came from both improved disposable income and reduced savings.

Households had an additional $279 in real annualized per capita disposable income (now reported to be $37,775 per annum). This is still down $94 per year from the 4th quarter of 2012. The household savings rate dropped another -0.1% for the quarter to 4.6%. As mentioned last quarter, plunging energy prices are likely playing havoc with many of the numbers in this report. US “at the pump” gasoline prices fell 33% quarter-to-quarter – pushing all consumer oriented inflation indexes firmly into negative territory. During the fourth quarter (i.e., from October through December) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics was solidly dis-inflationary at a -2.47% (annualized) rate, and the price index reported by the Billion Prices Project (BPP – which arguably more fully reflected the “at the pump” impact on American households) was significantly more dis-inflationary, dropping a full -2.14% quarter-to-quarter (an astounding -8.30% annualized rate during the quarter).

Yet for this report the BEA still assumed a very mildly dis-inflationary annualized deflator of only -0.09%. The disparity between the BEA’s and the BLS’s “deflators” raises some serious consistency issues. Over reported inflation (or under reported dis-inflation) will result in a more pessimistic growth data, and if the BEA’s “nominal” numbers were corrected for inflation using the line-item appropriate BLS CPI-U and PPI indexes, the economy would be reported to be growing at an implausibly high 7.17% annualized rate. Clearly the BEA’s deflator is troubling, but using the more reasonable deflators from the BLS generates nonsensical growth rates when applied to the BEA’s nominal data – suggesting that the BEA’s initial nominal data may be more overstated (or guesstimated) than reasonable deflators can handle.

“I don’t think there’s anything on the scale of the housing bubble or the Internet bubble right now. The only candidate is bonds, government debt and other kinds of debt,” he said. “I’m not counting that, I guess, because that’s us..”

• Fed’s Bullard Warns of Asset Bubble Risk If Rates Are Kept Too Low (Bloomberg)

U.S. central bankers risk inflating another asset-price bubble if they keep interest rates too low as unemployment falls, said St. Louis Fed President James Bullard. Bullard said the “die is already cast” for the jobless rate to drop below the Federal Open Market Committee’s estimate for full employment of 5.2% to 5.5% regardless whether the Fed raises rates. “You are already talking about a policy that is going to be slow moving over the next couple of years, against an economy that is going to run hot,” Bullard said in an interview Friday in New York. William Dudley, president of the New York Fed, last year said the economy may need to run “a little hot” to lift inflation back toward the Fed’s 2% goal. Bullard, despite his wariness, said didn’t see any evidence of an obvious bubble at the moment.

“I don’t think there’s anything on the scale of the housing bubble or the Internet bubble right now. The only candidate is bonds, government debt and other kinds of debt,” he said. “I’m not counting that, I guess, because that’s us,” he said, referring to the Fed’s own-bond buying campaign that more than quadrupled its balance sheet to $4.5 trillion. The Fed ended purchases in October. The last two times unemployment dove below economists’ estimates of full employment was in the late 1990s and in the mid-2000s. The first occasion became associated with very high valuations in technology stocks, and the second coincided with strongly rising home prices.

Both episodes ended with the bubbles bursting and the U.S. economy in recession, Bullard noted, with the real-estate bust spiraling into a global financial crisis. “The wisdom of going forward here and really pushing hard on this, given the recent history is, I think, one of the elephants in the room about American monetary policy,” he said. The unemployment rate fell to 3.8% in April 2000 and to 4.4% in May 2007. It was 5.6% in December of last year, and economists forecast a report next week will show it slid to 5.5% in January. Bullard argued for the central bank to raise interest rates from near zero as lower oil prices provide a strong boost to the economy this year.

“Markets should take it at face value”

• Investors Wrong Not to Expect Mid-Year Rate Rise: Bullard (Bloomberg)

Federal Reserve Bank of St. Louis President James Bullard said investors are wrong to expect the Fed to postpone an interest-rate increase beyond midyear, with the U.S. economy leading global growth and unemployment dropping. “The market has a more dovish view of what the Fed is going to do than the Fed itself,” Bullard said in an interview Friday in New York. “Markets should take it at face value” from the Fed’s rate projections, and it’s “reasonable” to expect an increase in June or July. Unemployment could fall below 5% by the third quarter, he said, adding that both policy makers and private economists have been overly pessimistic in their forecasts for joblessness. The jobless rate was last below 5% in February 2008, when it fell to 4.9%.

The Federal Open Market Committee said two days ago it would be “patient” in its plans to raise rates, which Chair Janet Yellen said in December meant no tightening “for at least the next couple of meetings.” The central bank described the expansion as “solid,” while cautioning that inflation could decline further “in the near term.” The “patient” language could be removed at one of the next two meetings, setting up a discussion on rate increases by midyear, said Bullard, who isn’t a voting member of the FOMC this year. “Zero is not the right number for this economy,” Bullard said in a reference to the benchmark federal funds rate, which has been kept near that level since December 2008. “It is hard to rationalize a zero policy rate” because the economy has “a lot of momentum.”

Investors see only a 15% chance that the Fed will raise its benchmark federal funds rate in June, down from 30% a month ago, according to fed funds futures. The odds that the Fed will have raised rates by December are 55%, down from 58% a month ago. Fed officials expect the benchmark funds rate rise to 1.125% by the end of 2015, according to the median estimate of their quarterly forecasts in December. These will be updated at the FOMC meeting on March 17-18. Bullard said low oil prices and low interest rates are “two important tailwinds” for the U.S. economy. He said the European Central Bank’s decision on Jan. 22 to embark on a €1.1 trillion bond purchase program is also a plus, because it helps to keep borrowing costs low in the U.S. “It’s lower rates that are just coming over to us for free,” he said of the impact of ECB policies on the U.S.

“The purpose of studying economics is to learn how not to be deceived by economists.”

• Varoufakis, Keynes and the ‘Global Surplus Recycling Mechanism’ (Guardian)

Since Syriza’s victory in the Greek elections on Sunday, it is the new Essex-educated finance minister Yanis Varoufakis who has been grabbing most of the headlines. Much of his appeal lies in his iconoclasm: in his 1998 book Foundations of Economics, a kind of bible for the growing alternative economics movement, he cites the British Keynesian Joan Robinson: “The purpose of studying economics is to learn how not to be deceived by economists.” But what can we expect from this reluctant economist and reluctant politician intellectually? Announcing his decision to run for a parliamentary seat on Syriza’s ticket on his personal blog, Varoufakis stressed that he never wanted to run for office, preferring to channel his policy ideas across the political spectrum. But he grew tired of seeing his policies ignored. Above all he wants to draw attention to an idea that was first conceived by one of his major intellectual influences: John Maynard Keynes.

It’s an idea that even ardent Keynsians often neglect; an idea that Keynes dramatically announced to a group of sceptical listeners at the 1944 Bretton Woods conference; an idea that runs diametrically counter to the current policies of Germany’s government. That idea is a global surplus recycling mechanism. In his recent book The Global Minotaur, Varoufakis claims that the notion of a surplus recycling mechanism is simple in theory and revolutionary in its implications. It was first devised by Keynes while working as an unpaid policy adviser to the British Treasury during the early 1940s. The proposal was an outgrowth of Keynes’s frustration with the limits of the gold standard during the 1920s. At that time there was an outflow of gold from Britain to the US to pay for Britain’s trade deficit. Logically the inflow of gold should have expanded the money supply in the US, increasing the competitiveness of UK exports. But the US adopted policies to offset inflationary pressures.

As the economist Marie Christine Duggan has suggested, the harsh lesson for Keynes was that the gold standard was ineffective at forcing creditor nations to increase domestic prices or reinvest their surpluses. Creditor nations were free to hoard as they liked, placing the burden of action on debtor nations who had very little choice but to act in ways that tended to depress their domestic economies. Keynes’s proposal for curbing the problem was to create global rules that would place equal pressure on both creditor and debtor nations to adjust their respective trade imbalances, helping to ease the burden shouldered by debtor nations. He suggested that any nation that failed to ensure its trade surplus did not exceed a particular%age of its trade volume would be charged interest, compelling its currency to appreciate. These interest payments would help to finance the second arm of Keynes’s proposal: the creation of an International Clearing Union. The ICU would act as a sort of automatic “global surplus recycling mechanism,” to use Varoufakis’s term.

“..a committee built on rotten foundations..”

• No ‘Grexit’ From Euro, EU’s Moscovici Vows (BBC)

Greece belongs in the eurozone and the single currency depends on there being no “Grexit”, the EU economic and financial affairs commissioner says. Pierre Moscovici told the BBC’s Hardtalk “we will do everything” to prevent Greece leaving the eurozone. But he said the Greek government had to respect previous commitments. The new finance minister has meanwhile said he will not negotiate bailout terms with the “troika” – the global institutions overseeing Greek debt. The left-wing Syriza party won last weekend’s election on an anti-austerity platform, promising to have half of Greece’s debt written off, and to roll back on deep cuts to jobs, pay and pensions. “We believe that the place of Greece is in the eurozone, the euro needs Greece and that Greece needs and wants to be in the eurozone,” Mr Moscovici, a former French finance minster, said.

He added: “We feel that it’s very important for the stability of the eurozone and for the credibility of the euro that there is no ‘Grexit’. This is why we will do everything that is needed to avoid it.” But the commissioner said that while Europe had to respect the will of the Greek people, following last Sunday’s election that swept Syriza to power, the commitments made by the previous Greek government also had to be taken into account. “We must address these issues in a quiet, peaceful and serene way. This [new] government has to say exactly what it intends to do,” Mr Moscovici said. After meeting with the head of eurozone group of finance ministers, the new Greek finance minister said he would not work with the troika – the European Commission, European Central Bank and International Monetary Fund – calling them “a committee built on rotten foundations”.

Yeah, why not bring in the bookies?

• Eurozone Breakup Threat Reaches All-time High (Telegraph)

The formation of a new left wing Greek government has elevated the risks of a eurozone breakup to levels “significantly higher than at any point in 2012”, according to Barclays. 2012 is widely viewed as the height of the eurozone crisis. A cocktail of political populism across the continent and the prospect of a deflationary spiral has now elevated the risks of a breakup even higher in 2015. “The risks have also risen as the periphery, especially Spain, is aligning itself with the views of several countries in the core of granting few concessions to Greece on a new programme,” Francois Cabau of Barclays said. Syriza leaders view the burden of debt imposed on Greek shoulders as far too heavy to pay, and have sought some form of relief. They will clash with the so-called “troika” – the EU, IMF, and ECB – on the matter. Jan von Gerich, a strategist at Nordea, has described the coming confrontation as an “unstoppable force meeting an immovable object”.

The new government has implemented new policies in a matter of days that run contrary to the structural reforms they have been required to implement. Measures have included an increase of the minimum wage and the cancellation of privatisation plans for a power company and ports. “Greece has very tough negotiations ahead,” Mr Von Gerich said. “If Syriza is seen to be able to change the terms of Greece’s adjustment programmes, the spill-over effects could be sizeable in many other countries, which would add to euro area political risks.” If neither party is willing to blink, then a ‘Grexit’ may result, which economists fear could add momentum to populist parties in other eurozone states. Bookmaker Paddy Power offers 6/4 odds on a Greek exit by the end of 2016.

“The fear is that [left wing] Podemos, polling first in Spain, would get a boost if Syriza is able to negotiate easier policy conditionality for Greece,” Mr Cabau continued. He said that a hypothetical exit is “likely to imply increased volatility in peripheral risk assets”. Greek stocks have suffered a torrid week in the aftermath of Syriza’s stunning victory on Sunday. Banking sector shares were some of the most exposed, as political uncertainty knocked €8bn (£6bn) off their value in three days. There was some respite for the sector on Thursday, as bank stocks rebounded by 12.9pc after comments from Daniele Nouy, a European Central Bank official. She attempted to downplay concerns that banks would be unable to survive the current turbulence in financial markets. “They will go through this crisis like they went through the previous ones,” she said.

“..the logic of austerity had been repudiated by voters when the far-left Syriza party stormed to victory..”

