Tag: news

Three months ago we discussed in detail the growing anti-dollar hegemony alliances that were building across the BRICS countries (Brazil, Russia, India, China and South Africa). Their efforts at the time, to create a structure that would serve as an alternative to the IMF and the World Bank (which are dominated by the U.S. and the EU), appear to be nearing completion. As AP reports, Brazil's President Dilma Rousseff and Russia's Vladimir Putin have discussed the creation of a development bank to promote growth across the BRICS and hope to produce an agreement on the proposed institution at this week's BRICS Summit.

As AP reports,

Brazil's President Dilma Rousseff and Russia's Vladimir Putin have discussed the creation of a development bank to promote growth in Brazil, India, China, Russia and South Africa.

 

Rousseff received Putin in the presidential palace in Brasilia on Monday, a day before leaders of the five emerging BRICS nations meet in the northeastern city of Fortaleza.

 

Rousseff told reporters the bank would top the summit's agenda, adding she hoped the event would produce an agreement on the proposed institution.

 

She said the five countries "are among the largest in the world and cannot content themselves in the middle of the 21st century with any kind of dependency."

 

Brazil and Russia also signed bilateral accords on air defense, gas and education

The leaders who will be present (not so many big fans of the US there)…

 

They seem serious:

• *BRICS DEVELOPMENT BANK KEY TO FOSTER GROWTH IN GROUP: BORGES
• *BRICS BANK AT 1ST TO FINANCE EXCLUSIVELY INFRASTRUCTURE:BORGES
• *RUSSIA'S PUTIN SAYS COOPERATION WITH CHINA IS GROWING
• *PUTIN SAYS RUSSIA TO PROMOTE CURRENCY SWAP WITH CHINA: XINHUA

As we concluded previously, as RBTH reports, it seems the BRICS are not slowing down efforts to create their own IMF-alternative…

The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.

 

Brazil has already drafted a charter for the BRICS Development Bank, while Russia is drawing up intergovernmental agreements on setting the bank up, he added.

 

In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. "Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory," Lukov said.

 

It is expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each; and South Africa, $5 billion. The amount of the contributions reflects the size of the countries' economies.

 

…

 

The creation of the BRICS Development Bank has a political significance too, since it allows its member states to promote their interests abroad. "It is a political move that can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues. The stronger this union and its positions on the world arena are, the easier it will be for its members to protect their own interests," points out Natalya Samoilova, head of research at the investment company Golden Hills-Kapital AM.

Perhaps the following sums it all up perfectly…

Economists warn the IMF's legitimacy is at stake, and they say U.S. standing abroad is being eroded.

"Eroded" indeed…

*  *  *

Read more here on the BRICS morphing into an anti-dollar alliance…

If the current trend continues, soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington's bullying will make even former American allies choose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance.

via Zero Hedge http://ift.tt/1oCobxI Tyler Durden

Last week, Zero Hedge first reported on this side of the Pacific, some very troubling news: the biggest offshore buyer of luxury US real estate, that would be Chinese money laundering oligarchs and other member of the upper class, may be locked out of any future US housing purchases for a long, long time. The reason: an unexpected revelation by the power state CCTV channel revealed that contrary to popular disinformation, some of the largest Chinese banks – the PBOC included – were not only permitting but actively encouraging Chinese “money laundering” far above the $50,000/year statutory limit, the immediate result of which was soaring prices of the luxury segment of the US housing market.

We summarized the next steps last Thursday:

“So what happens next? Assuming there is the anticipated resulting backlash and crackdown on Chinese banks, which will finally enforce the $50K/year outflow limitation, this could well be the worst possible news not only for Chinese inflation, which suddenly – no longer having a convenient outlet for the unprecedented liquidity formed in the country every month – is set to soar, but also for the ultra-luxury housing in the US.

 

Because without the Chinese bid in a market in which the Chinese are the biggest marginal buyer scooping up real estate across the land, sight unseen, and paid for in laundered cash (which the NAR blissfully does not need to know about due to its AML exemptions), watch as suddenly the 4th dead cat bounce in US housing since the Lehman failure rediscovers just how painful gravity really is.”

We forgot to mention one other thing that would promptly happen: the rest of the US mainstream media would quickly catch to this critical story which is still woefully unreported.

