The decision to crush Cypriot depositors (first all of them, then just the uninsured ones) came in March, without any prior hints of the carnage that was about to be unleashed upon Cypriot bank unsecured liabilities. Or so the media narrative goes, because the last thing needed is to give skeptics any indication the "ad hoc" Troika plan was not so ad hoc after all, and some individuals - notably the whale depositors - were warned in advance, sparing them the indignity of pulling a few billion at €300 per day. Alas, as just released central bank data shows, there may be cracks in the narrative because in February, at a time when the Eurozone was supposedly getting better every day and the Dow Jones was on the verge of its all time high, Cypriot depositors pulled the largest amount of cash in over three years.
Add this curious finding to the to do list for the 'task force' investigating who not only circumvented the capital controls, but had advance knowledge it was coming. Surely they will get right on top of that.
Note Barclays and Key 35% Leverage Line
Was Cyprus About saving Barclays?
UK - FINANCIALIZATION over 750% of GDP
(Need Offshore Tax Havens under British Law - i.e. Cyprus, Malta)
Slovenia’s borrowing costs have rocketed over recent days as it grapples with a festering financial crisis, becoming the first victim of contagion from Cyprus. “Banks are under severe distress,” said International Monetary Fund in its annual health check on the country.
Non-performing loans of the Slovenia’s three largest banks reached 20.5pc last year, with a third of all corporate loans turning bad.
Yields on two-year debt in the Alpine state have tripled over the past week, jumping from 1.2pc to 4.26pc before falling back slightly on Thursday. Ten-year yields have reached a post-EMU high of 6.25pc.
“The country has lost competitiveness since joining the euro and it’s lead to slow economic collapse.
Markets have been very complacent, but it has been clear for a long time that the banks need recapitalisation, and it is not easy to raise money in this climate,” said Lars Christensen from Danske Bank.
The IMF expects the economy to contract by 2pc this year, following a fall of 2.3pc in 2012.
“A negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession. A credible plan to address these issues is essential to restore confidence and access markets,” it said.
The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”
Slovenia’s bank assets equal 130pc of GDP compared with 700pc for Cyprus, though the Cypriot figure is misleading since a large part of its banking system is made of “brass plate” subsidiaries of foreign lenders such as Barclays or Russia’s VTB.
Tim Ash from Standard Bank said the events of the past two weeks had pushed the country over the edge. “Slovenia is now inevitably heading towards a bail-out. The eurozone shot itself completely in the foot in Cyprus,” he said. The Slav-speaking state - a Baroque jewel with historic ties to Austria - has a population of just 2m and is too small to pose a financial threat.
However, analysts say a crisis in Slovenia would further complicate EMU politics, forcing the northern creditor states to define their rescue strategy yet again. Austerity fatigue in Germany and Holland has already caused policy to harden.
Luxembourg has also come into focus as markets take a closer look at EMU money centres. Its banking assets are 2,500pc of GDP, by far the highest in the eurozone.
Eurogroup chief Jeroen Dijsselbloem fanned the flames in an interview this week, advising Luxembourg to cut leverage in its financial system and slim down its banks. “Deal with it before you get into trouble,” he said. The comments caused fury in the Grand Duchy. “We do not attract Russian money to Luxembourg with high interest rates. The Luxembourg financial centre is based on several pillars, we are characterised by the breadth of our product range,” said premier Jean-Claude Juncker.
Luxembourg officials have been deeply alarmed by the handling of the Cyprus crisis, intervening in the talks to try to soften the demands. Foreign Jean Asselborn accused Berlin of pursuing “hegemony” in Europe. “Germany does not have the right to decide the economic model for other EU states,” he said.
The knock-on effects in Portugal, Spain and Italy have so far been mild, though bond spreads have spiked to three-month highs.
“It’s remarkable how little contagion there has been, since capital controls and major depositor haircuts violate fundamental principles. The assumption has always been that this would be game over,” said Julian Callow, chief global economist at Barclays.
Moodys warned that the erratic handling of Cyprus had “significantly heightened fears surrounding the safety of bank deposits in other European systems”, and left Portugal vulnerable to renewed stress.
While the agency praised Lisbon for carrying out deep reforms, it said public debt had reached 123pc of GDP in 2012 and is still rising. The economy is likely to contract by 2pc this year.
“The ongoing recession has been the main reason that revenue shortfalls have persisted, and has contributed to the further deterioration in the government’s debt metrics,” it said.
Italy faces its own crisis after last-ditch efforts to form a government collapsed on Thursday night, raising the likelihood of a caretaker leader and fresh elections. Mr Callow said it is hard to see Italy can now comply with the strict terms of an EMU bail-out, which in turn leaves it is unclear whether the European Central Bank’s back-stop for Italian debt is still valid.
Italy’s national data agency Istat said the economy may contract by more than the official forecast of 1.3pc this year, with no recovery until 2014.
Italy’s business lobby Confindustria said the country faces a “full credit emergency”. The authorities are to raise €40bn or 2pc of GDP to pay off arrears to suppliers, a way to form inject immediate fiscal stimulus, while skirting EU deficit rules.
“The eurozone is running out time. If there is no growth for another year, and unemployment ratchets higher, citizens are going to turn against the euro,” said Mr Callow.
Loan data released by the ECB on Thursday show that credit to eurozone private firms contracted by 2.5pc in February, with signs of a deepening credit crunch for small business across the South.
Europe’s top officials may have jumped the gun earlier this year by proclaiming the EMU debt crisis to be over and the economy to be well on the way to recovery. The mission is not yet accomplished.
4- EU Banking Crisis
HOT MONEY - Flows Out Faster than it Flows In with Devastating Repercussions
On Monday, our AM readings had a link to Krugman’s Hot Money Blues. There was lots of pushback against the article, which blames concentration of capital seeking to circumvent taxes and regulation as an underlying cause of nearly all financial crises:
“But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment . . . Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
What’s the common theme in these episodes? Runaway bankers; they played a role in a number of these crises, from Chile to Sweden to Cyprus. Best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.” (edited & emphasis added).
Perhaps a better way to express that is a visual depiction of Cyprus’ Debt and Bank deposits, shown above. The outsize deposits relative to the nations debt or GDP) does seem like an accident waiting to happen.
There are other tax havens — Luxembourg, Switzerland, Cayman Islands, Bermuda, Singapore, Dubai, etc. — that have yet to have their crisis. This implies a full on financial crisis requires more than mere concentration of idle tax-avoiding capital.
Those who live in glass houses shouldn’t throw stones.
Mess with the banks and Europe gets nervous. After getting all lathered up over the Cyprus deal, markets tanked when the head of the Eurogroup of euro zone finance ministers, Jeroen Dijsselbloem, came out with this:
What we’ve done last night is what I call pushing back the risks..If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself? If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.
25 March 2013 Statement by the Eurogroup President on Cyprus
Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday. Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.
Go no further than the following two charts to understand why markets freaked out over Dijsselbloem’s comments. Europe is way overbanked and vulnerable to financial sector shocks.
Even in the so-called “safe haven” Switzerland the banking system is outsized relative to the country’s GDP. Compare the relative size of UBS, for example, to largest bank in the U.S., JP Morgan. Nuff said
4- EU Banking Crisis
CYPRUS - The Troika Stick it to Russia
KEY: Appears to be the 'saving' of the insured depositors (crucial to avoid a pan-European bank run) and the crushing of the Russian whale' depositors
DEAL DESIGNED TO NOT REQUIRE CYPRUS PARLIAMENT APPROVAL - Not a Tax
There is talk that there may be no need for the government to vote for this - since it is not a 'tax' but a bank restructuring. It seems they have kept it in the bankers... the ECB (in its independent way) tells the Cypriot NCB what it should do, the Cypriot central bank then restructures its bank how it sees fit - good/bad bank and haircuts where it sees fit - this then gets around need for vote from government AND any possibility of a European Union law (on taxation) being broken...
Cypriot MP's not held responsible
Cypriot MP's can't reject terms
PUBLICALLY DISCLOSED DETAILS ARE EXACTLY WHAT GERMANY CALLED FOR - a deal far worse then the original on proposed by the Eurogroup last week - when the banks still existed. So let us get this straight, we have no further information on the actual terms of the deal than we did on Friday afternoon; the government (who rejected the deal last week) has no details of the deal yet; and the actual impairment for the depositors is far worse than last week's rejected deal; and the market is rallying...
i) Laiki to be wound down;
ii) Bank of Cyprus to survive but with deposit haircuts of up to 40% for the uninsureds, and
iii) deal would see secured deposits in Laiki moved to Bank of Cyprus.
It would appear the week was spent sorting through the names of bank accounts in each bank and the one with the most ending in '-ov' is to be wound down...Laiki
A more granular breakdown of the deal's "accomplishments", but with the same result for large depositors, via Reuters:
Laiki will be resolved immediately - with full contribution of equity shareholders, bond holders and uninsured depositors - based on a decision by the Central Bank of Cyprus, using the newly adopted Bank Resolution Framework.
Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.
The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 billion Euros of ELA with it. Only uninsured deposits in BoC will remain frozen until recapitalization has been effected, and may subsequently be subject to appropriate conditions.
The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.
BoC will be recapitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.
The conversion will be such that a capital ratio of 9 % is secured by the end of the program.
All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.
The program money (up to 10 billion Euros) will not be used to recapitalize Laiki and Bank of Cyprus.
As Bloomberg further clarifies, uninsured depositors, or those with over EUR100,000 in savings may be completely wiped out: "Deposits below the EU deposit-guarantee ceiling of 100,000 euros will be protected, and
a loss of no more than 40 percent will be imposed on uninsured depositors at the Bank of Cyprus, two EU officials said.
Uninsured depositors at Cyprus Popular would largely be wiped out, two other officials said." Farewell Russian oligrach money. We hardly knew ye.
