Month: September 2016

There was an interesting exchange during Janet Yellen’s testimony before the House Financial Services Committee on Wednesday morning, when South Carolina Republican Mick Mulvaney asked Yellen if the Fed will openly (as opposed to indirectly via Citadel) buy stocks. Specifically, he said that “there’s been some attention in the last few months about the resent decision by the Bank of Japan to start purchasing equities and my question to you is fairly simple. Is the United States Federal Reserve looking at the possibility of adding the purchase of equities to its tool box as it looks at monetary policy?”

This was her response:

“Well, the Federal Reserve is not permitted to purchase equities. We can only purchase U.S. treasuries and agency securities. I did mention in a speech in Jackson Hole, though, where I discussed longer term issues and difficulties we could have in providing adequate monetary policy. Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider, but if you were to do so, it’s not something that the Federal Reserve is asking for.”

And there you have the apolitical Fed hinting to Congress all it would to keep the stock market propped up in perpetuity is a small change in the law for Yellen to lift the offer, or as Chuck Schumer would put it, “get to work Mrs; Chairwoman.”

Also, not asking for yet, because we are certain that there was a time when neither the BOJ nor the SNB imagined they would have to officially intervene in the stock market to keep it propped up. Furthermore, as the WSJ notes, “Yellen’s tentative openness to changing the law suggests Fed officials have been giving a lot of thought to new ways to jolt the economy in an era of low inflation and low interest rates.”

Alas, in a time when the Reuters writes that “any ECB scheme to buy stocks could total 200 billion euros“, to keep hammering the idea that central bank purchases of stocks are just a matter of time, we get the feeling that the spot Yellen envisions as being “somewhere in the future” is not that far off.

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By Gary Leupp, Professor of History at Tufts University, originally posted on Counterpunch

Hillary Clinton’s Campaign Against Russia

George H. W. Bush’s unsurprising support for Hillary Clinton strengthens the alliance of careful, conniving warmongers (including both neocon and “liberal interventionist” camps), admiring former generals,  middle and upper-class “Clinton Coalition” African-Americans (including clerics and TV commentators like MSNBC’s awful anchor/DNC shill Joy Reid snarling first about Bernie as much as Trump, and now trashing Putin along with Trump), Wall Street donors, older women too driven by identity politics, masochistic and naive former Bernie supporters settling for “the lesser evil,” and miscellaneous communities of the confused.

It is a rainbow coalition of everyone she needs on board when she starts bombing Syria—seriously bombing Syria, courageously doing so one-upping Barack Obama (who she thinks blew his opportunities to take out Assad in 2011 and 2013) and producing another regime change accompanied by her triumphant Tarzan yell. This time it will be: “We came, we saw, Syria died!”

Hillary was, you recall, a leading cheerleader of the destruction of the modern Iraqi and Libyan states, and continues to justify those regime-change actions while bemoaning their aftermaths, which she blames on others.

For someone doing so poorly in the polls, and exciting so little enthusiasm—barely edging over a buffoon whose main purpose seems to be to reveal to the world the depths of the U.S. electorate’s abject ignorance and moral depravity—Hillary can boast on the one hand that the Democratic Party platform is the “most progressive” in the party’s history (thanks to the Bernie supporters, whom she regularly acknowledges, pandering with little success); and on the other hand her candidacy is solidly supported by Goldman-Sachs and the neocons and the whole military-industrial complex. From left to right, such a big tent!

Everybody else (especially, we’re supposed to believe, less-educated “middle-class” white men over 40) is for Trump. But (the Hillary camp wants to believe) with such high negatives among blacks, Latinos and women Trump can’t win barring some horrible failure of the good people to go to the polls.

But polls are showing Trump and Clinton neck and neck, or even showing the billionaire leading, including in some key states. This brings out the worst, most dishonest streak in Clinton’s character. Her response indicates that she remains the eternal Goldwater Girl. Running scared, she resorts to the least creative yet tried-and-true ploy imaginable: Cold War-era style redbaiting.

Never mind that there are few Reds in Moscow anymore, and that Russia is a thoroughly capitalist society posing no threat to the U.S.  Never mind that Russia like the U.S. has a multiparty democratic political system (rigged, like that in the U.S.) and like the U.S. is controlled by its billionaire One Percent (that by the way invests heavily in the U.S. and Britain). There is no ideological divide, and Russia does not head an international ideological movement.

