“Pathetic Number Of Loans” – Democrats Complain SBA Rescue Loan Program Was Unevenly Distributed
In the first two weeks of the Trump administration’s Paycheck Protection Program (PPP) for small businesses crushed by coronavirus, the credit spigot was wide open. Still, it was not evenly distributed across the country.
On a geographical basis, loan amounts for firms were approved at a very high percentage in Central, Midwest, Rust Belt, and Southern states, compared with lower numbers for coastal ones.
Bloomberg notes the findings were calculated via Evercore ISI estimates of eligible payrolls in each state, suggests the $342 billion of Small Business Administration (SBA) loans were ‘unevenly distributed’ in the first two weeks of the program ending on April 16.
The disparity between individual states was evident in New York. SBA loan approvals were as low as 23% on April 13, while other states had a higher degree of approved loans for small firms. Then right before the fund ran out of money, approved loans in the state jumped to 40% from 23%. This phenomenon was also seen in California.
Ernie Tedeschi, the Evercore analyst responsible for computing the available payroll figures, noticed hard-hit states with early lockdowns saw firms have the most trouble in arranging rescue loans.
Tedeschi said some companies in hard-hit states did not apply for the loans because it wouldn’t be impactful. He added that some firms received loans much quicker in some states because they had better relationships with community banks.
Judging by the distribution of the loans on a state by state basis, one thing is evident: it appears Republican states were favored to a higher degree than Democratic states, which was noticed by Jackie Speier, a Democratic congresswoman from California, who tweeted last week:
“I’m hard-pressed not to think that this is political,” Speier said. “Blue states like California got a pathetic number of loans.”
Democrats have found something else to b*tch at — not just President Trump’s virus response…
Amidst an investigation into the question of whether Spain’s draconian lockdown laws are constitutional, people are being fined a whopping €2,000 euros for “disrespecting” a police officer.
Unlike other European countries, people in Spain aren’t even allowed to go out to exercise during the coronavirus quarantine.
Citizens are only allowed to visit their nearest grocery store and only one person can be in a vehicle at a time unless the other person is classed as “vulnerable” or there is a medical emergency.
The lockdown is enforced via a network of roadblocks at which drivers are quizzed as to their intentions by aggressive police, some of whom carry guns. A physiotherapist was hit with a €600 euro fine for going to see a client after police stopped him when he was driving home.
The €2,000 euro fine for “disrespecting” a police officer is obviously completely arbitrary and easily open to abuse as a form of revenue generation.
“The guidelines state a standard €601 penalty for unauthorized movement outside the home without good reason that can be increased to up to €2000 if the offender responds with an “inappropriate attitude” to law enforcement officers, reports the Local.
People who cannot provide identification to police are fined €700 euros, while a trip to a second home earns a €1500 euro fine. The biggest fine – a gargantuan €10,400 euros – is reserved for anyone who attempts to “to organize or participate in a gathering, party or celebration.”
According to journalist Jason O’Toole, who is locked down in Madrid, tensions are “running high” and people are now being arrested for going out “too frequently” to the grocery shop.
This has prompted some judges, solicitors, law professors, and NGOs to complain that the onerous fines are “unconstitutional.”
“There’s an investigation now underway by the Defensor del Pueblo (Spanish Ombudsman) to see if the fines are “correct and proportional,” because they want to “protect the rights of the citizens.” It’s a move that has even been welcomed by La Abogacia del Estado,” writes O’Toole.
“The Ministry of Justice is now questioning whether the fines are legally sound and says it’s possible many cases could be thrown out of court on a technicality. They say, for example, those apprehended might get off scot-free if the police didn’t first give them a formal warning – like a yellow card in football.”
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Black Market Demand for COVID-19-Fighting HIV Drug Surges In Russia
News that HIV drugs were being deployed in hospitals in China and elsewhere to treat COVID-19 patients has resulted in panic hoarding on the Russian black market by speculators and people who fear they could contract the deadly virus.
Panic hoarding began in February and has since increased months later. Reuters points out that Kaletra is one of those leading antiviral HIV drugs that are in high demand.
Reuters’ explanation of why Kaletra is in high demand dates back to January in China, where scientists used the drug on COVID-19 patients and showed encouraging results. There were also 20 other trials of the drug across the world that followed. The Russian Health Ministry even recommended Kaletra as a possible treatment but added its effectiveness was uncertain.
We noted in February that a 21-year-old man in Wuhan, China, who contracted the virus, was prescribed Kaletra, which the treatment ultimately led to his recovery.
Speculators on the black market were buying Kaletra, and the generic form Kalidavir, in large amounts earlier this year, betting shortages would develop.
“Three months ago, people were buying Kaletra from us without much enthusiasm for 900 roubles ($12) a box,” an online trader of HIV drugs told Reuters.
“Now, anticipating (supply) interruptions, people are buying between 100 and 700 boxes from us, at 3,800 roubles ($51) a box. Mainly, people are buying (Kaletra) with the aim of reselling it for a very high price.”