THE Cyprus bail-out package agreed on March 25th between the European Commission, European Central Bank and the IMF is the fifth euro zone rescue operation in three years. At €10 billion ($13 billion), or €12,500 for every person on the island, it is tiny compared with the previous deals in Greece, Ireland and Portugal, and the partial bail-out for Spain’s banks. Greece's two bail-outs together amounted to €246bn, more than 110% of its gross domestic product. But the Cyprus deal is the first to impose a levy on the country’s bank deposits: all those over €100,000 will be hit. One thing certain is that the island's financial woes are far from over. What the fall-out will be for the euro area, however, is less clear.
5- Sovereign Debt Crisis
GERMANY - German EU Bailout Contribution Bigger than Marshall PLan on a GDP Basis
At the end of the day, every EU solution/bailout/ intervention hinges on whether or not Germany will write the check.
The EBC can promise this and that, but unless Germany’s signature is on the check, all of this is just posturing and verbal intervention.
With that in mind, it’s worth considering just how much Germany would be willing to spend. Historically the single largest transfer payment ever made by one country to another was the Marshall Plan, which saw the US make a transfer payment of slightly over 5% of its GDP to Europe as aid following WWII.
Given this, it is highly unlikely Germany will foot the bill for a larger amount than this on a per-GDP basis. True, Germany has promised more than this in the form of its supposed contributions to various EU bailout funds, largely due to the fact that German banks are exposed to the PIIGS and other problem countries of Europe.
However, I sincerely doubt that when the tab is drawn up and the funds are actually needed, Germany will actually write the check for an amount greater than 5% of its GDP (roughly €140 billion).
Thus, the key issue is whether the tab comes due before Greece or Cyprus (or Italy at this point) else leaves the Euro. Angela Merkel is up for re-election this year, which is a big reason why Germany was demanding depositor confiscation to help fund the Cyprus bailout (she cannot afford to look soft).
Moreover, the German economy is proving weaker than originally forecast.
Economic advisers to the German government on Monday slashed their forecast for 2013 growth to 0.3 percent from 0.8 percent, blaming a sharp fourth-quarter contraction, and said weaker foreign trade and investment would weigh on growth.
The advisers, traditionally known as the "wisemen", predicted capital investment would drop by 3 percent this year and saw foreign trade subtracting 0.3 percentage points from German gross domestic product (GDP).
Between Merkel’s re-election bid, and the German economy weakening, bailing out Europe is going to be a lot more politically unsavory than it has in the past. The question now is whether Cyprus or someone else calls Merkel’s bluff.
5- Sovereign Debt Crisis
GLOBAL DELEVERAGING - UK & JAPAN Have Serious Problems for Differing Reasons
GOVERNMENT DEBT - Japan a Major Problem & Getting Worse - Fast!
FINANCIALIZATION - UK Clearly the Epicenter. (Cyprus was British Banking Centric)
5- Sovereign Debt Crisis
GERMANY - Anti Euro AfD Party May Cost Merkel in Critical September Election
Political revolt against the euro construct has spread to Germany.
A new party led by economists, jurists, and Christian Democrat rebels will callfor the break-up of monetary union before it can do any more damage.
"An end to this euro," is the first line on the webpage of Alternative für Deutschland (AfD). "The introduction of the euro has proved to be a fatal mistake, that threatens the welfare of us all. The old parties are used up. They stubbornly refuse to admit their mistakes."
They propose German withdrawl from EMU and return to the D-Mark, or a breakaway currency with the Dutch, Austrians, Finns, and like-minded nations. The French are not among them. The borders run along the ancient line of cleavage dividing Latins from Germanic tribes.
The plans draw on work by Hans-Olaf Henkel, former head of Germany's industry federation (BDI) and a chastened europhile -- the "worst error of my professional life", he told me.
The appeal of German exit is obvious. It is the least traumatic way to end the 20pc to 30pc misalignment between North and South, the cancer eating Europe. Club Med keeps the euro. It enjoys instant devaluation, while still able to uphold euro debt contracts. The spectre of sovereign defaults recedes.
The party hopes to contest the federal elections in September, winning enough votes to scramble a tight race. Chancellor Angela Merkel suddenly has a "UKIP problem" on the her right flank. Should she sign off on a bail-out out for Cyprus -- safeguarding the "dirty funds of Russian oligarchs", as the AfD puts it -- she will be raked by heavy fire.
That will test her solidarity mantra, and she can turn on a Pfennig. She ditched her nuclear energy policy days after surveying the post-Fukushima polls.
Nobody knows how much support AfD could command. Protest parties usually flop in Germany, but the Free Voters won 10pc in Bavaria in 2008 on a Right-leaning, eurosceptic ticket, and there have never been circumstances quite like this before.
The slide towards fiscal union is a constitutional revolution. It erodes the budgetary supremacy of the Bundestag and threatens to eviscerate Germany's vibrant post-war democracy. Large matters.
The AfD leader Bernd Lucke says Beppe Grillo's threat to default on Italy's external debt has demolished claims that Germany's rescue pledges will never be called. "The Italian election shows how dangerous the whole euro crisis really is. Whether countries can and will pay back their debts is dependent on the unpredictable voting choices of their peoples," he said.
Professor Lucke, an expert on Real Business Cycle Theory, says German voters may not have mastered EMU mechanics but they can see it is going off the rails. "Everybody understands that 50pc youth unemployment in Greece and Spain is a catastrophe," he said.
The latest ZDF poll shows that 65pc of Germans think the euro is damaging, and 49pc think Germany would be better outside the EU. This is no doubt "soft", yet what is clear is that the all-party consensus on EMU gives voters nowhere to turn.
The rebels may struggle to cross the 5pc threshold for seats in the Bundestag, but they do not have to take seats to plague Angela Merkel over the next six months. She is already in trouble. Her Free Democrat (FDP) allies have crashed to 4pc in the polls.
Alternative für Deutschland threatens to take votes from the Right. On the other side, the Green resurgence to 16pc makes up for the sluggish Social Democrats. As things stand, the Left is slightly ahead. Angela Merkel is on course to lose office.
"Merkel will have to be even tougher on Europe, she cannot allow herself to be outflanked," said David Marsh, author of books on the euro and the Bundesbank. "She will try to keep up a steely facade and hope everything stays calm until September, but the next crisis may come to a head before that."
Indeed it may. Italy does not have a government, and putatitve premier Pier Luigi Bersani has vowed break out of the "austerity cage", explicitly rejecting policies that anchor the EU backstop for Italian bonds.
Fitch expects Italy's public debt to hit 130pc of GDP this year, up from 125pc forecast a few months ago. The country has one foot in a debt compound trap already. One more shock will do it.
This latest deterioration is self-inflicted, the result of contractionary EU policies that have pushed Euroland into a double-dip slump, and ravaged Italy in particular with fiscal tightening of 3pc of GDP in 2012.
This policy was deranged. Italy's primary budget was already near balance. Fiscal overkill caused to the economy to contract by 2.6pc in 2012, and the debt ratio to rise even faster. In flogging Italy's economy to death, EU elites have destroyed political consent for the reforms that are most needed.
For Germany's Alternative, September may come too soon. Michael Wohlgemuth from Open Europe says they lack the organization for a quick breack-through, but their moment may come in next year's vote for Euro-MPs.
"By then the real costs of the bail-outs for German taxpayers will be clearer. People sense that at a crisis is looming, but they have not yet felt it," he said.
The tragedy for Germany is that the bill for EMU will come due just as the country's aging crunch hits. Germany will have impoverished itself for no useful purpose, and without winning much love in the process.
Some say Germany is "winning" because its firms are conquering Club Med markets with a rigged exchange rate, but that is a Pyrrhic triumph. Latins will not tolerate this, once they grasp that the "gains" of their internal devaluations -- ie 1930s wage cuts -- are dwarfed by the greater losses of a wasted youth.
There are no winners. Each country is blighted in turn, and in different ways. Like Goethe's Sorcerer's Apprentice, they have launched an experiment they cannot control. The broom has a fiendish will of its own.
5- Sovereign Debt Crisis
GERMANY - The Euro Crisis Escalation over Cyprus May Politically Cripple Merkel
In recent days, FX desk chatter has been of rising concerns over "Germany’s New Anti-Euro Party." 'The Alternative for Germany' party is set to run in the upcoming parliamentary elections in September with a clear goal: "the dissolution of the EUR in favor of national currencies or smaller currency unions." It also demands an end to ESM payments. As evidenced by the recent vote in Italy, voting intentions in Europe are not just ultra-left or ultra-right wing anti-European, but increasingly mainstream. "Democracy is eroding. The will of the people regarding (decisions relating to the EUR) is never queried and is not represented in parliament. The government is depriving voters of a voice through disinformation..." Ultimately, as Der Spiegel notes, however, the party's success will likely have more to do with the state of the common currency as the election approaches. Should the crisis flare up, so too could anti-euro sentiment. That sentiment in Germany now has a political home.
Anti-euro political parties in Europe in recent years have so far tended to be either well to the right of center or, as evidenced by the recent vote in Italy, anything but staid. But in Germany, change may be afoot. A new party is forming this spring, intent on abandoning European efforts to prop up the common currency. And its founders are a collection of some of the country's top economists and academics.
Named Alternative für Deutschland (Alternative for Germany), the group has a clear goal: "the dissolution of the euro in favor of national currencies or smaller currency unions." The party also demands an end to aid payments and the dismantling of the European Stability Mechanism bailout fund.
"Democracy is eroding," reads a statement on its website (German only). "The will of the people regarding (decisions relating to the euro) is never queried and is not represented in parliament. The government is depriving voters of a voice through disinformation, is pressuring constitutional organs, like parliament and the Constitutional Court, and is making far-reaching decisions in committees that have no democratic legitimacy."
The sentiment, of course, is hardly new. Euro-skeptics are everywhere these days, particularly in those southern European countries that have been hit hardest by the crisis that continues to plague the common currency. And even in mainstream parties, concerns about the path on which the EU currently finds itself are common. But in Germany, as elsewhere in northern Europe, the most vocal critique of the euro has tended to come from right-wing populist parties.