• Greek Finance Minister Vows To Shun Officials From Troika (Guardian)

The battle lines between Greece and its creditors were drawn in Athens as the Greek finance minister announced that the new government would refuse to engage with representatives of the country’s hated troika of lenders. Standing his ground after talks in the capital with Jeroen Dijsselbloem, head of the eurogroup of EU finance ministers, Yanis Varoufakis said Greece would not pursue further negotiations with the body of technocrats that has regularly descended on the country to monitor its economy. Nor would it be rowing back on election-winning pledges by asking for an extension to its €240bn (£180bn) bailout programme. “This platform enabled us to win the confidence of the Greek people,” Varoufakis said, insisting that the logic of austerity had been repudiated by voters when the far-left Syriza party stormed to victory in Sunday’s election. Greece has lost more than a quarter of its GDP, the worst slump in modern times, as a result of consecutive waves of budget cuts and tax rises enforced at the behest of creditors.

Varoufakis and the new Greek prime minister, Alexis Tsipras, who also met Dijsselbloem on Friday, are adamant that the government will deal only with individual institutions and on a minister-to-minister basis within the EU. They have vowed to shun auditors appointed by the troika of the EU, the European Central Bank and the International Monetary Fund. “Our first action as a government will not be to reject the rationale of questioning this programme through a request to extend it,” quipped Varoufakis. “We respect institutions but we don’t plan to cooperate with that committee,” he said, referring to auditors who run the rule over Greece’s books on behalf of the three lenders. An internationally renowned economist, Varoufakis has been an outspoken critic of the austerity measures demanded in exchange for the aid that has bolstered Greece since its economic meltdown.

But on Friday the eurogroup president also held his ground. Visibly tense, Dijsselbloem – the Dutch finance minister – said it was imperative that Athens did not lose the headway that had been achieved. He reiterated that the creditor group expected Greece to honour the terms of its existing bailout accords. “I realise the Greek people have gone through a lot. However, a lot of progress has been made and it is important not to lose that progress,” he said. [..] “It is of utmost importance that Greece remains on the path of economic recovery. Taking unilateral steps or ignoring previous agreements is not the way forward.” Dijsselbloem ruled out an international conference being held to discuss ways of reducting Greece’s €320bn euro debt pile, saying the Eurogroup of euro area finance ministers “is that conference”.

“Varoufakis plans to visit London, Paris and Rome next week for talks, according to a ministry statement that didn’t list Berlin on his itinerary.”

• Germany Warns Greece Against Isolation as Tsipras Shunned (Bloomberg)

Greece’s government risks isolation in the European Union by threatening to break ranks on sanctions against Russia and ditch its bailout deal, German Chancellor Angela Merkel’s minister for European affairs said. “Greece is firmly anchored in the mainstream of the European Union,” Michael Roth, who’s also deputy foreign minister, said in an interview. “I can only hope that this is where it wants to stay.” Prime Minister Alexis Tsipras’s government, sworn in Tuesday, is putting Greece’s financial lifeline at risk, the German Finance Ministry said. Greece’s bailout terms mean his government needs to undertake further reforms by the end of February. Extending the deadline would only make sense if Tsipras showed willingness to implement agreed reforms, and “the announcements from Athens go in the opposite direction,” ministry spokesman Martin Jaeger said Friday.

The warnings reflect Merkel’s tactic of waiting Tsipras out as he mounts a full-court challenge to German-led austerity in his first week in office. It also shows her refusal to engage in a public shouting match over his demands as he portrays her as the main source of Greece’s woes. Insisting that Tsipras has to deliver on reforms unites Merkel’s Christian Democrats and Roth’s Social Democrats, her junior coalition partner. Merkel told a closed meeting of her bloc’s lawmakers in Berlin on Tuesday that it’s up to Tsipras to make the first move, according to a party official. She said his government has to make clear it’s committed to the terms of the aid program, the official said. Merkel has no immediate plans to meet Tsipras one-on-one, German government spokeswoman Christiane Wirtz said Friday.

“We have to wait and see which offers of dialogue we get from the Greek government, what their ideas are,” she told reporters in Berlin. “You have to ask Mr. Tsipras why he isn’t approaching us for an invitation to Berlin.” Greece isn’t negotiating with Germany but with the EU as a whole, and the German Finance Ministry’s views “are known,” government spokesman Gabriel Sakellaridis said in Athens. Greeks voted on Sunday “to exit the dead end of toxic austerity,” he said. “The Greek government will continue negotiations to find a common, beneficial solution.” Greek Finance Minister Yanis Varoufakis plans to visit London, Paris and Rome next week for talks, according to a ministry statement that didn’t list Berlin on his itinerary.

They fired external financial advisors to hire back their cleaners. Kudos.

• Greek Cleaners Show Dichotomy of Tsipras as Markets Tumble (Bloomberg)

On a sunny Wednesday morning in Athens, two days after Alexis Tsipras became Greek prime minister, workmen dismantled the barricades that had protected the Parliament and its ceremonial guards for three years from angry protesters. The riot bus stationed by the side of the building in Syntagma Square was gone. Cleaners camped outside the Finance Ministry to protest the loss of their jobs embraced and cried after hearing they had been reinstated. “Not even 30-year-olds can get jobs nowadays, much less a 58-year-old grandmother like me,” said Evangelia Alexaki, who picketed the ministry for months to get back her job cleaning tax offices on the island of Corfu.

As financial markets took the opposite view of a government promising to end austerity and restore the country’s dignity, Greeks at least were certain of one thing: They had a 40-year-old leader who had won a decisive mandate to pursue something different, from tossing out the old political order to taking on the euro region and its bailout agreements. By midday on Wednesday, as Finance Minister Gikas Hardouvelis handed over the reins to his successor, Yanis Varoufakis, dark clouds hovered over the Parliament. Some said it was a bad omen for Tsipras who had promised in his victory speech to raise the sun above Greece again. Others disagreed. “When you’ve been through snow and heat, a little rain isn’t going to hurt you,” Alexaki said.

In the five years since the government of George Papandreou revealed deficit figures four times those allowed for countries using the euro, Greece’s economy has shrunk by a quarter, more than a million people joined the search for employment, and pensions, wages and jobs were cut so the country could receive a €240 billion bailout. That all paved the way for Syriza, Tsipras’s party, to come to power on Jan. 25 on a promise to seek get rid of more of Greece’s debt, currently about €320 billion. The day after the election, Tsipras confounded skeptics by forming a government by midday, teaming with what appeared to be his party’s alter-ego, the conservative Independent Greeks. Then his newly minted ministers made statements. The Athens General Index sank to its lowest level since 2012, the year that Greece’s status as a euro member was last in question, before recouping some of the loss later this week. The yield on three-year bonds surged to more than 17% and was at 16.82% on Friday.

“The cash flow of Greek pension funds fell from €2.155 billion in November 2013 to just €435 million in November 2014..”

• Greece: Will Syriza Or Its Creditors Blink First?

The first financial tests of Syriza’s audacious new policies for Greece loom – as it is still unclear who will concede ground on its debt pile first. Alexis Tsipras, the new Greek Prime Minister, may end up banging his head off a wall of opposition from Germany, the biggest single contributor to Greece’s bailout, who is staunchly against any debt relief for the struggling country. On Friday, Reuters cited a source saying that Greece planned to refuse to allow a planned visit from its bailout supervisors in the European Union and the International Monetary Fund. The country’s finance minister announced during the day that Greece would not be seeking to extend its bailout program. The biggest bones of contention will be whether Greece can secure a nominal debt haircut, or even some further aid, and the halting of its privatization program, imposed by the troika of international bodies which oversee its bailout, agreed upon a few years ago.

The halting of the privatization program was seen as an early signal of intent by Tsipras, and caused shares of Greek banks to plummet this week. On Friday, the country’s new energy minister, Panagiotis Lafazanis, told Reuters that the government would cancel plans to sell a state-owned natural gas utility. This came after the sale of the lucrative Port of Piraeus, as well as shares in Greece’s biggest refinery, Hellenic Petroleum, were scrapped. “These announcements (on privatization) will satisfy the unions but scare away new investors,” Miranda Xafa, CIGI senior scholar and chief executive of E.F. Consulting, warned CNBC. If a deal is not reached soon, the consequences for ordinary Greeks could be severe. Giorgos Romanias, an economist from Syriza’s right-wing coalition partner Independent Greeks, who is Greece’s new secretary for social security, said on television Thursday that pension payments could be “a little tight” in March.

Demographics are not in Greece’s favor. As a result of the country’s poor economic situation, pensioners have often supported unemployed children and grandchildren, as well as themselves – so any threats to their payments will have a wide-ranging impact. More Greeks were either unemployed or drawing a pension than in employment in 2012 and 2013, according to government statistics. And as the crisis has deepened, the birth rate has fallen, meaning that there will be even fewer young tax-paying workers to support an aging population over the next few decades. The cash flow of Greek pension funds fell from €2.155 billion in November 2013 to just €435 million in November 2014, according to figures from the Greek government, flagged by ekathimerini.com.

“The only position they have – to renegotiate.”

• German Anti-Euro Party: ‘Pigs Might Fly; Greece Might Pay Its Debt To EU’ (RT)

Greece will inevitably get a debt haircut as it’s not able to cope with the €240 billion bailout loan given by the EU, said Hugh Bronson from the Alternative for Germany party. No national structure is able to cope with that amount of debt, he added. Greece refused to back the EU’s statement on Ukraine on Tuesday. Following the move, Athens was accused by the EU of diverting from the block’s official stance on that issue. European Parliament President Martin Schulz said that he “was appalled to see Greece abandon the joint position of the EU.” On Thursday, EU foreign ministers voted to extend the anti-Russian sanctions over the situation in Ukraine till September.

RT: Greece wants a chunk of its debt cancelled, but would that be fair given that billions of taxpayers’ money has been sent there, particularly from your country?
Hugh Bronson: I believe [German Finance Minister] Wolfgang Schauble and the Troika, and everyone else involved have no chance but to negotiate a new deal with Mr. [Alexis] Tsipras. There will be a haircut, there is no question about it, and the only question is when. If you look at Greece and just the figures, you have a country of 11.5 million people, who managed a GDP of €208 billion in 2013. They are burdened with a national debt of 175%. That country was given a bailout loan totaling €240 billion. No national structure is able to cope with that amount of debt. This money is a write-off. Pigs might fly; we can say good-bye to this loan, there’s no question about this.

RT: Greece with a new government doesn’t want to follow EU policy on sanctions anymore. Where do you stand with that fact?
HB: I believe Greece right now has much more serious problems than joining in on sanctions, which are very questionable. They are looking at rebuilding their economy. They want to regain their competitive advantage in the global market. That is the number one priority. Also the main party [which is] in power right now, Syriza, certainly will look twice before it agrees on sanctions against Russia. First of all, they have to deal with their own national problems before they join in any big mashes on an international level.

RT: You are talking about a haircut and the fact that they can’t pay off this money because they simply don’t have it. However, EC President Jean-Claude Juncker has ruled out forgiving Greece’s debt. What do you make of that?
HB: Of course he is going to say that. What else is he going to say? But on the other hand, there are other serious people, serious experts. Take Philippe Legrain, the former economic adviser to the president of the European Commission who quite clearly said [that] Greece needs a haircut. Greece’s debts are unsustainably large. What is the Troika, what is the eurozone is going to do? If Mr. Tsipras and the government simply refuse to continue with the austerity measures, if they, what they’ve started already, if they are rehiring fired public sector workers, and simply ignore the demands from the eurozone.The only position they have – to renegotiate.

But they already have?!

• Greece Should Ice The Troika! (StealthFlation)

Dear Yanis, As an ardent admirer, with the utmost respect for what you have put forward and accomplished to date, I humbly offer my thoughts for your consideration. In my measured estimation, requesting substantive forbearance from the TROIKA on a purely rational and fair minded basis, as you have suggested, in the anticipation of a desirable outcome, is likely a proposition which will disappoint. There obviously exist significant and powerful vested financial interests adamantly opposed to you on the other side of the table, not to mention the even more considerable, and now intensifying, European periphery precedent concerns which are clearly raising the ante.