The trader said a box now fetches 7,000-8,000 roubles ($94-$108), which is a dramatic increase in the price from several months ago.
The prescription-only HIV medicine is ordered in bulk by the Russian health ministry and handed out to HIV patients for free. Still, with panic hoarding over the last several months, supply disruptions could materialize.
The director of H-Clinic in St. Petersburg, who specializes in infectious diseases, said HIV patients at his pharmacy had been worried that the supply of the medication would run out thanks to the new demand.
“We have a van coming from the pharmaceutical company, and everything in it has already been claimed in orders,” H-Clinic’s Andrei Skvortsov told Reuters. “There were up to 120 calls a day.”
Skvortsov said there were ample supplies of the generic drug, but it was the distributor of Kaletra that said supplies had recently become exhausted.
A person that goes by the name of Alexei, who asked Reuters for anonymity, operates a ‘back-up medicine cabinet’ that delivers leftover drugs to people in need when shortages emerge.
He said, “Messages and calls started coming in from people saying they were ready to purchase these medicines.”
Alexei said there are “resellers and middlemen” attempting to acquire as much of the HIV drug as they can.
R-Pharm CEO Alexei Repik said Kaletra is in high demand, and it is now being sold illegally at some pharmacies.
Repik said he was boosting the output of Kaletra as the pandemic could worsen.
“But of course, no one can predict the full scale of the epidemic,” he added.
Demand for Kaletra has flourished on the Russian black market as the world is without a vaccine at the moment for COVID-19. Speculators, who bet on the shortages of the drug would arrive, have been handsomely rewarded as cases and deaths surge in Russia.
Although the heads of the world’s largest oil-producing nations were quick to claim a diplomatic victory following the latest OPEC+ (Organization of the Petroleum Exporting Countries “plus” non-OPEC oil producers) output-cut agreement, crude prices are telling a different story. Prompt month Brent and WTI futures contracts are now trading nearly 20 percent below their early April highs, both returning to a supercontango forward curve price structure following the conclusion of the OPEC+ meeting. A contango price structure, where near-term prices plummet relative to prices further along the curve, is the market’s way of clearing. But political efforts to support crude prices from around the world continue to muddy the waters for those trying to efficiently and rationally reallocate capital in the industry.
With the long-awaited OPEC+ deal failing to balance the market, some Texas oil producers are hoping to rekindle a largely dormant regulatory body in the Texas Railroad Commission to coordinate output cuts in the heartland of US crude production for the first time since the 1970s. In addition, amid this week’s turn lower in oil prices, US tariffs on crude imports are reportedly still on the table as well as a newfound idea to potentially pay producers to shut in production. Although politicians and regulators are still busy trying to find regulatory cures, this historic moment in oil markets should serve as a lasting reminder of the limitations of political remedies and the need to allow market prices to be the ultimate arbiter of production levels. Efforts by US policymakers to boost crude prices and to throw a lifeline to high-cost US crude producers is the exact opposite of what prices are telling us the market needs at this time. Seeking to prop up the least efficient US oil producers through import penalties or production quotas risks further misallocations in the sector going forward.
Let us address a few key points:
1. Higher Crude Prices Are Not What Is Needed Amid Sharp Fuel Demand Contraction
Much of the recent focus for US politicians and other representatives of oil-producing nations has been on getting crude prices higher. But nothing could be more unwarranted at this time. As fuel demand for transportation has ground to a halt globally over the past two months, refining margins have been crushed—particularly for gasoline and jet fuel. It is this record weakness in underlying demand for transportation fuels, and the accompanying weakness in refining margins, that has led to the rapid surplus of crude oil globally as refineries have cut throughput.
Therefore, global political efforts to send crude prices higher risk exacerbating demand contraction for crude oil in the near term as higher crude prices without higher refined fuel demand would further limit a refiner’s incentive to process crude.
2. The Market Is Trying to Do Its Job
Crude prices returned to a state of supercontango early this week, following the conclusion of the OPEC+ meeting. After narrowing to just –$3.96 in early April, the Brent 1–7 month time spread has widened back to –$9.51 as of the April 15 close. Prompt month WTI is at an even wider discount to prices further along the curve than it was prior to the OPEC+ agreement, with the 1–7 month time spread closing at a whopping –$13.54 on April 15. This historically steep discount for near-term crude reflects the market coordinating multiple needed processes simultaneously.
On the one hand, physical crude prices and prompt month futures prices are coordinating the process of shutting in production. With prompt month WTI trading at a $13.54 premium to current prices just six months from now, a steep contango price structure is the strongest signal a US producer can receive to shut off new supply today and reserve that production for a future date. To the extent that production cannot be immediately shut in, this same price structure incentivizes placing crude into storage rather than continuing to push it onto the market, further crushing physical prices.