First, the WSJ, from earlier today, which basically provides a recap of what we wrote before:

China’s major banks have halted an experimental program, sanctioned by the country’s central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter.

The halt, which the people said was likely to be temporary, comes after the program was criticized by China’s powerful state television broadcaster, underscoring the political sensitivity of the issue of wealthy Chinese moving money abroad. Experts said the criticism could set back China’s efforts to ease its grip on the country’s financial system.

 

* * *

 

The controversy comes at a politically sensitive time. China’s top leadership is deepening a nationwide effort to fight corruption, with a focus on officials suspected of trying to move abroad assets they might have gotten through bribes or other illegal means. Earlier this month, Liu Yunshan —a member of the Communist Party’s top decision-making body who is in charge of the country’s propaganda apparatus—called on the government to address the problem of what are known in the country as naked officials, or those whose families have moved overseas.

 

Analysts and economists have widely acknowledged that China’s closed capital-account system has become more porous and that the rules are routinely circumvented. A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $123 billion with them. A favored method, according to the PBOC report, involved squirreling cash away with the help of loved ones emigrating abroad.

 

The CCTV report brought to light a trial program the PBOC launched about two years ago that allowed a few approved banks, including Bank of China, ICBC and China Citic, to start offering cross-border yuan remittance services for Chinese individuals through their branches in the southern province of Guangdong. The PBOC never publicly announced the program because it intended to carry out the trial quietly, the people familiar with the matter said.

 

“The program itself is neither illegal nor improper as it’s been approved by the central bank, but the question is if any particular bank has gone too far by offering clients services they are not supposed to,” said a senior executive at a big state-owned bank in Beijing. “We all had to put a brake on it before the central bank draws a conclusion from its investigation.”

Of course the program was legal and proper: it served a key purpose – to keep Chinese hot money inflation under control, by which we mean, exporting it to the US housing market. This is what we said last week:

Why would the PBOC agree to quietly bless this activity which it has, at least openly, blasted vocally in the past?

 

Simple – to keep inflation in check.

 

Recall that China is a country which creates nearly $4 trillion in bank deposits every year. Also recall that back in 2011 China nearly chocked when inflation briefly soared out of control, leading to sporadic “Arab Spring” type riots in various cities. And since China simply can not reduce the pace of its loan creation at the macro level without crushing the economy, what it needs is to find outlets – legal or otherwise – that permit the outflow of funds.

 

Which is why it is not at all surprising that as SCMP reports, the scheme was launched in 2011, just as China’s scary encounter with soaring inflation was unfolding and Beijing needed a fast way to solve the overabundance of domestic liquidity. Basically at that point the central bank agreed to keep its eyes shut as wealthy oligarchs transferred funds to developed world nations, something the US government and NAR were delighted by as it kept real estate prices (if only at the very top) soaring, dragging the entire housing market higher with them. Furthermore recall: the one thing the Fed has wanted more than anything for the past several years is inflation. And since the US economy is nowhere near strong enough to create the kind of inflation needed, with the bulk of the Fed’s reserves ending up in the capital markets and the latest and greatest credit bubble, the Fed would be more than happy to import some of China’s inflation from it, even if that means a housing market which at the upper end is no longer accessible to anyone but the 0.0001%.

This explains the following qualifier from the WSJ:

Officials close to the PBOC said on Monday that it isn’t likely that the central bank will withdraw the trial program altogether, as it is in keeping with Beijing’s broader effort to make it easier for funds to move in and out of the mainland and to promote the yuan’s use overseas. In its latest announcements aimed at gradually freeing up the flow of money, China’s foreign-exchange regulator on Monday issued revised rules that would make it easier for Chinese companies to keep overseas profits and dividends earned in other countries.

 

Some analysts say the halting of the business amounts to a setback to the government’s reform efforts, at least for now. “This action highlights the tension between the benefits of easing restrictions on capital flows and the risks of allowing freer movement of capital in the absence of effective regulation of financial institutions,” said Eswar Prasad, a China scholar at Cornell University.

Worse, should the hot money flow into ultra luxury US real estate stop, watch as New York City double (and triple) digit million duplex and triplex condo plummet in value as the dumb, marginal money is locked out for good.

Which brings us to the next account of the same story: that of Bloomberg, and its specifics of just how it took place. According to Bloomberg the endorsed money laundering program was introduced in 2011 for overseas property purchases and emigration and, drumroll, doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said.