Your adversaries obtuse position continues to remain implacable for the most determined of self-seeking reasons, and the collateral damage that is Greece, obviously matters far less to them then the well defined and established course they have set for themselves. Remember, they have not done the right thing previously, they don t do the right thing presently, and thus, will likely not do the right thing in the future given the opportunity. Don’t kid yourself, these adversaries are just that, lethal opponents. Considering they were able to stomach the desolation Greece has so desperately endured throughout this period, there should be little to no expectation that they will now suddenly magnanimously change their stripes, simply because it’s been determined by newly elected, more reasoned and humane men, that it’s the right and sound thing to do.

Misleading headline.

• The Middle-Class Voters Who Can’t Resist Karl Marx (BBC)

To give you an idea of how fractured and confused politics is in Greece right now, let me recount a conversation I had with a Greek journalist before the election who was explaining to me why he wasn’t planning to vote Syriza. The reforms imposed upon Greece by the IMF and the EU – while painful – were a necessary step, he said, to shake the country out of a state of moribund corruption. “You probably think I’m really right wing,” he added, apologetically. “I’m not, honestly, I’m very centrist. I love Marx.” In that context, can it be surprising that Syriza has chosen as its coalition partner not the communists – who you’d think might be their natural bedfellows – but a group called Independent Greeks? They’re a centre-right anti-immigration party whose only common ground with Syriza is their shared opposition to the policies of austerity.

On pretty much everything else they disagree. But Syriza needs to move fast, and a fractious coalition is going to be the least of their worries. Greece is about to start negotiations with its creditors. Neither side knows what the rules are anymore. But in essence, here’s the deal – a coalition of radical left groups that believes capitalism is a bad thing now runs a country that owes around €280 billion to institutions that are wedded to the economics of the free market and whose credo is austerity. For each side to come out of this confrontation intact, both will have to compromise. Failing that, one of the two will break. And the EU could be the one to crack. In other European capitals, that thought fills many with dread. But not all.

Athens has become a beacon for thousands of leftists, who are flocking to Greece to be part of what they hope is the beginning of a revolution. On the square – as Polly, Yanis and their fellow Greek voters waited for the new prime minister – a group of 200 Italians unfurled a bright red banner. “L’altra Europa con Tsipras,” it read – “An alternative Europe with Tsipras.” Mingling among them were dozens of young men and women in purple T-shirts emblazoned with the Podemos logo. Podemos is Spain’s answer to Syriza, and they believe their country could be next when they hold general elections later this year. British Marxists, French socialists, they all joined in the celebrations, as Patti Smith’s anthem People Have the Power blared over the loudspeakers.

“The election of the president of the Republic, just like that of the pope, is totally unpredictable, but unlike a conclave, it’s not even assisted by the Holy Spirit..”

• Italy Vote: Why Keep It Simple When You Can Complicate It (Bloomberg)

As Italian lawmakers huddle to elect the country’s next president, observers can’t help but wonder why the process needs to be so complicated. In an exercise that could drag on for days, more than 1,000 lawmakers and regional delegates have gathered in Rome for a special session of parliament reminiscent of a papal conclave, the method by which the Roman Catholic pope is chosen. The voting is by secret ballot and will involve multiple rounds to pick a successor to 89-year-old Giorgio Napolitano. The first three votes need a two-thirds majority, while from the fourth an absolute majority of 505 electors will suffice. The second round of voting is under way in Rome.

“The election of the president of the Republic, just like that of the pope, is totally unpredictable, but unlike a conclave, it’s not even assisted by the Holy Spirit,” Luigi La Spina, editorialist for daily La Stampa, wrote in a tongue-in-cheek commentary earlier this month. Reflecting the contorted nature of some of the steps in the process, Italian Prime Minister Matteo Renzi said his party will put in blank ballots for the first three rounds and will only vote for its chosen candidate, Constitutional Court Judge Sergio Mattarella, from round four on Saturday morning. The first of the votes started Thursday. Renzi’s move is dictated by both practical and strategic reasons. He doesn’t have the votes to get his choice through in the first three rounds. He also wants to give the opposition time to decide whether or not to back him. While some presidents, like Francesco Cossiga in 1985, were chosen in a day, the election of Giovanni Leone in 1971 took 23 rounds of voting.

The longest election in post-war history was Giuseppe Saragat’s in 1964, which went on for a record 12 days, took 21 rounds, and included a vote on Christmas day. The voting process itself is elaborate. There are generally only two votes held each day. Each of the 1,009 electors walks down to the floor of the parliament and disappears into one of several wooden voting booths with red curtains set up for the occasion, and mockingly called “catafalques,” in a reference to the supports used to hold coffins up in state funerals. After emerging from the booths, electors put their ballot inside a large wicker urn lined with light green satin known as “the salad bowl. Once the voting is over, the president of the Chamber of Deputies reads out the names on the ballots one by one. At the end, the numbers are tallied and results announced. The secrecy is often an opportunity for parties to test the strength of alliances, and for party leaders like Renzi to see how many loyal supporters he really has among his own.

Dire straits.

• Brazil’s Economy Is On The Verge Of Total Collapse (Zero Hedge)

Back when the BRICs were the source of marginal global growth, the punditry couldn’t stop praising them. However, in the past year, now that China’s housing bubble has burst and its shadow banking system has imploded, those who remember what BRIC actually stood for are about as rare as those who recall what it means for the Fed to hike rates. Which is precisely why nobody in the mainstream financial media has commented on the absolutely abysmal economic update reported earlier today out Brazil. We are happy to do so because today’s data follows up quite well to our article from a month ago “Brazil’s Economy Just Imploded” and as the earlier article on the crashing Brazilian Real hinted, things for the Brazilian economy how gone from imploding to, well, worse because not only did the twin fiscal and current account deficits rise even more, hitting a whopping 11% of GDP – the worst since August 1999, but its government debt soared to 63.4% in 2014, up from 56.7% a year ago, and the highest since at least 2006.

In short – the entire economy is now on the verge of total collapse. This is what happened in a few bullet points:
• The fiscal picture has deteriorated very sharply since 2011 at both the flow (fiscal deficit) and stock (gross public debt) levels. The primary and overall nominal fiscal surpluses at year-end 2014 were at levels last seen in the late 1990s.
• The steady decline of the public sector savings rate is leading to a wider current account deficit despite weaker growth and low investment. In fact, the twin fiscal and current account deficits are now tracking at a combined, very troublesome 10.9% of GDP, the worst picture in 15 years (since August 1999). Repairing the severely unbalanced macro picture would require a deep, structural and permanent fiscal and quasi-fiscal adjustment and a significantly weaker BRL.
• The new economic team faces, among other things, the very significant challenge of repairing the severely deteriorated fiscal picture.
• The steady erosion of the fiscal stance pushed net and gross public debt up. Furthermore, fiscal and quasi-fiscal activism undermined the effectiveness of monetary policy, contributed to keep inflation very high and drove the current account deficit to a very high level despite weak growth.

“..his statement is a legal fact, which thwarts numerous accusations made by NATO and Western states..”

• Ukraine Chief Of Staff Admits No Russian Troops Involved in Donbass Battle (RT)

The Ukraine army’s chief of staff has admitted that Kiev troops are not engaged in combat with Russian units, thereby thwarting all Western allegations of Moscow’s “military invasion,” said Russian Defense Ministry spokesman Igor Konashenkov. “Yesterday afternoon the Chief of the General Staff – Chief of the Armed Forces of Ukraine – Viktor Muzhenko officially acknowledged during a briefing for foreign military attachées that Russian troops are not involved in the fighting in the country’s southeast,” Konashenkov said on Friday. Given the fact that Muzhenko directly supervises military operations in the southeast, “his statement is a legal fact, which thwarts numerous accusations made by NATO and Western states” concerning Russia’s alleged “military invasion” in Ukraine, the spokesman added.

The Russian Defense Ministry, however, was puzzled by a statement from Muzhenko’s subordinate, Sergey Galushko, made several hours later. According to Galushko – an employee of the Department of Information Technology – Russian troops are located in the so-called “second echelon.” On Thursday, Muzhenko said “the Ukrainian army is not engaged in combat operations against Russian units.” He added, however, that he had information about Russian individuals fighting in the country’s east. He also said the Ukrainian army has everything it needs to drive off armed units in Donbass. His speech was aired by Ukraine’s Channel 5 television, owned by President Petro Poroshenko. Commenting on Muzhenko’s statement, Galushko said that reporters were only allowed at the open part of the meeting. He said that later, during the closed part, the chief of general staff said that Russian units are “in the second tier.”

The devil has competition.

• DuPont Employees Pay Price for Monsanto’s Growth in Seed Sales (Bloomberg)

DuPont’s Pioneer seed unit took it on the chin from Monsanto this year, and now salaried employees are taking a hit in the wallet. DuPont is cutting 2014 bonuses and delaying 2015 salary increases until July 1, according to an internal memo distributed Tuesday, a copy of which was obtained by Bloomberg News. The company saved $175 million from reduced bonuses, with half the reduction coming at the expense of agriculture unit employees, DuPont said in a presentation this week. “We set our targets and objectives, and our compensation is tied to the achievement of those targets,” Chairman and Chief Executive Officer Ellen Kullman said in the memo. “It is important to recognize that in 2014, we did not meet all of our targets.”

Operating profit in agriculture, DuPont’s biggest business, fell 5.3% last year as the Pioneer unit lost market share to Monsanto, which increased operating income 14%. Agriculture along with the nutrition unit would be the focus of a smaller DuPont under a plan by activist investor Trian Fund Management to split the company in two. Most of DuPont’s recent success in agriculture has come from selling pesticides, rather than genetically modified seeds, Jeffrey Zekauskas at JPMorgan said in a Jan. 28 note. DuPont trails in developing second- and third-generation seeds engineered to fight insects and tolerate weed killers, helping Monsanto gain share in North America corn and soybeans and Brazil corn, he said.

We can’t have a precautionary principle, can we?

• China’s Rules Smother GMOs, Researcher Says (WSJ)

China’s government has too many rules restricting the adoption of genetically modified food, and that’s ultimately hurting its long-term competitiveness in the sector, according to a leading Chinese researcher on the topic. While Beijing keeps most foreign GMOs out, it is keen to develop its own genetically modified products. However, Huang Dafang, the former director of the country’s Biotechnology Research Institute – and a strong GMO advocate — says that the government is going about it the wrong way. “The approval process for GMOs is too lengthy, there are too many steps,” Mr. Huang, also a professor at the state-backed Chinese Academy of Agricultural Sciences, said Wednesday at an industry conference.

Beijing does not allow the commercial production of GMO food, apart from papayas. While the government permits a handful of GMO crops to be imported for animal consumption and, in the case of soybeans, to be processed into edible oil, even that extent of permission has stirred public controversy. So far, agriculture officials have not given any indication on when they might give the green light on GMOs for human consumption in China. Some analysts have suggested that the government is keen to make sure that the China is prepared to master the technology to such an extent that the market won’t be swamped by foreign competition from biotechnology giants like Monsanto and DuPont once Beijing permits domestic commercial production of GMO food.

They say the situation is similar to Beijing’s filtering of the Internet, with the government wanting to ensure its companies can develop in the absence of other competition. The agriculture ministry requires three years of further tests from the time a food item receives biosafety certification. But Mr. Huang pointed out that the government has exceeded even its own time frame on this front. The ministry gave out its first biosafety certifications for a handful of GMO rice and corn strains in 2009, but only renewed the certification late last year after they briefly lapsed.

At the very least, GMO food hasn’t been around long enough to conclude it’s safe. That ends the discussion. Calling it safe is turning all of mankind into guinea pigs.

• Scientific Consensus On GMO Safety Stronger Than For Global Warming (GLP)

A Pew Research Center study on science literacy, undertaken in cooperation with the American Association for the Advancement of Science (AAAS), and released on January 29, contains a blockbuster: In sharp contrast to public skepticism about GMOs, 89% of scientists believe genetically modified foods are safe. That overwhelming consensus exceeds the%age of scientists, 88%, who believe global warming is the result of human activity. However, the public appears far more suspicious of scientific claims about GMO safety than they do about the consensus on climate change.

