Israel's Financial Expert

Consumer Metrics View of the Great Recession

2010-09-02T10:04:00.000-07:00

The Consumer Metrics Institute was founded on a simple observation: many 'leading'

economic indicators are published, but few (if any) are sufficiently 'leading' to be meaningful to

investors. In fact, many 'leading' indicators use the prior month's equity market results as a key

component of their indexes. Investors may find their last month-end account statement more

timely.

To remedy this, the Consumer Metrics Institute has developed (and is continuing to develop)

techniques for monitoring 'up-stream' economic activities on a daily basis.

The "Great Recession" that began in 2008 has had many nuances, some of which can only be seen in data with higher resolution than that provided by the BEA or NBER. Our day-by-day profile of consumer demand helps us understand triggering events while also making it clear that many recent changes in consumer behavior have begun to linger -- much as the recession itself now appears to have done.

We have previously reported that consumer demand for discretionary durable goods is now at recessionary levels after starting to contract on a year-over-year basis on January 15, 2010. On the surface this would indicate a "double-dip" recession following the 2008 economic event. We may have inadvertently promoted the "double-dip" aspect of 2010's contraction by often graphing the two events superimposed upon each other in our "Contraction Watch" chart -- as though they were independent episodes:

(Click on chart for fuller resolution)

But to even a casual observer there is something unsettling in the above chart, especially if we've been told that the "Great Recession" was a once-in-a-lifetime event that required once-in-a-lifetime amounts of new national debt to fix. Clearly, the 2010 contraction already appears well on the way to equaling or exceeding the "Great Recession" in severity despite those "fixes."

By the end of August, the 2010 contraction had out-lasted the "Great Recession" in duration, and was contracting at a rate that we might expect to see only once in every 15 years. But it is highly unlikely that two fully independent contractions this severe would happen only two years apart -- just as the 1937 recession is not generally thought to be just another closely spaced severe recession, but is rather seen in the proper context.

Perhaps we need to take a look at our longer term charts, including our 48 months of Weighted Composite Index data (a nominal base 100 index where 100 = zero net year-over-year change):

From this perspective, we might reasonably ask whether the upward bump that reached a daily peak on August 12, 2009 is a "Great Recovery" or merely a stimulus fueled anomaly within a longer term economic slowdown. If the latter is true, then the shape of the 2010 contraction in our "Contraction Watch" chart makes more sense; we might be seeing now how the 2008 event would have progressed without generous doses of short term consumer stimuli during 2009 (e.g., "Cash for Clunkers" and the Federal Housing Tax Credit).

Our data also indicates that the "Great Recession" unfolded for consumers differently than National Bureau of Economic Research ("NBER") might have us believe. The NBER is considered to be the official scorekeeper for recessions, and they have dated the beginning of the "Great Recession" to December 2007. While it is true that consumer demand (as measured by our Daily Growth Index) peaked prior to that month (on July 28, 2007 to be exact), we find that during December 2007 consumer demand was still growing year-over-year by more than 1% -- slow growth perhaps, but hardly a recession. In fact, on December 13, 2007 some sectors of consumer demand were almost giddy in their growth: housing was still growing at a 12.8% year-over-year rate while our retail department chain index was up double digits. Consumers were clearly not yet in any major funk.

By May 26, 2008 -- nearly two quarters after the NBER claims we were already in a recession -- consumer demand for discretionary durable goods had finally slipped into year-over-year net contraction. By that time the consumer climate had changed: crude oil was topping $130 per barrel and the collapse of Bear Stearns was in the nightly news. Additionally, in the U.S. the presidential primaries were in full swing, bringing with them unprecedented political uncertainty. When the timing of consumer behavior changes is better understood, the triggering events can be more readily identified. By May 2008 consumers had good reasons to be cautious about big-ticket discretionary expenditures -- reasons that simply had not existed six months earlier.

Similarly, the lowest levels of consumer demand we have ever recorded occurred on November 5, 2008 while the entire nation reflected on the results from the preceding day's elections. That was followed by an organic rebound in demand that brought the entire consumer economy into net growth by early January 2009, long before any major fiscal stimulus had reached the streets. The consumer climate had once again changed: oil was $33 per barrel and the election was behind us. Again, higher resolution data can help sort out cause and effect, making policy responses better timed and targeted.

Economic cycles are complex and economic cause-effect relationships can often be ambiguous. In May, 2008 unemployment was still only 5.4%, and the downturn that we monitored in consumer demand preceded and plausibly caused at least a portion of the subsequent rise in joblessness. Now, over two years later, the cause-effect relationship has at least been muddled and arguably flipped: on the one hand we have observed high unemployment levels persisting throughout the artificially stimulated "green shoots"; while on the other hand we see in our daily data that rising unemployment concerns inversely correlate with dropping overall consumer demand for discretionary durable goods. Unfortunately this means that unemployment has remained sticky in the face of positive stimuli while discretionary consumer demand remains free to float down on bad news or increased uncertainties.

Contrary to the timeline suggested by the NBER, our data strongly suggests that the consumer portion of this recession did not start out to be about housing or damaged consumer balance sheets. But it is now. It has clearly evolved, and the average consumer's version of a recession diary might look something like this:

► December, 2007: Spending slightly more than last year, sub-prime mess is somebody else's problem

► May, 2008: Gas prices way up, banking crisis in the news -- maybe we need to be little cautious

► August, 2008: Democratic National Convention says things really are getting different this time, maybe more caution is warranted

► November, 2008: Good, the election's over, and gas prices are down -- things are getting normal again

► March, 2009: The 401K may be hurting, but at least we have the house to retire on

► June, 2009: Unemployment numbers don't look good, but those usually start back down

► August, 2009: A lot of vacant houses in the neighborhood, let's rethink retirement funding

► January, 2010: Unemployment is getting worse, let's pay down our credit cards

► May, 2010: There may be a recovery going on somewhere else, but it certainly ain't here

► August, 2010: Politics are getting ugly again, things aren't about to improve anytime soon

There probably hasn't been two separate recessions in three years, simply one that has evolved in significant ways. But if this really is a "double dip" recession, then our data indicates that the "Great Recession" of 2008 was merely the precursor, and not the main event. It is this current dip that we should be really concerned about; the current contraction in consumer demand is about structural changes in consumer behavior, whereas the "first dip" was about short term loss of consumer confidence.

This recession has been complex and constantly evolving in ways that policy makers have not been able to understand through their low resolution lenses. As a consequence their policy responses have been misguided, ineffective and wasteful. The Federal Reserve may be able to save the banking system by being the "lender of last resort", but it is powerless to change perhaps the one thing that John Maynard Keynes got right -- and what he mischaracterized as a "Paradox of Thrift" -- as over 100 million U.S. households become economic "loose cannons", acting exclusively in their own best interests in 100 million different ways.

Guest Post: Militancy and the U.S. Drawdown in Afghanistan

2010-09-02T05:54:00.000-07:00

Militancy and the U.S. Drawdown in Afghanistan is republished with permission of STRATFOR.

The drawdown of U.S. forces in Iraq has served to shift attention toward Afghanistan, where the United States has been increasing its troop strength in hopes of forming conditions conducive to a political settlement. This is similar to the way it used the 2007 surge in Iraq to help reach a negotiated settlement with the Sunni insurgents that eventually set the stage for withdrawal there. As we’ve discussed elsewhere, the Taliban at this point do not feel the pressure required for them to capitulate or negotiate and therefore continue to follow their strategy of surviving and waiting for the coalition forces to depart so that they can again make a move to assume control over Afghanistan.
Indeed, with the United States having set a deadline of July 2011 to begin the drawdown of combat forces in Afghanistan — and with many of its NATO allies withdrawing sooner — the Taliban can sense that the end is near. As they wait expectantly for the departure of the International Security Assistance Force (ISAF) from Afghanistan, a look at the history of militancy in Afghanistan provides a bit of a preview of what could follow the U.S. withdrawal.

A Tradition of Militancy

First, it is very important to understand that militant activity in Afghanistan is nothing new. It has existed there for centuries, driven by a number of factors. One of the primary factors is the country’s geography. Because of its rugged and remote terrain, it is very difficult for a foreign power (or even an indigenous government in Kabul) to enforce its writ on many parts of the country. A second, closely related factor is culture. Many of the tribes in Afghanistan have traditionally been warrior societies that live in the mountains, disconnected from Kabul because of geography, and tend to exercise autonomous rule that breeds independence and suspicion of the central government. A third factor is ethnicity. There is no real Afghan national identity. Rather, the country is a patchwork of Pashtun, Tajik, Hazara and other ethnicities that tend also to be segregated by geography. Finally, there is religion. While Afghanistan is a predominantly Muslim country, there is a significant Shiite minority as well as a large Sufi presence in the country. The hardcore Deobandi Taliban are not very tolerant of the Shia or Sufis, and they can also be harsh toward more moderate Sunnis who do things such as send their daughters to school, trim their beards, listen to music and watch movies.

Any of these forces on its own would pose challenges to peace, stability and centralized governance, but together they pose a daunting problem and result in near-constant strife in Afghanistan.
Because of this environment, it is quite easy for outside forces to stir up militancy in Afghanistan. One tried-and-true method is to play to the independent spirit of the Afghans and encourage them to rise up against the foreign powers that have attempted to control the country. We saw this executed to perfection in the 1800s during the Great Game between the British and the Russians for control of Afghanistan. This tool was also used after the 1979 Soviet intervention in Afghanistan and it has been used again in recent years following the 2001 U.S. invasion of the country. The Taliban are clearly being used by competing outside powers against the United States (more on this later).

But driving out an invading power is not the only thing that will lead to militancy and violence in Afghanistan. The ethnic, cultural and religious differences mentioned above and even things like grazing or water rights and tribal blood feuds can also lead to violence. Moreover, these factors can (and have been) used by outside powers to either disrupt the peace in Afghanistan or exert control over the country via a proxy (such as Pakistan’s use of the Taliban movement). Militant activity in Afghanistan is, therefore, not just the result of an outside invasion. Rather, it has been a near constant throughout the history of the region, and it will likely continue to be so for the foreseeable future.

Foreign Influence

When we consider the history of outside manipulation in Afghanistan, it becomes clear that such manipulation has long been an important factor in the country and will continue to be so after the United States and the rest of the ISAF withdraw. There are a number of countries that have an interest in Afghanistan and that will seek to exert some control over what the post-invasion country looks like.
The United States does not want the country to revert to being a refuge for al Qaeda and other transnational jihadist groups. At the end of the day, this is the real U.S. national interest in Afghanistan. It is not counterinsurgency or building democracy or anything else.

Russia does not want the Taliban to return to power. The Russians view the Taliban as a disease that can infect and erode their sphere of influence in countries like Uzbekistan and Tajikistan and then move on to pose a threat to Russian control in the predominately Muslim regions of the Caucasus. This is why the Russians were so active in supporting the Northern Alliance against the Taliban regime. There are reports, though, that the Russians have been aiding the Taliban in an effort to keep the United States tied down in Afghanistan, since as long as the United States is distracted there it has less latitude to counter Russian activity elsewhere.

