The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[seafoid]

"ample choice of public investments that would yield high returns – far higher than the real cost of capital "

Wish he'd give more detail. Could an ordinary punter get in on these high return investments ?

Infrastructure investment eg replacing Amtrak in the US or making Dublin less car dependent or climate proofing New York
Huge returns and you could get in via  Exchange Traded Funds, for example.

[seafoid]

A great article.

QE is just pushing on a bit of string, creating asset bubbles and storing up trouble.
The EZ is in a real mess.

The Politics of Economic Stupidity

NEW YORK – In 2014, the world economy remained stuck in the same rut that it has been in since emerging from the 2008 global financial crisis. Despite seemingly strong government action in Europe and the United States, both economies suffered deep and prolonged downturns. The gap between where they are and where they most likely would have been had the crisis not erupted is huge. In Europe, it increased over the course of the year.

Developing countries fared better, but even there the news was grim. The most successful of these economies, having based their growth on exports, continued to expand in the wake of the financial crisis, even as their export markets struggled. But their performance, too, began to diminish significantly in 2014.

In 1992, Bill Clinton based his successful campaign for the US presidency on a simple slogan: "It's the economy, stupid." From today's perspective, things then do not seem so bad; the typical American household's income is now lower. But we can take inspiration from Clinton's effort. The malaise afflicting today's global economy might be best reflected in two simple slogans: "It's the politics, stupid" and "Demand, demand, demand."

The near-global stagnation witnessed in 2014 is man-made. It is the result of politics and policies in several major economies – politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize. It is that simple.

Nowhere is this clearer than in the eurozone, which has officially adopted a policy of austerity – cuts in government spending that augment weaknesses in private spending. The eurozone's structure is partly to blame for impeding adjustment to the shock generated by the crisis; in the absence of a banking union, it was no surprise that money fled the hardest-hit countries, weakening their financial systems and constraining lending and investment.

In Japan, one of the three "arrows" of Prime Minister Shinzo Abe's program for economic revival was launched in the wrong direction. The fall in GDP that followed the increase in the consumption tax in April provided further evidence in support of Keynesian economics – as if there was not enough already.

The US introduced the smallest dose of austerity, and it has enjoyed the best economic performance. But even in the US, there are roughly 650,000 fewer public-sector employees than there were before the crisis; normally, we would have expected some two million more. As a result, the US, too, is suffering, with growth so anemic that wages remain basically stagnant.

Much of the growth deceleration in emerging and developing countries reflects China's slowdown. China is now the world's largest economy (in terms of purchasing power parity), and it has long been the main contributor to global growth. But China's remarkable success has bred its own problems, which should be addressed sooner rather than later.

The Chinese economy's shift from quantity to quality is welcome – almost necessary. And, though President Xi Jinping's fight against corruption may cause economic growth to slow further, as paralysis grips public contracting, there is no reason for Xi to let up. On the contrary, other forces undermining trust in his government – widespread environmental problems, high and rising levels of inequality, and private-sector fraud – need to be addressed with equal vigor.

In short, the world should not expect China to shore up global aggregate demand in 2015. If anything, there will be an even bigger hole to fill.

Meanwhile, in Russia, we can expect Western sanctions to slow growth, with adverse effects on an already weakened Europe. (This is not an argument against sanctions: The world had to respond to Russia's invasion of Ukraine, and Western CEOs who argue otherwise, seeking to protect their investments, have demonstrated a disturbing lack of principle.)

For the past six years, the West has believed that monetary policy can save the day. The crisis led to huge budget deficits and rising debt, and the need for deleveraging, the thinking goes, means that fiscal policy must be shunted aside.

The problem is that low interest rates will not motivate firms to invest if there is no demand for their products. Nor will low rates inspire individuals to borrow to consume if they are anxious about their future (which they should be). What monetary policy can do is create asset-price bubbles. It might even prop up the price of government bonds in Europe, thereby forestalling a sovereign-debt crisis. But it is important to be clear: the likelihood that loose monetary policies will restore global prosperity is nil.