On the other hand, and to reflect on the first point above, the steep discount in near-term crude prices is needed to begin to stimulate crude demand at refineries once again. Crude prices must drop faster than refined fuel prices or refiners will have no profit motive to begin to process the glut of crude. In order to clear, the crude market needs positive gasoline-refining margins and/or diesel margins high enough that the weak gasoline and jet fuel margins are not overwhelming. This can only be accomplished by allowing for weakness in crude prices.
WTI Crude Oil Forward Curve
3. Only the Market Knows Which Crudes Should Be Cut and in What Quantities
Any refiner knows that crude quality matters, but most policymakers certainly do not. Crude quality, which is to say the profile of a specific grade of crude based on both its API gravity and sulfur content, is of chief importance to a refiner. A crude refining slate consisting of various grades is chosen carefully, based in large part on a refinery’s physical sophistication (what they can run) and the cost of the crudes compared to their expected revenues (based on their relative yields of the refined products (what they want to run)). For example, with gasoline currently bearing the brunt of the demand-contraction pain, light, sweet crudes that yield high volumes of light distillates, such as the majority of US shale grades, are far less desired by refiners that can run heavy crudes and are optimizing their refining slate to target higher yields of diesel.
Only the market knows which crude grades need to be produced and in what quantities at a given time. Likewise, only the market knows which crude grades need to be exported or imported and in what quantities. Prices along the oil supply chain alone coordinate this process. Now more than ever, the market needs unfettered prices to tell producers which grades to produce and refiners which grades to refine. This is just another reason why blanket production cuts or quotas and penalties on crude imports are both risky and suboptimal. Only refiners and producers themselves are sophisticated enough and can respond in a timely enough fashion to optimize the supply chain. And let us not forget that this market function will be just as important as demand begins to recover in the coming months. Policy interventions risk not only skewing market prices today, but also causing misallocations longer term.
Conclusion
It is often forgotten that market prices are themselves the constant coordinators of commerce. “The market” is not just some amorphous entity in the imaginations of ideologues and traders. Markets are made up of the industrial players that have the most skin in the game and the most to lose from misallocating capital.
In times of high uncertainty and economic risk it is politically difficult to resist the temptation to intervene in markets in an effort to protect specific pieces of domestic industry, but policies enacted in panicked times can also produce large and lasting unintended consequences. As we hope for a slow return to normalcy in refined product demand as COVID-19 quarantines are lifted in the coming months, let us be cautious of policy prescriptions that can wind up further ailing the entire oil industry and consumers in the long run.
Norway’s Wealth Fund CEO Embroiled In Scandal Over Private Jet Ride As Oil Prices Collapse
As international crude benchmarks get clobbered (though not quite as badly as their American cousin), major oil-producing nations have been a major focus on Monday. The markets have taken a keen interest in how they plan to weather this unprecedented market dislocation, or whether the damage to the local energy industry might set production capacity back for years.
However, we’ve found an intriguing story from Norway – Europe’s biggest oil producer – and its sovereign wealth fund, one of the biggest – if not the biggest (it has got some pretty stiff competition in the Middle East) – piles of fossil fuel blood money in the world.
The story is this.
The fund’s former chief executive, who announced his plans to resign last fall, as well as his successor have become embroiled in a scandal involving the appearance of what might be a bribe involving a seminar appearance, five-star treatment including food and musical performances by major artists (we hear Sting is very popular in Norway), and a ride back home on a luxury jet when an affordable public option was available.
The world’s biggest sovereign wealth fund faces serious questions over the conduct of its outgoing chief executive and the selection process of his successor amid a scandal involving a luxury jet and a private performance by Sting.
CEO Yngve Slyngstad has had to explain why he accepted a flight paid for by Nicolai Tangen, the hedge-fund manager who was eventually tapped to succeed him. The development has now prompted the central bank’s watchdog to look into convening an emergency meeting to examine more closely the circumstances under which Tangen was selected.
The revelations have stunned Norwegians and created the appearance of scandal around one of the country’s most revered institutions. Tangen’s appointment had already raised eyebrows. To some, his jet-set lifestyle seemed at odds with the spirit of a fund created to safeguard the savings of an entire nation.
The Supervisory Council of Norway’s central bank, which oversees the $1 trillion fund, will try to find out whether the events “represent a breach of regulations applying to Norges Bank’s activities,” its head Julie Brodtkorb, said in a text message on Monday.
In his defense, Tangen, a billionaire who doesn’t really even need this job, said he booked Slyngstad years ago when the seminar was first planned, and that the other accoutremonts were last-minute requests, and perhaps reflective of bad judgment.
At this point, who would even want that job? Slyngstad grew the fund’s capital by many, many hundreds of billions during his tenure as a rode a global equity bull market to riches. It certainly doesn’t sound like a good fit for somebody who’s no longer ‘hungry’ to make a name for themselves.
Tangen
For foreigners who are reading this and trying to understand why such a small appearance of impropriety is being taken so seriously, the FT explained it’s simply the latest reminder of how cozy Norway’s elites are. It seems they all know each other, because they probably do.