Some 57% of Americans say GM foods are unsafe and a startling 67% do not trust scientists, believing they don’t understand the science behind GMOs. Scientists blame poor reporting by mainstream scientists for the trust and literacy gaps. The survey also contrasts sharply with a statement published earlier this week in a marginal pay-for-play European journal by a group of anti-GMO scientists and activists, including Michael Hansen of the Center for Food Safety, and philosopher Vandana Shiva, claiming, “no scientific consensus on GMO safety.”

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.

The Last Days Of The Growth Story

Oct 212014

October 21, 2014 Posted by Raúl Ilargi Meijer at 8:10 pm Finance Tagged with: debt, denial, Freud, Growth, Keynes 7 Responses »

Dorothea Lange Rear window tenement dwelling, 133 Avenue D, NYC June 1936

I am thinking about the similarities between a financial crisis and for instance a family crisis, the death of a loved one or close friend, a divorce, or a personal bankruptcy.

And I wonder why in the case of our recent (aka current) financial crisis, we allow nothing to enter our communications, and our train of thought, but the idea of recovery and a return to growth. Has everyone always reacted that way after earlier financial crises – history is full of them -, or is something else going on?

Why do we insist on returning to something we once had, even if we have no way of knowing whether we can ever return? Why don’t we focus – more – on what lies ahead, instead of what is behind us? Is it because we loved what we had so much? Or is something else going on?

Even if we do love what once was so much, there’s a time to move on after every disaster, every death in the family, every bankruptcy. And deep down we know that very well. Life will never be the same, but it’ll still be life. It seems safe to say that in general, life is about turning, not returning. Life changes, we change, every day, every minute, every millisecond.

This refusal to turn a new leaf and find out what’s on the other side of the hill has enormous consequences. We are actively digging ourselves so deep into debt that it’s preposterous to claim this debt is ours only, because it’s painfully clear, though we would never admit it (too painful perhaps?), that we can never pay it back. We leave that honor to our children, and to the generations after them.

We should undoubtedly have protected us from ourselves, by making it illegal and punishable by law to engage in such behavior (something along the lines of Child Protection Services). We chose instead to be blind to it. We still could – should – write such legislation, but it looks as if present politics and economic ‘thinking’ will only exacerbate a situation that is already far worse than we care to know.

The overruling ‘wisdom’ looks to be that we miraculously freed ourselves from the yoke of a balanced budget, an idea seemingly justified by the fact that a return to growth has been elevated to the status of a law, of either physics or a deity of our choice, growth that will subsequently make all debts melt like the snow on the Kilimanjaro.

That overruling wisdom, as should be obvious, is at best wishful thinking, but far more likely pure fantasy. Which has become our main, make that only, approach of the crisis we find ourselves in. If only we believe, our leaders will deliver us to growth heaven.

But what if this is the end of the growth story? What if it’s already behind us? It’s not as if growth has been a constant factor in the lives of our ancestors. And it’s not as if the laws of physics put no limits on everlasting growth. Growth is a passing thing, it’s a phase.

Most of us have heard of the seven stages of grief. Shock, Denial, Anger, Bargaining, Guilt, Depression, Acceptance. Where are we in our journey through these stages when it come to the financial crisis, and to growth? There’s only one stage that even remotely sounds right: Denial. We’re not even close to Anger yet, not when it comes to the larger population.

We simply deny that something has really changed. And even if you wish to claim that it hasn’t, no-one can deny the possibility that it has. Still, that is exactly what happens. Denial, everywhere you look.

The something else that is going on is that our brains have been kidnapped by those who (probably not even always consciously) seek to strengthen their – power – political and financial positions by making us believe in the growth story long after it has – for all we can see – died. That’s why we listen only to the growth story, to the exclusion of any and all other stories.

It’s a form of progress, though not a benign one. Freud’s ideas are (ab)used to hide reality from us (to ‘sell’ the message), while Keynes’ ideas are abused to hide the reality that you can’t buy growth with debt your children will have to pay back. Pretty simple, when you think about it.

If you know how to sell people detergents and presidents, abstract ideas is easy. And if those ideas are about economics, that nobody knows much about and all the trusted experts and press have the same message about 24/7, the circle is pretty much closed. All that’s left then is places like the Automatic Earth and others to get your alternative stories, but that’s no match for full blown propaganda.

Still we’re seeing, we’re living in, the last days of the growth story. And when the master class decides to drop that story, watch out. The emperor is one ugly wrinkled old duckling when he’s naked. You don’t want your kids to see that.

Deflation Flirts With America

Oct 162014

October 16, 2014 Posted by Raúl Ilargi Meijer at 5:51 pm Finance Tagged with: consumer, deflation, Juncker, Keynes, markets, Merkel, Yellen 5 Responses »

Jack Allison Street scene, New York City Summer 1938

“When it becomes serious, you have to lie,” said brand-new EC head Jean-Claude Juncker back in May 2011. I’m thinking the last few days have been serious enough to warrant some real whoppers from Brussels. And beyond.

Yesterday, one hour after the S&P reached its low point, not only was it deemed necessary to bring out the Plunge Protection Team, Fed grey head Janet Yellen was trotted out as well to soothe the dark mood with rosy tales about the US economy.

A multi-day series of downturns got a temporary crescendo, with many of the richest stock European exchanges at 10-11% losses from recent highs. Many lost 3-3.5% for the day alone, with Greece down 6.25% (Athens is off some -25% in all), and having its bonds dumped while Germany et al see ‘investors’ fleeing into theirs. A new attack on Athens certainly looks possible. And where Greece goes, so go Italy and Spain, albeit a few mph slower.

Is this the end or the beginning? Well, as should have been clear for a very long time now, you cannot buy growth. And in ‘our’ efforts to buy growth instead of working for it, a lot of damage has been done. Which won’t all show up at once, but it will at some point. There will be many, and mighty, voices clamoring for more of the same, in more than one sense, as people seek to hold on to what looks familiar with additional debt injections in the by now 7 year-old tradition spirit of ‘stimulus’.

It’s become a new normal to claim the Germans must be insane not to follow the teachings of the Great Lord Keynes, with the huge success stories of the US and UK as ‘proof’ of just how wise he was. Then how come this kind of plunge is so predictable?

US stocks see their heaviest trading volume in 3 years. That takes liquidity. Dollars. But they are getting scarce. The ‘insanest’ amounts of free money, from China and America, are shrinking (Japan has become a story all of its own) and right away, panic ensues. Add the threat of higher rates and you get a sell-off. I see plenty ‘experts’ saying both Beijing and Washington will see the folly of their ways in time, but can they really do more of the same? And what would be the benefit vs the cost?

I remain solidly convinced that Yellen et al will suffocate QE, hike interest rates, and raise the dollar. Because that’s the triple that benefits big banks the most. And that’s also why she, yesterday, held that speech in which she ‘voiced confidence in the durability of the U.S. economic expansion’.

Yellen Voices Confidence in U.S. Economic Expansion

Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend [..] Yellen told the Group of 30 that the economy looked to be on track to achieve growth of around 3%. She also saw inflation eventually rising back to the Fed’s 2% target as unemployment falls further… [..] Yellen’s reported remarks were roughly in line with the forecasts presented by Fed policy makers at their last meeting in September.

Not only did she, with the PPT, save the day on Wall Street, she also provided the reason why rates will rise, even if world markets have a high fever. In an aside, an Air France plane has been quarantined at Madrid airport just now with a Nigerian man with high fever and 182 other passengers. We can’t seem to get this right, can we?

Back to da mullah. Here’s a few interesting lines from Bloomberg yesterday afternoon:

U.S. Stocks Drop as Weakening Economic Data Fuel Selloff

The Chicago Board Options Exchange Volatility Index, the benchmark gauge of options prices known as the VIX, jumped 15% to 26.25, the highest level since 2012, amid demand for protection against losses in equities.

Almost 12 billion shares changed hands in the U.S., the most since October 2011. Stocks pared losses after the S&P 500 fell to its low of the day of 1,820.66 shortly before 1:30 p.m. in New York. About an hour later, Bloomberg News reported that Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend.

Retail sales in the U.S. dropped more than forecast in September, decreasing 0.3% after a 0.6% gain in August that was the biggest in four months, Commerce Department figures showed. Another report today showed manufacturing in the Federal Reserve Bank of New York’s region slowed more than projected in October. The bank’s so-called Empire State index dropped to 6.2 this month from an almost five-year high of 27.5 in September.

That ‘demand for protection against losses in equities’ is a curious line. Can’t they let the PPT act in secret anymore? What else is its use? You can’t very well make it the Public Plunge Protection Team, nudge nudge…

But the big one is the drop in US retail sales. No harsh winter, no hurricanes, not even heavy rains. And the Empire State Index falling of a cliff. I know that today US industrial output came out looking like a harvest queen, and initial claims were down a bit, but I find the timing odd, and I can’t rhyme it with the heavy drop in that NY Fed index. Is it winter in Manhattan already? Or is it Juncker time?

It gets truly hilarious when you see things like this from Bloomberg. Pay special attention to Deutsche’s Joseph LaVorgna:

The $11 Trillion Advantage That Shields U.S. From Turmoil

Call it America’s $11 trillion advantage: Consumer spending is likely to steer the U.S. economy safely through the shoals of deteriorating global growth and turbulent financial markets. The combination of more jobs, falling gasoline prices and low borrowing costs will help lift household purchases. Such tailwinds probably matter more than Europe’s struggles or the slackening in emerging markets that caused the Dow Jones Industrial Average last week to erase its gains for the year.

“We’ve got a lot of things working in favor of the consumer right now,” said Nariman Behravesh, chief economist at IHS. “To have that kind of strength is the biggest asset for the U.S. It’s a pretty rock solid footing.” Household purchases make up almost 70% of the $16.8 trillion U.S. economy and have climbed an average 2% in the recovery that’s now in its sixth year. Spending growth will accelerate to 2.7% next year after 2.3% in 2014, according to the latest Bloomberg survey of economists.

The poll, taken from Oct. 3 to Oct. 8 in the midst of the meltdown in equities, showed little change in the median projections from the prior month. The economy is forecast to expand 3% in 2015 after 2.2% growth this year, according to the survey. “We’ve got the proverbial 800-pound gorilla – the consumer,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Households are more fixated on the good news here, and a big part of that is the labor market. The U.S. is going to be pretty immune to the rest of the world.”

“The U.S. is going to be pretty immune to the rest of the world.” No, Joe, it’s not. The US is less vulnerable than most to lower oil prices and higher and scarcer dollars, true enough. But the US also still has a population in which labor participation is at a historic low, in which those who have jobs are paid less and get far fewer benefits, and which has huge levels of personal debt.

Ergo, the only way the US consumer can consume is by delving deeper into debt. They have to borrow before they can spend. Just like much of the rest of the world. Only, in the US consumer spending accounts for 70% of GDP (and it’s down); in other countries, it’s substantially lower.

A nice example of where the US stands at this point in time is here: German states ask Merkel for more infrastructure spending, which she refuses, while the US can’t even afford it own infrastructure anymore, because all the trillions the US spent (by expanding its central bank balance sheet), – and Germany did not -, went to Wall Street. And then you get this:

German States Join Ranks Pressing Merkel to Spur Spending

Germany’s state governments stepped up calls for infrastructure spending, adding another source of pressure on Chancellor Angela Merkel to boost investment as economic growth falters. Much like Merkel’s national government, the states are caught between a deteriorating growth outlook and the balanced-budget drive that Germany started in response to the euro area’s debt crisis.[..] A day after the German government lowered its growth outlook, proposals to spend more on projects such as highways in Europe’s biggest economy are on the table at a retreat of state premiers that Merkel plans to attend.