The basis for its deteriorating relationship with the U.S. and some of its allies is that Washington has steadily expanded NATO to surround the Russian Federation since 1999 (when during Clinton’s husband Bill’s administration it added Poland, Czechoslovakia, and Hungary); wants to add Georgia and Ukraine to the alliance; and spends billions trying to influence elections or fund movements for regime change such as the one that toppled Ukraine’s elected president Viktor Yanukovych in February 2014.

The U.S. press has virtually ignored one of the most important geopolitical developments of our time. NATO expansion has been a non-story. Russia’s reactions to it (including recent war games held on Russian territory, in response to the biggest NATO war games ever in Poland earlier this year) are invariably depicted as “threatening” to Europe. Vladimir Putin is personally vilified as a brutal dictator who imprisons and assassinates political foes and journalists and has ambitions to restore the Soviet Union.

All of this is accepted without questions by cable anchors, coached no doubt by news editors who shape the packaging of the news. Instead of noting the obvious fact that NATO is by its very expansion provoking Russia, the mainstream press declares with a straight face that Russia is provoking NATO—by opposing its expansion!

The reportage on Ukraine has been particularly bankrupt. Talking heads repeatedly refer to Russian “invasions” of the Donbas region of eastern Ukraine and Crimea that never happened. They methodically avoid discussion of the neo-fascist element in the post-coup regime and how its actions prompted separatism among Russian speakers in the east. Journalists for the top newspapers routinely cite unnamed “government officials” as confirming Russian responsibility for all manner of offenses, from shooting down planes to hacking U.S. emails, blissfully free of any need to provide evidence. This is why polls show Putin the most despised man in the U.S.

The vilification is absurd, especially given the kid gloves treatment of much worse leaders in the U.S. camp. (Turkish President Recep Tayyip Erdogan resembles Putin in many respects but the U.S. press ignores his repression, military aggression, aid to terrorists, and mass detention of journalists.) But the press generally echoes the State Department, to which it is sometimes literally wed (Christiane Amanpour). And the post-Cold War State Department and Pentagon have felt the need to posit a new Enemy in the form of a Russia that threatens its neighbors and (in Syria and elsewhere) supports horrible regimes.

So when Hillary gets scared, she plays the Russia card. Her campaign has been doing it in several ways. It notes that Trump campaign staffers arranged the removal of a call to arm Kiev against separatists in the Republican platform, implying that this shows Trump’s support for Putin’s objectives in Ukraine (rather than, say, a disinclination to exacerbate the conflict and to support the Minsk Agreement).

It notes that former Trump campaign manager Paul Manafort also worked as a campaign advisor and lobbyist for Ukraine’s Yanukovich for over a decade, and implies that this connection explains the platform change. (As though there were something especially nasty about a professional political operative from the U.S. selling his services to a politician who won what everyone acknowledges was a “free” election in Ukraine in 2010. But Yanukovych, because he opposed NATO membership for Ukraine and decided to reject EU membership due to the austerity conditions it would impose on Ukraine, was considered “pro-Russian” by the State Department.  Ergo, Manafort must be a Putin agent. Such accusations forced him to resign as campaign manager Aug. 19.)

The campaign responded to the devastating Wikileaks revelation that the DNC rigged the primary process in favor of Clinton against Sanders—a scandal serious enough to result in the resignation of Debbie Wasserman Schultz and other top DNC officials—by blaming the leaks on Russia! Even if someone in that country hacked the accounts announcing to the world how corrupt the U.S. political process is, what should it matter more than if the hacker was a high school kid in Florida? Because, the Clinton campaign echoed by the entire bourgeois media proclaims, Russia is trying to influence our elections!

The media sometimes uses the term “bromance” and posits a soul-mate relationship between the Russian leader, who has in fact never met Trump nor said more than a couple sentences relating to him (in answer to reporters’ questions). He has called him “flamboyant” (which is true), not “brilliant” as the press sometimes reports. It’s common sense to imagine that he prefers Trump to the warmongering Clinton, who wants regime change in Syria, and more NATO expansion, and has preposterously compared Putin to Hitler. But Putin has in fact been diplomatically silent on the U.S. election. (RT TV has contrasted this silence to the active U.S. support for the reelection of Russian president Boris Yeltsin, a total buffoon—opposed by the initially more popular Communist Party leader Gennady Zyuganov—in 1996.)

