Bluff of the Day: Germany Warns "Greece is No Longer of Systemic Importance For the Euro"

In the obvious bluff of the day, Euro zone No Longer Obliged to Rescue Greece, Merkel Ally Says.

Actually, the eurozone was never obliged to rescue Greece, and in fact did not rescue Greece. Rather the EU and Troika rescued European banks holding Greek bonds.

Here's the actual bluff.

In an interview with Rheinische Post newspaper published on Wednesday, Michael Fuchs also said Greek politicians could not now "blackmail" their partners in the currency bloc.

"If Alexis Tsipras of the Greek left party Syriza thinks he can cut back the reform efforts and austerity measures, then the troika will have to cut back the credits for Greece," he said.

"The times where we had to rescue Greece are over. There is no potential for political blackmail anymore. Greece is no longer of systemic importance for the euro."

Blackmail Potential

Curiously, there was little potential for blackmail years past when Greece ran a primary account deficit (Greece needed money from Europe to stay afloat), but now Greece has a tiny current account surplus (not counting interest payments).

Countries with current account surpluses are not dependent on foreigners to finance debt. This makes it all the more likely Greece can tell the Troika "go to hell".

Of course, Tsipras has made all kinds of pledges that would kill the surplus if carried out, but since when do politicians keep promises?

More than likely a default would wreck the Greece economy, but so does interest on €245 billion in "bailouts" for years if not decades to come. Tsipras may easily decide he has nothing to lose.

Ironically, if his economic proposals were better, Greece would indeed have everything to gain and nothing to lose by cramming this straight down the EU's throat.

Eurozone Financial Stability Contribution Weights

Country	Guarantee Commitments (EUR) Millions	Percentage
Austria	€ 21,639.19	2.78%
Belgium	€ 27,031.99	3.47%
Cyprus	€ 1,525.68	0.20%
Estonia	€ 1,994.86	0.26%
Finland	€ 13,974.03	1.79%
France	€ 158,487.53	20.32%
Germany	€ 211,045.90	27.06%
Greece	€ 21,897.74	2.81%
Ireland	€ 12,378.15	1.59%
Italy	€ 139,267.81	17.86%
Luxembourg	€ 1,946.94	0.25%
Malta	€ 704.33	0.09%
Netherlands	€ 44,446.32	5.70%
Portugal	€ 19,507.26	2.50%
Slovakia	€ 7,727.57	0.99%
Slovenia	€ 3,664.30	0.47%
Spain	€ 92,543.56	11.87%
Eurozone 17	€ 779,783.14	100%

The above table from European Financial Stability Facility

I posted the above table on Monday in Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand?.

Here's a second table I created today to put a potential €245 billion default into proper perspective based on percentage liabilities.

Responsibility in Euros

Country	Percentage	Greek Debt Responsibility
Austria	2.78%	6.79875
Belgium	3.47%	8.49317
Cyprus	0.20%	0.479465
Estonia	0.26%	0.62671
Finland	1.79%	4.3904
France	20.32%	49.79527
Germany	27.06%	66.308515
Greece	2.81%	6.88009
Ireland	1.59%	3.88913
Italy	17.86%	43.75651
Luxembourg	0.25%	0.611765
Malta	0.09%	0.221235
Netherlands	5.70%	13.96451
Portugal	2.50%	6.12892
Slovakia	0.99%	2.42795
Slovenia	0.47%	1.151255
Spain	11.87%	29.076355
Eurozone 17	100%	245

The idea that Greece is responsible to cover its own default is of course ridiculous, so mentally spread Greece's €6.88 billion liability to the other countries.

Italy's responsibility would rise by a little over €1 billion while Spain's liability would rise by a little under €1 billion. Germany would need to pick up about €2 billion, and France about €1.5 billion etc.

Where is Spain going to come up with €30 billion? Italy €45 billion? France €51 billion?

The simple answer is they aren't. So, does the ECB print the money in violation of rules and pass it out?

If not, who's bluffing whom regarding "systemic importance" of Greece?

The irony of the day is that Greece was no systemic threat to the eurozone until the Troika foolishly threw  €245 billion at Greece hoping to prevent a default.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Vermont Throws in the Towel on Inane Single-Payer "Medicare for All" Proposal; Live and Let Die; Why Does Single-Payer "Work" in Europe?