This brings us back to politics and policies. Demand is what the world needs most. The private sector – even with the generous support of monetary authorities – will not supply it. But fiscal policy can. We have an ample choice of public investments that would yield high returns – far higher than the real cost of capital – and that would strengthen the balance sheets of the countries undertaking them.

The big problem facing the world in 2015 is not economic. We know how to escape our current malaise. The problem is our stupid politics

Read more at http://www.project-syndicate.org/commentary/politics-of-economic-stupidity-by-joseph-e--stiglitz-2015-01#cV4vZwqrVmmGsZ1U.99

[seafoid]

http://dailyreckoning.com/four-market-signals-that-the-crack-ups-begun/our Market Signals That the Crack-Up's Begun
New York City, New York
November 27, 2015

Easy money is always the wrong medicine for what ails the market.

The inflated and unsustainable growth that the Greenspan Fed engineered by encouraging Main Street households to stage a massive raid on their "home ATMs" has sharply reversed... and properly so.
This is no small number. Compared to the peak MEW (Mortgage Equity Withdrawal) rate of 8% of disposal income, today's negative 2% rate means there has been about a $1 trillion downward swing in household "spending."

Our Keynesian central bankers lament this as a loss of "aggregate demand." And they intend to remedy the problem by printing more money. In truth, it was always phony demand. It could not be sustained and had not been earned through production. Its disappearance simply marks the fact that households have been forced back to the old-fashioned virtue of "living within their means."

Stated differently, the supply side is back in charge after a 30-year spree of one-time debt and leverage expansion. Consumer spending now depends on income, which means production, investment and enterprise are once again the source of growth, jobs and true national wealth.
The implication is that our monetary politburo is out of business. "Monetary accommodation" is nothing more than a one-time parlor trick of central bankers.

Unfortunately, like the politburo in the Kremlin, the incumbents in the Eccles Building will not stop until they are finally chased from office by a massive uprising of the people. That is: Savers, workers and entrepreneurs of America who have been shafted by the bubble finance policies of our monetary central planners.
We're in the crack-up phase now. As such, four things are going to shape the way the economy and the markets unfold as we go forward.   

First, you are going to see increasing desperation and extreme central bank financial repression. This is because central banks have painted themselves so deep into the corner that they're lost and desperate.
Almost week by week, we have another central bank — most recently it was Sweden — lowering their money market rates into negative territory. The Swiss National Bank is already there. Denmark's Nationalbank is there. The European Central Bank is there on the deposit rate. The Bank of Japan is also there.

All of the central banks of the world now are desperately driving interest rates into negative territory. I believe that they're lost. They're in a race to the bottom whether they acknowledge it or not.

The People's Bank of China, for example, can't sit still much longer when the renminbi has appreciated something like 30% against the Japanese yen because of the massive bubble of monetary expansion that's being created by Tokyo.
Central banks are out of control and in a race to the bottom, sliding by the seat of their pants and making up incoherent theories as they go.
The second thing that's happening is increasing market disorder and volatility. In the last four months, the stock market has behaved like a drunken sailor. But it's just a bunch of robots and day traders that are mindlessly trading chart points. It has nothing to do with information or
incoming data about the real world.

Today we have the 10-year German bond trading at a yield of just 0.61%. The German economy's been reasonably strong, having been fueled by the Chinese boom. But that export boom is over. The Chinese economy is faltering. And Germany is going to have its own severe problems soon.
But clearly, 61 basis points on a 10-year bond is irrational, even in the case of Germany. This is to say nothing of the 160 or so basis points available today on the 10-year bond for Spain and Italy. (Note: A basis point is 1/100th of a percentage point.)
Both Spain and Italy are in deep, deep fiscal decline. There is no obvious way for them to dig out of the debt trap they're in. It's going to get worse over time.
There is huge risk in those bonds. Especially because there's no guarantee that the European Union will remain intact or that the euro will survive.
Why would anybody in their right mind own Italian debt earning 160 basis points a year?

Maybe those who anticipate the massive purchases that Mario Draghi at the European Central Bank has promised and the Germans have acquiesced to over the next year or two. But that only kicks the can down the road.
One of these days, central banks are going to falter. And the market is going to reset violently to prices that reflect the true risk on all this sovereign debt and the cloudy outlook that's ahead for the world market.