On the other side of that equation, Pakistan helped foster the creation of the Pashtun Taliban organization and then used the organization as a tool to exert its influence in Afghanistan. Facing enemies on its borders with India and Iran, Pakistan must control Afghanistan in order to have strategic depth and ensure that it will not be forced to defend itself along its northwest as well. While the emergence of the Pakistani Taliban and the threat it poses to Pakistan will alter Islamabad’s strategy somewhat — and Pakistan has indeed been recalculating its use of militant proxies — Pakistan will try hard to ensure that the regime in Kabul is pro-Pakistani.

This is exactly why India wants to play a big part in Afghanistan — to deny Pakistan that strategic depth. In the past, India worked with Russia and Iran to support the Northern Alliance and keep the Taliban from total domination of the country. Indications are that the Indians are teaming up with the Russians and Iranians once again.

Iran also has an interest in the future of Afghanistan and has worked to cultivate certain factions of the Taliban by providing them with shelter, weapons and training. The Iranians also have been strongly opposed to the Taliban and have supported anti-Taliban militants, particularly those from the Shiite Hazara people. When the Taliban captured Mazar-e-Sharif in 1998, they killed 11 Iranian diplomats and journalists. Iran does not want the Taliban to become too powerful, but it will use them as a tool to hurt the United States. Iran will also attempt to install a pro-Iranian government in Kabul or, at the very least, try to thwart efforts by the Pakistanis and Americans to exert control over the country.

A History of Death and Violence
It may seem counterintuitive, but following the U.S. invasion of Afghanistan, the casualties from militancy in the country declined considerably. According to the International Institute for Strategic Studies Armed Conflict Database, the fatalities due to armed conflict in Afghanistan fell from an estimated 10,000 a year prior to the invasion to 4,000 in 2002 and 1,000 by 2004. Even as the Taliban began to regroup in 2005 and the number of fatalities began to move upward, by 2009 (the last year for which the institute offers data) the total was only 7,140, still well-under the pre-invasion death tolls (though admittedly far greater than at the ebb of the insurgency in 2004).
Still, even with death tolls rising, the U.S. invasion has not produced anywhere near the estimated 1 million deaths that resulted during the Soviet occupation. The Soviets and their Afghan allies were not concerned about conducting a hearts-and-minds campaign. Indeed, their efforts were more akin to a scorched-earth strategy complete with attacks directed against the population. This strategy also resulted in millions of refugees fleeing Afghanistan for Pakistan and Iran and badly disrupted the tribal structure in much of Afghanistan. This massive disruption of the societal structure helped lead to a state of widespread anarchy that later led many Afghans to see the Taliban as saviors.
Following the Soviet withdrawal in 1989, the communist government in Kabul was able to survive for three more years, backed heavily with Soviet arms, but these years were again marked by heavy casualties. When the communist government fell in 1992, the warlords who had opposed the government attempted to form a power-sharing agreement to govern Afghanistan, but all the factions could not reach a consensus and another civil war broke out, this time among the various anti-communist Afghan warlords vying for control of the country. During this period, Kabul was repeatedly shelled and the bloodshed continued. Neither the Soviet departure nor the fall of the communist regime ended the carnage.
With the rise of the Taliban, the violence began to diminish in many parts of the country, though the fighting remained fierce and tens of thousands of people were killed as the Taliban tried to exert control over the country. The Taliban were still engaged in a protracted and bloody civil war against the Northern Alliance when the United States invaded Afghanistan in 2001. During the initial invasion, very few U.S. troops were actually on the ground. The United States used the Northern Alliance as the main ground-force element, along with U.S. air power and special operations forces, and was able to remove the Taliban from power in short order. It is important to remember that the Taliban was never really defeated on the battlefield. Once they realized that they were no match for U.S. air power in a conventional war, they declined battle and faded away to launch their insurgency.
Today, the forces collectively referred to as the Taliban in Afghanistan are not all part of one hierarchical organization under the leadership of Mullah Mohammad Omar. Although Mullah Omar is the dominant force and is without peer among Afghan insurgent leaders, there are a number of local and regional militant commanders who are fighting against the U.S. occupation beside the Taliban and who have post-U.S. occupation interests that diverge from those of the Taliban. Such groups are opportunists rather than hardcore Taliban and they might fight against Mullah Omar’s Taliban if he and his militants come to power in Kabul, especially if an outside power manipulates, funds and arms them — and outside powers will certainly be seeking to do so. The United States has tried to peel away the more independent factions from the wider Taliban “movement” but has had little success, mainly because the faction leaders see that the United States is going to disengage and that the Taliban will be a force to be reckoned with in the aftermath.
Once U.S. and ISAF forces withdraw from Afghanistan, then, it is quite likely that Afghanistan will again fall into a period of civil war, as the Taliban attempt to defeat the Karzai government, as the United States tries to support it and as other outside powers such as Pakistan, Russia and Iran try to gain influence through their proxies in the country.
The only thing that can really prevent this civil war from occurring is a total defeat of the Taliban and other militants in the country or some sort of political settlement. With the sheer size of the Taliban and its many factions, and the fact that many factions are receiving shelter and support from patrons in Pakistan and Iran, it is simply not possible for the U.S. military to completely destroy them before the Americans begin to withdraw next summer. This will result in a tremendous amount of pressure on the Americans to find a political solution to the problem. At this time, the Taliban simply don’t feel pressured to come to the negotiating table — especially with the U.S. drawdown in sight.
And even if a political settlement is somehow reached, not everyone will be pleased with it. Certainly, the outside manipulation in Afghanistan will continue, as will the fighting, as it has for centuries.

Why Pakistan’s Disaster Could Lead to a Systemic Collapse

2010-09-02T05:25:00.000-07:00

From 11 Big Surprises for the Next Decade

4. Pakistan Collapses- The nuclear state fell victim of various terrorist groups who eventually succeeded in overthrowing the regime. The country falled into a bloody civil war. The U.S military, in a planned operation which was planned during the Bush years took control of the military facilities and dismantled them. The civil war affected India, which increasingly suffered from terrorist attacks throughout the decade. The collapse of Pakistan symbolized a new phase in the global "War on Terror" with the pro- American Gulf States becoming the main target.

Pakistan’s disaster could lead to a systemic collapse

The colossal humanitarian tragedy and the imminent economic meltdown, will now shape a new Pakistan or rather, exacerbate its predicament in the months and years to come. Pakistan’s chronic political instability, structural economic constraints and a warped national security policy are all going to be affected by the unfolding drama of the national disaster, perhaps the severest, in the country’s history. Whilst the challenges have snowballed within a short duration of ten days, the response of the Pakistani state and society underline extremely dangerous trends and make us wonder about future of the country, as we have known it for the last 63 years.

Systemic shock:
Pakistan had reverted to quasi-democratic rule after a decade of dictatorship in March 2008. Since the resumption of the electoral process in February 2008, the traditionally powerful unelected institutions, had acquired both legitimacy and unprecedented powers. The power troika of the 1990s had transformed into a quartet comprising the army, judiciary, the media and the civilian government which was represented by a ‘discredited’ president who has been a constant punching bag for the unelected institutions of the state.
Notwithstanding the isolation of the elected in the afore-mentioned quartet, the pending reform of governance was well-executed by the political elites by forging a consensus around the devolution of powers from the centre to the provinces via the 18th Amendment, and by establishing the rules of the game on fiscal transfers. However, these advances were overshadowed and challenged by the bane of Pakistani state: the national security policy, and its proclivity to act as a rentier entity for the Western agendas in the region.
Despite the fundamental shifts in governance, Pakistan has been in the tight grip of the civil-military-bureaucratic nexus and its newfound ally i.e. the ubiquitous electronic media. This is why the calamitous circumstances of today are turning into a major shock to the political system, which may unravel its very existence.

Dangerous trends:

Three key trends can be cited here. First, the perpetual attack on the person and office of the President who symbolises the political consensus of the federation and, especially, the popular will for the smaller provinces. Second, the relentless glorification of militarism by using the pretext of emergency relief. To illustrate, while the President was demonised during his UK visit, not a whimper was sounded out on the Army Chief’s official visit to the UAE, especially by those who have been praising the ascendant role of the armed forces in ‘saving’ Pakistan. Lastly, the sheer failure of the civilian administration to install an early warning mechanism and cope with the scale and immensity of the disaster has yet again raised the questions of state failure in the civilian domain. However, this time the civilian failure is hounded by the large-scale presence of banned militant organisations and their cadres in undertaking rescue-and-relief work in Southern Punjab and parts of KP, which casts a dark shadow over the attempts of the present civilian government to fight extremism in the country. Things have come to such a pass that the Taliban are advising a sovereign state not to seek international help and gunning down Awami National Party (ANP) workers and activists even in these dire times. All in all, political instability is likely to grow and deepen in the short-term leading to a systemic collapse, which Pakistan is familiar with and which almost always results in taking recourse to an authoritarian regime.

Economic collapse:

It has already been highlighted even when the floods have not receded that we are now heading fast towards an imminent economic meltdown. Such has been the nature of devastation reeked by the calamity that our GDP growth rate estimated to be 4.5 percent in the current fiscal year, is likely be halved due to the loss of crops, livestock, infrastructure and exports. The recent figures floated while the floods had not arrived at Kotri in Sindh, was around $10 billion. Given that the flood situation is getting complex and the outbreak of disease is an inevitable eventuality, the final estimate of losses will be far greater. Rough estimates suggest that 30-40 percent of crops may have already been lost while the strains on budgetary expenditures may be beyond the capacity and resources of the federal government. In these circumstances, the economy has emerged as a major challenge and one linked to our earlier discussion on political instability, the future scenario for Pakistan looks far from promising.
In KP alone, vital infrastructure such as bridges, roads, and highways have been damaged beyond repair, not to mention, the loss of timber, cattle and housing stock. The Prime Minister and other responsible officials of the state have already stated that parts of Pakistan have lost decades of development. It would be too early to make further estimates of what may have happened given that 70 percent of Khyber-Pakhtunkhwa and 50 percent of Southern Punjab remains inaccessible at the time of writing these lines. Perhaps the most under-reported aspect relates to the energy crises that may erupt once again in the short-term. Qadirpur gas field and many power plants has been shut down for days and thereby, depriving the country of nearly 2000 MW of electricity. Pakistan was battling with a circular debt and regular supply of furnace oil to the Independent Power Producers (IPPs), and had barely managed to devise a strategy to overcome energy deficits. It seems that efforts made earlier might be, to some extent, jeopardized in the wake of the current situation.

