Wednesday, February 19, 2014

Today's links

1---China: From credit boom to crisis, BBC

Over the past few years, China has built a new skyscraper every five days, more than 30 airports, metros in 25 cities, the three longest bridges in the world, more than 6,000 miles of high speed railway lines, 26,000 miles of motorway, and both commercial and residential property developments on a mind-boggling scale....

 with encouragement from the US government (we interviewed the then US Treasury Secretary, Hank Paulson), the Chinese government unleashed a stimulus programme of mammoth scale: £400bn of direct government spending, and an instruction to the state-owned banks to "open their wallets" and lend as if there were no tomorrow.....Which, in one sense, worked. While the economies of much of the rich West and Japan stagnated, boom times returned to China - growth accelerated back to the remarkable 10% annual rate that the country had enjoyed for 30 years....

Before the crash, investment was the equivalent of about 40% of GDP, around three times the rate in most developed countries and significantly greater even than what Japan invested during its development phase - which preceded its bust of the early 1990s.

After the crash, thanks to the stimulus and the unleashing of all that construction, investment surged to an unprecedented 50% of GDP, where it has more or less stayed.

Here is the thing: when a big economy is investing at that pace to generate wealth and jobs, it is a racing certainty that much of it will never generate an economic return, that the investment is way beyond what rational decision-making would have produced...

But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%....

Most people are aware we've had a credit boom in China but they don't know the scale. At the beginning of all of this in 2008, the Chinese banking sector was roughly $10 trillion in size. Right now it's in the order of $24 to $25 trillion.
"That incremental increase of $14 to $15 trillion is the equivalent of the entire size of the US commercial banking sector, which took more than a century to build. So that means China will have replicated the entire US system in the span of half a decade."

Anyone living in the rich West does not need a lecture on the perils of a financial system that creates too much credit too quickly. And in China's case, as was dangerously true in ours, a good deal of the debt is hidden, in specially created, opaque and largely financial institutions which we've come to call "shadow" banks....

More broadly, for the economy as a whole, when growth is generated over a longish period by debt-fuelled investment or spending, there can be one of two outcomes.

If the boom is deflated early enough and in a controlled way, and measures are taken to reconstruct the economy so that growth can be generated in a sustainable way, the consequence would be an economic slowdown, but disaster would be averted.

But if lending continues at breakneck pace, then a crash becomes inevitable.

2---The Young Subprime Debt-Slave Generation , Testosterone Pit

Household debt – mortgages, credit cards, auto loans, student loans, and other debt – jumped $241 billion, or 2.1%, in the fourth quarter 2013 to reach $11.52 trillion, the New York Fed reported. It was the largest quarterly rise since 2007, near the peak of the last bubble. For the year, consumer debt rose $180 billion – the first annual rise since 2008 when the last bubble imploded. But it’s still 9.1% below the all-time record of $12.68 trillion, set in that fateful year of 2008. Very reassuring.
But that household debt has bad breath.

Mortgage balances, which account for 70% of total household debt, rose $152 billion in Q4 2013, to $8.05 trillion. With that whopper, mortgage debt for the entire year increased by $16 billion, the first gain after four years of declines. One-quarter wonder? Originations of new mortgages, after rising steadily since 2011, plunged $97 billion to $452 billion. Down for the second quarter in a row. Investors and private equity funds, increasingly dominant buyers in some markets, have driven up home prices and have successfully pushed first-time buyers and others off the cliff. So this isn’t exactly a sign of health.

Home equity lines of credit declined 1.1% to $529 billion. So total housing debt was barely in positive territory.

Non-housing debt – credit cards, auto loans, student loans, and “other” debt – looked better on the surface with a 3.3% gain that pushed it to $2.94 trillion.
Credit card debt rose $11 billion to $683 billion in Q4, enough to nudge the year into positive territory, for the first time since 2008! Auto loan balances were up $18 billion for the quarter and $80 billion for the year to hit $863 billion, the highest level in the data series going back to 2004. The glory days may be over. In another ominous sign for the auto industry, after the auto-sales and inventory debacles that started late last year, newly originated auto loans dropped in the fourth quarter to $88 billion.

Student loan balances soared $53 billion in the quarter and $114 billion for the year, to end at $1.08 trillion, an unbroken record in the data series of ever higher highs. Student loans now make up 9.4% of total consumer debt and 36.7% of non-housing debt. In 2003, student loans accounted for 3.1% of total consumer debt and 12.2% of non-housing debt. The $1.86 trillion in credit card debt, auto loans, and “other” debt are now a smidgen below where they were in 2004. But student loans have more than quadrupled.

Student loans going to bankrupt a generation....