There is now nearly $3 trillion of sovereign debt spread over Japanese issues and the major European countries that are trading at negative yields. That is irrational. It's also completely unsustainable. And yet it's another characteristic of what I call Bubble Finance.
The third thing that's happening is that global malinvestment, fueled of course, by central banks, is now coming home to roost. It will be driving a huge deflation of commodity and industrial prices worldwide. You can see that in iron ore, which is now barely holding $48 from a peak of almost $200.

You can see this in the oil patch too. Look at the Baltic Dry Index. That's an index, created by the London-based Baltic Exchange, that tracks changes in the cost to transport raw materials by sea.   



This is a result of faltering demand for shipments and overbuilding of bulk carrier capacity as a result of this central bank-driven boom that we've had in the last 10 to 20 years. And it is going to be ripping through the financial system and the global economy in ways that we've never before experienced.
It will become extremely hard to predict what all the ramifications and cascading effects will be. But the degree of overinvestment and excess capacity in everything from iron ore mines... to dry bulk carriers... aluminum plants... steel mills... and so on is something we have never seen before.
Fourth, demand has run smack up against peak debt.
There was a tremendous study that came out in February from the McKinsey Global Institute. It did an excellent job of trying to calculate, track and total up the amount of global credit outstanding, public and private.
According to the report, we're now at the $200 trillion threshold. That's up from only about $140 trillion at the time of the 2008 financial crisis. So we've had a roughly $60 trillion expansion worldwide of debt since 2008. Over that same time, global GDP only increased by about $15 trillion (roughly speaking, from $55 trillion to $70 trillion).
[/b]Owing to central bank money printing and all of this unprecedented monetary stimulus, we've added about $60 trillion of new debt. And we've gotten somewhere around $15 trillion of extra output in return. That's not even one-third of the amount of debt.
The numbers from China are even more startling. In the year 2000, China had $2 trillion of credit outstanding. In 2008, Chinese debt was $7 trillion. It now has an unbelievable $28 trillion of credit outstanding.
And at the time of the 2008 crisis, China had allegedly — if you believe the numbers, which no one really should — $5 trillion of annual economic output. It's now $10 trillion. So officially it's doubled its GDP.
But China's debt is up more than $20 trillion while its GDP is up just $5 trillion.
These are extreme unsustainable deformations. They just scream out, "Danger ahead. Mayhem has happened." As all of this unwinds and becomes resolved it is not going to be pretty.
When you see that kind of minimal yield from the vast amount of new debt, it should tell you that the boom is over... and that the crack-up is under way.

[periere]

"ample choice of public investments that would yield high returns – far higher than the real cost of capital "

Wish he'd give more detail. Could an ordinary punter get in on these high return investments ?

Infrastructure investment eg replacing Amtrak in the US or making Dublin less car dependent or climate proofing New York
Huge returns and you could get in via  Exchange Traded Funds, for example.

I'm suspicious about claims of "huge returns". I've heard that phrase before. To put it in perspective I was involved in Fiber roll out back in 2001 when the dot com boom burst.

From the public good point of view I am all for public investment if it is tied to measurable productivity. However, public investment can also be seen as an artificial actor in the market. When I see investments that are predicated, to some degree, on govt investment I smell pork. I see the invisible , but dead,  hand of lobbyists everywhere in that scenario.

The problem with with govt increasing taxes or borrowing more to invest is that they never know when to stop. Same as banks giving out loans or investors taking on debt. How do you know when to call stop ? Once everything turns around what minister is going to be brave enough to say "right, things are going well now, we should back off the spending/investment".

[armaghniac]

The problem with with govt increasing taxes or borrowing more to invest is that they never know when to stop. Same as banks giving out loans or investors taking on debt. How do you know when to call stop ? Once everything turns around what minister is going to be brave enough to say "right, things are going well now, we should back off the spending/investment".