Militancy and extremism:

As noted above, the two agents seemingly well-organised are the Pakistan Army and the militant organisations, inextricably linked through history and the national security paradigm we have followed. As independent field reports from national and international media suggest the people in southern Punjab and KP are extremely angry and frustrated at the inability of the state to act in a timely and purposeful manner. For instance, Jamat-ud-Dawa is already at the forefront of relief efforts in the Punjab, while the several offshoots of the militants’ alliances in the northwest are capitalising on the extraordinary situation that we face today. It is not beyond the realm of possibility that these two parts of Pakistan already poor, marginalised and victims of state neglect, would see a major swing towards Islamism.
This is where the real challenge to Pakistan’s policy-makers and the Western powers emerges. The earlier militaristic efforts (military strikes, drone attacks, search operations and rounding up of Taliban militants) were yet to be backed by large-scale development programmes. In fact, the need for a Marshall Plan for the conflict-affected areas has already been highlighted at the international fora by the President and the Foreign Office. But the floods and the affiliated disasters have turned the clock backwards. The challenge of reconstruction, already beyond the capacity of the Pakistani State, will now be confounded by the rejection of constitutional governance and a secular governance framework that the ANP and the PPP have been propagating since the last few years.
The Pakistan state, including its nuclear-armed military has been on the defensive and their personnel and installations have been relentlessly targeted in the last three years. Over 30,000 civilian and military casualties and 7 percent of Officers Corps (of those fighting the insurgents) have died in the war against terror. Given such a vast and effective terrorists’ network, the current crisis is likely to compound the extent of terrorist attacks and recruitment of militants from the disaster-hit areas. Many analysts had hoped that once the military operation was over, improved governance and investments would provide an alternative to lure of Islamism. But, such a plan appears to be a distant dream only.

Which way now:

It is absolutely clear that the challenges faced by the state on the eve of its 63rd birthday are gargantuan, if not insurmountable. Three realities of contemporary Pakistan make things even more difficult. First, there seems to be a lack of political consensus on how to approach the disaster as the political elites have been bickering and scoring points thus far. True to their historical understanding of politics as a divisive and competitive arena, the leaders of political parties have traded more allegations than presenting solutions for the current situation. Second, the private philanthropy, international donors and global relief networks have displayed a marked reluctance to commit resources and offer assistance to Pakistan in undertaking emergency work and long-term rehabilitation. Donor fatigue has been cited as a possible explanation: however, the issue is far deeper and pertains to the credibility-deficit of the Pakistani State. The reasons are simple: the reputation gained by the Pakistani government for its ‘double-speak’ and hydra-headed behaviour with respect to the war on terror. Further, Pakistan’s perception as a thoroughly corrupt society is also an unfortunate reality as confirmed by the recent Transparency International report.
Third, it is unlikely that Pakistan would be out of the Afghanistan imbroglio anytime soon, thereby making it prone to decisions or policies set by Western powers. Also, the India policy pursued by the security establishment remains fossilised and hostage to history. There are no signs that this imperative is going to change in the next year or so. It would not be unwise to expect that military spending will remain as high as before, leaving little room for resource transfer to the areas ravaged by floods.

Policy focus:

In these circumstances, what should the public policy focus on? There are no easy answers for this unfortunate structural conundrum. As a start, there are five areas, which should be explored by the federal government. First, a national consensus on post-disaster mitigation strategy would be forged through an immediate political dialogue and which should be manifested in the form of a national commission comprising of key political parties and members of the Executive (including the army). Second, resource mobilisation campaigns should be initiated, focusing on expatriate Pakistanis and those who have been transferring their capital offshore. Such campaigns must also be launched in major capitals of the West, with a clear signal that if Pakistan’s allies are not going to bail it out, then they should be ready for the dire consequences of its economic and political instability.
Third, this crisis affords an opportunity to reform the local governance systems that have worked in the past. The strengthening of district administration and setting up local governments as agents of reconstruction and rehabilitation must be undertaken as soon as the emergency relief tasks are over.
Fourth, this may be the right time to mobilise and incentivize Pakistan’s private sector to contribute to the rehabilitation of lost infrastructure by offering them tax concessions, enabling legal environment for public-private partnerships and ensuring that they are not victims to bureaucratic corruption. Finally, it is essential that a national communication plan should be developed whereby; the civilian governments across the country are able to respond to citizen requirements, check corruption and leakages in relief efforts and present a credible alternative to Islamo-fascist solutions for governance and development.

Spain Homeowners Face Squeeze as Mortgage Rates Rise

2010-09-02T04:42:00.000-07:00

Bloomberg:

Spanish homeowners will face higher mortgage repayments after the benchmark rate for loans last month posted its first annual gain since October 2008.
The benchmark rate for most of the country’s home loans, 12-month Euribor, rose to 1.42 percent in August from 1.33 percent a year earlier, the Bank of Spain said today on its website. That will further stretch the finances of Anabel Ruiz, who already spends two-thirds of her 1,000 euro ($1,271) monthly salary on making payments on a 30-year mortgage that runs until 2036.
“It’s going to make a desperate situation even more critical,” said Ruiz, 43, who works in an accounts department. “It could mean I lose my apartment and we all end up living under a bridge.”
Because almost nine out of every 10 new Spanish mortgages are floating rate, increases in Euribor may start to squeeze demand in an economy struggling to emerge from the deepest recession in 60 years. Higher mortgage payments as loans start to reset come as Spanish households adjust to an increase in sales taxes and a jobless rate above 20 percent.

“It’s another headwind for Spain among many,” said Kenneth Wattret, chief euro-area economist at BNP Paribas. “The turning point for interest rates can present a problem.”
Repossession petitions handled by the Spanish courts jumped to 27,621 in the first quarter, from 23,433 a year earlier and 5,688 in the same period of 2007, according to data from the General Council of the Judicial Power.

Rate Increases
Repayments on a mortgage of 171,000 euros, the average size of a home loan in Madrid according to the government’s statistics institute, would rise by 7 euros a month as a result in the increase in Euribor, assuming a 20-year repayment term and a spread for the loan of 50 basis points over Euribor.
Euribor may rise to 2 percent over the course of next year, said David Cano, a partner at Analistas Financieros Internacionales, a Madrid-based economic consultancy firm in a phone interview. At 2 percent, mortgage repayments would increase by about 50 euros a month, according to a simulation calculator on the website of the Spanish mortgage association.
“In macro-economic terms the impact probably is not going to be significant,” said Cano. “The risk is that it has a psychological effect.”
After reaching a record high of 5.39 percent in July 2008, the Euribor rate plunged to 1.22 percent in March this year.

Construction Boom

Spanish mortgage lending soared during Spain’s construction boom, surging more than fivefold from 1999 to 626 billion euros at the end of March this year, according to central bank data.
As much as 87 percent of new Spanish mortgages are floating-rate, meaning they reset according to increases or declines in benchmark interest rates.
In the U.K., the proportion is 54 percent, according to the European Mortgage Federation. While mortgage loans classed as “dubious” fell to 2.7 percent of total home financing in March, from 2.9 percent in December, that remain seven times higher than levels at the end of 2005, according to data from the Spanish mortgage association.
Higher rates come as government austerity measures and the withdrawal of public works programs threaten to undermine Spain’s economic recovery. The International Monetary Fund predicts a 0.4 percent contraction in the Spanish economy this year, after shrinking 3.6 percent in 2009.
While rates will climb, the increases shouldn’t be too “frightening,” said Raj Badiani, an economist at IHS Global Insight in London.
“You can’t expect Euribor to stay at the current low levels for ever and what really matters now is the rate of ascent,” said Badiani. “The last thing Spain needs now is Euribor rising rapidly over the next year.”

Greek PMI Shows Manufacturing Slump Worsened in August

2010-09-02T02:40:00.000-07:00

ATHENS, Sept 1 (Reuters) - A slump in Greece's manufacturing activity worsened in August as output and new orders contracted more sharply and job cuts accelerated, a purchasing managers' survey showed on Wednesday.

There was, however, one encouraging sign in that export orders rose slightly -- for the first time in nearly a year -- although the growth rate was marginal.

The Markit Manufacturing Purchasing Managers' Index (PMI) for Greece fell to 43.0 points in August from 45.3 in July, staying firmly below the 50 mark that separates growth from contraction.

Austerity measures and depressed confidence as Athens tackles the country's massive debt burden have kept Greece in recession for a second year. Gross domestic product is seen contracting by as much as 4 percent in 2010, according to analysts and the central bank, after shrinking 2 percent last year.

Weak economic conditions were hurting demand, making clients reluctant to commit to new projects, survey participants said.

With production and new orders in decline for 11 and 12 straight months respectively, excess capacity at manufacturing plants led to reductions in work backlogs, stocks of finished goods and employment.
The index for work backlogs plunged to 34.5 from 45.1 in July.

"Following the relative improvement during July, the PMI slipped back in Aug as new orders and output both deteriorated at accelerated rates," said Markit economist Gemma Wallace.
"Given the stringent fiscal tightening that will remain in place for some time to come, domestic demand is set to remain weak going forward. Exports will be required to play a key role in recovery and the latest survey offered a glimmer of hope -- foreign sales rose slightly for the first time in 11 months," Wallace said.
Companies continued to shed jobs in August for the 28th consecutive month and at the fastest rate in nearly a year and a half, the PMI survey showed.
Manufacturers' costs rose more sharply in August as a result of increased raw material prices, higher taxes and rising transport costs. But weak demand and intense competition meant manufacturers were unable to pass on those higher costs to customers and often had to offer promotional discounts.

The Coming Euro Collapse- Greece is Sliding into Deflation as Sales Go Down Despite Discounts

2010-09-02T02:12:00.000-07:00

Read more at Euro Crisis

Kathimerini:

Athens retailers report fall in turnover of 25 percent from last year; drop steeper in other parts of Greece

Revenue figures from the summer sales season in the retail sector were disappointingly low, according to data provided by trade groups yesterday.

Encouraging signs arising from increased shopper traffic lasted for just the first 15 days of the sales season, according to the National Confederation of Greek Commerce (ESEE), which said turnover this year fell by an average of 25 percent from 2009 levels. The sales period ran from mid-July until the end of August.

As pointed out by ESEE president Vassilis Korkidis, more shoppers visited retailers over the sales period but there was no increase in revenues, despite the lower prices.

In Athens, the drop in revenues reached between 25 and 35 percent compared to the same period a year earlier, while in Piraeus the drop was about 25 percent. In other parts of Greece, the figures painted an even bleaker picture.
In Serres, northern Greece, stores reported a drop of up to 65 percent in turnover, while in Edessa, also in the north, it was around 40 percent. Shopkeepers in Kastoria said revenues were up to 45 percent lower than last year.

Consumers are being more careful about their spending habits, resulting in a drop in sales across all retail sectors, and among both small and larger businesses.
An initial drop of 10 percent in revenues during the first two weeks of the sales season was considered to be satisfactory by store owners but this soon gave way to an even sharper drop-off.
In the two-month period leading up to the sales, many retailers had reported 23 percent lower turnover. Data showed that eight in 10 store owners reported a drop in revenues, with the remainder saying revenues were at last year’s levels.

“In many large cities, the drop in turnover was matched by the percentage cut offered by stores on products,” said Korkidis.