“What it shows is the government has been trying to internationalize the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., said by phone, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”

 

China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly. Policy makers have taken steps in recent years, including allowing freer movements of capital in and out of China, as they seek to boost the global stature of the not-yet-fully convertible yuan.

 

“There’s a silver lining in this incident as it may force the regulators to address the issue in a more open and transparent way,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said by phone. “This is an irreversible trend.”

 

The issue came to light after CCTV said Bank of China helped customers transfer unlimited amounts of yuan abroad through a product called Youhuitong, which means “superior foreign-exchange channel.”

Of course, this being China, it is far more likely that the “incident” will force the regulators to step aside and keep this all too critical overflow valve of China’s epic hot money, amounting to over nearly $4 trillion in credit money created out of thin air every year, perfectly function for future needs. Especially considering the original report has now been permanently “suicided.” That’s right: any reference to this story in China no longer exists!

The Guangdong branch of China’s currency regulator, the State Administration of Foreign Exchange, picked Bank of China, China Citic Bank Corp. (998) and a foreign lender to let individuals transfer yuan abroad in a trial the banks were told not to promote, Time Weekly reported in April 2013. A Beijing-based Citic Bank press officer declined to comment on the program.

 

While Bank of China didn’t provide figures, the 21st Century Business Herald estimated the lender has moved about 20 billion yuan ($3.2 billion) abroad through Youhuitong, citing people with knowledge of the trial program. “Many commercial banks” in Guangdong offer a similar service, Bank of China said in its statement, without naming them.

 

On CCTV’s website, the report on Bank of China hasn’t been viewable since at least July 12. Today, the story link led only to a series of advertisements. A spokeswoman for CCTV’s international relations department, which handles foreign media inquiries, didn’t immediately respond to an e-mailed request for comment on why the story wasn’t available.

And the details:

Youhuitong customers would typically deposit yuan with Bank of China at least two weeks before the transfer, the person said. Once approved, the customer and the bank agree on an exchange rate before the funds are moved to an overseas account designated by the customer, he said. Money destined for real estate would go directly to the property seller’s account to ensure the cash won’t be misused, he said.

Remember: the program is endorsed not only by the PBOC but certainly by the Fed which is delighted in importing tens of billions in offshore money spurring inflation in the US, even if it is very localized, asset-price inflation:

A Beijing-based press officer for Bank of China declined to comment. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. (939), the nation’s two largest banks, declined to comment on whether they offer similar products.

 

HSBC Holdings Plc (5), which runs the largest branch network among foreign banks in China, offers its Chinese clients another way to access offshore mortgages while avoiding the cap on foreign-exchange conversion, according to a person familiar with the mechanism, who asked not to be identified without having authorization to speak publicly.

 

Customers deposit yuan with HSBC’s mainland unit or purchase its wealth-management products, and the bank’s overseas branch then issues a foreign-currency denominated mortgage using the China deposits as collateral, the person said.

 

“We seek to abide by the rules and laws of the jurisdictions and geographies in which we operate,” said Gareth Hewett, a Hong Kong-based HSBC spokesman.

Translation: unlike money laundering originating at BNP or elsewhere in continental Europe, this particular instance of offshore funds parking in US real estate has been blessed by Janet Yellen. Why? “Clearly the property market wouldn’t nearly be so robust as it is today without mainland money,” Mizuho’s Antos said. “How did they do it? With Bank of China’s help. There has been a tremendous amount of mainland money flowing offshore and it couldn’t have happened without” official approval.“

And it’s not just the US:

Chinese have become the biggest investors in Australia’s commercial and residential property, with purchases surging 42 percent to A$5.9 billion ($5.6 billion) in the year to June 2013, according to the country’s Foreign Investment Review Board.

Vancouver’s real estate market has also seen the impact, having been “fueled tremendously in the last couple of years by high-end wealthy Chinese and Hong Kong buyers,” according to real estate agent Malcolm Hasman.