But Goldwater Girl Hillary wants to make it clear: she is anti-Putin, anti-Russian, while Trump is a Putin fan. (The press refers to Trump’s repeated “praise” for Putin, alluding to his occasional vague comments to the effect that Putin is sharp and popular. But my impression is that his references to Putin are largely allusions to his supposed high estimation of his own narcissistic and solopsistic self. Like the poet Apollinaire, Trump praises all who love him. And he is mercurial. Fawning generals could use these traits to affect his actual policies in power towards Russia. And recall Trump has boasted about being the “most militaristic” of candidates.)

That the first woman president of the U.S. will be elected (as still seems likely, I think, although not with high confidence) might be brought to power by a coalition of self-defined progressives and war criminals like George H. W. Bush, whipped up in part by tired old Russia-baiting, is depressing. It’s depressing that 27 years after the end of the Cold War it’s still possible to exploit a Russian bogeyman to win support for hot war.

That Hillary in power will try (and possibly) succeed in going to war once again, this time targeting Russia or its allies (the Syrian state, the Ukrainian Russian separatists), is frightening.  The electorate is malleable, its collective memory short. What should be universally acknowledged truths (the Iraq War was based on lies, produced horrible death and suffering, generated more terrorism that spread to Syria, etc.) are in fact not grasped adequately by the masses. If they were, how could anybody vote for hideous Hillary?

Remember how the ratings of an unpopular (and actually un-elected) president named George W. Bush leaped from around 50% at 9/11 to 70% just before the invasion of Iraq. Weak, unpopular presidents are sufficiently motivated to study history as to realize that war brings scared people together, causing them to unite around you. While the good thing about this nationally embarrassing farce will be the election of a highly unpopular president (vulnerable to overthrow), the really, really bad thing is that president might provoke World War III with Russia.

In that connection it might be worthwhile to check out the anti-Goldwater ad of the Democrats in 1964, raising this very issue. Fear, people, fear.

* * *

 

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If the rest of the world was already laughing violently, watching the spectacle that is America’s presidential election, we wonder how it would react if it knew that there is actually a third candidate for the US presidency, one who can’t name a single foreign world leader.

Sadly, that is precisely what happened today when during a New Hampshire townhall moderated by MSNBC’s Chris Matthews, libertarian candidate Gary Johnson had another “Aleppo moment” when asked who his favorite foreign leader is, as the clip below shows.

Gary Johnson had an “Aleppo moment” after @hardballchris asks who his favorite foreign leader is #JohnsonTownhall https://t.co/nRazpPL0q0

— MSNBC (@MSNBC) September 28, 2016

It did not end there.

Johnson continued, adding that Hillary Clinton would likely start a nuclear war if faced with a tough split-second decision. “I think she is going to press the button … She is going to be hawkish, she is going to be more hawkish in that role,” Johnson said. “I think that she is not going to air on the side of not being an aggressor.”

.@GovGaryJohnson says he thinks @HillaryClinton would press the nuclear button #JohnsonTownhall https://t.co/Qd8xs4hIIV

— Hardball (@hardball) September 29, 2016

The presidential candidate added that he would be the only candidate who could be trusted with the nuclear codes as president.

“I think she is going to shoot. She is going to shoot. She is not going to be herself. She is not going to be perceived as weak. She is going to shoot,” he said later.

And just to make it fair, former Massachusetts Gov. Bill Weld, Johnson’s running mate, said that Donald Trump is not to be trusted with the nuclear codes either, and pointed to the GOP nominee’s past support for countries like Japan and South Korea expanding their own nuclear capabilities. Weld said Trump would be better off running a laundry business than campaigning to become the President of the United States.

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The dollar amounts are so staggering, that simply telling you how much money humans have created probably wouldn’t convey the magnitude. However, The Money Project's data visualization in this video, allows us to relate numbers in the millions, billions, and trillions to create the context to make it more understandable.

Source: Visual Capitslist

Starting With Context

The median U.S. household income of $54,000 is a number that most people can relate to. It’s enough money to save up to buy a car, or maybe even a house depending on where you live.

Multiply that income by eight, and that number is now big enough to count as being in the top 1% of earners. People in the “one percent” make at least $430,000 per year.