Student loan delinquencies were barely above 6% in 2004 and 2005, meandered up to 7.6% by Q3 2007, to 9.2% in Q3 2010, eased off a bit in 2011, then soared. By the end of 2012, they hit 11.7%. Then they dropped to 10.9% in Q2 2013, espousing a tsunami of false hope that it would turn around somehow, only to jump to a new record 11.8% the next quarter. In Q4, delinquencies eased off, accompanied by another round of false hope, to a still astronomical 11.5%

3--The Rich get Richer, zero hedge

4---Japan--Growth in Q4 was estimated at 0.3%, less than half of what the Bloomberg consensus forecast.  This matched Q3's performance.  In addition, the GDP deflator fell 0.4% year-over-year, which is twice the pace the consensus had expected.  It renews concerns about a flagging economy as April 1 retail sales tax looms.   Ironically, despite the yen's depreciation,  net exports offset in full the rise in private consumption in the last three months of 2013.  Business investment rose 1.3% on the quarter, and while this represents some acceleration (0.2% Q3) and is the largest increase since Q4 11, it lagged expectations (~1.8%). 

5---Marx and Lincoln, economist view

Blackburn closes his introduction with some speculation about how Marx might have acted had he himself have relocated to America (as Engels briefly visited New York and Boston in 1887).
Just as he saw the importance of the slavery issue at the start of the Civil War, so he would surely have focused on "winning the battle of democracy," securing the basic rights of the producers -- including the freedmen -- in all sections as preparation for an ensuing social revolution.... Marx and Engels would have insisted that only the socialization of the great cartels and financial groups could enable the producers and their social allies to confront the challenges of modern society and to aspire to a society in which the free development of each is the precondition for the free development of all. (100)
The ideas that hold Marx and Lincoln together are emancipation and the basic dignity of the common working man and woman, and the vision of a society in which both freedom and dignity are possible for all.

6---Abenomics Fail; Slow growth, falling wages, droopy consumption, and giveaway programs to broken financial institutions, Bloomberg

Monthly wages excluding overtime and bonus payments fell 0.6 percent in December from a year earlier, extending a decline to 19 months, according to labor ministry data. The central bank projects consumer prices excluding fresh food will rise 1.9 percent in the 12 months starting April 1, 2015, excluding the effects of a higher consumption levy

Lending Program

Japan’s two-year yields fell yesterday to their lowest level since April after the BOJ maintained a pledge to expand the monetary base by up to 70 trillion yen ($685 billion) per year. The central bank also doubled the core portion of a low-cost funding program to 7 trillion yen, which was established in 2010 to provide banks with funds at 0.1 percent.

The decision came a day after a government report showed gross domestic product expanded an annualized 1 percent in the fourth quarter from the prior three-month period, less than median projection of 2.8 percent in a Bloomberg poll. Real growth is estimated to contract 3.9 percent in the second quarter, the sharpest drop in three years, as the nation faces a two-stage doubling of the 5 percent sales tax starting April.

Prices (JNCPIXFF) excluding fresh food rose 1.3 percent last month from a year earlier, pushing the core consumer price index more than halfway to the BOJ’s 2 percent target adopted in January last year. In April, the BOJ initially anticipated that the goal could be achieved in two years.

JGB Positive

“It will be more and more challenging for the BOJ to push the inflation rate any higher because the consumption tax hike will weigh on consumers,” said Credit Agricole’s Ogata, who forecasts the yen will slump to 115 by year-end and estimates 130 is necessary for the inflation target to be reached ...

Economists surveyed by Bloomberg expect the BOJ to expand its record monthly bond buying of about 7 trillion yen this year, as Japan’s sales tax increases hurts economic growth. The purchases will be in a range of 6 trillion to 8 trillion yen, Kuroda said yesterday. ...

7--Moscow accuses US diplomats of ‘puppeteering’ Ukraine, RT

8--The Stimulus worked, WA Post

But the stimulus bill was meant to provide a temporary bump to the economy — and it did just that. Here are the facts:
  • Gross domestic product and total payroll employment were at historic lows when the stimulus passed, and private-sector layoffs were peaking. All three of these very important indicators began to turn around almost exactly the moment the stimulus passed. (The Center for American Progress has some great charts here.)
  • The Congressional Budget Office concluded that the GDP in the fourth quarter of 2009 was as much as 3.8 percent higher than it would have been without the stimulus.
  • At the end of 2010, there were approximately 2.5 million more jobs in the country that wouldn’t have existed without the stimulus, according to Mark Zandi of Moody’s
  • The bill kept nearly 6 million people out of poverty in 2009, according to the Center on Budget and Policy Priorities (CBPP).
Most of the spending measures in the stimulus bill have expired, but the point is that it did what it was supposed to do. For Republicans to simply say “the economy is still bad, so the stimulus was a failure” is a cheap misdirection.