But it’s the US that would be crushed should Chinese money laundering into ultra luxury real estate – something we said is happening in 2012 – cease. From Bloomberg:

While Chinese buyers’ $22b in spending on U.S. homes in yr through March is “small fraction” of total existing-home sales, a halt in spending would “make a big impact” in cities with the most Chinese buyers, including Los Angeles, Las Vegas, NYC, San Francisco, Nela Richardson, Redfin chief economist, says in note to Bloomberg First Word. She notes Redfin agents have told her Chinese buyers will sometimes have several family, friends transfer $50k at closing, in keeping with yuan cap

Chinese parents also buy high-end properties where kids are going to college, use them as vacation homes or rentals after graduation

Raymond James also piggybacked on our conclusion adding that on the West Coast, Chinese, Taiwanese, Filipino buyers have been scouring parts of Orange County, and Las Vegas; and clearly it may hurt Lennar, SPF if travel/capital flows are suddenly restricted.

Because remember: there is good illegal money laundering, such as this one, and then there is bad illegal laundering, that which does not end up being invested in the massively overvalued luxury segment of the US housing market.

And that is all you need to know on a topic which will hardly receive much more coverage in any media outlets in the US, and certainly not China.

* * *

There is much more on this fascinating topic: those eager for a glimpse of the next steps are urged to read: “Bank of China-CCTV drama may reveal power struggle in Beijing – Money laundering accusation may be sign of a power struggle within mainland banking system.” Because when the laundering of trillions of dollars is at stake, a power struggle is certainly assured.

via Zero Hedge http://ift.tt/1n4uXAS Tyler Durden

The UBS trading floor in Stamford, CT was dubbed (by Guinness World Records) the largest in the world. But now… as the WSJ reports, there are virtually no traders shouting into their phones or staring at terminals. UBS’s cavernous floor is taken up mostly by back-office, legal and technology staffers, according to people familiar with the bank. Simply put, a deep slump in trading activity in everything from stocks and bonds to currencies is changing the face of Wall Street. Today’s markets are “boring,” rants a senior credit trader; “It’s been absolutely dead,” warns another adding, “When you go a day or two and don’t have a trade on the tape, it’s frustrating,” as stock trading in the second quarter fell 43.6% from second-quarter 2009 levels to their lowest level since 2007.

 

“You go through lulls,” he said. “If you’re going through this for the first time, you have no context.”

As WSJ reports,

UBS’s trading floor in Stamford, Conn., once teemed with traders occupying a space equal to two football fields. The Guinness World Records recognized it as the biggest such facility on the planet. And the Swiss bank used it to showcase its Wall Street credentials.

 

Today, there are virtually no traders shouting into their phones or staring at terminals. UBS’s cavernous floor is taken up mostly by back-office, legal and technology staffers, according to people familiar with the bank.

The reason…

A deep slump in trading activity in everything from stocks and bonds to currencies is changing the face of Wall Street. Businesses that once contributed disproportionately to the revenues of the world’s largest banks are now bleeding jobs and sparking fears of a permanent decline.

Today’s markets are “boring,”

“This is affecting the opportunity to make money, and ultimately the earnings these [trading] businesses can provide.”

 

Global revenue from trading in fixed income, currencies and commodities, or FICC, dropped to $112 billion last year, down 16% from a year earlier and 23% from 2010, according to Boston Consulting Group.

 

 

“It’s been absolutely dead,” said Jarrod Dean, a municipal-bond trader at Sierra Pacific Securities in Las Vegas. Municipal-bond trading volumes are down about 30% since last August, he said, while profits are down more than 70%.

 

Equities trading volumes also have taken a beating of late. Stock trading in the second quarter fell 43.6% from second-quarter 2009 levels to their lowest level since 2007, according to Credit Suisse Group data.

 

Bill Nichols, head of U.S. equity trading at Cantor Fitzgerald LP, said low volumes have taken a toll on traders’ psyches.

 

“When you go a day or two and don’t have a trade on the tape, it’s frustrating,” he said.