Famous celebrities and businesspeople have fortunes that dwarf those of many “one percenters”. Actor George Clooney, for example, has a net worth of $180 million. Meanwhile, author J.K. Rowling is estimated to have a net worth of roughly $1 billion according to Forbes.

Zuckerberg takes things to a whole new level. His net worth worth is $53 billion, thanks to the value of Facebook stock. Lastly, Bill Gates regularly tops the “richest people” lists with a wealth of $75 billion – though lately that number has been a little higher based on stock fluctuations.

However, even the wealth of the richest human on Earth is not enough to get up to our unit of measurement that we use in the video: each square is equal to $100 billion.

The World’s Money

Some of the world’s biggest companies take up just a few squares with our unit of measurement. ExxonMobil for example has a market capitalization of about $350 billion, and the world’s largest public company by market capitalization, Apple, is at about $600 billion.

The total of the world’s physical currency – all coins and bills denominated in dollars, euros, yen, and other currencies – is about $5 trillion.

Meanwhile, if we add checking accounts to the equation, the number for the amount of money in the world goes up to $28.6 trillionaccording to the CIA World Factbook. This is called “narrow money”.

Add all money market, savings, and time deposits, and the number jumps up to $80.9 trillion – or “broad money”.

But that’s nothing compared to the world of Wall Street.

Wall Street

All stock markets added together are worth $70 trillion, and global debt is $199 trillion.

That’s all impressive, but the derivatives market takes the cake. Derivatives are contracts between parties that derive value from the performance of underlying assets, indices, or entities. On the low end, the notional value of the derivatives market is estimated to be a whopping $630 trillion according to the Bank of International Settlements.

However, that only accounts for OTC (over-the-counter) derivatives, and the truth is that no one actually knows the size of the derivatives market. It’s been estimated by some that it could be as high as $1.2 quadrillion, and others estimate it could be even higher.

There are many financial critics who worry about the risk that these contracts pile onto the global financial system. With the sheer size of the derivative market dwarfing all others, it’s understandable why business mogul Warren Buffett has called derivatives “financial weapons of mass destruction”.

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Submitted by Jeffrey Snider via Alhambra Investment Partners,

Though I highly doubt he will admit it, he’s just not the type, even Ben Bernanke knows on some level that bond market is decidedly against him, or at least his legacy. Economists have a funny way of looking at bonds, decomposing interest rates into Fisherian strata. To monetary policy, interest rates break down into three parts: expected inflation over the term of the security; the expected path of real short-term rates; and the residual term premium. Policymakers love to focus on the last one even as (or especially because) it is the most esoteric.

To gain monetary “stimulus”, officials believe that they must arrest and reduce term premiums. What is a “term premium?” It is what economists believe is the extra return a bondholder demands in order to hold a longer range fixed income instrument. In other words, all else being equal (as economists like to surmise) where the path of real short-term rates is the same as are inflation expectations, the term premium determines where an investor will buy a bond in maturity versus something shorter or longer. Economists like Bernanke argue that term premiums are high where risk is perceived to be high; in other words, you have to be compensated that much more for holding a bond for that much longer.

From that perspective, term premiums make sense in a monetary policy setting, as does the surface considerations for QE. If QE can affect long-term rates while holding the others equal or better, that suggests lower risk of investing overall.

The trouble for policymakers is that on this side of the Great “Recession” we don’t even need to account for the academic posturing. On March 20, 2006, new Federal Reserve Chairman Ben Bernanke discussed the unusual nature of low interest rates of that time. Alan Greenspan had left Bernanke his “conundrum” where he raised short-term rates considerably (in his view) but longer rates failed very conspicuously to follow. In a speech to the Economic Club of New York, Bernanke noted this disparity:

For example, since June 2004, the one-year forward rate for the period two to three years in the future has risen almost 1-1/2 percentage points. As the ten-year yield is about unchanged even as its near-term components have risen appreciably, it follows as a matter of arithmetic that its components representing returns that are more distant in time must have fallen. In fact, the one-year forward rate nine years ahead has declined 1-1/2 percentage points over this tightening cycle.

The question was about how to interpret the apparent inconsistency. To Bernanke, it was a matter of breaking down the constituent parts of rates:

To the extent that the decline in forward rates can be traced to a decline in the term premium, perhaps for one or more of the reasons I have just suggested, the effect is financially stimulative and argues for greater monetary policy restraint, all else being equal. Specifically, if spending depends on long-term interest rates, special factors that lower the spread between short-term and long-term rates will stimulate aggregate demand. Thus, when the term premium declines, a higher short-term rate is required to obtain the long-term rate and the overall mix of financial conditions consistent with maximum sustainable employment and stable prices.