Slyngstad
Norway’s central bank governor Oystein Olsen, who led the search, told the FT on Monday that he has “concluded” an investigation into whether Slyngstad breached ethical guidelines by agreeing that the central bank should pay Tangen for the costs of the hotel in Philadelphia and the flight home. Put another way: The central bank has decided to put to rest questions of improper financial gifts made to a public official by reimbursing the alleged ‘giver’ of said gift for the costs of the gift.
Now, if they had asked Slyngstad to reimburse Tangen – who was already treated with suspicion by many in Norway’s establishment due to his flashy jet-setting lifestyle – that would have made more sense. But this?…
“Judged from now, he [Mr Slyngstad] should have taken another route home,” said Mr Olsen, who added that he now regarded the matter as closed.
[…]
The central bank published a long overview of the hiring process on its website, including the entire history of email exchanges between Slyngstad and Tangen. It also said it had decided to try to refund Slyngstad’s expenses.
Tangen is officially due to take over as CEO of the fund in September, unless his appointment is somehow rescinded, or he declines to accept it under pressure (or simply because he’s realized he’d rather be chilling on a yacht like Obama).
Back in October when we reported Slyngstad’s decision to resign after more than 20 years at Norway’s central bank and the sovereign wealth fund (which is an arm of the central bank, though it maintains a level of independence), we noted that Slyngstad was still planning to have some kind of hand in investment strategy via an advisory role with the fund’s renewables group. We must admit that raised eyebrows at the time. Is it still a good idea for Slyngstad to have any involvement with the institution after being the one who solicited the jet-ride? Perhaps we shall learn more in the coming weeks and months.
Professor Johan Giesecke, one of the world’s most senior epidemiologists, advisor to the Swedish Government (he hired Anders Tegnell who is currently directing Swedish strategy), the first Chief Scientist of the European Centre for Disease Prevention and Control, and an advisor to the director general of the WHO, lays out with typically Swedish bluntness why he thinks:
UK policy on lockdown and other European countries are not evidence-based
The correct policy is to protect the old and the frail only
This will eventually lead to herd immunity as a “by-product”
The initial UK response, before the “180 degree U-turn”, was better
The Imperial College paper was “not very good” and he has never seen an unpublished paper have so much policy impact
The paper was very much too pessimistic
Any such models are a dubious basis for public policy anyway
The flattening of the curve is due to the most vulnerable dying first as much as the lockdown
The results will eventually be similar for all countries
Covid-19 is a “mild disease” and similar to the flu, and it was the novelty of the disease that scared people.
The actual fatality rate of Covid-19 is the region of 0.1%
At least 50% of the population of both the UK and Sweden will be shown to have already had the disease when mass antibody testing becomes available
UnHerd host Freddy Sayers speaks with Professor Johan Giesecke in what they describe as one of the most extraordinary interviews they have done… Watch:
Turkey Overtakes China & Iran In Total COVID-19 Cases But Still Resists Lockdown
For the first time going back to February 25 when Iranian leaders first publicly admitted they had a serious outbreak on their hands, and with the country establishing itself with the grim distinction of remaining the Middle East epicenter, another regional country now leads in total infection numbers outside the US and Europe. As of Monday morning, Turkey has 86,306 cases, surpassing China’s 83,817 and Iran’s 83,505 reported cases.
Turkey on Saturday confirmed that its numbers had risen to over 82,000 – a jump of nearly 4,000 cases from Friday, surpassing Iran for the first time ever, making it the new regional epicenter.
Line outside of Istanbul market, AFP via Getty.
Like Iran before, Turkey is another country which has come under scrutiny and criticism for not only its slow response since cases began growing last month, but lack of testing and under-reporting numbers as well.
Over the weekend the Interior Ministry announced it was extending travel ban orders between 31 major cities for at least 15 more days.
Ankara has still held out against ordering a nationwide lockdown like other countries with its high numbers of cases, only opting to close schools and bars and imposing a weekend curfew only. It’s also imposed various age-restricted curfews.
“At [Turkey’s] level, most countries are implementing a full lockdown,” one virology expert was quoted in CNN as saying. “A partial lockdown can be good, it can balance keeping some of the economy functioning while still trying to contain the outbreak.”
The government has maintained its hospitals and heath care system is still functioning optimally and is nowhere near capacity, as Foreign Policy describes:
As the number of coronavirus cases has increased, Turkish Health Minister Fahrettin Koca has sought to allay fears of an overwhelmed health system. Speaking on Friday, Koca said that unlike Western nations, Turkey’s hospitals still hold excess capacity and that intensive care units were not exceeding 60 percent occupancy. A licensed physician, Koca’s daily briefings have made him a star on social media over the course of the pandemic; he has gained over 4 million followers on Twitter since the beginning of the year.
“Turkey’s problems with containing the virus came into focus on April 10, when a late announcement of a weekend curfew led to panic buying across the country,” FP adds.