*  *  *
Sounds eerily familiar to the total and utter collapse of Japanese bond markets – described as “dead” by traders with days going by with no trading… stunning!!

via Zero Hedge http://ift.tt/1nAFH92 Tyler Durden

Japan’s GDP may have declined in April and May, implying an overall collapse for Q2 not seen since 2009. Bloomberg’s Nowcast estimate suggests that the hope-strewn pre-tax-hike pile up of a +6.7% annualized GDP growth in Q1 will come crashing back to earth as consensus GDP for Q2 is -4.85% and even bigger based on Bloomberg’s models. As Bloomberg’s Tom Orlik warns, this could take markets by surprise. The good news is that Abe’s 3rd arrow has yet to reach escape velocity (any day now); below we highlight the entire package and how it will save the world…

 

This is not what Abe wants to see…

 

Bloomberg’s Tom Orlik notes that their Econometric model indicates it could significantly worse…

 

Consensus forecasts show Japan’s GDP growth contracting at an annualised 4.4 percent pace in the second quarter from the previous three-month period. The steeper drop in the economy projected by Bloomberg Nowcast might take the markets by surprise and increase pressure on the Bank of Japan to kick off a second round of easing… which is problem given the already high level of inflation.

 

But have no fear, the 3rd Arrow is here…

h/t @TomOrlik

*  *  *

What is even more problematic for Abe is the continuing collapse in his approval rating (down 5pts to 47%):

The approval rating is the lowest since Prime Minister Shinzo Abe took power in December 2012, public broadcaster NHK reports, citing own poll; and the disapproval rating climbs 6 pct points to 38%.

And this…

• ABE: NOT THINKING OF DISSOLVING PARLIAMENT AT THIS STAGE

So that’s it… or war!

via Zero Hedge http://ift.tt/1oBTw3x Tyler Durden

Excerpted from Michael Pettis latest letter to investors,

Clearly in the past two or three years there has been a huge shift in market perceptions of Chinese debt. Everyone recognizes that debt has become a serious problem.

But there are two very different ways to recognize this. Some believe that the Chinese financial system, and perhaps the shadow banking system more specifically, took a number of wrong steps, compounded by the lack of discipline among local governments, and created a debt problem. By that logic, Beijing can take administrative steps to address credit creation and to bring debt under control. It is especially important, according to this view, to analyze the source of risky credit creation and to suppress it, which is perhaps why so much attention of late has been placed on the shadow banking system and on ways in which Beijing can “resolve” the existing stock of bad debt.

My view is different. Burgeoning debt was not an unlucky accident. It is fundamental to the way the growth model works, and we have arrived at the stage, probably described most imaginatively by Hyman Minsky in his work on balance sheets, in which the system requires an acceleration in credit growth simply to maintain existing levels of economic activity.

China’s debt problems, in other words, cannot be resolved administratively, by fixing the shadow banking system, by imposing discipline on borrowers, or indeed by eliminating financial repression (much of which, by the way, has already been squeezed out of the system by lower nominal GDP growth). Without a massive transfer of wealth from the state sector to the household sector it will be impossible, I would argue, for GDP growth rates of anything above 3-4% – and perhaps even less – to occur without a further unsustainable increase in debt, whether that increase occurs inside or outside the formal banking system and whether or not discipline has been imposed on borrowers.

…

Last month I spoke with a very prominent European economist and he assured me that although he now agrees (he used strongly to deny it) that China has debt “problem”, he believes it can easily be resolved by “socializing” the debt, by which he means transferring it onto the government balance sheet.

…

I disagree completely, and not just because transferring bad debt from local governments to the central government, while undoubtedly reducing the probability of a legal default, does not in the slightest way address the cost of resolving the bad debt. The “successful” previous bailouts were not successful in any way if you place their “success” in the context of the rebalancing process, and this is obvious if you work through the full consequences on the structure of Chinese demand.

…

Because economists for many years have been trained to ignore balance sheets and, more generally, the way debt drives economic activity, the quality of analysis, especially the analysis of economic turning points during which the amount and structure of debt can create significant constraints on the way rebalancing can occur, has devolved, to be replaced mostly by vaguely empirical and very mathematically confused constructions.

…

I have described many times before why excess credit creation is at the heart of much of China’s GDP growth, and why this means that China must choose between a sharp slowdown in GDP growth as credit is constrained, or a continued unsustainable increase in debt.

No other options are available. But even this point is about new credit creation does not address the existing stock of bad debt, which is what I want to discuss in this blog entry. If you assume that for many years China has been misallocating investment (by which I simply mean that the resulting increase in productivity generated by the investment was less than the correctly calculated debt-servicing cost), it should be obvious that because there have been almost no defaults or other forms of debt write-down, the implicit losses have simply been rolled over, most likely in the balance sheets of the Chinese banks. This has several implications:

1. GDP growth has been implicitly increased by the amount of losses that should have been, but were not, written down. This means that China’s GDP today, compared to countries in which it is more difficult simply to roll over losses indefinitely, is overstated, and I suspect that it may be overstated by as much as 20-30%. Why? Because in an economy in which losses were not simply accumulated and rolled over, the amount of the write-down (which would have occurred, either as a default, or as an equivalent transfer from a more profitable part of operations to subsidize the loss) would have shown up as lower GDP.