Merkel will let some projects be executed, but she won’t let her country sink into debt to do it. For America, that’s not even a choice anymore. It needs Chinese funny money now or bridges will crumble. A country with such a rich history of citizens chipping in to build bridges, roads and other infrastructure, what a remarkable turn-around this is. Only 100 years ago, a town that couldn’t afford to build its own bridges would have been ridiculed. And look now:

Crumbling US Fix Seen With Global Trillions of Dollars

[..] Former Indiana Governor Mitch Daniels said: “America needs the upgrade and modernization of our infrastructure, and I don’t think you’ll get there if you keep excluding, or at least discouraging, private capital.” President Barack Obama’s administration, which had resisted private financing of public works, is starting a new center to serve as a one-stop shop for bringing capital into government projects.

U.S. Treasury Secretary Jacob J. Lew said while direct federal spending is indispensable in such cases, tight budgets demand creative ways for unlocking private money.His cabinet colleague, Transportation Secretary Anthony Foxx, put it more bluntly when he announced the Build America Investment Initiative in July. “There will always be a substantial role for public investment,” Foxx said. “But the reality is we have trillions of dollars internationally on the sidelines that are not being put to work.”

Now, America must pay hefty interest rates to strangers on its own bridges. Or they won’t get built. That should hurt. No, it really should.

You can focus on the hosannah news that comes out about the US economy every single day, and on Janet Yellen’s confidence booster yesterday, or you can look at how car sales are deteriorating, after they were upbeat for a while only on subprime loans.
The biggest number for me, amid the global storm in stocks and bonds, and the renewed – very real – threat of financial markets targeting southern Europe, is that drop in US retail sales.

So industrial output was up 1%. So what? That’s not the 70% of your economy. Retail sales are though. And they are down. Because Americans borrowed less, for whatever reason. And what they can’t borrow, they can’t spend. Because they’re dead broke.

So how are you going to make them less broke? Those 92 million Americans who are no longer counted in the work force, how are you going to get them to increase their spending patterns? Or the millions more who are still ‘counted’ in the work force, but have no jobs? Or the fast rising number who have jobs that pay close to or below a living wage?

I say let them stocks plummet, and let’s get a glimpse of where the real economy is at. We’ve seen the fantasy one for 7 years now, and it gets old and bitter.

I see deflation flirting with America. Retail sales equals consumer spending equals velocity of money. And unless the money supply is rising, hardly likely in the taper, less spending is deflation by definition. Forget about PMI and all that kind of data, it’s much simpler than that. Central banks can do all kinds of stuff, but they can’t make us spend our money on things we don’t want or need. Let alone make us borrow to do so. And if we don’t, deflation is an inevitable fact. That doesn’t mean prices for some items won’t go up, but that’s not what counts. It’s about how fast we either spend the money we have – if we have any left – or how much we borrow. And if time is money, then borrowed money is borrowed time. So we really shouldn’t.

Debt Rattle May 13 2014: The True Parasites Of Finance

May 132014

May 13, 2014 Posted by Raúl Ilargi Meijer at 7:22 pm Finance Tagged with: finance, Keynes, parasites, stimulus, zombies 6 Responses »

Jack Delano Information desk, Union Station, Chicago January 1943

This morning I saw an article by Barry Ritholtz on Bloomberg that got my few remaining active neurons going (or I think it was them). The title alone, The Parasites of Finance, did that, actually. I sort of knew, since I’ve known Barry’s work at the Big Picture site for quite some time, what he would talk about, and I knew I wouldn’t – fully – agree.

Or rather, it’s like this: I have nothing against Barry, and he does make some valid points in the article, but in my view his focus is too narrow for the title he’s chosen, willingly or not. But then Barry works in finance, and I don’t. For me the parasites of finance form a much larger group than for him. And that is the direct result of government policies, such as the promotion of creative fantasy accounting and the refusal to restructure debt, multiplied by the tens of trillions of dollars of future wealth that have been pumped into the financial system in the form of QE and other stimuli, lest the system collapse on the spot.

We all understand today, from the world of biology, why and how a body, a system, gets more susceptible to parasites when it becomes weaker. Well, financial stimulus of all shapes and forms, as executed over the past decade and more by governments and central banks, does just that: it makes the system weaker. This – temporarily – makes it possible for a large number of people to feed on the system (just like parasites do), and declare that from where they’re sitting, everything seems fine. But everything is not fine. The system, in this analogy, has turned into a body addicted to drugs to such an extent that without them it would risk … collapsing on the spot. The undead body of a zombie, essentially.

In short, this makes just about every investor today a parasite, if not of finance, then certainly of the financial system. Or even of society as a whole. In most cases this is not intentional, but for the end result that makes little or no difference. Everyone who owns assets of any kind at all today profits up to a point, at least on paper, from the gigantic asset bubble blown by “authorities” and their accommodative policies. That part is easy to see, so much so that it’s the only part most see. The shadow side largely remains hidden, until it will be too late. Because the shadow side lies in the future, and we live in the present. But before I stomp over him entirely, which is not at all what I want, let’s turn to Barry:

The Parasites of Finance

[..] … I am always amazed at how some business models manage to hang on despite overwhelming proof of their lack of purpose or value added. Some parts of the investment world exist simply because people don’t know better. The information is out there, but it is obscured by a relentless parade of advertising, promotion and marketing. The truth gets lost behind a smokescreen of noise and deception. Indeed, there are increasing numbers of people who are employed for just that purpose. Ignorance: It’s a job creator.

This first paragraph had me smile, because what Ritholtz says here about the (his) world of finance, for me describes our entire society. Or to put it in starker terms: to me, the entire world of finance today only exists, or continues to exist, because of a relentless parade of advertising, promotion and marketing, PR. Which makes that people don’t know better. For me it takes on the meaning that there is a relentless parade of journalists and government officials and central bankers and investors and hedge funders, etc., all hell bent on blowing such quantities of smoke up the public’s asses that the latter don’t think, or figure out, that the whole thing has become a parade of parasitical zombies, who suck the lifeblood out of society instead of creating value, something they will insist they do until their bodies crumble to ashes and evaporate.

That may sound harsh for everyone invested in something, and particularly unwelcome for finance professionals, but we can all imagine, though perhaps not all equally, what the world of finance, and society at large, would have looked like without such lovely though grossly expensive concepts as creative accounting, QE 1-1001, artificially and absurdly low interest rates, home purchase assistance plans that skirt on subprime, and with debt restructuring, defaults, bankruptcies and the like that until recently were considered normal, nay necessary. What it all would have looked like would be, to put it succinctly, more ‘normal’. More like a free market.

Not that things wouldn’t have been chaotic for a while, maybe quite a while. But does that warrant turning an entire society into a parade of zombies? Because that’s what we’re looking at now. It might be good to acknowledge who has benefited most from the entire set of extreme measures. And no matter how you look at that, you will always come back to the same group of people: those who benefit most would have risked losing most if ‘normal’ would have been the norm. That means politicians, bankers, finance professionals.

Everyone who profited most from the bubble had most to lose from it bursting. So a huge layer of virtual credit, for which your blood and sweat and tears is the collateral, was laid out on top of the imploding world of finance. That way they could all hang on and pretend everything was just hunky dory. But that won’t last, simply because it can’t. You can use creative accounting for your unemployment numbers too, but the fact remains that some 90 million working age Americans don’t work. And 60% of southern European young people don’t either.

And you need all those people to work, not just to keep them from rising up, but to make sure your society and economy produce things of actual value. That’s where the real crisis is, not in bank profits going down. But it’s not what all the measures have been aimed at, they have all been about propping up “finance” to the point where society at large could be made to believe it’s actually still standing while it’s as dead as King Tut.

It’s a policy that carries its own demise on its back. Then again, it also carries its own advertising, promotion and marketing parade. Because it makes everyone – except perhaps for the unemployed – think they are richer than they actually are. Temporarily. Not just investors, but really everybody. Because proper financial policy, the kind where the bankrupt actually go bankrupt, would cause a giant reset of the entire economy. Pensions funds are all invested up to their necks in assets that would have lost a lot of value if Bernanke and his ilk would not have taken their grandchildren’s money to spend it today on propping up their undead friends. Home prices would have fallen so much that over half the nation would have been underwater much faster than an Antarctic melt could have put them.

So why not just go for the Lord Keynes stimulus parade? Because it’s all fake. It’s virtual. It’s zombie. And it’s a way for the financial industry to transfer its debts to the rest of us. That way when the zombies start exploding and spewing around the gory green slimy juices that run in their veins, they’ll land on us, not them. Keynesian stimulus policies are utterly destructive to a society if they are not accompanied by debt restructuring, they become nothing but a free for all for the few. Because if that happens, stimulus only serves to keep the undead alive. And no matter how much it may hurt in the short term, the undead are not a good foundation to build a healthy society on. They’re too squishy.

Today, we are all zombies, to one degree or another. And we’re all parasites, feeding on the temporary feel-good effects of the stimulus that in turn sucks the (life)blood and tears out of our children. The question then becomes: would you prefer to have less spending money today, or to leave your kids in utter misery? And no, you can’t have both. That’s just PR.

It stops somewhere sometime.

• Yellen’s Housing Wand Is Running Low On Magic (Doug French)

How important is housing to the American economy? If a 2011 SMU paper entitled “Housing’s Contribution to Gross Domestic Product (GDP)” is right, nothing moves the economic needle like housing. It accounts for 17% to 18% of GDP. And don’t forget that home buyers fill their homes with all manner of stuff—and that homeowners have more skin in insurance on what’s likely to be their family’s most important asset. All claims to the contrary, the disappointing first-quarter housing numbers expose the Federal Reserve as impotent at influencing GDP’s most important component. No wonder every modern Fed chairman has lowered rates to try to crank up housing activity, rationalizing that low rates make mortgage payments more affordable.

Back when he was chair, Ben Bernanke wrote in the Washington Post, “Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.” In her first public speech, new Fed Chair Janet Yellen said one of the benefits to keeping interest rates low is to “make homes more affordable and revive the housing market.” As quick as they are to lower rates and increase prices, Fed chairs are notoriously slow at spotting their own bubble creation. In 2002, Alan Greenspan viewed the comparison of rising home prices to a stock market bubble as “imperfect.” The Maestro concluded, “Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.”

Three years later—in 2005—Ben Bernanke was asked about housing prices being out of control. “Well, I guess I don’t buy your premise,” he said. “It’s a pretty unlikely possibility. We’ve never had a decline in home prices on a nationwide basis.” With never a bubble in sight, the Fed constantly supports housing while analysts and economists count on the housing stimulus trick to work. “There’s more expansion ahead for the housing market in 2014, with starts and new-home sales continuing to rise at double-digit rates, thanks to tight inventory,” writes Gillian B. White for Kiplinger. The “Timely, Trusted Personal Finance Advice and Business Forecast(er)” says GDP will bounce back. Fannie Mae Chief Economist Doug Duncan says, “Our full-year 2014 economic forecast accounts for three key growth drivers: an acceleration in spending activity from private-sector forces, waning fiscal drag from the federal government, and continued improvement in the housing market.” We’ll see about that last one.

With the central bank flooding the markets with liquidity, holding short rates low, and buying long-term debt, mortgage rates have been consistently below 5% since the start of 2009. For all of 2012, the 30-year fixed mortgage rate stayed below 4%. In the post-gold-standard era (after 1971), rates have never been this low for this long. The Fed’s unprecedented mortgage subsidy has helped the market make a dead-cat bounce since the crash of 2008. After peaking in July 2006 at 206.52, the Case-Shiller 20-City composite index bottomed in February 2012 at 134.06. It had recovered to 165.50 as of January. However, while low rates have propped up prices, sales of existing homes have fallen in seven of the last eight months. In March re-sales were down 7.5% from a year earlier. That’s the fifth month in a row in which sales fell below the year-earlier level.

Lovely.

• German Investor Sentiment Falls Sharply In May (Reuters)

German analyst and investor sentiment declined for a fifth consecutive month in May to its lowest level in nearly 1-1/2 years as concerns intensified that economic growth in Europe’s largest economy would slow in the second quarter. Mannheim-based think tank ZEW’s monthly survey of economic sentiment, released on Tuesday, dropped to 33.1 from 43.2 in April, missing the Reuters consensus forecast for a reading of 41.0 and undershooting even the lowest estimate for 37.1. That sent the euro down to a one-month low against the dollar.