The already battered Turkish economy looks to be pummeled further by the crisis, as the Turkish lira’s recent plummet to a near-historic low of 6.95 lira to the dollar demonstrates.
Recall too this report from ten days ago: “Turkey has held talks with the United States about possibly securing a swap line from the U.S. Federal Reserve and has discussed other funding options to mitigate fallout from the coronavirus outbreak, Turkish officials said on Friday.”
As recently as Sunday Presidents Trump and Erdogan spoke on the phone and agreed to continue pursuing “close cooperation” to contain the pandemic.
No matter how hard I try to dig German Chancellor Angela Merkel’s political grave she proves more adept at staying alive than a cockroach in a woodpile. And the recent fight amongst European Union members over “Coronabonds” has proven yet another escape path for her to avoid political termination.
Thanks to Merkel holding the line on debt mutualization and EU fiscal integration, which is very unpopular in Germany, her Christian Democratic Union (CDU) is now polling at levels it hasn’t enjoyed since before the last general election in 2017.
According to Europe Elects, the latest polling out of Germany has the CDU commanding around 35-37% of German voters. This is a party that was in shambles not two months ago after Merkel heir apparent Annagret Kramp-Karrenbauer stepped down as CDU leader, prompting a new leadership vote, which, conveniently for Merkel, has now been postponed indefinitely thanks to the COVID-19 crisis.
Some of that is the normal “rally around the current leader” that occurs during any crisis. President Trump’s numbers in the U.S. have been strong despite the twin crises here. Even marginal leaders like Prime Minister Giuseppe Conte in Italy have seen their numbers rise.
But a 15-point bump for Merkel is tremendous and it only happens in conjunction with her refusing to cave on Germany being seen bailing out southern Europe. It may win her support domestically, but it sets up a disastrous future for the European Union.
As COVID-19 rages across Europe the two major factions within the EU have been fighting a desperate battle for its future with the issue of debt mutualization being the fulcrum. Now, I believe wholly that the use of lock downs and draconian measures to fight the disease have been more political than practical. Using a public health care crisis to advance a political agenda is the height of cynicism and megalomania.
On the one side we have the Euro-integrationists, led by French President Emmanuel Macron. On the other are the fiscal conservatives led by Merkel, who has given way to Dutch Prime Minister Mark Rutte to be the point man for Macron’s derision.
Trapped in the middle is the real human tragedy in northern Italy where thousands of people have died from the toxic mix of a lack of medical infrastructure, high concentration of high-risk people and lack of knowledge of how to fight the disease.
Worse than that, the government in Italy was put together to spearhead this fight for Eurobonds since Conte was kept in power to ensure Lega’s Matteo Salvini didn’t and fight Macron and Merkel by threatening to leave the euro-zone.
Whether you believe the EU’s response, or, more accurately, lack thereof, to Italy’s plight was motivated by malice or incompetence the result is the same. Thousands of Italians died and weakened already weak bonds between Italy and the rest of the EU technocracy.
So in the midst of this mess comes COVID-19 and the uncoordinated and inept response to it from the political center of Europe to date. Only now are they coming to the conclusion they need to restrict travel, after sitting on their hands for a few weeks while Italians died by the hundreds.
And do you think that’s engendering waves of love and affection among Italians towards Germans?
If you do then you don’t know Italians… at all.
And this is your signal that this is the beginning of the real crisis. Because while COVID-19 may have been the catalyst for the breakdown of capital markets, capital markets were simply waiting for that spark to occur.
Honestly I wasn’t harsh enough in my assessment of what was happening back then, but it was clear that this crisis was being used to push forward EU integrationist plans of Macron and ECB President Christine Lagarde trying to strongarm the Germans and the Dutch into their position.
By the meeting on March 26th that plan failed. Rutte, Merkel, Austrian Chancellor Sebastain Kurz and Norway all held their ground and the meeting would have ended in a fistfight had it not been held using social distancing rules via teleconference.
That meeting set up last week’s which saw Italy cave to German and Dutch intransigence. Macron and Lagarde lost, securing just $500 billion in new loans but no ECB bond issuance. And the issue now is whether Conte will partake of the program or not.
Meanwhile the polls in Italy haven’t really budged with Salvini’s Lega holding onto around 30% of the electorate with the Brothers of Italy holding onto recent gains in the mid-teens.
Moreover, now the question of EU membership in Italy is a coin flip. Two different polls (here and here) have it well within the margin of error.
Lastly, and most importantly, Conte’s coalition government is split on whether to avail itself of the newly-approved loans. Reuters reported that the divisions within the Italian coalition are rising and portend a split. In a show of political spine not seen in over a year senior partner Five Star Movement (M5S) is opposed while the Eurocentric Democrats are all for it since, as of right now, there are no strings attached to the money.
Conte will have to settle the dispute before a video conference among European leaders on April 23 when Italy will be expected to make its position clear.
He tried to defuse the quarrel on Wednesday, warning in a Facebook post that the ESM “risks dividing the whole of Italy,” and adding that more information was needed on the terms of any credit lines before a final decision could be taken.