 

2. In that case all GDP-related data is biased in a predictable way. Productivity numbers, for example, are biased upwards, and real worker’s productivity is lower than the numbers posted officially.

 

3. Losses that are rolled over do not disappear. They are implicitly amortized over the period of the loan, which, assuming that loans are rolled over indefinitely, means that every year a declining portion of that loan is effectively written down. Over long periods of time every economy recognizes investment losses, but depending on how these losses are treated, the recognition can take place either in the period in which the losses occur or over the loan amortization period.

 

4. There is a lot of confusion over how the implicit amortization of unrecognized losses takes place over time. Let us assume that an investor borrows $100 to invest in a project that creates only $80 of value. The project, in other words, creates a loss of $20. If the loss is not immediately recognized, there is a gap between the true economic value of the debt servicing cost and the increase in productivity associated with the project. This gap must be covered by implicit transfers from some other part of the economy, and these transfers reduce the economic activity that would have otherwise been created.If the gap is covered by financial repression, for example, (i.e. the authorities force down the borrowing cost to less than the increase in productivity generated by the project, so that the borrow shows a profit), the cost of amortizing the loss is passed onto the net lenders (usually, but not always, the household sector, who are net lenders to the banking system) in the form of a lower return on their savings. This lower return reduces their total income and, in so doing, reduces their consumption, which effectively reduces future GDP growth by reducing demand.

 

5. GDP growth is only artificially boosted during the period in which the total amount of losses rolled over exceeds the amount of the amortization. After that GDP growth is artificially constrained. When the system is still accumulating and rolling over losses, in other words, GDP growth is systematically biased upwards. When it stops, GDP growth will be systematically biased downwards.

 

6. This bias can be considerable. Let us assume, for example, that the real growth in an economy causes it to double its wealth every 10 years. Real GDP would, in that case, increase every year on average by nearly 7.2%. Let us also assume that during the first ten years, GDP growth was overstated by a failure to recognize investment losses, so that reported GDP growth was actually 10%. Finally we will assume that after ten years, this over-reporting stopped, and the excess GDP was amortized during the next ten years so that at the end of twenty years GDP was once more correctly stated. The numbers how that at the end of ten years, reported GDP would be overstated by 22.9% – that is, instead of doubling, reported GDP would be 159% higher. During the next ten years, as real GDP continued to grow by 7.2%, reported GDP would grow on average by just over 4.4% as the earlier losses that had not been recognized were amortized.

 

7. My numbers above assume that the overstatement and understatement are symmetrical. In fact the process is not symmetrical because of the possibility of financial distress costs. The total value of overstated GDP during the period when losses are being rolled over is only equal to the total value of the subsequent amortization of those losses if there are no financial distress costs.

 

8. But there are in fact likely to be substantial financial distress costs. In corporate finance theory we have a very clear understanding of how high debt levels change incentive structures in such a way so as to reduce overall growth. This means that the longer it takes to amortize the hidden losses, the greater the amount by which the future amortization costs will exceed the current overstatement of GDP. Japan after 1990 might a good example of this process. Its share of global GDP rose from roughly 10% in 1980 to 17% at is peak, only to have declined since then to roughly 9% of global GDP. This is an astonishing relative decline, and it must have been made worse at least in part by the financial distress costs imposed on an economy unwilling to write down debt correctly.

 

9. Remember that the only way debt can be resolved is by assigning the losses, either during the period in which the losses occurred or during the subsequent amortization period. There is no other way to “resolve” bad debt – the loss must be assigned, today or tomorrow, to some sector of the economy. “Socializing” the debt, or transferring the debt from one entity to another, does not change this.

 

10. There are three sectors to whom the cost can be assigned: households, businesses, or the government. In China we might usefully think of these as households, small and medium enterprises (SMEs), and the state sector (in principle there is a fourth sector, foreigners, to whom the losses can be assigned, but it is very unlikely that they will bear much of the losses). It is pretty clear that after the banking crisis of the late 1990s, the losses were assigned, largely in the form of financial repression, to the household sector.