“The fifth consecutive decline in ZEW investor sentiment in May suggests that the German recovery might not gain much pace from here,” said Jessica Hinds, economist at Capital Economics. “Data later this week are likely to reveal that the German economy made a strong start to the year, perhaps expanding by a quarterly 0.7 percent or so. But today’s survey broadly supports our view that this pace of growth is unlikely to be sustained.” Recent hard data has shown German exports posting their biggest fall in nearly a year, while industry output, orders and retail sales have all fallen.

Excellent read.

• The Writing Is On The Wall. And We Should All Read It (Zero Hedge)

The “Shiller P/E” is much in the news of late, and, as ConvergEx’s Nick Colas suggests, with good reason. It shows that U.S. equity valuations are pushing towards crash-worthy levels. This measure of long term earnings power to current price is currently at 25.3x, or close to 2 standard deviations away from its long run median of 15.9x. As Colas concludes, the writing is on the wall and we must all read it. Future returns are likely going to be lower. Competition for investor capital will get even tougher. That’s what the Shiller P/E says, and it is worth listening. Via ConvergEx’s Nick Colas:

With all the investor attention on this measure, you don’t hear much about how it should inform corporate capital allocation and investor relations. Since stock prices are essentially a conversation between the owners and managers of capital, the Shiller P/E should have a place in the boardroom as well. For example, should companies engaged in buybacks be more careful at these levels, and how do they explain that caution? And what about managing investor expectations for future returns on the business, and therefore its underlying equity? After all, the higher the Shiller P/E, the more likely that future returns will run below historical averages. In short, this is not just a useful tool for investors – it should also inform corporate capital planning and communication.

On the table in my den I have a plaque with Mercedes-Benz and Chrysler hood ornaments glued to the top. It is a deal toy – those commemorations that investment banks give out to the people who work on a specific transaction. You see them littering the officers of corporate treasurers and chief financial officers, bankers, and private equity professionals. The more toys, in theory, the more experience the person has. And the more elaborate the toy, the more creative the 28 year old investment banking associate who really did all the work getting that deal across the finish line.

You could tell that the merger of Daimler and Chrysler was going to fail by just looking at those hood ornaments on the deal toy. Daimler-Benz mounts its famous three pointed star (for land, sea and air transport) on a spring, so that in the case of an inadvertent knock it pops back up unharmed. The corporate name and laurel wreath on the base is done in a lovely blue lacquer worthy of a piece of jewelry. In contrast, the Chrysler hood ornament feels flimsier, has no spring mount and no lettering. One sharp blow and you just know the thing would snap two. And there’s really nothing wrong with either engineering ethos – they are just different approaches for different markets. But culturally, they are like oil and water.

Of course, it didn’t help matter that the merger occurred in 1998, right at the peak of the North American auto profit cycle. Chrysler got over $40 billion for the company in Daimler stock. Nine years and one forced CEO (the architect of the deal) departure later, Daimler sold Chrysler to private equity firm Cerberus for $6 billion. And two years after that the company filed bankruptcy. You could, in essence, time the tops of every market for the last two decades on when Chrysler changed hands. The U.S. stock market has its own “Chrysler Indicator” in the form of the Shiller Price/Earnings ratio. First developed by Nobel Prize winner Robert Shiller for his book “Irrational Exuberance” in 2000, it measures the current price of the S&P 500 as a multiple of 10 year average corporate earnings. It is essentially what old-school analysts would call an earnings power ratio, since it incorporates good and bad years into one across-the-cycle measurement.

Do read the entire piece. Bill Black knows the topic better than anyone.

• Geithner’s Single Most Revealing Sentence (Bill Black)

Timothy Geithner has a great deal of competition for the title of worst Treasury Secretary of the United States, but he has swept the field as worst President of Federal Reserve Bank of New York (NY Fed). Geithner is a target rich environment for critics and he has a gift for saying things that are obviously depraved, but which he thinks are worthy of a public servant. He did vastly more harm to the Nation as the President of the New York Fed than he did as Treasury Secretary. He was supposed to regulate most of the largest (and most criminal) bank holding companies – and failed so completely that he testified to Congress that he had never been a regulator and that the problem in banking leading up to the crisis was excessive regulation.

His statement that he was never a regulator was truthful – but you’re not supposed to admit it, and you’re certainly not supposed to be proud of it. Geithner, Greenspan, and Bernanke are the three Fed leaders who could have prevented the entire crisis by being even modestly effective regulators. Instead of regulating the banks, Geithner relied on the banks self-regulating through “stress tests.” The stress tests were (and remain) farcical. AIG, Fannie, Freddie, Lehman, the Irish banks, and the big three Icelandic banks all passed stress tests shortly before they collapsed. It is a measure of Geithner’s goofiness that he has entitled his book “Stress Test.”

As Treasury Secretary, Geithner made his infamous “foam the runways” comment. He admitted that while the way he ran the programs putatively designed to help distressed homeowners was causing them to fail frequently to help homeowners it was succeeding in easing the bank crashes. Geithner repeatedly claimed as Treasury Secretary that he never worked for Wall Street (and as he left congratulated himself on not joining Wall Street – a few months before he did). As New York Fed President Geithner worked for Wall Street for five years and was handsomely rewarded for that service. As he has admitted, virtually bragged, he did not work for the American people as a regulator though that is what he was supposed to do.

Iron ore has been used as money, collateral, credit. That use is largely gone.

• Price Destruction From Massive Iron Ore Glut Gains Momentum (Stockman)

At the heart of the global boom of the last two decades, of course, was a fantastic leap in credit expansion that has no historical antecedents. Around 1994 the combined credit market debt—public and private—of the US, EU, Japan and China amounted to about $35 trillion or 200% of GDP. By the turn of the century debt outstanding among these four major economies had doubled to $70 trillion, and then the central bank printing presses turned white hot. Combined debt outstanding at present is in the order of $175 trillion, meaning that it towers 4X above levels of only 20 years ago, and weighs in a nearly 400% of GDP among the big four economies. And what happened to this $140 trillion of tsunami of new debt since 1994?

In the DM world it ended up on the balance sheets of households and governments which have now reached “peak debt” ratios, meaning that the credit fueled consumption party is over. Accordingly, what had been double digit growth for EM exports of manufactured goods to consumers in the DM markets has hit the flat line since the 2008 peak. And in the EM world it ended up funding the most spectacular increase in mining, manufacturing, shipping, real estate and public infrastructure assets ever imagined by any economic scribbler prior to the turn of the century. Moreover, the artificial consumption boom in the DM world fueled the fixed asset boom in the EM based on the kind of mathematically impossible bullish extrapolations which always accompany a credit-fueled crack-up boom.

Yet when the housing and credit booms crashed in the DM world in 2009, the deep retrenchment of capital spending that was warranted in the EM supplier markets didn’t happen—except during a few brief months of panic and inventory liquidation in the winter of 2008-2009. Instead, the EM governments stepped into the breach, and launched a Keynesian pyramid building spree that surpassed by orders of magnitude any “stimulus” program ever conceived or imagined in the Harvard economics department. Accordingly, global demand for the building blocks of fixed assets and infrastructure—that is, copper, iron ore, bauxite, nickel, hydrocarbons etc.——took another giant leap upward after the financial crisis. Indeed, CapEx by the big three surviving mining companies—BHP, Rio Tinto And Vale—soared by 10X during the decade ending in 2012.

For now, it’s growth that goes down. But how long till the underlying data itself does?

• China Slowdown Deepens (Bloomberg)

China’s economic slowdown deepened with unexpected decelerations in industrial output, investment and retail sales, testing policy makers’ reluctance to step up monetary stimulus. Factory production rose 8.7% in April from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the 8.9% median estimate of analysts surveyed by Bloomberg News. Fixed-asset investment increased 17.3% in the first four months of the year, and retail sales advanced 11.9% in April. The figures signal risks are increasing that China will miss the year’s expansion goal of about 7.5%, as the government’s efforts to counter the slowdown, including tax breaks and spending on railways and housing, have yet to gain traction.

Leaders are trying to rein in a credit boom and curb pollution, and President Xi Jinping said last week that the nation needs to adapt to a “new normal” of slower growth. “The economy is still slowing,” Wang Tao, chief China economist at UBS AG in Hong Kong, said in an e-mail. The government’s “mini-stimulus has not yet turned around the growth momentum,” and the government may ease credit by loosening restrictions on lending to homebuyers and local-government financing vehicles, Wang said. The Shanghai Composite Index fell 0.3% as of 2:05 p.m. local time. The yuan weakened 0.05% to 6.2407 per dollar. Factory-production growth compared with an 8.8% increase in March. The advance in retail sales compared with the 12.2% median projection of analysts, and the same gain in March.

But is that also true for the shadow banks?

• China’s New Credit Declines (Bloomberg)

China’s broadest measure of new credit fell last month as authorities extended their campaign to tame financial dangers even as construction and manufacturing data point to risks that the economy’s slowdown will worsen. Aggregate financing was 1.55 trillion yuan ($249 billion) in April, the People’s Bank of China said yesterday in Beijing, compared with 2.07 trillion yuan in March. New local-currency bank loans were 774.7 billion yuan, down from 1.05 trillion yuan the previous month. The figures add to signs that officials are reluctant to heed calls for monetary stimulus, with President Xi Jinping saying in remarks published May 10 that the nation needs to stay “cool-minded” amid what analysts forecast will be the weakest annual growth since 1990.

PBOC Deputy Governor Liu Shiyu said the same day that shadow banking threatens to undermine the financial system, as policy makers try to rein in credit. “In the face of calls for stimulus, China’s government appears comfortable with a continued slowdown in credit growth,” Mark Williams, chief Asia economist at Capital Economics Ltd. in London, said in a note. “The government’s composure so far is an encouraging sign that policy makers are still giving priority to bringing credit risks under control,” said Williams, a former U.K. Treasury adviser on China.

China worries go mainstream.

• Chinese Leaders Face Mounting Pressure As Slowdown Concerns Grow (Forbes)

Will China’s economy have a hard or a soft landing? That was a question I was often asked when I was in New York, but struggled to answer. On one hand, I knew full well that theories, like the Solow Model, tell us an economy can’t keep growing forever. On the other hand, I also understand that a crash – a.k.a. hard landing – may not arrive in a form that many expect because the Chinese government is so proactive in cushioning the economy from negative shocks. Xinhua News Agency reported today China’s urban fixed asset investment reached $1.74 trillion in the first fourth months. The growth rate was 0.3%age points slower than the first quarter although it was up 17.3% on the yearly basis. On the same token, the country’s growth of factory output and retail sales have both missed estimates.

China’s PMI (Purchasing Managers’ Index) announcements have been grabbing lots of attention too these past few years. The latest figure released by the end of April showed that the country’s manufacturing sector recorded a contraction for the fourth straight month. As a more reliable indicator of the economy’s health than GDP, the PMI indicates a slowdown in activity in the world’s workshop, while other indicators, such as private investment in fixed assets and power consumption, are also reflecting a softening trend. The numbers have become the story. Private investment in fixed assets in China grew 20.9% to 4.43 trillion yuan in the first quarter. But that was a slowdown from growth of 24.1% in the same period a year earlier.

Moreoever, Xinhua quoted official figures stating that power use by Primary Industry, i.e. business related to natural resources and the manufacturing of certain products, Moreoever, Xinhua quoted official figures stating that power use by Primary Industry, i.e. business related to natural resources and the manufacturing of certain products, fell 7 % to 17.4 billion kwh in the first three months. Beijing’s technocrats say the phlegmatic scenario was brought on by a listless rebound in the U.S. and Europe , along with slack demand in emerging markets. In response to the slowdown, the government unveiled some measures, dubbed “mini stimulus,” which mainly focuses on raising funds for railways and social housing by early April.

Japanese nuts, anyone?