Alternative for Germany appears to be different, though it has yet to produce a party manifesto. Its impressive list of prominent supporters includes a large number of conservative and economically liberal university professors. The most notable name on the list is Hans-Olaf Henkel, the former president of the Federation of German Industries, but it also includes such economists as Joachim Starbatty and Wilhelm Hankel, who were part of the group that challenged Greek bailout aid at Germany's Constitutional Court.
Main initiator Bernd Lucke, a professor of macro-economics from Hamburg, was a member of Chancellor Angela Merkel's Christian Democrats for 33 years before leaving the party in 2011 as a result of euro bailout efforts. "The current, so-called rescue policies are exclusively focused on short-term interests, primarily those of the banks," Lucke told the Frankfurter Allgemeine Zeitung this week.
Alternative for Germany has not yet formally become a political party, though it reportedly plans to do so in the middle of April. Even then, however, it is not yet certain that the party will be able to collect the requisite number of signatures in time to be included on the ballot in general elections this autumn -- a minimum of 2,000 in each of Germany's 16 states or 0.1 percent of each state's population, whichever is lower. "We will make that decision based on the support we receive," Lucke told the FAZ. "But we have been overwhelmed by the public's reaction thus far."
A Political Home
Even if the party does get on the ballot, it remains unclear whether it will attract significant support. So far, it remains a single-issue party -- and even on that single issue there is a lack of clear consensus on exactly how to proceed.
Still, with concern in Germany growing that the country has become the de-facto paymaster for the rest of the euro zone, Alternative for Germany could attract a fair number of protest votes from frustrated conservatives. Judging by the increasing difficulty Merkel has faced in pushing euro bailout packages through parliament in Berlin over the last 15 months, the level of frustration on the center-right could be growing. Indeed, Lucke has said that he is in touch with a handful of euro-skeptic parliamentarians from the Free Democrats, Merkel's business-friendly junior coalition partner.
Ultimately, however, the party's success will likely have more to do with the state of the common currency as the election approaches. Should the crisis flare up, so too could anti-euro sentiment. That sentiment in Germany now has a political home.
IN THE race to become rich, several of Asia's economies have set records for long-run growth. Over the 30 years from 1982 to 2011 China achieved annual growth in GDP per person of nearly 10%. In doing so it overtook Japan to become the world's second-largest economy in 2010 and also graduated from lower to higher middle-income status, according to the World Bank's classification system. All of the other economies in our chart that maintained 6% growth or faster over 30 years can now be classified as high-income. If China wants to join them, it will have to keep up the pace a bit longer. The OECD, in a new survey of China, reckons it might get there by 2020.
The ominous term, “competitiveness” has been bandied about as the real issue, the one that causes European countries, in particular some of those stuck in the Eurozone, to sink ever deeper into their fiasco. To fix that issue, “structural reforms,” or austerity, have been invoked regardless of how much blood might stain the streets. And a core element of these structural reforms is bringing down the cost of labor.
In Europe’s private-sector, the cost of labor—gross earnings plus employer-paid social contributions, pensions, disability, etc.—is marked by stunning differences. At the bottom of the spectrum is Bulgaria: the average private sector employee costs a company €3.70 per hour worked; in manufacturing even less, €2.90. Romania is right there at €4.50 and €3.80 respectively. Near the top of the spectrum is Belgium at €40.40 and €41.90 per hour worked. But no one beats the Swedes: €41.90 and €43.80. Per hour worked, the average Swedish employee costs a manufacturer over 15 times more than an employee in Bulgaria.
So, relocate all manufacturing plants from Sweden to Bulgaria? Or Romania? Even Greece would be a great place. The cost of labor there is only €14.70 per hour worked, about a third of what it costs up north. It’s the only country in the EU where the average cost of labor actually fell in 2012—and by 6.8%!
But in Spain, which struggles with a similar unemployment problem, cost of labor rose by 1.1% to €20.90, in Italy by 1.7% to €21.90, in Germany by 2.8% to €31, in France by 1.9% to €34.90. The biggest gainers in percentage terms were at the bottom: in Bulgaria, cost of labor rose 6.4%, a whopping €0.24 per hour! In euro terms, the biggest gainers were at the top: cost of labor in Sweden rose 3.5%, or about €1.50 per hour! The cost of labor at the top is running away.
Based on data from the German statistical agency Destatis, this is what it looked like in 2012:
But if enough Swedish companies—and not just manufacturers but all kinds of companies—packed up their machines and robots and cubicles and headed south, unemployment would rise in Sweden. Once unemployment pushes deeply into the double digits, executives will defend their delocalization decisions by lamenting the cost of labor, and soon the government will be talking feverishly about “structural reforms,” without meaning it, and that’s where France is right now. But eventually the situation might deteriorate and pressure wages and associated costs. This has happened in Greece. And they’re all competing with the US, China, Mexico, Bangladesh.... Because competitiveness is not just a beggar-thy-neighbor system.
Alas, the rejuvenated “sick man of Europe,” Germany, isn’t surviving just by cutting its cost of labor. At €31 per hour, it was 32% higher than the EU average, though 11% lower than in France. In manufacturing, it was even more striking: Germany’s cost of labor of €35.20 per hour was 47% higher than the EU average, but still 3% lower than in France. Productivity, infrastructure, transportation costs, corruption, training and education, etc. all figure prominently into this equation. Cost of labor is not the only factor.
Yet German workers have been hit hard: between 2001 and 2010, the cost of labor grew 16%, less than the rate of inflation, while in France, for example, it grew 35%, and in southern countries it jumped far more. In 2011 and 2012, Germany’s cost of labor began to rise with renewed vigor, up 5.9%, but so did France’s at 5.4%.
Much of this money was absorbed by the costs of social contributions, pensions, etc. And they can be breathtaking. The graph below shows these additional costs to the employer per €100 in gross wages paid.
So an average worker in Sweden who earns €100 for a certain number of hours in gross wages costs his employer an additional €51, for a total cost of €151. A Maltese worker, who’d work about three times as long for the same pay, would cost the employer only an additional €10, so €110. And a Bulgarian worker who’d work about 15 times as long for the same pay would cost an additional €18, so €118. This is a conundrum looking for a solution.
Over time, “competitiveness” hollows out the middle and lower classes in some “rich” countries—this has been happening in the US and Germany for years—balloon the middle class in other countries, and make the top in all countries immensely rich. For many people, it’s nothing to look forward to.
Italy has Beppe Grillo, but with European governments reeling from self-inflicted crises, and the euro debacle descending into a tragi-comic farce, one wonders who the real clowns are – especially here in Spain, where ministers gorge themselves on the public purse, leaving behind a trail of evidence so obvious that even the mainstream media can’t ignore it. Read....Will the Real Clowns Please Stand Up?
BRICS - A Development Bank-Forex Reserve Pool-African Integration
Leaders of BRICS countries will consider establishing
A development bank and
Foreign exchange reserve pool
at its fifth summit, a Chinese Foreign Ministry official said Wednesday.
The fifth leaders' summit of BRICS countries, namely Brazil, Russia, India, China and South Africa, is scheduled on March 26-27 in Durban, South Africa.
BRICS deliberated the possibility of establishing a development bank last year. Details including the scale, functions, structure, and location will be discussed at the summit, said Ma Zhaoxu, assistant foreign minister.
Progress regarding this area is expected at the summit, Ma said.
"As an important part for financial cooperation, the bank will help BRICS sustain financial risks and provide support for the development of African countries," he said.
It is also expected that the bloc will make progress in establishing a foreign exchange reserve pool aimed at forming a capital security network among BRICS.
The scale and respective shares of each country are being deliberated and will be discussed at the summit, Ma said.
It is the first time that a BRICS summit is being held on the African continent, with the cooperation between BRICS countries and Africa high on the agenda. The theme of the summit is "BRICS and Africa -- partnerships for integration and industrialization."
Bilateral talks between BRICS and African countries, a joint press conference and a breakfast meeting with representatives from business circles are arranged for the two-day summit. Following the summit, the leaders will jointly release a Durban Declaration, according to Ma.
The Chinese government expects cooperation in fields of international politics, economics, finance, trade and development in order to help maintain worldwide peaceful development and contribute to global economic growth, Ma said.
"It is hoped that through talks among leaders of BRICS and African countries we can strengthen dialogues and cooperations among these nations so that emerging markets and developing countries can have a greater representation and voice in international affairs," he said.
China's newly-elected president Xi Jinping will attend the summit.
BRICS - 40% of World Population and 25% of World GDP
Brazil, Russia, India, China and South Africa represent about 40 percent of the world’s population and nearly 25 percent of its economic output. Yet momentum of the organized grouping of strong emerging economies could be fading, suggests Harsh V. Pant of King’s College. A major challenge to potential clout of BRICS is China’s dominance: “China’s power makes the other members nervous, leading them to hedge bets by investing in alternative alliances and partnerships even as China’s rapid accretion of economic and political power adds to its own challenges to to make friends,” Pant writes. Manufacturers in emerging economies gripe about contending with China’s currency manipulation, low-cost exports and trade barriers to its own markets. BRICS was supposed to demonstrate power shifting from the West to emerging economies. But four of the members seek equitable relationships and are nervous about serving as a platform for China’s rise. – YaleGlobal
China dominates BRICS with an economy larger than that of four other members combined
With China’s President Xi Jinping planning to make his first foray into international diplomacy since his election at the BRICS annual summit in Durban and his singer wife slated to perform, the organization will hit the headlines. Again, there will be talk about this loose grouping of Brazil, Russia, India, China and South Africa filling the emerging void left by the troubled US and European Union. But yet another summit and ritual show of unity won’t hide the emptiness at the core of BRICS. The strong display of China’s newfound power by its president will only underline the organization’s lopsided nature and lack of actual clout.
Representing around 40 percent of the world’s population and nearly a quarter of its economic output, BRICS does offer promise of clout. The economic profile of the five nations, especially that of China, has continued to grow with suggestions that BRICS collectively could become bigger than the US by 2018 and by 2050 even surpass the combined economies of G7 states.
Yet a major challenge for ongoing influence from BRICS is China’s dominance over the other four members. For all its promise, BRICS has remained a talk shop aspiring for greatness.