 

11. To the extent that China has significant hidden losses embedded in the balance sheets of the banks and the shadow banks, over the next several years Beijing must decide how to assign the losses. If it assigns them to the household sector, it will put significant downward pressure both on household income growth (which will be less than GDP growth) and, consequently, on consumption growth. Rebalancing means effectively that consumption growth (and household income growth) must exceed GDP growth, which means that even if GDP growth slows to 3-4%, as I expect, household income can continue growing at 5-6%. This explains why, contrary to the consensus, a more slowly growing, rebalancing China will not lead to social unrest.

 

12. Of course if the losses are assigned to the household sector, China cannot rebalance and it will be more than ever dependent on investment to drive growth. This is why I reject absolutely the argument that because China resolved the last banking crisis “painlessly”, it can do so again.

 

13. Beijing can also assign the losses to SMEs. In effect this is what it started to do in 2010-11 when wages rose sharply (SMEs tend to be labor intensive). It is widely recognized that SMEs are the most efficient part of the Chinese economy, however, and that assigning the losses to them will undermine the engine of China’s future productivity growth.

 

14. Finally Beijing can assign the losses to the state sector, by reforming the houkou system, land reform, interest rate and currency reform, financial sector governance reform, privatization, etc. Most of the Third Plenum reforms are simply ways of assigning the cost of rebalancing, which includes the recognition of earlier losses, to the state sector. This is likely however to be politically difficult. China’s elite generally benefits tremendously from control of state sector assets, and they are likely to resist strongly any attempt to assign to them the losses.

This is how I think we need to think about China’s debt problem. Notice that I am making no predictions. I am only trying to outline as schematically as possible the only ways in which the debt problem can be resolved. There are no other possible ways to address the debt, and so any analysis we do or propose must be consistent with the model described above.

The key point is that we cannot simply put the bad debt behind us once the economy is “reformed” and project growth as if nothing happened. Earlier losses are still unrecognized and hidden in the country’s various balance sheets. These losses will either be explicitly recognized or they will be implicitly amortized. The only interesting question, as I see it, is which sector will effectively be assigned the losses. This is a political question above all, and its answer will tell us a great deal about how the newly-constituted, “reformed” China will grow over the next few decades.

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In real terms, the price of crude oil has not been more expensive since the Pennsylvania Boom over 150 years ago…

 

 

Source: BP

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Submitted by Luke Eastwood of LukeEastwood.com,

To much trumpeting the IMF have kindly agreed to help out desperate and war torn Ukraine. How wonderful they are we are all meant to think, but the truth couldn’t be more opposite.

The International Monetary Fund was set up in 1945, describing itself as an “organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

This all sounds very laudable, but in reality the IMF has a very different purpose from that which is stated. If you look at the history of the IMF’s intervention in countries around the world you will see a trail of disaster and looting that repeats time and time again wherever they go.

The many countries that are involved are supposed to have some influence but this is proportional to their financial clout, which in truth means that the USA has most of the control of what happens and many countries have effectively no say at all.

My opinion of the IMF, concurs with that of John Perkins, author of ‘Confessions Of An Economic Hitman’, his views being that of an insider in the system and mine merely as an observer. He succinctly points out that major western nations use financial warfare to get what they want and gain influence over other countries – the IMF being one of the tools with which they do this.

Caribbean countries such as Jamaica have been destroyed by trade agreements and much the same thing has happened throughout Africa, South America  and Asia at various times since world war II. What the IMF does is somewhat similar to a thug loan shark. The loan shark lends money to people who can’t afford to borrow so that the borrower ends up having to not eat to make the payments or face having broken legs.

In a more subtle way, the IMF behaves in a similar way. Countries are given a ‘helping hand’ as loans that they will have great difficulty paying back. In return for the loans the IMF wants interest and regular repayments and ‘restructuring’ of the country’s assets. What this actually means is the asset stripping of sovereign nations so that their economic wealth is transferred from the country’s/public’s ownership into private hands.