This was not the only possibility (and again there are serious doubts as to just how realistic this view actually is). Juxtaposing that more hopeful condition against another scenario, Bernanke gives us his own answer to the current predicament delivered long before its appearance.

However, if the behavior of long-term yields reflects current or prospective economic conditions, the implications for policy may be quite different–indeed, quite the opposite. The simplest case in point is when low or falling long-term yields reflect investor expectations of future economic weakness. Suppose, for example, that investors expect economic activity to slow at some point in the future. If investors expect that weakness to require policy easing in the medium term, they will mark down their projected path of future spot interest rates, lowering far-forward rates and causing the yield curve to flatten or even to invert.

In terms of Fisherian decomposition of longer term interest rates, this means that where the expected path of short run real rates is low and gets lower then reduction in long-term rates is not helpful via lower term premiums but increased (perceived) risk accompanying that mark down. Typically we see this behavior where the UST curve inverts, but that is not the only way to observe it; and I would argue, given the state of short end activity, it is not the correct way.

In fact, there is an alternate method to derive what might be the expected path of short run rates, real or otherwise – the eurodollar futures curve. In the last nearly three years of this “rising dollar” and its preceding months, the eurodollar curve has not just flattened but done so in remarkable fashion. What it suggests about both the time value of money and overall risk/opportunity is nothing short of alarming. It qualifies in every way for Bernanke’s definition of “if investors expect that weakness to require policy easing in the medium term, they will mark down their projected path of future spot interest rates.” In the case of eurodollar futures, though they are not connected to spot rates but 3-month LIBOR, it is perhaps a more appropriate substitute (we could also use the OIS curve, as its history accomplishes the same result).

What was once a curve is now not. It has become a straight line that serves as a reminder of the death of money and time value, two key components that more than suggest risks and (lack of) opportunity. The yield curve doesn’t invert because current short rates are already near zero, so the decomposition of far forward expectations of spot rates indicates a huge increase in risk perceptions. From that view, falling longer-term rates simply confirm the worst regardless of inversion.

We don’t find declining term premiums leading to “stimulus” as the media presumes, rather we see a yield curve increasingly comfortable with the idea that there has been and likely will be no such thing. In other words, short-term rates get stuck around where they are now and the consequences are increasingly no economic opportunity for it. Even as the eurodollar futures market reacts to expectations of perhaps another “rate hike” in the near future, the only potential effect on the full futures curve is to further flatten it out beyond its already massively distorted condition.

The bond market selloff of the past month or so, which has apparently fizzled just as Alan Greenspan was assuring the world it was only getting started (once more preserving for posterity how little he knows about bonds, interest rates, and money, as if knowing anything about any of those would be useful to a central banker), has been, I believe, a microcosm of these forces at work if in reality as opposed to the academic manner in which policy and orthodox views take them. In other words, as the UST market was selling off and nominal rates turned slightly higher and the curve steeper, the eurodollar futures curve moved in sympathy.

From Bernanke’s own formula, that meant as rates were rising one significant view (I would argue the only view) of the expected path of future short-term rates was also rising. The eurodollar futures curve was decompressing into higher calendar spreads, suggesting that the appearance of higher nominal rates for UST’s was not an increased view of risk but rather a decreased view of it.

Conversely, since Greenspan’s appearance, nominal rates have fallen back as have calendar spreads of eurodollar futures. Before the selloff had completed, it was thought that the Federal Reserve might undertake a second “rate hike” which would confirm the judgment of lower risk (an eventual higher anticipated path of short-term rates) whereas since the bond selloff has reversed without any Fed action at all (“chickening out” and once more endorsing the prior negative view that all is not well – Bernanke’s second option).

It isn’t quite the interest rate fallacy but it is perhaps as close as an academic economist may ever come to describing it. People focus entirely too much on yield curve inversion in this context as the only definitive signal, but by Bernanke’s own formulaic approach we again see that what is important is the potential difference between expected short-term rates and how that reflects upon current levels of long-term interest – and really how changes in each reflect upon one another. From that harmonized view, where long-term nominal rates have fallen but so have expectations for short rates, it adds up even in the orthodox terms to a very negative outlook entirely devoid of “stimulus.”