The first formal summit meeting was held in Russia in June 2009 with South Africa joining the group in December 2010, changing the nomenclature from BRIC to BRICS. The Yekaterinburg summit called for “a more democratic and just multipolar world order based on the rule of international law, equality, mutual respect, cooperation, coordinated action and collective decision-making of all states.” Since then the joint statements of the various BRICS summits have repeatedly underscored need for a realignment of the post–World War II global order based on the untrammelled supremacy of the US. As the US is preoccupied with internal troubles and the eurozone is mired in a debilitating debt crisis, a vacuum is increasingly being felt in the international system. This presents an opportunity for the BRICS to emerge as major global players. Plans are underway for some joint projects. The New Delhi summit resulted in a proposal to create a joint BRICS development bank that would finance investments in developing nations, and this year’s summit is expected to conclude negotiations for setting up this bank.
But overall momentum for BRICS, a much-hyped initiative, seems to be flagging. Growth-rate estimates for all the BRICS are steadily declining. Fluctuating economic trends, however, are not the leading reason behind the unworkability of the BRICS idea, but rather the structural disparity at the heart of the grouping.
China’s rise has been so fast and so spectacular that others are still trying to catch up. The Chinese economy is not only the second largest in the world but also larger than the economies of the other four members combined. China’s power makes the other members nervous, leading them to hedge bets by investing in alternative alliances and partnerships even as China’s rapid accretion of economic and political power adds to its own challenges to make friends. Given the leverage that China enjoys in BRICS, it should come as no surprise that Beijing has suggested that IBSA – the grouping of democracies India, Brazil and South Africa – be shut down in favor of BRICS.
China’s manipulation of its currency has resulted in significant problems for manufacturing sectors of other emerging powers. India, Brazil and South Africa all have expressed disenchantment with Beijing’s economic policies at various times. New Delhi has even imposed anti-dumping duties on a range of Chinese goods. China’s dominance of the intra-South trade remains overwhelming with other emerging powers struggling to get a share of the pie. Central bankers from Brazil and India spoke against the undervalued yuan in 2009 and 2010 to little effect.
BRICS momentum may be flagging. Growth-rate estimates are declining. Structural disparity is a challenge.
Economic ties between China and Brazil have grown, but so have frictions. China is not viewed as a fair competitor with Brazilian manufacturers accusing China of dumping diverted exports from Europe even as Brazilian manufacturers face steep non-tariff barriers in trying to export to China. Worried about the influx of investment and cheap imports from China, Brazilian manufacturers are losing market share to Chinese counterparts, and Brazil is also wary of China’s growing economic profile in South America, which Brazil considers its own sphere of influence.
Russia and China are united in their aversion to a US-led global political order, but elite distrust of each other remains. Though they coordinate in trying to scuttle western policies, as has been the case on Iran and Syria recently, the partnership is one of convenience. Russia’s failure to develop its Far East has allowed China to gain a toehold in this strategic region and allowed Beijing to define the Asian security landscape. And though China is the largest buyer of Russian conventional weaponry, many in Russia see this as counterproductive: China could emerge as the greatest potential security threat to Russia.
Likewise, Sino-India ties have witnessed a steady deterioration over the last few years on a variety of issues – from land border to maritime disputes. Despite the public pronouncements by the two sides, New Delhi remains skeptical of China’s intentions. Beijing’s refusal to acknowledge India’s rise and a lack of sensitivity on core security interests are leading to pushback. With overall bilateral trade worth $55 billion, India’s trade deficit with China rose to $23 billion in 2012.
Russia and China are united in an aversion to a US-led global political order, but distrust of each other remains.
South Africa’s relations with China are also not as wrinkle-free as so often made out in the popular media. Concerns have been rising that China’s economic power is strangling South African manufacturing while locking up vital resources for years, as the flood of Chinese finished goods to Africa has created a large trade imbalance. Textile mills in South Africa have closed down under the onslaught of inexpensive Chinese imports, leading to public protests. In a somewhat surprising outburst, former South African President Thabo Mbeki had warned that Africa risked becoming an economic colony of China if the growing trade imbalance between the two was not rectified. Though China has its share of supporters in South Africa, its extractive economic policy is leading to growing calls for a more equitable economic relationship.
The fascination with BRICS is partly an offshoot of the discussion on the emerging so-called post-American world. Many commentators argue multipolarity is likely to be the norm. Yet while BRICS may have growing economies, it’s not clear this can translate into power at the global level. Even if the BRICS get their economic act together, the grouping will find it difficult to turn that strength into a unified political force. China’s dominance makes most of the goals articulated by the BRICS states wobbly. The point of this coalition was always to show that the balance of power is shifting toward emerging countries, away from the West’s historical dominance. But a multipolar world isn’t the same as China just trying to tilt the balance of power toward itself.
The narrative surrounding the rise of BRICS is as exaggerated as that of decline for the US. The tectonic plates of global politics are certainly shifting, but their movements are unpredictable. BRICS will remain an artificial construct, merely an acronym coined by an investment banking analyst, for some time to come.
Singapore, Hong Kong and New Zealand are the top-three easiest places to do business, beating the U.S. at No. 4, according to the World Bank’s 2013 rankings of regulatory environments. Singapore and Hong Kong also ranked No. 1 and No. 2 in the ease of trading across borders, while New Zealand was No. 25.
In the Association of Southeast Asian Nations, Malaysia and Thailand ranked the highest for “doing business,” at No. 12 and No. 18, respectively. Indonesia, the Philippines and Vietnam ranked No. 128, No. 138 and No. 99. In trading across borders, Malaysia ranked No. 3 and Thailand was No. 4. This may help these countries attract a greater share of foreign investment as Asean moves toward integration.
China ranked No. 91 overall — no change from last year — because of rankings below 100 in subcategories, such as the ease of starting a business, dealing with construction permits, getting electricity, protecting investors and paying taxes.
Nepal ranked No. 108 overall and No. 3 of countries defined as low income by the World Bank. Sub-Saharan African countries made up the bulk of the lowestranked countries, with the Central African Republic in the bottom spot at No. 185.
Jim O'Neill, who coined the acronymn BRIC for emerging nations, plans to leave his post at Goldman Sachs this year. In an interview with SPIEGEL ONLINE, he discusses the banking industry and why he still sees a bright future for China and Russia.
As chairman of Goldman Sachs Asset Management, Jim O'Neill is responsible for some $800 billion in assets. At the beginning of February, he made the surprise announcement that he would leave the bank by the end of this year.
O'Neill, 55, became well-known in 2001 for a paper in which he was the first to coin the acronomyn BRIC, for the developing nations of Brazil, Russia, India and China, which he predicted would be the great economic powers of the future. More recently, South Africa has also been frequently named as belonging to this circle.
The quintet, now called BRICS, accounts for about 40 percent of the world's population and has long seen itself as a counterweight to established powers, such as the United States or the European Union. At the end of March, BRICS leaders are scheduled to meet in Durban, South Africa, as part of their search for a new world order and their role in it.
SPIEGEL: You could start a second career as secretary general of the BRICS countries.
O'Neill: I have indeed received a few offers during the last several days, and this proposal is certainly one of the more interesting ones! However, I don't know whether the heads of the BRICS countries want to create such a post and, if so, whether they would like to give it to me. On the other hand, this club of countries owes its very existence to me -- if I may say so in all modesty. So I will be waiting for a call to come in.
SPIEGEL: At last year's meeting in Delhi, BRICS leaders already discussed some very specific joint actions such as establishing a "Bank of the South" to compete with the Western country-dominated World Bank ...
O'Neill: ... which I think is a fascinating idea that is being championed by India and, probably also by Brazil. However, it remains to be seen whether the Chinese really like this plan. At this point, it would be important for the BRICS countries to launch concrete projects if they want to be more than a club that is loosely tied together. They have already agreed on measures to facilitate trade between them and issued joint demands on some foreign and environmental policy topics. More can be done.
SPIEGEL: Are the BRICS countries not too different to form a really powerful group? When you invented the BRICS concept, did it ever occur to you that they would have such an impact on world politics?
O'Neill: No, of course not! Try to imagine the situation in which I came up with that idea. This was shortly after 9/11. The terrorist attacks on New York and Washington strengthened my belief that the dominance of the western countries needed to be superseded, or at least complemented, by something else. If globalization were to continue to be successful, it should not sail under the US flag. It seemed to me that because of their sheer size and their populations, China, India, Russia and Brazil had the economic potential. What emerging markets have in common -- in addition to their distrust of the West -- is their bright future. But apart from that, they could hardly be more different in terms of their politics and, also, their economic systems.
SPIEGEL: Economically, have the BRICs developed as you expected?
O'Neill: They have exceeded all expectations. In slightly over a decade the group's GDP has grown from approximately $3 billion to $13 billion. The BRIC countries have the potential to avert a global recession and to grow faster than the rest of the world and to pull all of us along with them as a (growth) engine.
SPIEGEL: That is what you say. But China, India, Russia and Brazil are also facing significant crises. Ruchir Sharma, your counterpart and the head of Morgan Stanley Investment Management, has already proclaimed the end of the miracle. In an article entitled "Broken BRICs" he wrote that "the world economy's new BRICs are broken" ...
O'Neill: … and part of the press keeps echoing that. This is so plain wrong that, depending on the mood I'm in, it sometimes amuses and sometimes irritates me.
SPIEGEL: You are not going to deny that last year the BRICs caused considerable disappointment and that their economic performance has also been far from splendid so far this year.
O'Neill: Opinions differ on this. Last year, China's economy grew by 7.7 percent. Thus, in 2012 the country again created the equivalent of another Greek economy every 11 and a half weeks. Admittedly, a rather slow growth rate by Chinese standards. Importantly, the reasons for China's lower growth rate were structural and cyclical in nature. It was a planned downturn, mainly due to concerns about overheating and inflation. During the last quarter China already did better again, coming out of its trough.
SPIEGEL: Don't you see any warning signs in the large number of strikes, in corruption and the growing gap between the rich and the poor? Are you selling shares in China funds right now?