Proponents of the single-payer healthcare idea who tout the idea such a system will save money need only look at Vermont to see reality.

Vermont Governor Peter Shumlin, a single-payer advocate, threw the single-payer idea on the ash heap of history admitting what any sensible person knew from the onset:

• The plan would cost far more than estimated
• The plan would quickly become insolvent
• Massive tax increases would be required
• Coverage would decline for many

MainWire explains in Lessons for Maine in Vermont’s Failure.

Last Wednesday, Vermont Governor Peter Shumlin announced that he was abandoning his plan for a single-payer health care system for the state, finally admitting in an unexpected news conference that it is “not the right time.”

As one most liberal states in the nation, Vermont has faced years of internal pressure to adopt government-run health care. Shumlin made single-payer health care a major feature of his recent re-election campaign, and until last week, seemed to be blazing a trail towards the first single-payer system in the U.S.

His plan, which was designed partly by controversial Obamacare architect Jonathon Gruber, would have pushed for a single-payer – the state of Vermont – to pay health care costs, instead of private insurance companies. Nearly every Vermonter would have been required to be insured under “Green Mountain Care,” a state-run agency funded primarily through taxes rather than insurance premiums.

The cost for Green Mountain Care was estimated to be approximately $2.6 billion, an astounding $300 million more Vermont’s entire budget for FY 2015. The state would have needed an overwhelming 11.5% payroll tax on businesses and a new sliding-scale income tax of up to 9.5% just to get the program off the ground. Given that Vermont already boasts a top income tax rate of 8.95%, a 6% sales tax and 8.5% corporate income tax, these new taxes would have made Vermont the highest taxed state in America, by a significant amount.

Even with those new taxes, Shumlin’s administration predicted that Green Mountain Care would be drawing a deficit by at least 2020, meaning additional revenue or tax increases would be needed in the near future.

Supporters assert that despite the huge tax increases, a single-payer system is ideal and could actually save money. They maintain that a single-payer system would lower health care spending by way of decreased administrative costs, discounts for buying bulk insurance, and lower reimbursement rates for hospitals.

However, there’s plenty of evidence to suggest that none of the above would or could happen in America. Medicare and Medicaid (government insurers already in existence) do not have significantly lower administrative costs. Large insurance companies already buy in bulk and purchase more plans than entire countries that utilize the single-payer system. And while slashing reimbursement rates may sound good for taxpayers, it would also mean drastic pay cuts for hardworking doctors, nurses, receptionists, and technicians. No politician in their right mind would ever cut health care reimbursements, or at least not to the point where taxpayers would see any benefit.

Another major issue that Vermont encountered is the level of coverage to provide in a single-payer system. Instead of having consumers purchase health insurance based upon their needs or income, the single-payer model favored by Vermont forces everyone to pay for the same amount coverage, regardless of health care requirements. With all citizens reduced to a single coverage level, Vermont was faced with the catch-22 of choosing between a low or high coverage level, and deciding whether they wanted to decrease or increase coverage for many of their residents.

In the end, Vermont chose platinum level coverage for all, reasoning it wasn’t fair to force anyone to decrease the quality of their insurance plan. While this was a polite gesture, it was nonetheless an expensive compromise, and a definite factor in the plan’s eventual failure.

Proponents of "Medicare for All" Rally

In spite of the obvious ridiculousness of "Medicare for All", Politico notes that proponents refuse to throw in the towel.

Advocates of a single-payer plan said Shumlin should not be able to cast aside Act 48, the 2011 law that called for the creation of Green Mountain Care, without repealing it. A group planned to hold a rally in front of the statehouse on Thursday to protest his decision.

“The governor’s misguided decision was a completely unnecessary result of a failed policy calculation that he pursued without Democratic input,” the group Healthcare Is a Human Right Campaign said in a statement.

Gruber Poison

Shumlin's plan was designed partly by Obamacare architect Jonathon Gruber. Thus, it's no wonder the plan was overoptimistic in what it could achieve.

Gruber is an admitted liar who will stop at nothing to get universal healthcare. As I noted on November 11, Gruber stated "Stupidity of American Voter" Needed to Pass Obamacare.