There is no bond market riddle. As each curve gets squashed by righteous pessimism, they together indicate nothing good about the near-term future, even more so than what their past corroboration has already been proved as valid. Each constituent part of the financial picture increasingly confirms there is no money in monetary policy. We truly don’t need the UST curve to invert, especially since the highly negative real money scenario at this moment no longer involves recession and the regular business cycle and has more than enough corroboration about economic and financial risk.

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The richest man in China, Wang Jianlin, made his ~$30 billion fortune by developed huge malls and office complexes across China but he now says Chinese real estate is the “biggest bubble in history.”

Certainly, one has to look no further than our post from yesterday entitled “Viral Surveillance Video Reveals A Shocking Scene From China’s Housing Bubble” to get a sense of just how “bubblicious” the China property market has become.  Below is footage from a surveillance camera that caught the moment a new real estate development in east Hangzhou opened for sale on September 24th. 

 

The big problem, according to Jianlin, is that prices keep rising in major Chinese cities like Shanghai but are collapsing in thousands of smaller cities where huge numbers of properties lie vacant.  Per an interview with CNN, Jianlin notes that rising household debt is a major issue fueling the bubble but Chinese officials have been reluctant to restrict leverage due to the fear of the economic consequences. 

“I don’t see a good solution to this problem,” he said. “The government has come up with all sorts of measures — limiting purchase or credit — but none have worked.”

 

It’s a serious worry in China, where the economy is slowing at the same time as high debt levels continue to increase rapidly. There are massive sums at stake in the real estate market: direct loans to the sector stood at roughly 24 trillion yuan ($3.6 trillion) at the end of June, according to Capital Economics.

 

“The problem is the economy hasn’t bottomed out,” Wang said. “If we remove leverage too fast, the economy may suffer further. So we’ll have to wait until the economy is back on the track of rebounding — that’s when we gradually reduce leverage and debts.”

Jianlin has been warning of a bubble in Chinese real estate for a while which has prompted his recent buying spree of international assets.  So far in 2016, Jianlin has been gobbling up U.S. based media companies including the Hollywood studio Legendary Entertainment, the movie theater business Carmike Cinemas and he is currently in talks to buy Dick Clark Productions.

Meanwhile UBS China Economist, Tao Wang, says the China real estate bubble isn’t a concern because it hasn’t yet pushed household debt to alarming levels…

Not yet a bubble that’s about to significantly damage the economy.  The recent property market frenzy has not yet spread to a great many cities, pushed household debt up to alarming levels, or led to strong construction growth.

…Even though her charts seem to paint a slightly different picture. 

Property prices seem to be surging across the board…

 

…while buyers are relying on a record amount of leverage to fund purchases…

 

…pushing household consumer debt closer to 250% of disposable income…

 

…all while there is seemingly 4-5 years worth of incremental residential supply under construction.

 

But we’ll take Wang’s word for it…probably nothing to see here.

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Of course our world is in shambles. The best salaries are paid to the people whose professions add the least value to society.

 

Why Garbagemen Should Earn More Than Bankers by @rcbregman https://t.co/9R9v57pZWg http://pic.twitter.com/xPlyVRnoBA

— Evonomics (@EvonomicsMag) September 28, 2016

 

I know, I know. Lots of people are capable of being garbagemen, but not everyone has the skills to be a parasitic financial criminal.

I agree.

*  *  *

…Imagine, for instance, that all of Washington’s 100,000 lobbyists were to go on strike tomorrow. Or that every tax accountant in Manhattan decided to stay home. It seems unlikely the mayor would announce a state of emergency. In fact, it’s unlikely that either of these scenarios would do much damage. A strike by, say, social media consultants, telemarketers, or high-frequency traders might never even make the news at all.

 

When it comes to garbage collectors, though, it’s different. Any way you look at it, they do a job we can’t do without. And the harsh truth is that an increasing number of people do jobs that we can do just fine without. Were they to suddenly stop working the world wouldn’t get any poorer, uglier, or in any way worse. Take the slick Wall Street traders who line their pockets at the expense of another retirement fund. Take the shrewd lawyers who can draw a corporate lawsuit out until the end of days. Or take the brilliant ad writer who pens the slogan of the year and puts the competition right out of business.