Until these details are clear, discussing whether an ESM loan is in Italy’s interests is “a merely abstract and schematic debate,” Conte said.
But we all know there will be strings in the end. If you doubt that assertion, I suggest you ask Greece how about this. So, Conte has his work cut out for himself. There is real urgency now in the EU to get even token Eurobonds approved before Germany takes over the Presidency of the European Commission in July, where it will set the agenda on the EU’s next seven-year budget.
After years of kicking the can down the road to avoid a messy political upheaval, which is Merkel’s trademark move, nothing has changed in the EU when it comes to fixing its untenable structure. And for this reason, as long as Angela Merkel is on the stage, there will be no European dream.
All Merkel ever does is manipulate events back to the previous status quo. She has no capacity or stomach to face the German voters nor will she allow anyone else to fully express themselves. Her handling of Brexit negotiations was a fiasco for the EU, thankfully, and her handling of Italy today is just as inept.
With Salvini waiting in the wings, the people ready to revolt over Germany’s handling of the crisis and a weak coalition government put in place by Merkel to hold things together, the probability of Italeave occurring rises daily.
So, while Merkel may have won this latest battle in the end she may lose the war for the EU. And, in the ultimate irony, the people of Europe may have her to thank for their deliverance from its dysfunction.
Watch: Russian Fighter Buzzes US Spy Plane Near Syria For 2nd Time In Four Days
For the second time in four days a Russian jet has intercepted a US plane over the Mediterranean, bringing tensions between the two countries to boiling point at a moment Moscow is appearing to flex in defense of its ally Syria.
The Pentagon confirmed the latest “unsafe and unprofessional” intercept incident in international airspace Sunday, after an incident the prior Wednesday involving a US P-8A Poseidon reconnaissance aircraft, which was similarly “buzzed” by an aggressive Russian SU-35, which reportedly performed a high-speed, inverted maneuver.
A Russian SU-35 aircraft is seen over the Mediterranean Sea in new footage released by the US military.
“The unnecessary actions of the Russian SU-35 pilot were inconsistent with good airmanship and international flight rules, seriously jeopardizing the safety of flight of both aircraft,” the US Navy said Monday. “While the Russian aircraft was operating in international airspace, this interaction was irresponsible. We expect them to behave within international standards set to ensure safety and to prevent incidents.”
However, a Russian Defense Ministry (MoD) statement framed the latest incident as one in which the Russian fighter, scrambled from Hmeymim air base in Syria, “shadowed” the US spy plane which apparently came too close to the Syrian coast for comfort.
The Navy’s 6th Fleet released video of Sunday’s incident in which a Russian SU-35 Flanker came dangerously close to a Navy P-8A surveillance aircraft:
The Russian MoD said Monday: “On April 19, the Russian equipment controlling the airspace over the neutral waters of the Mediterranean Sea detected an air target performing a flight towards Russia’s military facilities in the Syrian Arab Republic,” according to TASS. “A fighter jet from the air defense alert quick reaction force of the Hmeymim air base was scrambled to identify the target.”
“The aircraft of Russia’s Aerospace Force performed and perform all flights in strict compliance with the international rules of using the airspace over neutral waters,” the statement added.
Gen. Tod Wolters, Commander of US European Command and NATO’s Supreme Allied Commander, has subsequently said he’s protested Russia’s “unprofessional” and potentially dangerous maneuvers involving US planes over the Mediterranean directly with counterparts in Moscow.
Some have queried how it could be that President Putin would co-operate with President Trump to have OPEC+ push oil prices higher – when those higher prices precisely would only help sustain U.S. oil production. In effect, President Putin was being asked to underwrite a subsidy to the U.S. economy – at the expense of Russia’s own oil and gas sales – since U.S. shale production simply is not economic at these prices. In other words, Russia seemed to be shooting itself in the foot.
Well, the calculus for Moscow on whether to cut production (to help Trump) was never simple. There were geo-political and domestic economic considerations – as well as the industry ones – to weigh. But, perhaps one issue trumped all others?
Since 2007, President Putin has been pointing to one overarching threat to global trade: And that problem was simply, the U.S. dollar.
And now, that dollar is in crisis. We are referring, here, not so much to America’s domestic financial crisis (although the monetisation of U.S. debt is connected to threat to the global system), but rather, how the international trading system is poised to blow apart, with grave consequences for everyone.
In other words, Covid-19 may be the trigger, but it is the U.S. dollar – as President Putin has long warned – that is the root problem:
“We’re looking at a commodity-price collapse and a collapse in global trade unlike anything we’ve seen since the 1930s”, said Ken Rogoff, the former chief economist of the IMF, now at Harvard University. An avalanche of government-debt crises is sure to follow, he said, and “the system just can’t handle this many defaults and restructurings at the same time”.
“It’s a little bit like going to the hospitals and they can handle a certain number of Covid-19 patients but they can’t handle them – all at once”, he added.