9---Abenomics: GDP growth sags below forecasts, JT

The economy is forecast to contract in the April-June period, when the consumption tax will rise to 8 percent from 5 percent.
Vehicle sales rose in the five months ended January, and housing starts grew a 16th month in December — the longest since the period ended February 1994. At the same time, demand could be undermined by waning consumer confidence, which fell in January to the lowest level since Abe came to power in December 2012.

The economy grew at a pace slower in the October-December quarter than economists expected, underscoring risks to the recovery as the first stage of the consumption tax increase looms in April.
Gross domestic product expanded an annualized 1 percent from the previous quarter, the Cabinet Office said Monday, below the lowest estimate of 1.1 percent in a Bloomberg survey of 37 economists that generated a median projection of 2.8 percent.

While capital spending rose by the most in two years and consumption picked up, trade deficits from surging imports and limited gains in exports dragged on the expansion.
Weaker than forecast growth may fuel speculation that the Bank of Japan will expand stimulus in coming months and add pressure on Prime Minister Shinzo Abe to flesh out his heavily touted plans to make the nation more competitive.

“This weak export performance gives us a sense of risk that the Japanese economy may significantly stall after April,” Takuji Okubo, chief economist at Japan Macro Advisors, said. “Prime Minister Abe really needs to be quick in showing to the market that he can deliver reform.”

Business investment rose 1.3 percent from the previous quarter and consumer spending gained 0.5 percent. Exports rose 0.4 percent, while imports surged 3.5 percent.
Recent declines in consumer confidence and limited gains in exports have highlighted the risk that Japan’s recovery under “Abenomics” could fade after the hike.
“It’s unavoidable that the economy will slump in the April-June period due to a backlash from the front-loaded demand,” said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute.

Investors are waiting for Abe to make good on his structural reforms, the “third arrow” of Abenomics in addition to fiscal and monetary stimulus, as he seeks to drive a sustained recovery from deflationary malaise stretching back 15 years.

10---Ukraine on Fire: No to Obama. No to putin, wsws

US imperialism has pursued a relentless strategy of weakening and isolating Russia for more than two decades since the collapse of the Soviet Union in 1991. Starting with the wars in Yugoslavia in the 1990s, Washington has encouraged and supported so-called colour revolutions in the former Soviet republics. It invaded Afghanistan to establish a base of operations into Central Asia and sought, through sanctions and military threats, to carry out regime-change in Iran and Syria, Russia’s closest allies in the Middle East.

The ability of imperialism to intervene aggressively is the direct outcome of the dissolution of the Soviet Union, the restoration of capitalism and the opening up of the former Soviet republics to the plunder of global transnational corporations. In opposing the present imperialist intervention in Ukraine, no political support should be given to Yanukovych or Russian President Vladimir Putin, who represent corrupt, grasping oligarchs who have enriched themselves at the expense of the working class.

11---FEMA cuts aid to West Virginians affected by chemical spill, wsws

Last week, Federal Emergency Management Agency (FEMA) deputy associate administrator Elizabeth Zimmerman sent West Virginia Governor Ray Tomblin a letter declaring that “[b]ased on our review of all the information available, it has been determined that the event was not of such severity and magnitude as to warrant grant assistance under this emergency declaration.” The agency gave state officials 30 days to appeal the decision....

From the 2010 BP oil spill, to the Big Branch mine cave-in the same year, the Obama Administration has done everything in its power to shelter negligent energy corporations and help them to defend their profits, while simultaneously slashing funding for regulatory agencies, as well as benefits to those affected by industrial disasters. The 2014 budget of the Environmental Protection Agency is expected to result in a 20 percent reduction in its number of compliance and civil enforcement inspections in comparison to 2012 levels.

12---The Vampire Squid strikes again, Matt Taibbi

Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. ...

But banks aren't just buying stuff, they're buying whole industrial processes. They're buying oil that's still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they're also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures market, swaps on the swaps market, etc.
Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. ....

This leads to the next potentially disastrous aspect of this story: What happens if the Fed suddenly raises interest rates, and the banks, their access to free money cut off, can no longer afford to sit on piles of metal for 16 months at a time?
"Look at nickel," says Eric Salzman, a financial analyst who has done research on metals manipulation for several law firms. "You could see the price drop 20 to 30 percent in no time. It'd be a classic bursting of a bubble."....

Banks in America were never meant to own industries. This principle has been part of our culture practically from the beginning of our history. The original restrictions on banks getting involved with commerce were rooted in the classically American fear of overweening government power – citizens in the early 1800s were concerned about the potential for monopolistic abuses posed by state-sponsored banks.

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