 

Instead of creating wealth, these jobs mostly just shift it around…

Read the entire article (it is excellent): Why Garbagemen Should Earn More Than Bankers.

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While China’s excess debt problems have been extensively documented, the overall economy appears to also be slowing substantially as a result of the decline in the most recent credit impulse, noted as recently as one week ago when we reported that “Chinese Loan Demand Dropped To All Time Low.” Overnight, the latest warning about China’s economy came from the authors of the China Beige Book, a quarterly survey that tracks the world’s second-largest economy, who said that recent stability in the Chinese economy masks deep-seated problems that threaten to rattle global markets in advance of a leadership change next year, and added that ignoring these risks is shortsighted.

As reported by the WSJ, data from the group’s Q3 survey of 3,100 Chinese firms and 160 bankers point to some potential problems. New growth engines intended to shift the economy away from investment toward consumption-led growth are increasingly wobbly as corporate cash flow is squeezed and Beijing doubles down on traditional engines to stabilize output, the China Beige Book says.

“I’d find it earth-shatteringly surprising if we don’t have a significant problem between now and China’s leadership change” in the fall of 2017 when the 19th Party Congress convenes, said Leland Miller, China Beige Book’s president. “This is not a stable economy. It’s one that twists and turns and happens to end up at the same spot. There are real problems below the surface.”

More troubling, the report notes, growth in China’s service industry, a cornerstone of its planned transition to a new and more sustainable economic model, weakened during the third quarter as financial services, private healthcare, telecommunications, media and other subsectors flagged. In retail, the apparel, luxury goods and food sectors slowed, it said, as online retailers continued to cannibalize brick-and-mortar sales.

Despite Beijing’s pledge to reduce excess Industrial capacity and pare debt, China remains heavily dependent on government spending to power traditional debt-fueled growth engines, the group said. Much of the economic momentum during the third quarter came from infrastructure, manufacturing, commodities and real estate and many of these sectors are in danger of losing momentum, it said.

As the WSJ further notes, while property sales remained strong in major cities, cash flow in the sector tightened and borrowing increased, a sign that investors should “think about getting off this train sooner rather than later,” the China Beige Book said.“ Deteriorating corporate finances and a rebalancing reversal seem a high price to pay for a quarter’s worth of stability,” the group added.

When China reports Q3 GDP next month, it is expected to goalseek a number around 6.7%, the level it posted in both the first and second quarters. Gauges such as industrial production and fixed-asset investment have been surprisingly robust over the past month. However, the trigger for another potential market jolt in the next few quarters could be the release of particularly weak Chinese service or retail data coinciding with a Federal Reserve interest rate rise or another global event, Miller said. “Right now, the markets are lulled to sleep,” he said. “People become used to the stable China narrative until they start looking more closely into the data.”

For now, however, most are unwilling to look more closely into the data.

Economists say they expect the Chinese economy to remain relative stable through the once-in-five-year leadership change, which is expected to be in October or November of 2017, as long as Beijing continues stimulating the economy enough to avoid a drop in growth. “I don’t think there’s going to be a crisis next year,” said Julian Evans-Pritchard, an economist with Capital Economics Pte. “But they often take their foot off the pedal too much, then tend to panic again and put it back on, creating a lag.”

 

The Bank for International Settlements warned last week that mounting leverage raises the risk of a financial crisis in China. The nation’s total debt, led by rising corporate obligations, is on target to reach 253% of gross domestic product by the end of 2016, a doubling over the past eight years, according to credit ratings agency Fitch Ratings Inc.

It wasn’t all bad news however: courtesy of the recent wave to preserve zombie enterprises and near-insolvent corporations, the Chinese job market remains strong. The manufacturing outlook improved with new domestic and international factory orders picking up and deflationary pressure on industry ebbing. “It was not a disaster of a quarter,” Mr. Miller said.

“But it’s a lot more negative than people think.”

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Authored by Carmen Reinhart, originally posted at Project Syndicate,

“What a government spends the public pays for. There is no such thing as an uncovered deficit.”

 

So said John Maynard Keynes in A Tract on Monetary Reform.

But Robert Skidelsky, the author of a magisterial three-volume biography of Keynes, disagrees. In a recent commentary entitled “The Scarecrow of National Debt,” Skidelsky offered a rather patronizing narrative, in a tone usually reserved for young children and pets, about his aged, old-fashioned, and financially illiterate friend’s baseless anxiety about the burden placed on future generations by the rising level of government debt.