O'Neill: During my visits to China I have always been struck by how undogmatic the country's ruling party is about making economic-policy decisions. During the last two years, they tightened the financial reins a good deal because China's leadership tried to protect itself against inflation, and apparently they have overdone it. While I do not expect bold moves from the new political leadership, I do expect them to cautiously continue the reforms that have already started with the aim of raising living standards and reducing the huge gap between the rich and the poor.
SPIEGEL: Are you also so optimistic about Russia, Brazil and India?
O'Neill: Not quite. Russia must free itself from its dependence on oil and gas exports, but they stand a good chance of achieving continuous annual growth rates slightly above 4 percent. While Brazil needs to do more to foster growth, great opportunities lie ahead for the country in the long run because of its raw materials and industrial performance. Leaving aside South Africa, which does not belong in this club in the first place, India is the BRIC country facing the biggest challenges. The government in Delhi would need to do more to support foreign direct investment, and (the country's economy) urgently needs some stimulus. They simply do not govern enough. Politicians in India fatally believe that things will get better by themselves and that they don't need to do anything to contribute to this. Nevertheless, the country remains highly interesting. Besides, with its very young population it enjoys a demographic advantage.
SPIEGEL: Many investors feel the BRICS markets no longer offer the kind of return on investment they are looking for. Do you see any countries emerging that could replace them?
O'Neill: When I identified Mexico, Indonesia, South Korea and Turkey as new growth markets, somebody suggested calling them "MIST."
SPIEGEL: … investors are now referring to these four countries as "SMIT" ...
O'Neill: … Be that as it may: They are up-and-coming.
INVESTOR SENTIMENT - A World Wide Distrust of Financial Markets Building
Indian investor Nirav Vora had 2.5 million rupees ($45,984) in the Indian stock market six years ago. Today that figure is down by 75 percent after investment losses and withdrawals. Now the 39-year-old father of two in Mumbai, who depends on investment income for his livelihood, is plowing money into government bonds. “The confidence of small investors is rock bottom,” Vora says. “They have no faith in the markets.”
Disappointing economic growth and corporate profits have stocks in the BRIC nations—Brazil, Russia, India, and China—trailing global shares for a fourth year. While the Dow Jones industrial average is trading at an all-time high, the MSCI BRIC Index (MSCI) remains 37 percent below its 2007 peak. Emerging economies “are inherently and structurally more volatile,” says Jagannadham Thunuguntla, chief strategist at New Delhi-based SMC Global Securities. Investors should “realize that bumps on the way are not the exception, they are just the norm.”
Investors in the BRIC countries are losing their appetite for equities even as U.S. households pile back into them. Trading by Brazilian individual investors has dropped to the lowest level since 1999, exchange data show, as the benchmark Bovespa index has fallen 7 percent this year. Russian mutual funds posted 16 straight months of outflows, the most since at least 1996, according to the National League of Management Companies, a trade group in Moscow. “This is a somewhat steady march to the exit,” says Michael Shaoul, the chairman of New York-based Marketfield Asset Management, which is betting that shares in Brazil, India, and China will fall.
More than 59 percent of companies in the MSCI BRIC Index reported quarterly earnings that trailed analyst estimates this year, the fourth-straight quarter of disappointing results. Local investors know that their own economies are not very strong, says John-Paul Smith, an emerging-market strategist at Deutsche Bank (DB) in London. “It’s difficult to find stocks you want to own.”
Romano Allegro, a 57-year-old restaurant owner in Salvador, in northeastern Brazil, grew disillusioned with equities because government decisions hurt his investment in state-run oil company Petroleo Brasileiro (PBR). Allegro first acquired stock in Petrobras, as the company is known, through a state asset sale in 2000 and now owns 128 common and six preferred shares. “I started selling my shares because I lost a lot of money,” Romano says. “The fundamental reasons of all this damage, not only for me but for every Petrobras investor, has a name: government intervention. It destroyed the company’s value and, most of all, scared smaller investors on the Brazilian exchange.” Petrobras common shares have lost 64 percent during the past five years, vs. 7.4 percent for the Bovespa.
Dmitry Sukhov, who runs a Moscow-based firm that advises individuals on global markets, says he stopped buying Russian stocks about 18 months ago. “The Russian economy is becoming less market-friendly,” he says. “Investors were expecting liberalization of different economic sectors, and instead we’re seeing the opposite trend. There’s a sense of disappointment.”
The Shanghai Composite Index has tumbled 31 percent since the end of 2009, the most among the BRIC equity gauges. Former Chinese Premier Wen Jiabao said on March 5 that the country lacks a sustainable growth model as he set an economic expansion target of 7.5 percent for this year, unchanged from 2012, in his final report to the National People’s Congress in Beijing before handing power to his successor, Li Keqiang. Vivian Zhang, a 29-year-old in Shanghai, withdrew 260,000 yuan ($41,828) from the stock market in December and shifted the money into a fund that invests in global commodities. “I am still cautious on stocks,” Zhang says. “The outlook for economic growth is still murky.”
Education, like healthcare and commercial banking, would be best treated as public utilties and not 'winner take all' businesses with extravagant executive salaries and arcane investments.
A strong vocational secondary educational effort would do wonders for those who are not inclined to college.
There is always room for private enterprise for those who wish something different, above and beyond.
But in those cases they ought not to be tax exempt unless there is some integral religious affiliation, or subsidized in any way with public funding, except to fund specific special programs and research.
If a private educational institution were to desire tax exempt status, it would have to comply with some strict regulation on management salaries and investments for example. If they wish to be businesses, let them be businesses.
Wall Street and their financiers can take any human endeavor and turn it into a parasitical racket. Wait until you see what they do with agriculture, energy, housing, elder care, and water if the people allow it.
This is the corrosiveness of paper money and crony capitalism.
For some perspective on the post-financial crisis rally, today's chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by several major international stock market indices. For example, the S&P 500 peaked at 1,565.15 back in October 9, 2007 and troughed at 676.53 back on March 9, 2009. The most recent close for the S&P 500 is 1,563.77 -- it has retraced 99.8% of its financial crisis bear market decline. As today's chart illustrates, China (Shanghai Composite), Japan (Nikkei 225), India (S&P BSE Sensex), Germany (DAX), France (CAC 40) and the UK (FTSE 100) are all above their financial crisis lows (i.e. above 0% on today's chart) while none of the aforementioned countries are currently trading above their respective pre-financial crisis peak (i.e. none are above 100% on today's chart). It is interesting to note that the US (epicenter of the financial crisis) has outperformed the other major stock market indices while China has lagged.
FUNDAMENTALS - Shrinking Cashflow Growth Rate By Most Corporations
Citi credit strategist Jason Shoup offers an interesting stat about corporate cash balances in a recent note to clients.
"Using the Russell 3000 as a universe, we see that the top 20 corporates with the most cash on their balance sheets at the end of 2012 hold over $650 billion - almost 40% of all the cash and marketable securities of Russell 3000 companies," writes Shoup. "And among those top 20 companies, cash balances have grown between 15-20% for the last year, while the rest of the companies have seen far lower growth in the 0-5% range (see figure)."
It gives you a sense of how skewed things can be in the financial markets
The shift toward less volatility underscores investors' belief that the global economic recovery from the financial crisis is on a more sustainable track, due in no small part to commitments from major central banks to keep easy-money policies in place.
"The perception was that the global economy was sitting on the edge of a precipice, so…it felt like we were too close to falling off the precipice, whatever the headline was. Investors feel like the economy is not at the edge of a cliff any more, so when something comes along like Cyprus…we're now much better able to roll with the punches. If this was Italy or Spain instead of Cyprus, it might be a different conversation." says Richard England, portfolio manager for Atlanta Capital Management, which manages $14 billion in assets.
The VIX has sustained low levels during prior bull markets. From early 2003 through mid-2007, a time during which the S&P 500 rose about 33%, the VIX averaged 14.4.
"Europe scared the hell out of us the past couple years, but now we aren't reacting at all," said Michael Palmer of Group One Trading, who sits at the center of the VIX trading pit on the floor of the CBOE. "Headline risk has taken a back seat."
Christopher Cole, portfolio manager of the Artemis Vega Fund at Artemis Capital Management, a $25 million firm that specializes in trading volatility derivatives, said the reduced volatility may be a result of "disaster fatigue" among investors. "People have been screaming about the end of the world for years now, but markets have been pretty resilient." But, he said, "There is currently this dangerous belief that global central banks can backstop markets as long as they need to—and that will remain true until suddenly it isn't."
Julian Jessop, London-based chief global economist for research firm Capital Economics, says investors are overlooking real deterioration in euro-zone economies, which could lead to renewed strains in the financial markets. "There's a lot more volatility to come," says Mr. Jessop. "I'm not suggesting we're going back to financial-crisis levels—that was exceptional. But the current low levels are unsustainably low, and volatility in the next couple of years will be higher than it is now."
Terrific timely discussion chart from Mary Ann Bartels & Co. at MER showing the extent of bearish anticipation of a correction:
Investors Intelligence (II) sentiment data shows 34% of newsletter writers are expecting a correction. The prior two corrections occurred with this level at 34.7% and 35.1% respectively.
Bartels adds that “newsletter writers need to capitulate and remove their calls for a market correction in order to get a contrarian bearish sentiment extreme.”
When too many investors are looking for a correction, it reflects that selling has already occurred. That implies less supply, less downside pressure, and the potential for pros to be forced back in. It is the Long-only side version of a short squeeze.
COMMODITY CORNER - HARD ASSETS
2013 - STATISM
CENTRALIZED COMMAND AUTHORITY - The Path to Statism
There are two types of people in this world; those who worship the ideal of centralized command authority, and those who do not. Those who value freedom regardless of risk or pain, and those who value slavery in a desperate bid to avoid risk and pain. When I consider the ultimate folly of man, in the end I look to the meek and unquestioning masses who strive to avoid risk, because it is they who always end up feeding the machines of war, despair, and tyranny. The power thirsty halls of elitism surely instigate and manipulate the tides of this wretched ocean of quivering souls, but ultimately, the weak-hearted and weak minded make all terrible conquests possible.