Maya Bhandari on India's Reserve Bank of Stagflation

2010-09-02T01:30:00.000-07:00

Read more at India- An Examination of another Emerging “Miracle”

The Reserve Bank of Stagflation

The collapse of world trade in late 2008 drove brutal recessions for big exporting countries, most spectacularly China, Japan and Germany. But India, largely driven by domestic demand, emerged relatively unscathed. Gross domestic product shrank in the final quarter of 2008, but only by 0.2%. At its lowest point, industrial production dipped 2% below the pre-crisis peak, the best performance of all major economies, and has since bounced back powerfully to well above the mid-2008 peaks. Yet the combination of a lethargic central bank and swelling inflation could now quickly alter this seemingly benign scenario.
This may seem counterintuitive. India's Reserve Bank raised two of its four main policy levers—the repo and reverse repo rates at which the central bank lends to and borrows from banks—by 0.25 percentage points and 0.50 percentage points respectively at its meeting last week. The more powerful tool, the ratio of cash reserves banks must keep at the central bank, was left unchanged.

Notwithstanding a warm reception from markets and commentators, these latest policy "moves" were in fact little more than token gestures. The two most relevant rates, the repo and cash reserve ratio, are still considerably below where they were before the central bank misguidedly started slashing interest rates in the fourth quarter of 2008. While the cuts back then, by 4.25 percentage points and 4 percentage points respectively, appeared to conform to what other central banks were doing at the time, they may have had as much to do with the run-up to general elections in May 2009. The ruling Congress Party benefited from cheap credit before voters went to the polls.
At best, the new higher rates might convince banks to hold less excessive quotas of government paper on their balance sheets: More than 40% of banks' assets (measured as total loans) are held in government bonds. Meanwhile, raising the "tolerable" wholesale price inflation rate to 6%, from 5.5% in April and 4% a couple of years ago, is a grossly inefficient way to manage the problem. (Among other variables, India's central bank "targets" wholesale price inflation, which is also heavily influenced by the exchange rate.)
But these measures are unlikely to be anywhere near enough. It is clear that India has a large and growing inflation problem. Prices are rising at anywhere between the 10.5% on the wholesale price inflation measure and 14.5% on the rural consumer-price measure, considerably higher than inflation rates of the five years preceding the crisis, a period commonly known as the "Goldilocks years." The result has been heavily negative real, or inflation-adjusted, interest rates. Depending on which data one chooses, real rates are between minus 5% and minus 8%, and even that may be an understatement.
All inflation measures are poised to accelerate further. Primary articles inflation, for instance, leads other inflation rates—as it is released weekly rather monthly, and comprises chiefly food in most indices—is running at more than 15% in annual terms. At current levels, Indian inflation is also not far from British inflation just before and after the bitter stagflation years of the late 1970s and early 1980s, with a substantially more central role for domestic demand in India's case.

These price trends are unsurprising, given ultra-loose monetary and fiscal policies, an overheated economy and large-scale debt monetization by the government, which was highly inflationary.
But what is surprising is the central bank's meek reaction, particularly given the hawkish tone of its own statement last week, which acknowledges that inflationary pressures have become "exacerbated" and "generalized, with demand side pressures clearly evident." The statement warned that wholesale price inflation would likely trend higher. And the bank concluded that "real policy rates are not consistent with the strong growth that the economy is witnessing . . . (and that) it is imperative that we continue to normalize our policy."
In short, the central bank has fallen badly behind the curve. Having administered huge doses of unnecessary policy stimulus, it has been lethargic in its withdrawal. Political pressure probably explains why it is raising rates at this stage in the cycle—the government wants to get this phase over with before they have to face more elections.

The chief concern from here onward is that aggressive policy action will coincide with the worst point in the economic cycle. Consumer spending is both the major component and growth driver of the Indian economy, and the first quarter already saw a sharp 1.25% slide—the largest decline since 2002. The most likely explanation for this is that, as might be expected, inflation has chipped away at consumers' spending power. Based on available evidence, nominal incomes have not kept pace with average price gains.

India is on course for its very own version of stagflation: 5% growth with double-digit inflation. Given the major underlying price pressures, the central bank's promise of "further action as warranted" must come sooner rather than later.

Spain's Unemployment Continues To Rise While German Unemployment Falls

2010-09-02T01:02:00.000-07:00

Edward Hugh:

Spain's EU harmonised seasonally-adjusted unemployment rate (which is the interesting number) rose again in July, according to the latest data from Eurostat. It rose to 20.3% from 20.2% in June.

So despite a double digit fiscal deficit, Spain has not yet succeeded in putting a brake on the upward drift in the headline unemployment number.
And the number of those officially working continues to decline, according to the data on those paying insurance contributions from the Social Security Ministry.

Clearly having broken the 20% barrier the number looks like heading up even further in the second half of the year, although quite how far up is hard to say, since my feeling is that some of the increase in unemployment is now being offset by the silent march of feet, heading for the door, and looking for employment abroad.

Euronews:

The headline unadjusted figure – most commonly used in Germany – was down by 4,000 at 3.188 million.

The total adjusted for seasonal factors was down for the 14th straight month. The unemployment rate remained steady at 7.6 percent of the working population.

But there are worries about the effects of a further global slowdown on Germany’s export reliant economy.

Heinrich Alt of the Federal Employment Agency said: “There are still some very considerable risks in the world economy and in the German economy. The situation in the US, for instance, is bleak and there are many heavily indebted nations. There are liquidity problems as well as inflation and deflation fears. On the whole, there are quite a lot of risks.”

Economists said Germany will not be able to sustain its recent high growth rates but the slowdown should not be dramatic enough to have a major impact on the labour market. Separately, the EU statistics office Eurostat released figures showing unemployment totals throughout the euro zone in July were unchanged at 10 percent of the workforce for the fifth month running.

Related Stories:

The Euro Crisis and The Euro Collapse- Germany is Pushing Greece into Debt Deflation

Meat Price Surge Fuels Fears of Food Inflation

2010-09-02T00:28:00.000-07:00

Read more at:

If They Can’t Afford Wheat Let Them Buy Real Estate? Why the Price of Food Will Guarantee a Chinese Real Estate Crash

China’s Food Price Inflation Is Starting To Affect the Rest Of the World

Financial Times:

Global meat prices have hit a 20-year high as robust demand from emerging countries has coincided with a drop in production by exporters such as the US and Australia, fuelling concerns about rising food inflation.
The UN Food and Agriculture Organisation’s index of meat prices rose in August to its highest level since 1990, up 16 per cent over the past year, after lamb prices hit a 37-year high, beef prices climbed to a two-year high and the cost of pork and poultry prices rose.
“There has been sustained demand from Asia and from the Middle East for both beef and lamb,” said Pedro Arias, a livestock economist at the FAO in Rome, echoing a widely held view in the industry. “But the traders have not been able to satisfy that demand because herds have been curtailed.”
The sharp price rises have attracted speculative money to what is otherwise a niche market in Chicago. The number of outstanding contracts at the Chicago Mercantile Exchange for live cattle and lean hogs futures and options – both benchmark derivatives – has jumped by nearly a third since the start of the year.
But industry executives, traders and analysts said the increase in prices was not due to the inflows of hot money, but rather supply and demand factors. Meat production has stagnated in top exporting countries as livestock farmers suffered a series of misfortunes from severe droughts in Australia and Latin America, to low prices in the early 2000s and record high feeding costs.

At the same time, the growing middle class in emerging countries from China to Brazil is demanding a richer protein diet, further straining the industry’s supply.
Eddie Troutman, vice-president of international and byproduct beef sales at Cargill, the agribusiness that owns meatpacking plants in the US and Canada, said: “I’m very bullish on beef exports over the next several years.”
Live cattle futures in Chicago last month reached $1 a pound, the highest in 22 months and near the record high set in 2008. Australian lamb prices have risen above A$5.50 a kilo, the highest since 1973-4. And pork bellies – used to make bacon – have risen to a record price of almost $1.50 a pound in the US.
The rise in meat prices comes amid heightened concerns about food price inflation since this year’s drought in Russia devastated the country’s grain crop, triggering a sharp rise in the price of wheat and other cereals.
In Saudi Arabia, which depends heavily on imported food commodities, the price of red meat rose 12 per cent in the six months to July, said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.
“Food inflation is one of the main causes of build-up in inflation we are seeing this year,” he said.

China’s Shark Loan Ponzi Finance- An Overview of China’s Fake Mortgage Loan Industry

2010-09-01T16:24:00.000-07:00

Read more at China Bubble

From China’s Shark Loan Ponzi Finance- Understanding China’s Shadow Banking System

The five steps of a fake housing sale in China

1. Before the construction, loan shark operators provide initial finance to small or middle size developers in 2 and 3 tier cities in order to begin the construction.

2. After the construction is complete, and before the official sale to the public begins, loan shark operators will provide resident IDs and other fake documents for mortgage application to real estate developers and make together a fake sale contract.

3. The real estate developer brings the fake contracts to the bank in order to obtain a loan. That can explain why in China, many houses already get sold before they are opened to the public for sale, and why there are so many vacant houses already sold, which no one lives in. (According to the report by Fitch, that was mentioned above there are 64 million unoccupied homes in China)

4. A secret agreement is made between the shark loan operator and the real estate developer. The shark loan operator will get more bank loans through this fake sale, as will the real estate developer. They will use the bank loan in order to engage in another ponzi scheme.

5. The real estate developer and loan shark will hire people to fake sale frenzy in order to attract real buyers, and if there are enough sales the fake contract will be cancelled out.
During the time of the real estate bubble frenzy these ponzi schemes and fake sales were mostly covered, since real buyers could be found. But when the market slows down there will be a thin transaction volume, and the fake sales will be exposed. Then the real collapse will happen.

From China’s Shark Loan Ponzi Finance- Former Microsoft CEO in China is Under Investigation for Shark Loan Activities and Faking Commercial Real Estate Contracts.

He became famous recently due to the exposure of his purchase of a fake PHD diploma from Western Pacific University. He also claimed to have a PHD degree from California Institute of Technology in his Bio and numerous occasions. There is a hot debate on the Chinese web regarding Mr. Tang, who used to be a role model, and is now exposed to be a crook. On the other hand, in the fake goods capital of the world someone line Mr. Tang may as well be a role model.
According to the report, Mr. Tang is under police investigation for an alleged criminal corporation with real estate developers in Suzhou City. The police suspect that they faked a commercial real estate sale contract, which enabled him to receive a 112.8 million Yuan mortgage loan from a bank. Later, the loan has been lent out by the real estate developers and to loan sharks.

If you do a search for “Fake Mortgage Loan” in Mandarin in Google, you will get 298,000 hits; each hit will take you to an individual case, a news report, or a financial expert warning about potential financial risk.

Last time, we reported former Microsoft China CEO, Mr. Tang Jun was involved in a fake mortgage loan case. In that case, real estate developer colluded with Mr. Tang Jun to fake real estate sales contract to obtain more than 100million in loans from the bank, and it turns out this is standard practice in China’s real estate industry.