All the same if they build a road or a metro there is something to show for the spending and people get to use it for a long time. In the US they built things like the Hoover Dam or Golden Gate bridge in the 1930s and great use has been had of these things. You can have too much, but Ireland has erred on the other side, i.e. false economy.

[periere]

roads are great but the financial debt, or political debt,  hangs around like a bad smell. When I was a young lad going to college I remember seeing all those signs "funded by the European Union" . I used to think they were great lads giving us all these great roads for nothing.

There is no such thing as a free lunch.

[seafoid]

roads are great but the financial debt, or political debt,  hangs around like a bad smell. When I was a young lad going to college I remember seeing all those signs "funded by the European Union" . I used to think they were great lads giving us all these great roads for nothing.

There is no such thing as a free lunch.

Check this out from 1980 . Rates have consistently decreased in  35 years
https://research.stlouisfed.org/fred2/series/FEDFUNDS

Check this out

http://dailybail.com/home/chart-us-debt-to-gdp-1940-2015.html

Total US debt since 1980 has NEVER fallen.
Interest rates have consistently fallen

Why?

[thejuice]

Deutsche bank in trouble?

http://blogs.spectator.co.uk/2016/02/if-deutsche-bank-collapses-its-taking-the-euro-with-it/

[Declan]

Wonder how this will go today?

http://www.irishtimes.com/news/crime-and-law/supreme-court-to-hear-joan-collins-promissory-note-appeal-1.2538357

[Rossfan]

More taxpayers' money for the legal parasites.

[seafoid]

Euro zone growth for 2015 was 0.7%. This means Q E does not work. Another crisis is inevitable. 

[Declan]

It's amazing to watch this and see how ineffective politicians are:
https://twitter.com/namawinelake/status/700623117207543808

[macdanger2]

Watched the Big Short last night, depressing stuff

[muppet]

http://www.rte.ie/news/business/2016/0224/770421-shadow-banking/

Ireland has the highest level of shadow banking assets in the world as a percentage of GDP, according to figures from the Financial Stability Board, a group of global regulators.

Shadow banking is lending by entities outside the traditional banking industry.

A report from Bloomberg said that Ireland ranks with China as the biggest centre for non-bank finance after the US and UK, with €2.3 trillion of assets.

The country's shadow banking system - including hedge funds, mutual funds and insurers - is over 10 times the size of the Irish economy, the news agency adds.

While most of the network falls under the remit of the authorities in Ireland or elsewhere, unregulated vehicles - including special purpose vehicles - account for about €0.5 trillion, the board's survey found.

Bloomberg said that Irish authorities have begun collecting data on SPVs and joined last year in the annual survey of shadow banking by the Financial Stability Board.

The report examined 26 jurisdictions, though some countries with large shadow-finance operations - such as Luxembourg - did not take part.

Shadow-banking assets have swelled since the financial crisis - and not just in Ireland.

Non-bank firms internationally have extended credit of up to $36 trillion by the end of 2014, after climbing by about $1.3 trillion a year since 2011, the FSB said.

Up until late last year, Irish SPVs had no obligation to alert the Central Bank to their presence in Dublin or to explain their purpose, except where their activities touched on regulated areas, Bloomberg said.

The Central Bank said in a report last July that officials faced a challenge in monitoring SPVs because of the "complexity and opaqueness of their transactions".

Today's report from the FSB show that the biggest borrowers through these vehicles are in the US, UK, Germany, France, Italy, Russia and the Netherlands.

Finance Minister Michael Noonan recently told that Dáil that there were about 2,100 companies in Ireland who have set up under the legislation that governs SPVs.

Mr Noonan said that even the tax authorities did not know how many assets these firms held.

The ECB also said that "risks may be building up in part of the shadow banking sector for which a statistical breakdown is not readily available".

[muppet]

http://www.rte.ie/news/business/2016/0310/773861-ecb-rates-meeting/

The European Central Bank has cut its main interest rate from 0.05% to 0% - the first cut since September 2014.

The bank has also cut its deposit rate deeper into negative territory, cutting to to -0.4% from -0.3%.

The ECB also said that it would increase its bond buying programme from €60 billion a month to €80 billion a month .