They live by the rule of fear, and their fear drives them to seek control; control of their environment, control of others, and by extension they believe, control of the future. They attempt to mitigate their overwhelming fear by containing the world and sterilizing it of everything wild, untamed, and unknown. They dream of a society of pure predictability, and zero responsibility. They are willing to sacrifice almost anything to attain this position of artificial comfort.
The concept of “big government” appeals to such people for many reasons…
Government in most cases is nothing but an abstraction. It is merely a tool that serves the interests of a particular group of people at any given time. Modern politics is an expression of the foolish cat fight between factions of people to decide who gets to wield the weapon of government and impose their ideology on the rest of us. At least, that’s what it almost always devolves into. The great illusion of the system, though, is that ANY group of average people ever actually wields any power.
The truth is, big governments are always operated by very small and exclusive clubs of root beneficiaries out of the sight of the population. The smaller this dominant group becomes, the more corrupt and criminal the government generally is.
A government reaches a state of despotism whenever its functions are twisted for the sake of an elite few to the detriment of the common man, and when it ignores the natural inborn rights of the individual for the sake of some fabricated collective .
If one were to closely examine the birth of every iron-fisted oligarchy throughout history, they would find
A Cyclical Pattern of Centralization;
The removal of checks and balances,
The removal of legitimate public involvement in the political process,
A dependent and infantized citizenry, and
The rise of a “bureaucratic class” which regards itself as superior and born to lead.
All steps taking place within Western societies today.
Unfortunately, the masses tend to view big government as an inevitability of life; as a natural extension of culture. Rarely if ever do they ask what tangible purpose it serves. Are they really getting what they want out of their government? Or, is the government taking what it wants from them?
I have always found the worshipful attitude that some citizens ascribe to government simultaneously fascinating and disturbing, because these people are not bowing down to a wise and benevolent entity. Rather, they are bowing down to their own delusions of what they believe that entity to be. The most dangerous and insidious of governments present themselves as a kind of social vanity mirror. They allow the citizenry to project their collective desires, biases, shortcomings, and fears, and reflect back an image that entices and placates the majority. The lies and manipulations of big government are designed to satiate our basest fantasies, but what we see as a concrete edifice of political and legal might, in the end, is a mirage mired in the fog of our own naïve expectations.
So, the question again arises; if the structure of big government is built upon deceit and misrepresentation, what tangible purpose does it really serve?
The answer is no purpose…at least, no purpose that elevates and enriches the public at large.
Big government is not a “necessary evil”. It is just evil. Like the ring of Sauron, it lures in the weak with promises of power, but this power is a ruse. Each side of our false left/right paradigm, Democrat and Republican, thinks that if only THEY were the bearers of the ring they would “finally use it for good”. But once in their possession, they are overtaken, overwhelmed, and corrupted by personal temptation.
The Democratic Party, with all of its proclamations of humanism and respect for civil liberties, is a perfect example. How quickly did the rank and file Democrats turn away from their anti-war, anti-torture, anti-banker, anti-surveillance, anti-tyranny stance once Barack Obama, a self proclaimed Democrat, was placed in office? Very quickly!
And what about the common Republican? How many of them utterly abandoned their ideals of limited government, reduced spending, Constitutional rights, and Christian understanding as soon as Bush and the Neo-Con regime was installed? Most of them!
And when all is said and done, who has reaped profits and gained dominance during both disastrous administrations?
The corporate high priests and
International banking cartels,
not the oblivious participants of the fake political theater. Yet, a masochistic cycle of misplaced trust in the system on the part of the masses continues...
If these latest signs of big government corruption aren’t enough to make the public question the validity of the establishment, I’m not sure what will…
The Rape Of Cyprus
Even in the face of unmitigated government theft, I still hear the occasional rationalization of the Cyprus debacle. Defenders of the bailout measures (which the EU demanded) allowing the confiscation of private citizen savings to pay off government mismanaged debt, argue two things:
1) The banks that were targeted contained “Russian blood money” and hidden funds, so confiscation really amounted to a “punishment of rich criminals” rather than the Cyprus public.
2) It is “better” that the citizens go along with the confiscation of a percentage of their accounts, rather than lose everything through collapse.
Just to be clear, any sizable Russian funds being stored in Cyprus were removed before the bailout measures were instituted. Therefore, the assertion that such people were “punished” is a lie and a distraction. The Russian scapegoat was merely being promoted by global financiers and political elites in order to con people around the world (not just those in Cyprus) to accept the concept of government theft of private funds as being “moral” under “certain extraneous circumstances”. When a government wants you to set aside your conscience in support of an immoral action that serves their interests, they will almost always conjure a false villain and engineered consequences for you to direct your fear and anger at. Once they can convince you to abandon your own principles to smite an imaginary enemy or avoid a manufactured threat, even if only one time, it will be much easier for them to convince you again a second time.
Large and corrupt governments love to use the magic of the false choice. For instance, “…it is better to sacrifice some of your money and your principles to the establishment than it is to live through total collapse of the nation…” This false choice process, though, never ends. The offending government will demand more property and more freedom from the citizenry everyday while constantly warning that if we do not submit, the alternative will be “far worse”.
The truth is, Cyprus is not the issue. What the disaster in Cyprus reflects, however, concerns us all. It is a moment of precedence; an action which sets the stage for the final destruction of the idea of private property. It dissolves one of the final barriers to total government control. Governments and elitists have always stolen from the public through misspent taxation and rampant inflation, but with Cyprus, we see a renewed feudalistic paradigm. The EU and the banking hierarchy are sending a message to the Western world: You are now their personal emergency fund, and nothing you own is actually yours anymore.
When an institution confiscates property and capital at will from a subdued and frightened populace without consent, they are essentially exploiting the labor of that populace. In any culture or language, this is called “slavery”.
Private Corporations Openly Dictating The Law
As most in the Liberty Movement know, the seeds of Fascism germinate in the soil where the corporate world meets the political world. This is one of the primary reasons why we will stop at nothing to eliminate entities like the Federal Reserve; a privately run banking cartel that mingles with government yet answers to no one, including Congress or the people. The Fed has existed since 1913, and has dominated the value and circulation of our currency ever since. However, today, they are taking on new powers…
As a part of the recent bailout bonanza and the legislation surrounding it, the Fed has begun writing operational policy for other private banking institutions:
The transition has been subtle but the implications are dangerous. The Fed is becoming a regulatory body with expanding influence outside of the electoral process. It is preparing the ground for other private central banks to become fully unaccountable governing structures. Right now, they are limited to the banking sector, but eventually, this dynamic will poison every aspect of the financial world until every economic decision will be made without any oversight from the public.
Moving in a slightly different direction, the Federal Government is beginning to establish law which removes the ability of the public to have any means of redress against particular corporations. The ‘Monsanto Protection Act’ hidden within the pages of the HR 933 spending bill creates special circumstances that protect the GMO producer from litigation and public examination over the dangerous genetic products it markets. This legislation, in essence, builds a coalition between Monsanto and the government, and even allows Monsanto in some cases to dictate what the government can and cannot do when dealing with GMO’s.
The Obama Administration’s support of this bill should be a shock to any environmentally inclined Democrat, and any Democrat who is still willing to defend Obama after learning of this legislation, in my opinion, is a lost cause.
This move on the part of our government is striking because of its open criminality. It shows that we have entered a new stage of the totalitarian process; one that will invariably lead us to catastrophe.
Legislation By Special Interest Group
In the halls of big government, politicians do not produce major legislation. Rather, bureaucrats and think tanks fashion policy while elected officials serve as mouthpieces and middlemen.
How often do we discover after the passage of particularly nefarious pieces of legislation that the politicians who voted for them NEVER read the bills themselves?
This past week, sources within NY governor Andrew Cuomo’s administration claimed that he didn’t actually read the NY Safe Act before championing it, and blamed the vast mistakes and unconstitutional oversteps of the bill on Mayor Bloomberg and the Brady Center.
Now, I do not believe that Cuomo was not aware of the implications of the Safe Act, even if he didn’t read the bill. But I do believe that the bill was drafted purely by special interest groups like the Brady Center without any oversight from actual state legislators, who then passed it overnight without a second thought.
In a big government system, legislative wrangling is non-stop. A bureaucracy thrives on the endless introduction of new laws and new restrictions, and so it makes perfect sense that political representatives, who now act merely as mascots, never have the time to read all the paperwork. Why would they read it, when they are no longer making decisions on such policies anyway? All they have to do is vote how they are told to vote by their handlers, and trust that they will be protected by the establishment from public anger.
Legislation by proxy is rampant in our government today, and it begs us to consider this - If our government has become so oversized and complex that our elected leaders can no longer oversee the actual writing of legislation and must use private think tanks to write it for them, perhaps we should cut the system down until their work load is manageable. The alternative is a legal and political structure that is engineered entirely by obscure interest groups with an agenda, and this is highly unacceptable.
Complete Disregard For Individual Rights
In the evolution of big government, there comes a point at which the oligarchy has attained enough power that it feels safe in admitting its true intentions. Usually, this is done in the name of the “greater good”. Sometimes, they don’t even try to sugar coat it.
This past week, NY Mayor Michael Bloomberg in an unguarded moment stated the underlying philosophy behind the impositions of government control over the people. When questioned about the Constitutionality of the growing drone surveillance grid in American skies, Bloomberg had this to say:
“Everybody wants their privacy, but I don’t know how you’re going to maintain it. It’s just we’re going into a different world, uncharted, and, like it or not, what people can do, what governments can do, is different. And you can to some extent control, but you can’t keep the tides from coming in.”
“The argument against using automation, it’s this craziness– oh, it’s Big Brother. Get used to it.”
And there you have it. The new age (for Bloomberg and big government elites like him) is a place in which government is separate and above the people. The government does not exist to serve the citizenry; the citizenry exists to serve the government. Privacy is a privilege that governments can take anytime they wish. Citizens, being slaves, should not expect such privileges. And, this subjugated nightmare world is a place that we must accept as a natural extension of progress. Big Brother is the future, so grow up and “get used to it”…
I will not be “getting used to it”, and neither will millions of Americans like me. We'll tear the whole monstrosity down first.