As I stated before, China’s banks are more than happy to issue low interest rate mortgages to the applicants as far as there is real estate collateral involved. During good times and bad times, many cash stripped real estate developers will ask the key company employees, relatives, professional real estate flip floppers, and loan sharks to provide their own ID or borrowed ID from the country side to fake sale contracts in order to obtain the mortgage loan before the actual sale. That can explain the “sold out phenomenon” prior to official sales, and also can explain the higher vacancy ratio and high “new sales cancellation ratio”

After they obtain the low interest mortgage loan, they often work with loan shark operators to lend out at very high private interest rates, as the “Tang Jun” case exposed.

China’s real estate market has degenerated into a tool to trick the bank to obtain lower interest loans, and then this massive easy credit will go underground under the loan shark operation. Many loan sharks will park their funds in real estate, and use real estate as collateral to borrow again from the bank. This is deadly cycle.

Many western investors will doubt about the popularity of this reckless behavior, of course, there is legitimate purchase, but local insiders know, that a very higher percentage of China’s real estate sales are fake sales. As long as house price continue to go up, the deals will get covered later by legitimate sales. However, once prices head south, and they can’t sell the houses it will cause a giant domino affect.
A few days ago, China’s media exposed an individual case in Beijing, a 700 hundred million “fake mortgage case” involving 8 Beijing bank officials and other 10 defendants.

For full story, please check this LINK

In this case, a 30 years old former real estate broker, that is now a loan shark worked with senior bank executives to use fake residents ID’s and fake real estate sales contracts in order to obtain 700 million Yuan of mortgage loans from Beijing Agriculture and Commerce Bank. In this case, bank presidents received tens of millions of bribes from the main ring leader. The criminal activity has been going on for two years. Later the corrupted bank president even began to fake business licenses in order to apply for 200 million small business loans to pay back the previous mortgage loan. Only a small accident triggered the end of scheme when one outsider bank clerk called the police and the case got exposed.

In the last five years China residential real estate prices have exceeded ordinary Chinese purchasing power. The market has become a vehicle for different groups of people by which they park their corrupt revenue. Of course, there always will be some real buyers, but many of these real buyers have been forced to pay these high prices and accepted the fate of house slavery , and as I stated in previous articles, their recent purchase are motivated by concerns of runaway inflation, and fear of future price hikes a result of the distorted banking system. China’s banks can’t afford to tighten further; otherwise, the whole system will collapse.

The people who park their money in real estate, regardless if they can even rent the property, is comprised of loan shark operators, real estate developers, corrupted local government officials and bank executives. China’s Real estate market is degenerating into is an effective tool to steal funds from state banks.

As I stated in The Harsh Reality behind China’s Growth Story

The root of the problem is the same: more loan growth can benefit the borrower, the banking executive, and the local government officials. The return of capital and the potential loss of the principal is always a secondary consideration, especially when the loans are issued to the state owned enterprises or well connected “too big to fail” private businesses. Who cares? The banks are state owned banks, and the capital is state capital.
More and more Chinese began to realize the dark side of the real estate industry, their anger towards the government is growing , and a lot of them have lost confidence in their political and economic future. Emigration applications to Canada, USA, Australia surged this year. And all these anger and emigration happened in a time when China’s economy is booming. Just imagine what will happen when China’s real estate market will collapse.

Many people doubt a possible collapse, given the fact that China’s government can order the banks to lend again. Actually, recent developments in China in later August show that China’s bank began to offer “Bank Trust Products” again after one month freeze period.

Future will tell how long the tread mill to hell can go on before it plunges into abyss.

During time of crisis, the rich and the powerful always jump the ship and get bailed out first since they receive information first. This is especially true in China, a totalitarian country with information censorship.

Ordinary Chinese already suffer under the current system. As I stated in previous articles, China’s economic development only benefits a selected few.

Click for dozens of video links of “fake mortgage loans” exposed in China’s media.

A few days ago Shanghai Local TV station reported a story about a new residential development site in Shanghai. This site has just opened for sale, but the majority of the units were already sold out. This “sold out phenomenon” is the result of false sales by real estate developers, professional flip floppers and loan shark operators.

There are three purpose for these false sales. The first is to obtain business for loan sharks (many local developers will borrow from loan sharks in order to develop the project. There will be secret sale contracts and lending contracts between them). The second is to obtain mortgage loan from the bank before the real sales to real customers begin, thus shifting all the financial risk to the bank. The third is to create a bull market appearance in order to lure the buyers.

If the real estate price drops, this kind of practice will get exposed, since the developers will not pay the mortgage loan anymore. This means the price drop will cause enormous damage to China’s banking system. As a result, a large part of China’s real estate industry is degenerating into a tool to steal state funds from state banks.

For the TV report, please click the link

More on Canada's Housing Bubble and Debt Levels

2010-09-01T13:35:00.000-07:00

Robert Lenzner Explains Why Chinese Real Estate Bubble Is Bursting

2010-09-01T06:47:00.000-07:00

Forbes:

Of the 90 publicly listed Chinese property developers listed on the Shanghai and Shenzhen stock exchanges, almost two-thirds of them reported negative operating cash flows for the first half of 2010. No wonder the People’s Bank of China asked these companies to estimate their level of write-offs if home prices were to fall by a humungus 60% instead of the prior target of 30%. At t he time my China hands made little of the seemingly worrisome instruction.. I guess everyone wanted to believe that the Chinese equity market would remain the golden goose even as US equity prices faltered.
This sorry state of affairs obviously has repercussions for the Chinese economy and following on is a risk to the level of global growth. Trees don’t grow to the sky permanently. Real estate prices are 60% higher in China today than they were after the 2008 global financial crisis sent Chinese property stocks down 40% after a run-up of 10 times from 2005 to 2008. In fact home prices in Shanghai, Beijing and Shenzhen have risen so far into the stratosphere that mortgage payments on them are over 80% of average annual income, according to a recent Morgan Stanley chart. Obviously, this is unsustainable.

China’s central bank has decided to stem this madness by curbing loans to buyers of 2nd and 3rd homes or to buyers who can’t prove they can afford peak prices.. Could this slowdown in property development impact other areas of the Chinese economy? Well, power rationing in Zhejiang province is bound to reduce demand from copper fabricators. China’s coking coal imports are falling as is the price of iron ore from Australia.

Read more at: How to profit from the coming collapse of China

Opposition and Government in Ireland Clash Over Anglo's Role

2010-09-01T06:35:00.000-07:00

Read more at Euro Crisis

Irish Times:

THE GOVERNMENT and Opposition parties have clashed over the systemic importance of Anglo Irish Bank to the economy at the time of the State guarantee.
The row comes after the bank yesterday announced it had incurred losses of €8.2 billion for the first half of 2010, the highest ever loss recorded by any Irish commercial entity.
Last night, Minister for Finance, Brian Lenihan issued a statement taking issue with the assertion made by the Opposition that the bank was not systemically important at the time the Government guaranteed deposits in late September 2008.
Earlier Labour’s finance spokeswoman Joan Burton contended that the figures confirmed that Anglo was never of systemic importance to the economy.
“They show instead that it has become systemically destructive of Ireland’s capacity to recover and to restore its banking system.
“Anglo Irish is not just the biggest bank failure in Irish economic history, either before or since independence, it has also turned out to be one of the biggest corporate failures anywhere in the world,” she said.
Responding to the comments, Mr Lenihan claimed the bank was systemically important and said it had over 250,000 depositors at the time of the guarantee, and its importance had been confirmed by the governor of the Central Bank Patrick Honohan in his recent report on the causes underlying the banking crisis.
“I fail to see how Ms Burton can now claim to say that the bank was never of systemic importance,” said Mr Lenihan.
“Is Deputy Burton saying that the Labour Party would have allowed the bank to collapse thereby destroying the savings of those depositors?” Mr Lenihan did accept that the losses were unacceptably high.
However, in a clear contradiction of Coalition partners, the Green Party, he said the only wind-down option was one that took place over a long period of time, and not a quicker wind-down, as advocated by the Greens, which he said would cost the taxpayer more money.
Michael Noonan, the Fine Gael finance spokesman said yesterday that the overall burden to the taxpayer was now €22 billion and rising. He said that it suggested that the Standard Poor’s estimation of non-recoverable losses of €35 billion might be accurate.
He said the very wide range of the guarantee that was introduced in 2008 meant it was not possible to negotiate discounts on loans that were guaranteed.
There was no solution that would not prove very costly for the taxpayer, he added.
“What I am calling on the Minister to do is to publish a very simple balance sheet setting out the costs of the good bank/bad bank suggestion, as proposed by Anglo’s management, as against the costs of an orderly wind-down.

“We need to be told the solution that will cost the taxpayer the least as the bank has no economic importance. It is one that we could well do without,” he said.
Mr Noonan said his own preferred option was an orderly wind-down over a period of seven to 10 years.
Mr Lenihan confirmed yesterday that the Government had sent its final submission on the future of the bank to Brussels.
Sinn Fein’s spokesman on finance Arthur Morgan said the Greens should now insist on Fianna Fáil pulling the plug on Anglo.
“If they do not then they should pull down the Government and let the people finally have their say.
“Fianna Fáil have nationalised the losses of their banking and developer cronies and the revelation that Anglo incurred an €8.2billion loss for the first half of this year is the nail in the coffin for the Government’s banking strategy,” said Mr Morgan.

Bears Bet Time is Running out for China

2010-09-01T04:04:00.000-07:00

Read more at China Bubble

Reuters:

Three numbers should suffice to give Chinese economic policymakers a sleepless night: 65.4 million, $28.7 billion and $2.45 trillion.
In order, they are the estimate by a government researcher of how many apartments stand vacant in China, many of them bought as speculative investments; the country's trade surplus in July; and the international reserves the central bank has accumulated by buying dollars to hold down the yuan.
Together, they encapsulate the distortions of an economy that favors investment by suppressing the cost of capital and other inputs at the expense of consumers, whose spending power is held down by low wages and low deposit rates. Unable to sell at home all that it produces, China exports the rest.
This template has powered 30 years of headlong growth that is catapulting China past Japan to become the world's largest economy after the United States. But it is a formula that Beijing readily agrees is unsustainable: China needs to rely more on household spending, especially as its export prospects are darkening now that the West is tightening its belt to purge excess debt.

Many experts are confident that a pragmatic China will succeed in making the transition in the coming decade to a new growth model anchored by urban-based consumption, technological upgrading and a greater role for market forces.

Doubters, though, have two prime reservations. First, that China has left it too late to wean itself off investment-heavy exports. And second, that the ruling Communist Party will fail to overcome the vested interests resisting reform.

"The imbalances cannot continue at this rate for another 10 years. That's simply not possible," said Michael Pettis, a professor of finance at Peking University.

He said pressure to change could become overwhelming within two to three years, or even sooner if trade conflicts flare up.

"They're embarking on change at a time when the rest of the world may not give them much time to shift," Pettis said. "Over the next decade we're going to see average growth rates of 5-6 percent, heavily frontloaded."