• Japan to Sell Inflation-Linked Bonds to Individuals (WSJ)

Japan will allow individuals to own inflation-linked bonds from next year in response to growing demand for protection against rising prices as the Bank of Japan continues its ultra-easy monetary policy, the government said Tuesday. The move is also meant to complement the government’s policy of encouraging individual ownership of Japanese government bonds amid concerns that domestic institutional investors alone may not be able to carry Japan’s massive debt, the largest among industrialized countries. The Finance Ministry said bonds reaching maturity in 2016 or later will be eligible for individual ownership.

Inflation-linked bond issuance was resumed last year after a five-year hiatus, as appetite revived for inflation protection following the BOJ’s introduction of an inflation target. The outstanding balance of such bonds is expected to reach Y3.6 trillion in the year ending March 2015, including Y1.6 trillion to be issued during the year. Individuals currently own only 2.2% of outstanding JGBs totaling Y744 trillion. The government expects that greater individual ownership will help stabilize the JGB market.

“Japan’s gross public debt is 240% of GDP compared to 100% in the US”. Any questions?

• Abenomics: Live Fire Test Of Keynesian Central Banking Is A Disaster (Stockman)

You would think that Japan would be a blinding object lesson in the folly of Keynesian economics. After all, Japan has gone all-out on both fiscal stimulus and massive central bank balance sheet expansion and interest rate repression. Indeed, the US incursions into that fantasy world are somewhat modest by comparison: Japan’s gross public debt is 240% of GDP compared to 100% in the US; and its central bank balance sheet of nearly $3 trillion amounts to more than 40% of GDP. That vastly exceeds the 25% of GDP balance sheet generated by the mad money printers in the Eccles Building to date.

But the lessons go far beyond balance sheet ratios. Japan’s rapidly aging demographic profile—-its population is now actually declining— is only an advanced case of the US path over the next several decades. Likewise, its inability to close its yawning fiscal gap—last year it borrowed nearly 50 cents on every dollar of government spending—is a function of the same malady of governance that afflicts the Washington beltway. Namely, the domination of a nominal democratic process by crony capitalist gangs which resist all efforts to curtail privileges, subsidies and entitlements.

In truth, Japan is rapidly becoming a vast old age home buckling under the weight of a monumental accumulation of public, household, business and financial debt. Current estimates for total debt outstanding amount to nearly 500% of GDP—-a figure which would be equivalent of $85 trillion on a US economic scale. Needless to say, these staggering debt burdens have prevented Japan from returning to normal economic growth—ever since its giant financial bubble collapsed 25 years ago after the Nikkei average had hit 50,000 (vs. 15,000 today). The aftermath has been described as chronic “deflation”, but the true meaning of that term has been badly twisted and distorted.

What actually happened during the final stages of Japan’s 1980s bubble is that ultra-cheap interest rates caused financial and real estate values to become drastically inflated. Similarly, cheap capital resulted in a massive over-investments in long-lived industrial assets like auto plants, steel mills and electronics plants. So the deflationary aftermath of its bubble was an unavoidable and inexorable economic process. That is, real estate got marked down by upwards of 80%; stocks fell by even more; excess industrial capacity was steadily eliminated; and massive bad debts have been liquidated by Japan’s unique slow-motion process.

The renewed housing bubble and ongoing crisis change society in profound ways.

• America On The Move Becomes Stay-Home Nation For Young (Bloomberg)

Ryan Yang could have taken a job in a New Jersey DNA sequencing laboratory after graduating from college last year. Instead, the 23-year-old lives with his family in Queens, New York, still unemployed and searching. With the expense of commuting or relocating, “I thought about it and it just didn’t seem right,” said Yang, a biology major who rejected the job 50 miles away in Piscataway to look for opportunities closer to home. “If I was previously living in New Jersey, I think I would have taken that job in a heartbeat.”

Yang belongs to the age group, adults under 35, that’s traditionally the most mobile part of an American work force constantly on the move since the 19th century. Now, that’s changing as members of the millennial generation, the estimated 85 million born from 1981 through 2000, prove less restless than their forebears. The standstill may be holding back recovery in the labor and housing markets. “They remain stuck in place,” said William Frey, a senior fellow at the Brookings Institution in Washington who specializes in migration issues. “The recent slowdown is really an interaction of demographics and a continued housing- and labor-market freeze. Millennials are mired down, very cautious about buying a home or moving to new areas.”

While Frey’s analysis of U.S. Census Bureau data shows Americans under 35 move almost twice as often as other age groups, the pace is slowing. In the year ended March 2013, just 20.2% of those aged 25 to 34 relocated, the lowest rate for that age group in data going back to 1947, down from 31% in 1965, Frey said.

We need francs!, Eh, Euros!

• France Refuses To Block Mistral Warship Deal With Russia (RT)

The French government has said that it will go ahead with €1.2 billion ($1.6 billion) contract to supply Russia with two Mistral helicopter carriers because cancelling the deal would harm Paris more than Moscow. In the wake of the crisis in Ukraine, the United States had been pressing France as well as Britain and Germany to take a tougher line against Russia and cancel the Mistral contract. But France refuses to link the helicopter carrier deal to the US/EU debate over tougher sanctions against Russia.

A French government official travelling with President Francoise Hollande in Azerbaijan Sunday, who asked not be named, told reporters that the contract was too big to cancel and that if France didn’t fulfill the order it would be hit with penalties. “The Mistrals are not part of the third level of sanctions. They will be delivered. The contract has been paid and there would be financial penalties for not delivering it. “It would be France that is penalized. It’s too easy to say France has to give up on the sale of the ships. We have done our part,” the official said.

President Hollande also said earlier on Saturday that the contract will go ahead. “This contract was signed in 2011, it will be carried out. For the moment it is not in question,” President Hollande said on Saturday during a visit to German Chancellor Angela Merkel’s electoral district. The Russian defense ministry warned Paris in March that it would have to repay the cost of the contract plus additional penalties if it cancelled the deal. EU foreign ministers met in Brussels Monday and expanded their sanctions over Russia’s stance on the Ukrainian crisis, adding two Crimean companies and 13 people to the bloc’s blacklist, EU diplomats said.

Still the sole voice of reason in the US. Hope you noted that the Telegraph of all places started asking serious questions yesterday, see May 12 Debt Rattle.

• What Does The US Government Want in Ukraine? (Ron Paul)

In several eastern Ukrainian towns over the past week, the military opened fire on its own citizens. Dozens may have been killed in the violence. Although the US government generally condemns a country’s use of military force against its own population, especially if they are unarmed protesters, this time the US administration blamed the victims. After as many as 20 unarmed protesters were killed on the May 9th holiday in Ukraine, the State Department spokesman said “we condemn the outbreak of violence caused by pro-Russia separatists.”

Why are people protesting in eastern Ukraine? Because they do not believe the government that came to power after the US-backed uprising in February is legitimate. They do not recognize the authority of an unelected president and prime minister. The US sees this as a Russian-sponsored destabilization effort, but is it so hard to understand that the people in Ukraine may be annoyed with the US and EU for their involvement in regime change in their country? Would we be so willing to accept an unelected government in Washington put in place with the backing of the Chinese and Iranians?

The US State Department provided much assistance earlier this year to those involved in the effort to overthrow the Ukrainian government. The US warned the Ukrainian government at the time not to take any action against those in the streets, even as they engaged in violence and occupied government buildings. But now that those former protesters have come to power, the US takes a different view of protest. Now they give full support to the bloody crackdown against protesters in the east. The State Department spokesperson said last week: “We continue to call for groups who have jeopardized public order by taking up arms and seizing public buildings in violation of Ukrainian law to disarm and leave the buildings they have seized.” This is the opposite of what they said in February. Do they think the rest of the world does not see this hypocrisy?

The real question is why the US government is involved in Ukraine in the first place. We are broke. We cannot even afford to fix our own economy. Yet we want to run Ukraine? Does it really matter who Ukrainians elect to represent them? Is it really a national security matter worth risking a nuclear war with Russia whether Ukraine votes for more regional autonomy and a weaker central government? Isn’t that how the United States was originally conceived? Has the arrogance of the US administration, thinking they should run the world, driven us to the brink of another major war in Europe? Let us hope they will stop this dangerous game and come to their senses. I say let’s have no war for Ukraine!

As would anyone.

• Russia Tells Ukraine To Pay Gas Debt Or Supplies May Halt June 3 (BBC)

Russia’s state energy giant Gazprom has said it may halt natural gas shipments to Ukraine on 3 June unless the country pays in advance for supplies.Gazprom boss Alexei Miller said the move was because of outstanding debts. If there is no payment by the deadline then “Ukraine will receive zero cubic metres [of gas] in June,” Russian news agency Interfax reported. And Prime Minster Dmitry Medvedev said on Russian TV saying they could no longer “nanny” Ukraine. Mr Miller said Ukraine must pay in advance for its June deliveries because of debts amounting to $3.51bn. His comments were made during a meeting with Mr Medvedev. The Russian president said that Kiev could dip into its IMF aid package and questioned Ukraine’s refusal to do so until now. “According to our information, Ukraine has received money from the first IMF tranche,” he said.

Ukraine has refused to cover its obligations in protest over Moscow’s decision to nearly double the price it charges Kiev for gas imports. Ukraine’s Finance Minister Oleksandr Shlapak had earlier said on Monday that the county was willing to cover its outstanding payment as soon as Russia lowered its price. He said Ukraine was prepared to issue bonds worth $2.16bn to address its gas arrears. “If Russia extends the old price of $268 per 1,000 cubic metres [until] the end of the year, we will immediately cover the debt,” the UNIAN news agency quoted Mr Shlapak as saying. Gazprom now charges Ukraine $485.50 per 1,000 cubic metres – the highest rate of any of its European clients. Close to 15% of all gas consumed in Europe is delivered from Russia through Ukraine. There is a danger for EU nations that Ukraine will start taking the gas Russia had earmarked for its European clients, something it did when it was cut off from Russian gas during previous disputes in 2006 and 2009.

Partly true for sure. NATO is a big one too. US.

• EU Policy To Blame For Ukraine Crisis – Ex-Chancellor Schroeder (RT)

Germany’s former Chancellor Gerhard Schroeder has blamed European Union policy for the current situation in Ukraine and urged the West to stop focusing on new sanctions against Russia. In Schroeder’s opinion, the EU’s fundamental mistake – that subsequently led to the ongoing crisis in Ukraine – was its association policy, he said in an interview with German newspaper Welt am Sonntag published Sunday. Brussels “ignored” Ukraine’s deep cultural division between traditionally pro-European western regions and Russia-leaning regions in the east, the former chancellor said. Kiev, however, had to pick either an association with the EU or a Customs Union with Russia, Schroeder said. He suggested that it could have been more reasonable if the former Soviet republic was offered an alternative when it could do both.

Asked whether it was the corrupt system and government in Ukraine that led to the unrest, Schroeder agreed that that was also true, but, at the same time, Yanukovich came to office through a free election. Initially, protests in Ukraine began in November, after President Viktor Yanukovich put on hold the signing of the association agreement with the EU, because, as he explained, at that moment it would be against national interests. The decision sparked months of fierce protests on Kiev’s Maidan square which ended with a February coup and the ouster of Yanukovich. Since then, the epicenter of bloody unrest has moved to eastern regions where many oppose to the new Kiev government, the republic of Crimea decided to rejoin Russia. Schroeder admitted that the situation with Crimea joining Russia might be controversial in terms of international law, but that has already happened after the republic decided to be part of Russia via a referendum.

Not so sure about this. They tried that one before, last time early 40’s.

• ‘Russia Should Ignore Washington’s New Cold War’ (RT)

Washington desperately needs a new Cold War with Russia to ensure a healthy Military-Security Complex and to maintain global hegemony, former Reagan administration official Paul Craig Roberts told RT in an interview. “The best thing the Russian government could do is just ignore [Washington’s rhetoric] and go on making its relations with China, India, Brazil, and South America, and go on about its business and leave the dollar system, and simply quit trying to be accepted by Washington,” said Roberts, also an economist and columnist on global affairs.

RT: The way that some US officials are speaking, it seems that NATO seriously believes that Russia is set to invade the Baltic states.