This has happened in Europe recently, with countries such as Greece, Portugal, Ireland and even Spain and Italy faced with the prospect of having to sell off national assets in order to finance repayment of loans to either the IMF or EU. Private consortiums, owned by the banks or oligarchs buy up a nation’s forests, coal industry, water supply etc so that instead of the country receiving income from its recourses the private company makes all the money off the backs of the increasingly impoverished population.

At the moment the Ukrainian people might welcome the IMF but you can be sure that in a short time the country will be financially raped and the population plunged into even worse poverty as a result of IMF ‘assistance’.  Here in Ireland we are realizing the foolishness of the IMF/EU bailouts that is making life increasingly difficult for ordinary citizens while the government ponders selling off our resources.

Any country with sense (like Iceland) would show the IMF the door and find a better way of clawing its way out of economic problems. Iceland is a perfect example of how a country could solve its own problems – but no-one in the media talks about this – the corpocracy does not want anyone else getting the same idea. Surely, if every nation took the same actions the corporate take over of sovereign nations would fall flat on its face wouldn’t it?

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When we first brought the transformation of the American economy into a part-time worker society in 2010, many scoffed and suggested that when the ‘recovery’ really gets going the temp jobs will all be morphed into high-paying full-time jobs. That hasn’t happened, and in fact, as we noted most recently, it’s got worse.

As Mort Zuckerman blasts in his rampagingly honest WSJ Op-Ed, “Most people will have the impression that the 288,000 jobs created last month were full-time. Not so.” And more directly, “most Americans wouldn’t call this an economic recovery.” The lack of breadwinners working full time is a burgeoning disaster that we have covered extensively. There are 48 million people in the U.S. in low-wage jobs, resulting, as Zuckerman concludes, “Faith in the American dream is eroding fast.”

 

Via The WSJ,

As Mort Zuckerman rages – echoing our analysis…

There has been a distinctive odor of hype lately about the national jobs report for June. Most people will have the impression that the 288,000 jobs created last month were full-time. Not so.

 

The Obama administration and much of the media trumpeting the figure overlooked that the government numbers didn’t distinguish between new part-time and full-time jobs.

 

 

On July 2 President Obama boasted that the jobs report “showed the sixth straight month of job growth” in the private economy. “Make no mistake,” he said. “We are headed in the right direction.” What he failed to mention is that only 47.7% of adults in the U.S. are working full time.

There are numerous reasons for this but the most recent and most-telling is Obamacare…

But there is one clear political contribution to the dismal jobs trend. Many employers cut workers’ hours to avoid the Affordable Care Act’s mandate to provide health insurance to anyone working 30 hours a week or more.

 

The unintended consequence of President Obama’s “signature legislation”? Fewer full-time workers. In many cases two people are working the same number of hours that one had previously worked.

As Zuckerman concludes…Most Americans wouldn’t call this an economic recovery.

Yes, we’re not technically in a recession as the recovery began in mid-2009, but high-wage industries have lost a million positions since 2007. Low-paying jobs are gaining and now account for 44% of all employment growth since employment hit bottom in February 2010, with by far the most growth—3.8 million jobs—in low-wage industries. The number of long-term unemployed remains at historically high levels, standing at more than three million in June. The proportion of Americans in the labor force is at a 36-year low, 62.8%, down from 66% in 2008.

Part-time jobs are no longer the domain of the young. Many are taken by adults in their prime working years—25 to 54 years of age—and many are single men and women without high-school diplomas.

 

Why is this happening? It can’t all be attributed to the unforeseen consequences of the Affordable Care Act. The longer workers have been out of a job, the more likely they are to take a part-time job to make ends meet.

The result: Faith in the American dream is eroding fast.

The feeling is that the rules aren’t fair and the system has been rigged in favor of business and against the average person. The share of financial compensation and outputs going to labor has dropped to less than 60% today from about 65% before 1980.

…

The great American job machine is spluttering. We are going through the weakest post-recession recovery the U.S. has ever experienced, with growth half of what it was after four previous recessions. And that’s despite the most expansive monetary policy in history and the largest fiscal stimulus since World War II.

That is why the June numbers are so distressing. Five years after the Great Recession, more than 24 million working-age Americans remain jobless, working part-time involuntarily or having left the workforce.

 

We are not in the middle of a recovery. We are in the middle of a muddle-through, and there’s no point in pretending that the sky is blue when so many millions can attest to dark clouds.

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Nothing to add but “bravo”

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