CAR CRASH

His skepticism is shared by some at the heart of the Chinese establishment. Zhou Tianyong, a professor at the Central Party School in Beijing, which trains rising Communist Party officials, has long argued that China needs steady but far-reaching political reforms.
In a new book, "Where Is China Headed?", Zhou says China could be heading for a political car-crash unless it reduces bloated government, unshackles small business and ends distortions in the housing market.
"Which way will we go down? If we choose the right route we can avoid falling into a development trap; if we choose the wrong one, we may fall into a 'China trap' of social and political turmoil, slow economic growth, enduring lack of prosperity, and weak and declining national competitiveness," Zhou writes.
The 'China trap' looms if policymakers continue to promote a pattern of growth that "privileges industry, big corporations, big capital and big projects", Zhou believes. Shifting gears will be difficult, he reckons, because of the habits China has formed and the entrenched interests that have built up.
And there's the rub. Does the Communist Party have the will to remove some of the power and wealth it has bestowed on its favorites? China's markets for the factors of production are riddled with distortions that subsidize producers, exporters and investors, according to Huang Yiping and Wang Bijun from the China Center for Economic Research at Peking University.

Labor, capital, land and energy are all cheap, they write in "China: The Next Twenty Years of Reform and Development", a joint Australian-Chinese collection of essays.
This is equivalent to taxing the owners of these inputs, mainly consumers, which is why household income and consumption have plummeted as a share of GDP, they argue.

"All these suggest that factor-cost distortions have been a fundamental force behind China's structural imbalances, which alongside other problems such as inefficient resource use and pollution could seriously affect China's ability to sustain its rapid growth in the future," they write.

VESTED INTERESTS

Seen in that light, the problem is not one of economic policy but of political economy. Yao Yang, also an economics professor at Peking University, bemoans that the government itself, its cronies and state-owned enterprises are forming powerful interest groups.

Writing in the same volume of essays, Yao says the Chinese Communist Party should realize for its own sake that there is no alternative to fuller democratization if it wishes to maintain both high economic growth and enhanced social stability.
"The emergence of strong and privileged groups will block equal distribution of the benefits of economic growth in society, which will then render futile the CCP's strategy of trading economic growth for people's consent to its absolute rule," he says.

Diana Choyleva, who follows China from Hong Kong for Lombard Street Research, a consultancy, says that because of the new international environment it will become clear in the next two years whether Beijing has the appetite to change.

"I want to believe that they'll move in the right direction, but every time the going really gets tough you don't seem to get that response," she said. Financial journalist Richard McGregor says the Party should not be counted out despite the political risks that the next stage of economic reform entail.

"Does unraveling the state's economic interests irreparably damage the party's political clout? There is no easy way to chart a course through this thicket but the Party's adaptive abilities should not be underestimated," McGregor writes in a new book, "The Party".

India's Housing Bubble: Anecdotes from an Indian Blogger

2010-09-01T03:56:00.000-07:00

Read more at India's Housing Bubble

India's Housing Bubble Blog:

Here is my anecdotal evidence based on my interactions with brokers in Mumbai and other parts of the country.
Market has gone up rapidly in the past 7 months. They do not expect prices to rise much more beyond this. Investors are selling their properties however they are asking for almost 50% black. Some investors cannot exit with a high white component. Such properties are 20% lower the other all white deals sold by the builders. Like they say cash is king. In this case if you have cash you can negotiate any price. One of my friends put his house on the market. An offer was made within a day for 10% lower then the quoted price. For sellers the best thing is to decide the lowest price you are willing to take and then mark it up by 20%. People always like discounts so a 10% discount on a 120% marked price is better then a 5% on the 100% price. For buyers it makes sense to cut prices by atleast 20%. Give reasons like loan is not available for that amount. Funds are available but deployed elsewhere. This gives a sense of relief to the seller that even though you may not buy the flat, atleast you are capable of making funds available at some point in time and he is not dealing with a someone with an empty wallet.
Another person I met put his house on the market and got a quote right away, again at 10% below. This made me smart and I tried to do the same. I put my parents house and priced it 25% up and told this to the broker. The broker is like 'bahut jyaada quote kar rahe ho'. I know then that the rate I've quoted is what I should not be paying to buy the apartment from the broker.
In today's market in Mumbai it makes no sense to buy directly from the builder. The builder has already sold many properties to investors who keep rolling their money with him so the price is already higher then when the first flat got sold. In fact by buying the property you are decreasing the already reduced inventory and causing the price rise for the next buyer.

Secondly there are a plethora of taxes imposed by the government, BMC and other departments. This is true for all cities where I've looked. Pune, Chennai, Bangalore, Mumbai are all the same when it comes to government fees, all these fees are up some even by 40-50%.
There is Service tax due which can be almost be 3% of the total agreement value. There is VAT, impact fee, premium housing fee all which add to the underlying house price. The government sees this as a quick way to make money since they expect most of these prices to get passed down to the housing loans of the buyers
Its best for somebody else like the investor to pick up the taxes and you get what you pay for. The investor is happy to exit at the agreeable price so even though he makes money, he saves you money since the newer fees from the builders are much higher. Investors are also happy to negotiate a discount to the builder so your final price is also lower then what a builder will charge you.
In Chennai the first sale is registered at the UDS (undivided share of land) value, a fraction close to 10-15% of the full apartment value. If you buy an apartment from an investor before registration you can easily save the 9% registration cost of the full price plus you get an almost ready apartment if you buy an apartment nearing construction
Everywhere I've seen investor flats seem to be the best bet for any underlying house purchase

The Eurozone's Flat Jobless Rate Maskes a Chasm Between the “Core” Economies and the “Peripheral” Group

2010-09-01T01:56:00.000-07:00

Financial Times:

Robust growth in the eurozone in the second quarter failed to dent its near-record unemployment rate, which remained flat for a fourth consecutive month in July, although prospects are brighter for the revived German economy.
The 10 per cent overall eurozone figure once again masked a chasm between the “core” economies led by Germany, which are doing well, and the “peripheral” group, such as Spain, which continues to struggle.

Germany’s seasonally adjusted unemployment rate, as measured by the European Commission’s statistical arm, remained flat at 6.9 per cent in July, below its own pre-crisis levels, though its national figures point to a small decline in joblessness.

By contrast, Spain’s unemployment rate nudged up to 20.3 per cent, the highest figure ever seen in a eurozone country since the single currency was introduced in 1999. In Spain, 41.5 per cent of young people are now looking for work, compared to 19.6 per cent across Europe.
Joblessness in Ireland also rose, from 13.3 per cent to 13.6 per cent, but fell in Portugal from 11.0 per cent to 10.8 per cent; Greece no longer releases monthly data.

Read More:

The Euro Crisis and the Coming Euro Collapse Act II- Time to Check How Austerity Is Going

The Mirror Images of the Spanish and German Economies

The Euro Crisis- a Look at Spain's Great Depression

The Greek Shipping Sector Is Left to Rust

2010-09-01T01:40:00.000-07:00

Read more at Euro Crisis

Kathimerini:

Greece is a major player in international shipping, yet it is surprising to see how poorly it has taken advantage of its position of power and in maximizing the benefits it could bring to the economy as a sector and as a whole.
One of the biggest factors that is to blame for this situation is the hard-core unionism that has essentially destroyed the country’s ability to serve as a hub for shipbuilding and vessel repairs over the course of the last few decades. Now the European Union is considering issuing a directive that will abolish the rights stemming from the Greek Shipping Register.

Greek shipping has become as strong as it has thanks to the fact that the state has stayed out of its operations. But it is clear that successive governments have failed to develop parallel services that could have been major revenue sources, such as in restoring the country’s shipyards to full operational capacity.
The reason for this is a lack of professionalism, the union movement and the inability of the Greek state to respond to the needs of the times.

The Coming Euro Collapse and the Greek Economic Crisis: Losers Eclipse Winners in H1 Results

2010-09-01T01:36:00.000-07:00

Read more at Euro Crisis

Kathimerini:

number of companies that reported a loss for the first half of the year outnumbered those in the black for the first time in the history of the Athens bourse, according to data prepared by a brokerage and released yesterday.
Final figures show that collective data from 265 balance sheets combine for losses of 1.37 billion euros versus a profit of 2.99 billion euros in the same period year earlier.

Data from brokerage Pegasus showed that of the 265 companies, 144 posted a loss, with 50 of them sinking deeper into the red, while 57 of them had made a profit in the first half of last year.
Of the 121 that showed a profit this year, 24 reported earnings growth, while 79 of them saw earnings fall from last year’s levels.

The calculations indicate that if the companies had not had to pay a one-off tax levy imposed on corporate profits by the government to boost state revenues, they would have added 581 million euros to their profits.
“This is not the first time that companies are showing losses. Losses which reached more than 1 billion euros also appeared in the last quarter of 2008 and 2009. What changed dramatically this time is the large number of loss-making companies,” said analyst Manos Hatzidakis, in charge of strategic investments at Pegasus Securities.
“For the first time in the history of earnings numbers being published, the number of companies with a negative bottom line exceeded those with a profit – at a ratio of 54:46 – confirming a trend seen in the last quarter of last year. The significance of this development has multiple messages for investors, bankers and tax collectors,” Hatzidakis added.

Credit Flow in Greece Slows to a Trickle

2010-09-01T01:30:00.000-07:00

Read more at Euro Crisis

Kathimerini:

Loan growth continued to slow in July, reflecting the tight liquidity conditions that have been putting the squeeze on the majority of business, according to Bank of Greece data
Credit expansion to businesses and households in July slowed to an annual pace of 2 percent, from 2.4 percent in June and 2.8 percent in May.
Total private sector debt at the end of July reached 261 billion euros, versus 262.3 billion in June and 255.6 billion in May. Tight liquidity conditions are affecting 86 percent of businesses – which are already hurting from plunging consumption – according to recent survey results from the Athens Chamber of Commerce and Industry (EBEA).

Finance Minister Giorgos Papaconstantinou told Parliament earlier this month that lenders interested in seeking financial support from a 25-billion-euro bank plan will need to tell the government the rate at which they expect to pump money into the economy by disclosing credit growth plans.

Meanwhile, Alpha Bank, the country’s third-largest lender was hit by a one-off tax, higher provisions and weaker loan growth, Alpha Bank’s first-half net profits fell 82.2 percent year-on-year, to 38.2 million euros. Analysts were expecting a figure of about 23 million euros.

Anglo Irish Digs Deeper Hole

2010-08-31T16:01:00.000-07:00

Read more at Euro Crisis

Wall Street Journal:

Anglo Irish Bank Corp. Chief Executive Mike Aynsley on Tuesday put a €25 billion ($31.7 billion) estimate on the Irish government's bill to bail out the bank, as it reported a huge first-half loss and said it will seek to wind down at least 80% of its business over 10 years.
Ireland has injected €22.88 billion into the bank since it was nationalized in January 2009, the biggest of a series of bank bailouts as a decade-long boom in Ireland's economy reversed sharply. The country's borrowing costs have soared in recent weeks amid worries that the final bill for recapitalizing the banking sector could reach €90 billion or more.
Anglo Irish's CEO says the bank will need another €1.5 billion to €2 billion. Above, the headquarters in Dublin. For the first six months of 2010, Anglo Irish Bank posted a net loss of €8.21 billion, reflecting a €3.5 billion loss on assets sold to National Asset Management Agency, a body set up to handle Irish banks' bad loans, and €4.9 billion in impairment charges.
Mr. Aynsley said he anticipates the bank will need another €1.5 billion to €2 billion to help cover losses from transferring additional assets to NAMA at discounts to face value of as much as 60%. Any additional commitments would depend on the state of the Irish economy and the bank's ultimate restructuring plan, he said.