Institutions of law and order are supposed to reflect the highest inherent principles of humanity and defend those principles regardless of the nature of the times. Honor and conscience do not suddenly become obsolete simply because danger looms, or catastrophe strikes.
Big government bastardizes the original intent of the founders, who formed a small subservient central federal structure to fulfill one purpose – as a protector of the natural freedoms of the population. The federal system was never meant to have any domestic power beyond this task, nor should it. Today, as we have shown over and over again, the centralized political behemoth we live under is absolutely unnecessary and completely destructive to the freedom and prosperity of the culture it was originally tasked to defend. It can and must be dissolved, and it is time for average Americans to deeply and seriously ponder this option rather than ignorantly assume that because it exists, it should exist. Otherwise, like a weaponized cancer, it will devour what is left of the healthy fabric of our society and destroy whatever good remains within us.
STATISM - The Deadly Symbiotic Relationship of Politicians and Bankers; Governments and Banks
Reclaiming the Founding Fathers’ Vision of Prosperity
To understand the core problem in America today, we have to look back to the very founding of our country.
The Founding Fathers fought for liberty and justice. But they also fought for a sound economy and freedom from the tyranny of big banks:
“[It was] the poverty caused by the bad influence of the English bankers on the Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary War.”
- Benjamin Franklin
“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”
- John Adams
“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.”
- John Adams
“If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied”.
— Thomas Jefferson
“I believe that banking institutions are more dangerous to our liberties than standing armies…The issuing power should be taken from the banks and restored to the Government, to whom it properly belongs.”
- Thomas Jefferson
“The Founding Fathers of this great land had no difficulty whatsoever understanding the agenda of bankers, and they frequently referred to them and their kind as, quote, ‘friends of paper money. They hated the Bank of England, in particular, and felt that even were we successful in winning our independence from England and King George, we could never truly be a nation of freemen, unless we had an honest money system. ”
-Peter Kershaw, author of the 1994 booklet “Economic Solutions”
Indeed, everyone knows that the American colonists revolted largely because of taxation without representation and related forms of oppression by the British. See this and this. But – according to Benjamin Franklin and others in the thick of the action – a little-known factor was actually the main reason for the revolution.
When he arrived, he was surprised to find rampant unemployment and poverty among the British working classes… Franklin was then asked how the American colonies managed to collect enough money to support their poor houses. He reportedly replied:
“We have no poor houses in the Colonies; and if we had some, there would be nobody to put in them, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.”
In 1764, the Bank of England used its influence on Parliament to get a Currency Act passed that made it illegal for any of the colonies to print their own money. The colonists were forced to pay all future taxes to Britain in silver or gold. Anyone lacking in those precious metals had to borrow them at interest from the banks.
Only a year later, Franklin said, the streets of the colonies were filled with unemployed beggars, just as they were in England. The money supply had suddenly been reduced by half, leaving insufficient funds to pay for the goods and services these workers could have provided. He maintained that it was “the poverty caused by the bad influence of the English bankers on the Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary War.” This, he said, was the real reason for the Revolution: “the colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction.”
Alexander Hamilton, the nation’s first treasury secretary, said that paper money had composed three-fourths of the total money supply before the American Revolution. When the colonists could not issue their own currency, the money supply had suddenly shrunk, leaving widespread unemployment, hunger and poverty in its wake. Unlike the Great Depression of the 1930s, people in the 1770s were keenly aware of who was responsible for their distress.
As historian Alexander Del Mar wrote in 1895:
[T]he creation and circulation of bills of credit by revolutionary assemblies…coming as they did upon the heels of the strenuous efforts made by the Crown to suppress paper money in America [were] acts of defiance so contemptuous and insulting to the Crown that forgiveness was thereafter impossible . . . [T]here was but one course for the crown to pursue and that was to suppress and punish these acts of rebellion…Thus the Bills of Credit of this era, which ignorance and prejudice have attempted to belittle into the mere instruments of a reckless financial policy were really the standards of the Revolution. they were more than this: they were the Revolution itself!
And British historian John Twells said the same thing:
The British Parliament took away from America its representative money, forbade any further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all taxes should be paid in coins … Ruin took place in these once flourishing Colonies . . . discontent became desperation, and reached a point . . . when human nature rises up and asserts itself.
In fact, the Americans ignored the British ban on American currency, and:
“Succeeded in financing a war against a major power, with virtually no ‘hard’ currency of their own, without taxing the people.”
Indeed, the first act of the New Continental Congress was to issue its own paper scrip, popularly called the Continental.
Franklin and Thomas Paine later praised the local currency as a “corner stone” of the Revolution. And Franklin consistently wrote that the American ability to create its own credit led to prosperity, as it allowed the creation of ample credit, with low interest rates to borrowers, and no interest to pay to private or foreign bankers .
Not Ancient History … One of the Most Vital Issues of Today
Is this just ancient history? No.
The ability for America and the 50 states to create its own credit has largely been lost to private bankers. The lion’s share of new credit creation is done by private banks, so – instead of being able to itself create money without owing interest – the government owes unfathomable trillions in interest to private banks.
Read this background to understand how money is really created in our crazy current banking system. And read this and this to learn why we are paying trillions of dollars to the big banks in unnecessary interest costs.
America may have won the Revolutionary War, but it has since lost one of the main things it fought for: the freedom to create its own credit instead of having to beg for credit from private banks at a usurious cost.
No More Federal than Federal Express
While many Americans assume that the Federal Reserve is a federal agency, the Fed itself admits that the 12 Federal Reserve banks are private. See this, this, this and this.
Fed boss Bernanke falsely stated that the big banks receiving bailout money were healthy, when they were not. They were insolvent. By choosing the big banks over the little guy, the Fed is dooming both.
To anyone paying attention, reality is now painfully obvious. These bankrupt, insolvent governments have just about run out of fingers to plug the dikes. And history shows that, once this happens, governments fall back on a very limited playbook:
As Cyprus showed us, bankrupt governments are quite happy to plunder people’s bank accounts, especially if it’s a wealthy minority.
Aside from bank levies, though, this also includes things like seizing retirement accounts (Argentina), increases in civil asset forfeiture (United States), and gold criminalization.
Just another form of confiscation, taxation plunders the hard work and talent of the citizenry. But thanks to decades of brainwashing, it’s more socially acceptable. We’ve come to regard taxes as a ‘necessary evil,’ not realizing that the country existed for decades, even centuries, without an income tax.
Yet when bankrupt governments get desperate enough, they begin imposing new taxes… primarily WEALTH taxes (Argentina) or windfall profits taxes (United States in the 1970s).
This is indirect confiscation– the slow, gradual plundering of people’s savings. Again, governments have been quite successful at inculcating a belief that inflation is also a necessary evil. They’re also adept at fooling people with phony inflation statistics.
Governments can, do, and will restrict the free-flow of capital across borders. They’ll prevent you from moving your own money to a safer jurisdiction, forcing you to keep your hard earned savings at home where it can be plundered and devalued.
We’re seeing this everywhere in the developed world… from withdrawal limits in Europe to cash-sniffing dogs at border checkpoints. And it certainly doesn’t help when everyone from the IMF to Nobel laureate Paul Krugman argue in favor of Capital Controls.
Wage and Price controls
When even the lowest common denominator in society realizes that prices are getting higher, governments step in and ‘fix’ things by imposing price controls.
Occasionally this also includes wage controls… though wage increases tend to be vastly outpaced by price increases.
Of course, as any basic economics textbook can illustrate, price controls never work and typically lead to shortages and massive misallocations.
Wage and Price controls– on STEROIDS
When the first round of price controls don’t work, the next step is to impose severe penalties for not abiding by the terms.
In the days of Diocletian’s Edict on Prices in the 4th century AD, any Roman caught violating the price controls was put to death.
In post-revolutionary France, shopkeepers who violated the “Law of Maximum” were fleeced of their private property… and a national spy system was put into place to enforce the measures.
Despite being completely broke, governments will dramatically expand their ranks in a last desperate gasp to envelop the problem in sheer size.
In the early 1920s, for example, the number of bureaucratic officials in the Weimar Republic increased 242%, even though the country was flat broke from its Great War reparation payments and hyperinflation episode.
The increase in both regulations and government officials criminalizes and/or controls almost every aspect of our existence… from what we can/cannot put in our bodies to how we are allowed to raise our own children.
War and National Emergency
When all else fails, just invade another country. Pick a fight. Keep people distracted by work them into a frenzy over men in caves… or some completely irrelevant island
2012 - FINANCIAL REPRESSION
NEW NORMAL - The Results of Moral Hazard and Unintended Consequences
Over the years a number of economists and political scientists have seen the error of their ways and come clean with a reasoned recantation. The mid-19th century British thinker John Stuart Mill famously changed his mind on the divisive question of industrial wages. My contribution to political economy hardly matches Mill’s, but I have spent my adult life pondering the linkages between economics and markets. However, in recent times I have come to realize that I was wrong in my most basic understanding of these relationships. So for the edification of younger readers, and possibly future generations, I have composed a single document to explain my about-face; to my tormentors I hope this proves that I have left behind impure thoughts and incorrect reasoning!
My recantation will take the form of key lessons learned:
Lesson #1 Government agencies allocate capital better than the private sector
We have moved into a new world where it is no longer necessary to have the market decide short rates, long rates or, for that matter, the currency exchange rate. This happy state of affairs started with euro’s adoption in 2000 and intensified in 2002 when US real interest rates were driven negative. Given the massive successes of these policies, the authorities have expanded their horizon to seize control of other troublesome prices such as salaries, either by fixing them (minimum wages and the capping of financial professionals’ bonuses), taxing “excessive” remuneration (think anything above the minimum wage, especially in France). Even more creatively, new regulations such as Basel III or Solvency II have compelled savings to be invested in government securities rather than financing private sector capital spending. This properly “guided” financial system means a portfolio invested 50/50 in US and German bonds since 2000 has outperformed pretty much all assets with the exception of gold (we expect a directive banning the use of the “barbarous relic” anytime soon). Such a portfolio of government securities, I am told, will continue to outperform for the foreseeable future, and I, of course, believe it. Moreover, the next step will be to control the price of disorderly markets that still exist for traded goods and salaries. And the perfectly dreadful free movement of capital will soon be brought to heel through foreign exchange controls. Hence, a portfolio of securities issued by such enlightened authorities will surely outperform for the foreseeable future.