PCR: What this is all about is that Washington had hoped to grab Ukraine, especially the Russian naval base in Crimea, in order to cut Russia off from the port and access to the Mediterranean. Now, Washington lost that game. They’re trying to retrieve it by starting a new Cold War, and that’s what all this talk is about. They’re pretending that Russia is going to invade the Baltics or Eastern Europe. This is absurd.

RT: NATO is building up its forces in the Baltic region. Isn’t this a dangerously provocative step in terms of a new Cold War?

PCR: Washington wants a Cold War, they need it. They’ve been defeated in Afghanistan, they were blocked from attacking Syria and Iran, so they’ve got to keep the military-security complex funded, because that’s where an important part of their campaign contributions comes from. When Washington gives the taxpayers’ money to the military sector, it is cycled back in campaign contributions to keep them in office. They have to have conflict. With the wars in the Middle East winding down, apparently, they have to start new conflict, and since they lost their plan to take over Ukraine – which has defected, much of it, back to Russia – they’re going to start a new Cold War.That’s what this means.

Now they haven’t put enough troops or aircraft in these countries to make any difference, but they want to. So what Russia is faced with is a new Cold War, and the best thing the Russian government could do is just ignore it and go on making its relations with China, India, Brazil, and South America, and go on about its business and leave the dollar system, and simply quit trying to be accepted by Washington.

As is everybody’s. Just a little later.

• Ukraine’s Destiny Is To Go Medieval (Jim Kunstler)

I’m not persuaded that Russia and its president, Mr. Putin, are thrilled about the dissolution of Ukraine. Conceivably, they would have been satisfied with a politically stable, independent Ukraine and reliable long-term leases on the Black Sea ports. Russia is barely scraping by financially on an oil, gas, and mineral based economy that allows them to import the bulk of their manufactured goods. They don’t need the aggravation of a basket-case neighbor to support, but it has pretty much come to that. At least, it appears that Russia will support the Russian-speaking region east of the Dnieper.

My guess is that the Kiev-centered western Ukraine can’t support itself as a modern state, that is, with the high living standards of a techno-industrial culture. It just doesn’t have the fossil fuel juice. It’s at the mercies of others for that. In recent years, Ukraine has even maintained an independent space program (which is more than one can say of the USA). It will be looked back on with nostalgic amazement. Like other regions of the world, Ukraine’s destiny is to go medieval, to become a truly post-industrial agriculture-based society with a lower population and lower living standards. It is one the world’s leading grain-growing regions, a huge advantage for the kind of future the whole world faces — if it can avoid becoming a stomping ground in the elephant’s graveyard of collapsing industrial anachronisms.

Ukraine can pretend to be a ward of the West for only a little while longer. The juice and the money just isn’t there, though. Probably sooner than later, the IMF will stop paying its gas bills. Within the same time-frame, the IMF may have to turn its attention to the floundering states of western Europe. That floundering will worsen rapidly if those nations can’t get gas from Russia. You can bet that Europe will think twice before tagging along with America on anymore cockamamie sanctions. Meanwhile, the USA is passing up the chance to care for a more appropriate client state: itself. Why on earth should the USA be lending billions of dollars to Ukraine when we don’t have decent train service between New York City and Chicago?

The new known unknowns…

• Former CIA Director: ‘We Kill People Based On Metadata’ (RT)

At a recent debate concerning the National Security Agency’s bulk surveillance programs, former CIA and NSA director Michael Hayden admitted that metadata is used as the basis for killing people. The comments were made during a debate at Johns Hopkins University, after Georgetown University Law Center professor David Cole detailed the kind of information the government can obtain simply by collecting metadata – who you call, when you call them, how long the call lasts, and how often calls between the two parties are made.

Although NSA supporters often claim such metadata collection is permissible considering the content of the call is not collected, Cole argued that is not the case, since the former general counsel of the NSA, Stewart Baker, has already stated metadata alone is more than enough to reveal vast amounts of an individual’s personal information. Writing in the New York Review of Books, Cole elaborated:

“Of course knowing the content of a call can be crucial to establishing a particular threat. But metadata alone can provide an extremely detailed picture of a person’s most intimate associations and interests, and it’s actually much easier as a technological matter to search huge amounts of metadata than to listen to millions of phone calls. As NSA General Counsel Stewart Baker has said, ‘metadata absolutely tells you everything about somebody’s life. If you have enough metadata, you don’t really need content.’ “When I quoted Baker at a recent debate at Johns Hopkins University, my opponent, General Michael Hayden, former director of the NSA and the CIA, called Baker’s comment ‘absolutely correct,’ and raised him one, asserting, ‘We kill people based on metadata.’”

How to use NZ laws to cheat the entire planet.

• New Zealand Shell Companies And Stooges -and Ukraine- (NC)

In our first post in this series, we reminded readers of the nearly complete demolition, by the New Zealand Company registrar, of the GT Group and Company Net shell company incorporation franchises in New Zealand. In the second post, we highlighted another franchised shell incorporator, Unicredit, incidentally trampled by the NZ Registrar’s giant Monty Python foot as it descended on the shell companies created by GT Group and The Company Net. That was semi-good work by the Registrar, but The Company Net had another deal going, with another incorporator, and the Registrar, despite a frenzy of striking off back in 2011, didn’t clean it all up. This post gives the background to that deal, and should make it pretty obvious why these particular shells matter. Subsequent posts will round out the picture and bring it up to date.

Once again, the stooge directors recorded in the New Zealand register are the indicators. Their names are Juri Vitman (associated with one NZ company), Erik Vanagels (associated with 318 NZ companies), Voldemar Spatz (associated with 360 NZ companies), and Inta Bilder (associated with 897 NZ companies). All the New Zealand companies the stooges purportedly directed were originally incorporated by The Company Net. They all have Latvian addresses; Erik Vanagels (who may be two people of the same name, father and son perhaps; no-one’s quite sure) often has an address in Panama, as well as his Latvian one. Here is their pedigree, from a 2011 article by Graham Stack, then of Business New Europe, fittingly entitled “Massive Ukrainian government money-laundering system surfaces”:

What do Ukrainian tank exports to Kenya, flu vaccine imports from Oregon and oil rig imports from Wales all have in common? They are all deals carried out by the same shell companies that are linked to a small set of Latvian directors. A scandal is unfolding in Ukraine that could be dubbed Vanagels-gate as more details of dodgy and outright illegal deals using a string of shell companies emerges, which can be traced directly back to the upper echelons of the Ukrainian government. … According to an investigation conducted by bne, Vanagels and Gorin – together with Latvian colleagues such as Juri Vitman, Elmar Zallapa and Inta Bilder – preside over a sprawling network of companies with Baltic bank accounts that have extensive dealings with the Ukrainian state, covering everything from arms exports to machinery imports.

The “Ukrainian government” mentioned here is the Yanukovych one, recently turfed out either by neo-Nazis and the CIA, or by concerned freedom-loving citizens, depending on which Manicheism you subscribe to. The back story of the network that shows up in this group of New Zealand shell companies just grows and grows. For a 2012 baseline, try this Swiss summary of the trail left in Ukraine, Russia, Moldavia and Rumania by one of these stooges, Erik Vanagels (I was tempted to make the prose more English, but resisted):

Why am I not surprised?

• Australia Asked Americans For More Help To Spy On Australian Citizens (Guardian)

Australia’s intelligence agency asked for more help from its US counterparts to increase surveillance on Australians suspected of involvement in international extremist activities. Documents from the US National Security Agency, published by Glenn Greenwald on Tuesday in his book No Place to Hide: Edward Snowden, the NSA and the Surveillance State, reveal new details of Australia’s close relationship with the US spy agency. In an extract on 21 February 2011 from the acting deputy director of Australia’s Defence Signals Directorate, which has since been re-named the Australian Signals Directorate (ASD), the director pleads for additional surveillance on Australians.

“We would very much welcome the opportunity to extend that partnership with NSA to cover the increasing number of Australians involved in international extremist activities – in particular Australians involved with AQAP,” the extract said. AQAP stands for Al-Qaida in the Arabian Peninsula, an organisation that is proscribed as a terrorist organisation under Australia’s Commonwealth Criminal Code. The letter says the Australian spy agency has enjoyed a long and very productive partnership with the NSA in obtaining access to “minimised access to United States warranted collection against our highest value terrorist targets in Indonesia”. “This access has been critical to DSD’s efforts to disrupt and contain the operational capabilities of terrorists in our region as highlighted by the recent arrest of fugitive Bali bomber Umar Patek,” the letter said.

It’ll take centuries. Ready to fall back asleep yet?

• Western Antarctic Ice Sheet Collapse Underway, Unstoppable (Guardian)

The collapse of the Western Antarctica ice sheet is already under way and is unstoppable, two separate teams of scientists said on Monday. The glaciers’ retreat is being driven by climate change and is already causing sea-level rise at a much faster rate than scientists had anticipated. The loss of the entire western Antarctica ice sheet could eventually cause up to 4 metres (13ft) of sea-level rise, devastating low-lying and coastal areas around the world. But the researchers said that even though such a rise could not be stopped, it is still several centuries off, and potentially up to 1,000 years away. The two studies, by Nasa and the University of Washington, looked at the ice sheets of western Antarctica over different periods of time.

The Nasa researchers focused on melting over the last 20 years, while the scientists at the University of Washington used computer modelling to look into the future of the western Antarctic ice sheet. But both studies came to broadly similar conclusions – that the thinning and melting of the Antarctic ice sheet has begun and cannot be halted, even with drastic action to cut the greenhouse gas emissions that cause climate change. They also suggest that recent accumulation of ice in Antarctica was temporary. “A large sector of the western Antarctic ice sheet has gone into a state of irreversible retreat. It has passed the point of no return,” Eric Rignot, a glaciologist at Nasa and the University of California, Irvine, told a conference call. “This retreat will have major consequences for sea level rise worldwide.”

Good title.

• This Is What a Holy Shit Moment for Global Warming Looks Like (Mother Jones)

If you truly understand global warming, then you know it’s all about the ice. That’s what matters. Planet Earth has not always had great ice sheets at the poles, of the sort that currently exist atop Greenland and Antarctica. In other periods, much of that water has instead been in liquid form, in the oceans—and the oceans have been much higher. How much? According to the National Academy of Sciences, the globe’s great ice sheets contain enough frozen water to raise sea levels worldwide by more than 60 meters. That’s about 200 feet. And it makes all the sea level rise that we’ve seen so far due to global warming appear piddly and insignificant.

That’s why scientists have long feared a day like this would come. Two new scientific papers, in the journals Science and Geophysical Research Letters, report that major glaciers that are part of the West Antarctic Ice Sheet appear to have become irrevocably destabilized. The whole process may still play out on the scale of centuries, but due to the particular dynamics of this ice sheet, the collapse of these major glaciers now “appears unstoppable,” according to NASA (whose researchers are behind one of the two studies).

The first study, by researchers at NASA and the University of California-Irvine, uses satellite radar to examine an array of large glaciers along the Amundsen Sea in West Antarctica, which collectively contain the equivalent of four feet of sea level rise. The result is the documentation of a “continuous and rapid retreat”—for instance, the Smith and Kohler glaciers have retreated 35 kilometers since 1992—and the researchers say that there is “no [major] obstacle that would prevent the glaciers from further retreat.” In the NASA press release, the researchers are still more vocal, with one of them noting that these glaciers “have passed the point of no return.”

The other group of researchers, based at the University of Washington, reach similar conclusions with their paper in Science. But they do so by using an computer model to study one of these glaciers in particular: The Thwaites Glacier, pictured above, which contains about two feet of sea level rise and is retreating rapidly. “The simulations indicate that early-stage collapse has begun,” notes their paper. What’s more, the Thwaites Glacier is a “linchpin” for the rest of the West Antarctic Ice Sheet; its rapid collapse would “probably spill over to adjacent catchments, undermining much of West Antarctica.” And considering that the entire West Antarctic Ice Sheet contains enough water to raise sea levels by 10 to 13 feet, that’s a really big deal.