“More than 90 countries have inquired about bailouts from the IMF—nearly half the world’s nations—while at least 60 have sought to avail themselves of World Bank programs. The two institutions together [only] have resources of up to $1.2 trillion”.
Just to be clear, this amount is not nearly sufficient.
Rogoff is saying that $1.2 trillion is a drop in the ocean – for what lies ahead. The health of the global economy thus has attenuated down to a race between dollars flooding out of this ‘complex self-organising’ system amidst the coronavirus pandemic, versus the very limited resources of the IMF and World Bank to pump dollars in.
Simple? Just ramp up the dollar flow into system. But whoa there! This would mean the U.S. providing a flow of dollars sufficient to meet ‘rest of world’ needs – ‘during the biggest collapse since the 1930s’? There is $11.9 trillion of U.S. denominated debt out there alone, plus the dollar float required to finance day-to-day international trade (usually held as national, foreign exchange reserves).
That however, is only a fraction of the dollar-denominated debt ‘problem’, since a part of that debt takes the characteristics of a distinct ‘currency’ used in international trade, called Eurodollars. Mostly (but not exclusively), they present themselves as if ordinary dollars, but what distinguishes them is that they are overseas dollar deposits that exist outside of U.S. regulation, in one sense.
But which – in the other sense – they become the tools extending U.S. jurisdiction (think Treasury sanctions), across the globe, through the use of U.S. dollars, as its medium of trade. That is to say, this huge Eurodollar market serves Washington’s geo-political interests by enabling it to sanction the world. Hence, the Eurodollar market is a main tool to the U.S.’ covert ‘war’ against China and Russia.
Eurodollars just ‘emerged’, (initially) in Europe after WW2 (no-one is sure quite how), and they grew organically to huge size, by the European banking system simply electronically creating more of them. The Achilles’ Heel is that it lacks any Central Bank to supply it with liquid dollars, as and when, payments into the U.S. sphere are sucked out of it.
This happens especially in times of crisis, when there is flight to the onshore dollar. Oh, no. Oh yes: It’s another self-organising dynamic system that can only ‘grow’ under the right conditions, but will be prone to dynamic de-construction if too many dollars are withdrawn from it. And now, with the Covid-19 pandemic, the Eurodollar market is in a near panic for dollars: liquid dollars.
The U.S. Fed does ‘help out’, at its own discretion, but mainly through offering to swap other currencies for dollars, and by extending short term dollar loans. But this ‘swap bandage’ cannot of course staunch full-blown global trade blowout – in the same way that the Fed is ‘supporting’ U.S. domestic financial system – by throwing trillions of dollars at it.
President Putin saw this eventuality long ago, and predicted the dollar’s ultimate collapse, as a result of the world’s trade becoming too large and too diverse to be sustained on the slender back of the U.S. Fed. And because the world is no longer ready for the U.S. to be able to sanction it, willy-nilly, and at will.
And here ‘is’ that moment – very possibly. So, the collapse in the oil price is a piece to this much bigger story. Putin – not so surprisingly – thus cooperated with Trump’s OPEC initiative, no doubt guessing that the attempt to ramp prices higher would never ‘fly’. Putin may not want to see the dollar hegemony renewed, but nor would he want Russia to be viewed as a main contributor to a global blow-out. The blame being heaped on China over coronavirus serves as a potent alert in this context.
This – emphatically – is not an essay about barely-understood Eurodollars. It is about real global risk. Take the Middle East, as one example. Oil is trading currently at $17 (Friday’s WTI). No producer state’s Middle East business-model is viable at this price level. National budget ‘break-evens’ require a price of oil to be at least three times higher – maybe more. And this, comes on top of the collapse of the Gulf air-travel hub business and tourism. The northern tier of states additionally, is being pressed hard by U.S. sanctions, with the latter tightening the sanctions tourniquet, as Covid-19 strikes, rather than relaxing it. Lebanon, Jordan, Syria – and Iraq. All have national business-models that are bust. They all require bail-outs.
And into this bleak picture, coronavirus has gripped precisely that class of expatriates and migrant workers that sustain the Gulf ‘way of life’ and its business model. NGOs presently are scouring the UAE for empty buildings, and Bahrain is re-purposing closed schools in order to re-house migrant-labourers from cramped accommodation where one room with bunk-beds would sleep a dozen workers.
The virus has also spread to densely populated commercial districts of cities, where many expatriates share housing to save on rent. Many have lost jobs and are struggling. The authorities are trying to deport the migrants home; but Pakistan and India both are refusing them immediate entry. These victims have lost their livelihood, and any chance to escape their misery.
Just to be clear: Gulf élites are not exempt from Covid-19. The al-Saud have been particularly hit by what they sometimes call the “Shi’i virus”. The situation is turning explosive. Gulf economies are held aloft by expatriates, migrant workers and domestic help, and coronavirus has upended the pillars of their economies.