Mr. Aynsley said a plan to hive off at least 80% of Anglo Irish Bank's assets into a wind-down vehicle and set up a viable "good bank" with the remaining, better-quality assets is "the best alternative to recoup state aid or a portion of the state aid and limit the costs for the Irish taxpayers."

He said the initial plan was to give the new bank a starting loan book of between €15 billion and €17 billion, but that it had been reduced to about €12 billion as the bank's bad loans continue to mount. Impaired loans at June 30 totaled €34.5 billion, or 54% of loan balances, and Anglo Irish Bank said 65% of its loans are considered at risk of becoming impaired.

"What's critical when we identify loans from the portfolio to go into the good bank is that they won't have problems in the future," Mr. Aynsley said. "As we have gone through the process, Ireland has deteriorated throughout the year, so the planned number of loans has been progressively downsized."
Mr. Aynsley said the bank and Ireland government ministers are in "very advanced talks" with the European Commission over the plan, which requires approval because of the €22.88 billion in state aid already received and expectations of additional state support.
Ireland Finance Minister Brian Lenihan Tuesday said final documents were submitted to the European Commission Tuesday, and that the government's central objective in providing support to the bank is to minimize the cost to taxpayers.
Several other European banks that received state aid have undertaken similar restructuring with commission approval, but decisions involve numerous factors such as domestic competition and the prospects for long-term viability. A spokeswoman for the European Commission said the plan is still being analyzed and a decision hasn't been reached yet.
In part because of Ireland's commitments to Anglo Irish Bank, Standard Poor's Corp. last week downgraded the sovereign's credit rating to double-A-minus from double-A, and estimated the government's bank bailout costs could reach €90 billion.
Two of the country's other major banks, Allied Irish Banks PLC and Bank of Ireland PLC, are part state-owned after a series of capital boosts. The ratings agency said Anglo Irish Bank might need as much as €35 billion in capital, a figure Mr. Aynsley rejected.
The cost of insuring Anglo Irish Bank bonds against default widened 0.25 percentage point Tuesday to 6.15 percentage points, meaning it would cost $615,000 to insure $10 million in bonds. The cost to insure Ireland's sovereign debt against default widened by 0.07 percentage point to 3.45 percentage points, or $345,000 to insure $10 million in five-year bonds. In early August, before the latest investor worries over Ireland's financial health, the cost was $200,000.

CBS News: Canada's Housing Bubble May Soon Burst

2010-08-31T12:29:00.000-07:00

Read more: Canada's Housing Bubble

CBS news:

As Canada's record housing costs continue to slide, an Ottawa-based organization is suggesting parts of the nation are in a housing bubble, which may soon burst. The Canadian Centre for Policy Alternatives is warning Canada may be facing a U.S. style housing bubble. (iStock)Prices in six of the country's largest housing markets have hit 30-year highs and are in bubble territory.
A report by the Canadian Centre for Policy Alternatives coming out Tuesday also says a U.S. style correction cannot be ruled out. The Ottawa-based think-tank says home prices are 4.7 to 11.3 times Canadians' annual income — much higher than historical comfort levels.
Sales are down 25 per cent since reaching a peak at the start of the year, but in major cities, home prices were up 13.6 per cent in June from a year ago.

The centre warns that a rise of one per cent to 1.25 per cent in mortgage rates would be enough to cause a housing crash similar to the one in the U.S.

The report says bubbles occur when housing prices increase more rapidly than inflation, household incomes and economic growth.

Stratfor Explains Rumormongering about the Unpopularity of Political Leaders Has Become a National Sport in China

2010-08-31T06:15:00.000-07:00

The rumors about Zhou thus reveal that the individual or group that first promulgated the story -- whether because they thought it was true or sought to tarnish his reputation -- was able to create a national phenomenon in a few days, and the government was unwilling or unable effectively to extinguish it. The subject matter, timing and size of the phenomenon is significant. The central bank governor's name has become a target of public scrutiny at a time of immense economic challenges, and his reputation has possibly suffered -- a wave of popular feeling by no means unusual in the West, but of serious interest in China, where popular criticism of government is a much more sensitive matter. Crucially, China's fifth generation leaders are preparing to take office in 2012

STRATFOR has confirmed that China's central bank governor, Zhou Xiaochuan, did not defect to the United States, having spoken with United States officials who refuted rumors, intensifying in China on Monday, that suggested he had done so.
The rumors originated Aug. 28 on an internet forum that STRATFOR has not been able to identify, most likely due to the Chinese government's censorship of the issue, which resulted in shutting down web pages and blocking search engine results on Zhou's name and words related to his supposed exit from the country. The unidentified original report attributed the rumors to a well-known Hong Kong newspaper, Ming Pao, which Monday denied having published anything of the sort. The People's Bank of China's official website highlighted pictures of Zhou in meetings dated August 30, likely in an attempt to quell the rumors, but the pictures themselves could not be confirmed as taken on that date.
At the time of this writing, the Chinese government still has not officially refuted the rumors, though officials have been reported off the record as saying not to trust the noise. It is not yet known whether the other aspects of the rumor -- that Zhou is under investigation for corruption or that the central bank is experiencing an internal political dispute -- are completely unfounded or sprung from some basis of fact that has not yet been discerned. Certainly, there was little reason to subscribe to the idea that Zhou was responsible for the loss of $430 billion connected with Chinese investments in U.S. Treasury bills -- an amount that could only have been hyperbole to begin with.
"Over the past decade, the Internet has transformed China, generating massive amounts of information and speeding up its dissemination, regardless of whether that information is factual."
More details will likely surface soon as Beijing moves to stomp speculation. But the story's rampant dissemination points to some significant facts about China's current situation.
Over the past decade, the Internet has transformed China, generating massive amounts of information and speeding up its dissemination, regardless of whether it is factual. The rumor mill has gotten bigger and more powerful. Falsehoods have proliferated as fast, or faster, than truths. In such a case, the Chinese government's tendency to censor websites and suppress controversial information, or merely not to provide transparency in dealing with public matters, suggests it does not want the rumors spread, which in turn creates the impression, whether intentionally or not, that they have a kernel of truth.

Rumormongering about the unpopularity of political leaders, whether due to their personalities or criticisms of their policies, has also spread wider and wider. While grassroots criticism of government can cause discomfort in an authoritarian system, China's leaders themselves have learned how to use the new media outlets to force debates into the open, promote themselves or challenge and undercut their political opponents. While high-level officials like Vice Premier Wang Qishan or Chongqing Party Secretary Bo Xilai have built their popularity through their openness and manipulation of new media channels, several others have seen their careers dashed after their incompetence or corruption was exposed on internet forums. Criticism of leaders has especially spiked during times of uncertainty and intense debate over China's economic policies, especially in recent years due to the global financial crisis and, most recently, wavering recovery and anxiety about the future.
In 2010 so far, rumors have surfaced that Chinese Premier Wen Jiabao -- the second most powerful leader -- would be ousted due to his economic leadership (not by any means the first time Wen's future has been in question). Also, chief banking regulator Liu Mingkang reportedly was nearly forced to step down in the spring, blamed for mismanaging the explosion of bank credit in 2009 and the attempt to coordinate bank fundraising schemes to replenish their capital afterward. So far, both these leaders have survived. Yet the Communist Party and government have also waged an extensive and politically influenced anti-corruption campaign over the past year, leading to the prosecution and conviction of a number of middle- and high-ranking officials. All of this is conducive to an atmosphere of speculation, and falsehood, about the fortunes of ranking officials.
The rumors about Zhou thus reveal that the individual or group that first promulgated the story -- whether because they thought it was true or sought to tarnish his reputation -- was able to create a national phenomenon in a few days, and the government was unwilling or unable effectively to extinguish it. The subject matter, timing and size of the phenomenon is significant. The central bank governor's name has become a target of public scrutiny at a time of immense economic challenges, and his reputation has possibly suffered -- a wave of popular feeling by no means unusual in the West, but of serious interest in China, where popular criticism of government is a much more sensitive matter. Crucially, China's fifth generation leaders are preparing to take office in 2012. Those in the party or state bureaucracy who seek to rise in the ranks, hold their turf or undercut opponents have only a short time to take action. The details and connections in this case are not yet fully known, and they appear to amount to little. But they point to deeper trends than the fate of one government official.

Edward Hugh Examines the Mirror Images of the Spanish and German Economies

2010-08-31T05:53:00.000-07:00

Read more at Euro Crisis

Edward Hugh:

The current generation of policymakers seem to be like Captains of large ocean liners, out there on the high seas, bereft of either compass or adequate charts, trying hard to calm there worried passengers by telling them nothing is amiss. But the charts are there, if only they would look at them, and in the present Spanish case, unlike the old refrain, the future is ours to see, and it has a name: Germany.
For those willing and able to examine our present situation with a reasonably open mind, a comparison of the recent history of the Spanish and German economies can prove illuminating, especially since, as I will argue below, there are strong structural homologues to be observed in the evolution of the two.
This post will contain comparatively few words (what a blessing!) since I will try and let the charts themselves tell their own story, in the hope that concepts which seem to be difficult to convey verbally, may be easier to grasp visually.

Consumer Boom
The first myth I would like to debunk is that it simply is not true that the Germans are a group of "non consumers", and inveterate savers. Back in the 1990s German private consumption enjoyed a huge boom, a boom which ground itself to a halt around the year 2000. It is only since 2000 that German private consumption growth has been lacklustre, and incapable of driving the economy. (I am using a Bloomberg chart here, since I don't have a long enough time series to hand to make my own version).

Now if we look at the same chart for Spain, we can see that private consumption growth enjoyed the same kind of "blossoming" that German consumption did between roughly 1999 and 2007.

Driven By Borrowing

But more than the phenomenon of the consumption boom in and of itself, what is interesting is what was driving it. Unsurprisingly we find the "usual suspect" - rapid increases in credit. Again, the following charts belie the idea that Germans have always been a nation of meticulous savers.

And again, the Spanish charts for mortgage increases tell a very similar (if even more exaggerated) story.

And it wasn't only households, corporates were busy at it too. Interestingly, corporate borrowing seems to have had a brief renaissance in Germany on the back of the current crisis.

Yet again, the only area in which Spain distinguishes itself is in the magnitude of the phenomenon. Spanish corporate indebtedness is a much, much more serious problem than German corporate indebtedness ever was.

When we come to look at the last set of loan charts, I would point of two features. In the first place, total private sector debt is not that different between the two countries, despite the fact that German GDP is around twice as large as Spanish GDP.