If Skidelsky’s point had been that some economies, including the United States, would benefit from higher infrastructure spending, even at the cost of more debt, I would agree wholeheartedly. Compelling reasons for boosting US public investment include deteriorating infrastructure, tepid growth, low interest rates, and limited scope for further monetary stimulus. For the US, such an impetus might be especially welcome as the Federal Reserve raises interest rates (albeit gradually) while other countries ease further or hold rates steady and the dollar likely strengthens.

But that was not the route Skidelsky took. Instead, in his critique of a commentary by Kenneth Rogoff, he argued that it is silly and passé for a country that can issue debt in its own currency to fret over medium-term debt levels. Call me old-fashioned, but that argument smacks of complacency and is not supported by evidence. On this score, Skidelsky confuses two different papers on debt and growth, a 2012 paper of mine, in which there were some alleged data concerns, with one that I co-authored with Rogoff and Vincent Reinhart, in which there were none.

Coming from an author who knows Keynes so well, such complacency disappoints. I cannot read How to Pay For the War and conclude that Keynes thought that high war debts were a “scarecrow” for the United Kingdom. In fact, the apparatus of the Bretton Woods arrangements that Keynes subsequently helped to craft were designed to ease a difficult transition out of debt.

The case for near-term fiscal stimulus, even if in the form of increased infrastructure outlays, cannot ignore the medium-term outlook for economies with already large debt obligations, major entitlement burdens, aging populations, and what appears to be a steady downward drift in potential output growth.

As Skidelsky notes, debts have risen significantly in the UK and the US (among others) since 2008, while interest rates have remained low or declined. Should we therefore conclude that high debt is not linked to low growth via high interest rates (which crowd out private spending)?

Reading a little further into my study with Rogoff and Reinhart, one would find that there was ‘‘little to suggest a systematic mapping between the largest increases in average interest rates and the largest (negative) differences in growth during the individual debt overhang episodes.”

Our research considered 26 high-debt episodes between 1800 and 2011, looking both at growth rates and at levels of real (inflation-adjusted) interest rates. In 23 of these high-debt episodes, growth was lower, and in eight growth slowed even as real interest rates remained about the same or edged lower. Japan’s debt overhang (entirely domestic currency debt), which we trace back to 1995, illustrates this pattern.

Why do high debt and slow growth coexist, despite cheap financing?

High debt levels can and do constrain a country’s abilities to cope with adverse events. For example, some of Italy’s largest banks have been diagnosed as approaching insolvency and requiring substantial recapitalization. Not surprisingly, the confidence of Italian households and firms has been shaken, and capital flight has ensued. If Italy’s debt were not already 130% of GDP, might its government have been better positioned to provide the resources to tackle decisively its lingering banking and confidence problems?

Our 2012 study identified three ongoing public-debt overhangs that began in the mid-1990s – Greece, Italy, and Japan. Relative to other advanced economies, these three economies are the worst growth performers (see chart). To be sure, a country’s economic performance depends on many factors. But the view that it is low growth that causes debt to rise, though important when assessing the cyclical feedback effects, can hardly explain the two-decade experience of these three countries.

It is difficult to imagine a sustained revival of Greek growth without another round of haircuts and debt forgiveness from Greece’s official creditors, which now hold most of its debt. Italy depends critically on the continued large-scale purchases of its bonds by the European Central Bank (its Target 2 balances have recently climbed, reflecting capital flight). The Bank of Japan is going to greater and greater lengths to orchestrate an increase in inflation expectations and price growth, which can help erode the value of outstanding debts. (“For inflation is a mighty tax-gatherer,” as Keynes observed.) Other countries, like Portugal, are also struggling with low growth and weak fiscal positions.

Concerns about debt levels (public and private) have now extended beyond the advanced economies to many emerging markets. I cannot recall an instance of a government that is concerned about having too low a level of debt. Perhaps, it is because the debt scarecrow has teeth.

Skidelsky needs no reminder of the historical record, but it bears noting that more than a dozen advanced economies received debt relief in one form or another during the depression of the 1930s. The approach to unwinding current debts is likely to vary considerably across countries, but it is time to place greater emphasis on debt restructuring (which comes with a menu of options) than on accumulating more debt.

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