The state looms large over the financial sector in the Gulf, and this makes financial institutions especially vulnerable, because the proportion of loans that local banks extend to the government or to government-related entities, has been rising since 2009. As the authorities draw further on these institutions, so the Gulf economies will prove more vulnerable to Eurodollar stress – absent huge Fed bail-outs.
The global impact of Covid-19 is only beginning, but one thing is abundantly clear:Middle Eastern states will be needing a great deal of spending money, just to fend off social disorder. An economic breakdown is more than just economic. It leads quickly to a social breakdown that involves looting, random violence, fraud and popular anger directed at authorities. Global trade is going to be hit hard, and U.S. imports are going to tumble, which threatens one of the main USD liquidity channels into the Eurodollar system.
This fear of a systemic dynamic destruction of the trading system has led the BIS (Bank for International Settlements: the Central Bankers’ own Central Bank) to insist that:
“… today’s crisis differs from the 2008 GFC, and requires policies that reach beyond the banking sector to final users. These businesses, particularly those enmeshed in global supply chains, are in constant need of working capital, much of it in dollars. Preserving the flow of payments along these chains is essential if we are to avoid further economic meltdown”.
This is a truly revolutionary warning. The BIS is saying that unless the Fed makes bail-outs and working capital available on a massive scale – all the way down, and through, the supply-pyramid to nitty-gritty individual enterprises – trade collapse cannot be avoided. What is hinted at here is the concern that when multiple dynamic complex systems begin to degrade, they can, and often do, enter into a spiralling feedback-loop.
There may be agreement in the G7 on the principle of a limited debt moratorium to be offered to struggling economies, but an approach à outrance – on the BIS lines – apparently is being blocked by U.S. Treasury Secretary Mnuchin (the U.S. enjoys a veto at the IMF by virtue of its quota): No more U.S. cash is being offered to the IMF by Mnuchin, who prefers to keep the U.S. Fed front and centre of the USD liquidity roll-out process.
In other words, Trump wishes to keep intact the scaffolding of the ‘hidden’ dollar-based, sanctions and tariff ‘war’ against China and Russia. He wants the Fed to be able to determine who does, and who does not, get help in any ‘liquidity roll-out’. He wants to continue to be able to sanction those he wants. And he wants to maintain as large an external footprint of the dollar as possible.
Here then, is the crux to Putin’s complaint:
“At root, the Eurodollar system is based on using the national currency of just one country, the U.S., as the global reserve currency. This means the world is beholden to a currency that it cannot create as needed”.
When a crisis hits, as at present, everyone in the Eurodollar system suddenly realizes they have no ability to create fiat dollars, and can rely only on that which exists in national foreign exchange reserves, or in ‘swap lines’. This obviously grants the U.S. enormous power and privilege.
But more than subjecting the world to the geo-political hegemony of Washington, the crucial point is made by Professor Rogoff:
“We’re looking at a commodity-price collapse – and a collapse in global trade unlike anything we’ve seen since the 1930s. An avalanche of government-debt crises is sure to follow, he said, and “the system just can’t handle this many defaults and restructurings – at the same time”.
This simply is beyond the U.S. Fed, or the U.S. Treasury’s capacities, by a long shot. The Fed is already set to monetize double the total U.S. Treasury debt issuance. The global task would overwhelm it – in an avalanche of money-printing.
Does Mnuchin then, believe his and Trump’s narrative, that the virus will soon pass, and the economy will rapidly bounce-back? If so, and it turns out that the virus does not rapidly disappear, then Mnuchin’s stance portends a coming, tragic débacle. And with further massive money issuance, a collapse in confidence in the dollar. (President Putin would have been proved right, but he will not welcome, assuredly, being proved right in such a destructive manner).
In a parallel sphere, the global trade plight is being mirrored in the microcosm by that of EU states, such as Italy, whose economies similarly have been racked by Covid-19. They too, are beholden to a currency – the Euro – that Italy and others cannot create as needed.
With this crisis hitting Europe, everyone in the Euro system is experiencing what it means to have no ability to create fiat currency, and be entirely subject to a non-statutory body, the Eurogroup, which – like Mnuchin – simply says ‘no’ to any BIS-like approach.
Again, it is about scale: this is not business as usual, as in some neo-‘Greek’ eruption, to be countered with EU ‘discipline’. This crisis is much, much greater than that. The absence of monetary instruments – in crisis – can become existential.
Some muse might recall to Mnuchin and the Eurogroup, Alexander del Mar’s 1899 Monetary History, in which he observes how the manoeuvres of the British Crown, in constricting the export of gold and silver (i.e. money) to its American colonies, led to the Crown’s ‘war’ on the paper monetary instruments – Bills of Credit – issued by the Revolutionary Assemblies of Massachusetts and Philadelphia, to compensate for this British monetary starvation.
Finally, it left the desperate colonists with but one resort: “to stand by their monetary system. Thus the Bills of Credit of this era … were really the standards of The [American] Revolution. They were more than this: They were the Revolution itself!”