Patrick Chovanec Explains Why China Has Picked The Wrong Time To End Its Love Affair With Capitalism

2010-08-31T05:14:00.001-07:00

Andi Xie On China's Many Flaws

2010-08-31T05:12:00.000-07:00

Read more at China Bubble
Andi Xie:

China's GDP surpassed Japan in the second quarter of 2010. The international media gave this milestone considerable attention. The domestic media hasn't paid as much attention. As natural disasters, environmental degradation and property bubble at the center of attention, the domestic media isn't likely to focus on this number. Besides, China has 10.5 times as many people as Japan does. The same GDP still puts China's per capita income at less than a tenth of Japan's, which is hardly a moment to celebrate. Nevertheless, it would be useful to look back on how far China has come, study the risks in China's future, and, if the country can overcome the existing challenges, how much further the country can go in the next ten years.
China's economy took off in 2002: nominal GDP has grown at 18.5 percent, exports in dollars at 21.7 percent, and electricity consumption at 12.8 percent in the following eight years. (I extrapolated the economic performance for the remaining months of 2010.) In terms of levels the nominal GDP has increased by 2.9 times, exports by 3.8 times in dollars and 2.9 times in yuan, and electricity consumption by 1.6 times in eight years. Japan had similar performance in 1960s, Korea and Taiwan in 1980s. But, they were much smaller. What China has done is unprecedented in terms of scale.
When growth lasts many years, it makes a huge difference over time. It is the miracle of compounding. China and India had about the same value in GDP twenty years go. In 2010 China's GDP is roughly four times India's. There is little doubt that China has done many things better than India or most other emerging economies. Otherwise its economy couldn't be so much bigger in relative terms.
The "Reform and Opening Up" policies have been the center of China's economic policy in the past three decades. This has undoubtedly been the most important factor. China's exports have become the largest in the world from virtually nothing three decades ago and almost nothing two decades ago. In the last decade alone the exports have risen 5.2 times. Being the workshop of the world has been the most important part of China's economy so far. Without China's export success China's economy wouldn't be near where it is today.
Joining the WTO was the critical difference to the country's export success. It has given multinational companies the confidence to base so much production in China. As China's domestic market becomes big, it gives MNC's another powerful reason to keep production in China. No other country could offer the economies of scale from selling locally and exporting abroad plus low production cost.
China's production cost is no longer the lowest. Bangladesh's labor cost is merely one fourth of China's. Indonesia's labor cost was twice as high as China's before 1997. It is now comparable to China's and is rising slower. Some industries that don't require the supply chain all nearby are likely to leave China. Shoe and garment industries, for example, may move to other countries. But, most other industries will stay in China.
Infrastructure development has been China's second important competitive advantage. China has continually delivered strong infrastructure development due to the government's ability to mobilize resources. The state ownership of land and banks are the critical factors. Land and credit are usually the constraints to infrastructure development in most other countries. Without such constraints, China could go for size to achieve economies of scale.

The development of the national expressway system, for example, is a good example. Only an interconnected system of size could deliver economic benefits. A few isolated expressways couldn't deliver much benefit. This is due to the so-called network effect. In a dozen years China has completed over 60 thousand kilometers of expressways with another 30 thousand under construction. The expressway system has made the national population mobile, integrated villages and small cities into the national economy, and sharply decreased logistics costs.
The development of ports and industrial parks has made it possible for OEM industries to locate in China. Together with the highway system they have made it possible for China to become the largest export country in the world. Inability to build infrastructure quickly is perhaps the bottleneck in most developing countries. Money is a constraint in that regard but is not the most important. Land acquisition and government implementation capability are the most important barriers.
In addition to traditional infrastructure, China embraced early internet, the latest necessary infrastructure for a modern economy. When China decided to embrace internet in the 1990s, it laid the foundation for China to benefit from and be part of the global economy. It is hard to imagine that China could be where it is without internet. If China hadn't embraced internet, its economy today could be only half as big as it is.
Third, China's large and productive labor force has contributed more than any other factor to China's growth. Until five years ago, the nominal wage remained stagnant in nominal dollar terms for over a decade, even though labor productivity increased at nearly 10 percent per annum and total factor productivity at over 4 percent. Chinese labor's increased productivity showed up in declining prices for western consumers, rising profits for multinational companies, and rising tax revenues for Chinese government. This is why more and more multinational companies have come to China to produce, and Chinese local governments have invested more in infrastructure to attract them.
China's wages are rising from a low base. Many people are worried about China's competitiveness. As I mentioned earlier, some shoe and garment manufacturers may move to other countries. Other industries may do so but not without difficulty. And some may stay, but pass the higher cost on to consumers. They need to regurgitate some of the past price reductions. Also, multinational companies may have to accept lower profit margins. The consumer products that China exports retail for 3-4 times the factory-gate prices. There is plenty of room to absorb China's labor cost rise.
China's rapid growth has coincided with a weak dollar. The dollar index peaked in 2002 and has declined by one third since. The Tiger economies and Southeast Asia had very high growth from the mid-1980s to mid-1990s, which also coincided with dollar weakness. The dollar plunged after the Plaza Accord in 1985. A banking crisis kept it weak into the first half of 1990s. The tech burst in 2000 was really the trigger for the dollar weakness this time. It slowed capital from flowing into the U.S. The current financial crisis is keeping the dollar weak.

Is the dollar weakness during China's boom entirely a coincidence, since the triggers for the dollar's weakness could be indentified? Is the weak dollar a cause or the cause for the boom of China's or other emerging countries'? Or is the booming in China and other emerging economies causing the dollar's weakness?
I actually think the third scenario more likely. The U.S.'s economic problems originate in its declining competitiveness or the responses to it. The current banking crisis is due to Greenspan's loose monetary policy to support the U.S.'s living standard during its declining competitiveness. It led to a series of financial bubbles that sucked in capital to fund its persistent balance of payment deficit-a sure sign of declining competitiveness. The current financial crisis reflects the logical ending to this bubble policy. And, the crisis is causing so much pain, because the effect of cumulative competitiveness loss is showing through at the same time plus the usual consequences of a bubble bursting.
The previous two bouts of the dollar's weakness were due to a similar reason. The Nixon Administration de-pegged the dollar from gold in 1972, destroying the Bretton Woods System that pegged other currencies to the dollar that in turn pegged to gold at US$ 36 per ounce. The reason was that Europe and Japan gained competitiveness to the U.S. during the post-World War II recovery. What occurred in 1985 was like in 1972, recognizing further competitiveness gain by Europe and Japan. As the Tiger economies and Southeast Asia pegged their currencies to the dollar, they gained competitiveness again Europe and Japan and boomed accordingly.
China's industrialization is one factor for the dollar's weakness. Globalization in general, however, is more important. The development of IT and internet in particular has allowed multinational corporations to shift production to wherever the cost is lowest. China's infrastructure development has just made the relocation easier and faster. But, the fact that IT has made workers in developed and developing countries more equal to multinationals would inevitably cause the dollar to be weak.
While the dollar's weakness is due to globalization and technology, it has a byproduct of driving liquidity into emerging economies, in particular China. This will cause problems later in future.
A crisis always seems to follow a period of high growth in emerging economies. People tend to blame the crisis on slow growth. It actually gets the causality wrong. The problems that are allowed to accumulate during the high growth period cause both the slow growth and crisis. Nothing hides problems like high growth. Hence, there is a tendency among policymakers to prolong high growth as long as possible, hoping to grow out of all the problems.
The problems that China's economy faces today and the policy recommendations that many recommend bear resemblance to what had been observed during high growth in other emerging economies. History teaches us that one couldn't grow out of all the problems. The longer the growth lasts, the more intractable the problems are. Trying to grow out of one's problems inevitably leads to monetary excess. The weak dollar makes monetary excess supportable in the short term, as the external pressure restricting money printing is weak. It leads to bubbles. The asset appreciation then becomes the source of profit that justifies investment. A collapse is inevitable.
China's money supply has quadrupled between mid-2002 to mid-2010, growing at 19 percent per annum. Including the off balance sheet expansion of the financial institutions and underground financial activities, the ‘money supply' may have grown at 22 percent per annum. During the same period the nominal GDP has grown at 18.5 percent. Comparing the official GDP data to monetary data does not produce worrisome conclusions, as the two are about the same. The problems are (1) that the nominal GDP has really been inflated by property that is a bubble, i.e., the rapidly monetary growth is probably a bubble, and (2) that the real monetary growth is much higher.
China's electricity consumption grew at about 13 percent per annum between 2002-10. Historically, China's real GDP grew faster than electricity consumption. The ratio of electricity increase to GDP increase is called the elasticity. The elasticity was around 0.8 in the 1990s. In the current boom, heavy industries have taken the lead. The economy has become more dependent on electricity for growth. The elasticity should have increased. I suspect that it wouldn't be more than one. Hence, it is reasonable to guess that China's real GDP has grown at 13 percent in the past eight years. That would make GDP deflator, the broadest inflation gauge, at 4.5 percent.

The inflation has so far occurred mostly in land and commodities. The land price has increased by over ten times since 2002, thirty times in some hot coastal cities, and over one hundred times in the most speculative areas. For example, in many villages in Zhejiang Province, the land price has risen above 10 yuan per million mu to 100 times the price a decade ago. Even though the land is rezoned for urban use, the price can't be justified under any circumstance. It is nearly ten times the average land price in Britain for urban use. Britain's urban land prices are the highest among all major developed economies. It is reasonable to believe that China's land price is the highest among than all the major economies today, even though China's average wage is one tenth of the developed countries'.
The increasingly inflated land prices have shown up in the nominal GDP through rising property sales to over 14 percent of GDP last year. Moreover, so much investment has occurred due to the collateral value of land. Local governments have borrowed enormous amount of money (probably around 17 percent of total bank lending) to fund or subsidize investment for creating GDP. The loans are secured with land. Without the high land price it is impossible for this source of financing to be possible. As fixed investment is close to half of GDP and driven by government, it is easy to understand how the land bubble has accounted for a big part of the growth in this cycle.
Recent manufacturing investment, for example, is partly due to high land price. Local governments have been competing fiercely for manufacturing investment. Many companies have learnt to exact so much benefit from local governments that they put down no equity capital for investment. They often ask for free land and use the land as collateral for a bank loan. They then lease equipment from the manufacturers that obtain bank loans for the leases. Essentially, the equity capital is from the land donated by the government. This explains why so many companies have always had negative net cash flow but keep expanding. Indeed, expansion is critical to their survival, as they need new investment to bring in cash to sustain themselves.
Profit drives investment that in turn powers employment that then grows consumption. When profit is due to asset appreciation and not sustainable, it can lead to crisis. Large bubbles often occur during prolonged prosperity. People stop paying attention to risk and have excessive demand risk assets. It leads to an asset bubble that prolongs prosperity beyond the normal cycle time length. The more overextended the cycle, the more pain in adjustment after the bubble bursts.
Possibly half of China's bank lending is to the property related businesses or local governments that pledge land as collateral. While the current boom has catapulted China ahead of Japan as the world's second-largest economy, we must remember the excesses in this cycle and the need for an adjustment as soon as possible. Nothing reveals the vulnerabilities more than the banking system's exposure to unsustainable economic activities that depend on land appreciation. China should proactively bring about the needed economic adjustment.