Lesson #2 Central banks should control asset prices and prevent them from falling
The problem with capitalism (a most disruptive and chaotic economic paradigm as anyone with a proper historical understanding knows) is that asset prices can jump around depending on financial market participants’ reading of "the expected marginal rate of return on capital". For this reason, central banks will soon act to phase out numerically inexact "expectations" since serious decision makers operate only in an environment of full certainty. This means that asset prices will henceforth only go up, and those market participants who disagree will be dissuaded through a restriction that makes “anti-social” trading activity prohibitively expensive (the Tobin tax on financial transactions). Unhealthy volatility will be removed by banning short sales. Another factor supporting prices is the punitive taxation of capital gains as very few wealthy people will now sell anything. And since such benign interventions must expunge risk from the economic system, it is only fair (and logical) to tax capital at the same rate as labor—France is, of course, leading the world.
Lesson #3 Darwin & Schumpeter were wrong, creationists are right; there is such a thing as a free lunch
I once thought that economic growth emerged from the unplanned process of "creative destruction" identified by a charlatan Austrian-American economist named Schumpeter. This was a misunderstanding since wealth and economic growth are both created "ex nihilo" by a benevolent god called "the state," whose role is to stimulate demand by buying goods and services that nobody needs with money that does not exist. This process, of course, leads to an ever rising standard of living.
Such truth was revealed by a great prophet named "Keynes" who some years ago endowed a new church and its clergy of "civil servants" who obey the orders of their economist cardinals. Such fellows are beyond criticism as they selflessly strive to improve the lives of lesser mortals. For their service and their abnegation, they are usually very well paid (as the clergy class always is when it supports the dominant political power). They deserve their stipend, or at least this is what they say, and, of course, unnecessary questioning of settled truths can be a bad career move.
The promise of this religion is that compliance with the clergy’s edicts will ensure a happy and prosperous life. How do the new economic clergy measure whether its followers’ actions meet divine approval? By using a quantitative measurement called "the GDP"—a central feature of the Keynesian catechism that mixes added values created by the private sector through voluntary transactions and costs incurred by the public sector. (see GDP As A Concept: Misleading If Not Downright Criminal) These public sector costs are funded from taxes (the ignorant might assume such deductions would reduce incomes, but miraculously they do not) and through borrowings. It is an article of faith that any damage to the national balance sheet from the resulting debt will not be recognized. Hence, I will incant in a lusty fashion "glory to the GDP," even if my recidivist inner-self mutters a little like Galileo, "et pur si muove.”
Lesson #5 Wondrous tools used by the clergy to grow GDP
The new clergy uses two tools to guarantee that GDP always gets bigger. It prints "money" which is used to buy government debt and in turn allows the clergy to purchase goods and services on behalf of a needy population. For sure, some citizens may crave worldly vices bought with their own money, but mercifully the good shepherds know best. In order to secure economic control the new clergy needed to capture the central bank(s). Of course, in any reformation there will be apostates; in this case the unreconstructed German central bank which continues to resist the doctrinal shift propagated by Pope Heli I, a brilliant theoretician from the new world who has even promised to dispense money from the skies. Pope Heli I, together with leading cardinals in Europe and Japan, detests the old elite and their quaint belief in monetary orthodoxy. Why this backward-looking ancien regime clings to its old fashioned "market fundamentalism" is beyond me. Looking back, I wonder how I ever supported a group that did not promise happiness on earth for all.
This is where the miracle promised by the new faith manifests itself. The elected government issues debt in unlimited amounts to pay for the politicians promises. Hey presto! The old malediction of penury has disappeared as the ability to pay has been unshackled from any worldly constraint. This new debt is bought by the central bank on the most pious orders of Pope Heli I.
Heli I’s omnipotence is revealed by his ability to part the sea of market turmoil and set interest rates on the new debt at zero. Even if the government issues an infinite amount of debt the fact that it pays zero interest means the service cost will remain zero. Truly, water into wine! Only a small and increasingly marginalized group of deficit hawks fail to appreciate the beauty of the new construction. The true believers, who proudly proclaim themselves "deficits deniers'" have seen the light and promise to lead their flock into a promised land of unlimited borrowing with no downside (see Deficit Deniers Of The World Unite).
I am puzzled that no one has thought of such an idea before, but then again what need have I for reading history—especially economic history— when, like Heli I, I can rely on my models. After all, these new revelatory tools of science have passed all tests of statistical significance. It does not matter that their forecasts have been consistently faulty—the model is compliant with the Keynesian sacred books.
In summary my new faith can be understood as follows:
Government allocates capital better than the private sector, and should use interest rates, exchange rates, price fixing, price controls or whatever artifice it deems fit to ensure that capital goes to where it is properly directed.
The alpha and omega of the central bank’s proper role is to finance government spending.
Money belongs to the government, as we have seen properly demonstrated this week in Cyprus.
Property rights, the antediluvian obsession of the market fundamentalists, have been subject to a doctrinal revision “the template” as also shown this week in the eastern Mediterranean.
As a result of this new paradigm, asset prices must rise for the foreseeable future so long as Heli I decrees that the money printers keep printing. How can asset prices fall while the US central bank is printing more than $80bn a month? Even the unreformed Bundesbankers will surely grasp that if the European Central Bank did the same thing, the euro's problems would disappear overnight and prosperity would swiftly return to southern Europe, (Really, Germans should not be allowed into politics until they have had a primer indoctrination at either Cambridge or Princeton.)
More money creates more wealth, and more wealth, especially in real estate, creates more jobs—evidence to the contrary in Spain only represents a small setback on this road to happiness. As we all know, a rise in real estate prices leads to a massive increase in productivity, a prerequisite for an increase in the standard of living.
Services or goods provided to the population by the government, borrowing money from the central bank to pay the fellows who produce the goods that nobody needs with money that does not exist, will add tremendously to the GDP. This is a sure sign that the right policy is being pursued.
These goods and services anyway have a higher moral value than the ones produced in the private sector. One should simply compare the "social usefulness" (a favorite notion of Lenin and Stalin) of a nurse versus a hedge fund manager to be convinced. I rest my case.
So from now on, I will buy what the US, UK, French, Spanish, or for that matter Greek governments and central banks tell me to buy. I cannot afford to offend the new clergy. As a market “intellectual” the risks to my social standing, not to mention career prospects, are too high. One day if I keep my nose clean and my thoughts pure, I may just be admitted to the College of Cardinals.
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS
2010 - EXTEN D & PRETEND
CORPORATOCRACY - CRONY CAPITALSIM
GLOBAL FINANCIAL IMBALANCE
SOCIAL UNREST - Importance of Employment, Equality and Per Capital Income
Asian economies may be less prone to clashes between the “haves” and “have nots,” according to an analysis based on income inequality rankings. Gini coefficients, which are statistical measures of income inequality, tend to be lower in Asia than in Africa or Latin America, where index readings above 50 are common.
A Gini coefficient measures the extent to which the income or consumption of individuals deviates from an equal distribution, with an index level of zero represening perfect equality and 100 representing perfect inequality.
Scandinavia has the lowest income inequality, with after-tax Gini coefficients between 20 and 30. Among the so-called BRICS countries, South Africa has the highest Gini coefficient at 63.1. The average reading for Asia is 36.9, which is on par with New Zealand’s, at 36.2, and below that of the U.S., at 40.8, according to calculations based on the latest available data from the World Bank. Japan, att
24.8, has the lowest reading in Asia and the second-lowest in the world after Denmark.
Other Asian economies with Gini coefficients below 40 are Pakistan (30.0), South Korea (31.6), Bangladesh (32.1), India (33.4), Indonesia (34.0), Australia (35.2) and Vietnam (35.6). Malaysia has the highest reading in Asia at 46.2. Mainland China, Singapore and Hong Kong fall in between, with the latest available readings in the 42.5 to 43.4 range.
Income inequality can be affected by factors including demographics and market shocks, which can be mitigated or exacerbated by government tax and transfer regimes, labormarket structure and credit-market access.
Older populations may be susceptible to greater income inequality because of wealth and capital gains accrued over time, and higher compensation for experience. Economic downturns can increase income inequality temporarily because of unemployment, though consumption inequality may hold steady or decline if lower-income households are able to compensate for lost income with increased debt. More-rigid labor market structures may deter firings and prevent wages from fully adjusting to economic downturns.
Asia’s lower Gini coefficients shouldn’t be viewed as guarantees of harmony. While Tunisia, at 41.4, and Egypt, at 30.8, have Gini coefficients on par with or better than that of the U.S., both countries experienced unplanned regime change in 2011. Low and stagnant growth may be partially to blame for the rise in political turmoil.
Tunisia and Egypt have relatively low employment-to-population ratios — below 45 percent compared with Asia’s average of 61.4 percent. The lowest employment-to-population ratios in Asia belong to Pakistan (50.5), Sri Lanka (52.2) and India (53.6). GDP per capita is also low for Tunisia and Egypt, whereas some Asian countries rank among the highest in the world on this metric.
There is a strong negative relationship between income inequality and economic growth, according to research by Voitchowsky (2005), Herzer and Vollmer (2011) and Maestri and Roventini (2012). Asia’s relatively high growth rates are consistent with the regions’ low Gini coefficients. Still, growth in Asia has slowed from historical levels. This may make policy adjustments to labor- and credit-market structure, or social safety nets, more appealing in countries where income distribution may present a significant headwind to economic activity.
STANDARD OF LIVING
Learn more about Gold & Silver-Backed, Absolute Return Alternative Investments
with these complimentary educational materials
Tipping Points Life Cycle - Explained Click on image to enlarge
FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.
DISCLOSURE Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.