For his lies and deceit, he was paid $400,000 by the Obama administration. Vermont also paid the liar.

From Politico ....

Gruber, now infamous for his blunt assessments of the Affordable Care Act and his remarks about “stupid” voters, was until recently a state consultant. Days after the election, video emerged of him dismissing criticism of Vermont’s plan in 2011 by asking, “Was this written by my adolescent children, by any chance?” State officials said they would cut off his contract.

Activists in California, Hawaii, New York, Illinois, Washington, Massachusetts, Ohio, Oregon and Pennsylvania still pursue their fantasy.

Vermont’s outcome is a “small speed bump,” said New York Assembly member Richard Gottfried, who’s been pushing single-payer bills for more than 20 years. Gottfried has been introducing his New York single-payer bill every year since 1992. The cause is “not for the faint of heart.”

Why Does Single-Payer "Work" in Europe?

Proponents of single-payer say countries in Europe proves the model works. But what does "work" mean?

The answer is enormous taxes, control of doctors' salaries, control of nurses' salaries, control of drug costs, etc., etc. In other words, government-run everything is why the model appears to work.

In the US, control of all of that is impossible, thankfully. When accurate assessments of tax hikes are imputed, no one wants to pay.

Single-payer advocates in the US don't want any controls even though US citizens are the most obese in the world and the most resistant to "rationing".

People expect the "free lunch" that liars like Gruber promise.

Live and Let Die

"Medicare for all" cannot and will not work in the US because the US is not willing to become France or Sweden. Meanwhile, government interference in the free markets has given the US the worst of possibilities.

The solution is not "medicare for all" with government controls over everything but to live-and-let-die.

Massive amounts of money in the US are wasted keeping people alive for another six months or less, in great pain. This holds true even for those without insurance.

Heck, it even holds true for the already dead!

Terri Schiavo Case

Let's not forget the Terri Schiavo Case. By any practical measure, Terri Schiavo was dead. She had no functioning brain. Yet it took a 7 year battle for her husband to get the right to remove her feeding tube.

George Bush signed legislation to keep her alive. in 2003 Florida Governor Jed Bush signed "Terri's Law" forcing the state to keep a dead woman breathing against the wishes of her husband.

Once someone is terminal, without proper insurance, nothing other than comfort drugs should be given. And in regards to drugs, the US has the highest prescription drug prices in the world because of import restrictions.

Obamacare will not let insurers charge more for smokers or obese. There are many healthcare cost items a free market could solve.

At what point do we say "you get food, comfort care, and pain relievers" but that's it? 

Instead, we suffer with the worst of both systems, unwilling to become France or Sweden for tax purposes, unwilling to ration health-care based on life expectancy, and willing to pay the highest costs in the world thanks to very poorly written legislation.

It's time to scrap the whole damn thing and start all over.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

1000% Inflation in Venezuela?

Those looking for hyperinflation can find it in Venezuela. Here's the question of the day: How bad is Venezuelan inflation and how bad can it get?

Bloomberg reports Venezuelan 1,000% Inflation Seen by BofA Without Weaker Bolivar

Venezuela President Nicolas Maduro, set to announce a new currency system today, needs to devalue the bolivar or risk inflation passing 1,000 percent as soon as next year, according to Bank of America Corp.

Under the current system, Venezuela’s overvalued bolivar means that the government effectively sells the dollars it gets from oil exports at a discount, compelling policy makers to print extra currency to cover domestic spending needs. Currency controls that limit Venezuelans’ access to dollars have spawned a black market in which the greenback fetches 172 bolivars, compared with officially sanctioned exchange rates that range from 6.3 to about 50 bolivars per dollar.

“If we don’t see a large adjustment of the exchange rate, we’re almost certain to have triple-digit inflation and I wouldn’t be surprised to see the economy veering into four-digit annual inflation,” Francisco Rodriguez, the chief Andean economist at Bank of America, said by phone from New York on Dec. 28, before Maduro scheduled his announcement. The government “needs to print money to finance the deficit and it is running a deficit because its revenues in bolivars are too low.”

Maduro said in televised speeches earlier this month that he saw no need to cut the government subsidies that leave gasoline selling for 6 cents a gallon, and that he will keep a 6.3 bolivar-per-dollar fixed exchange rate for priority imports.

The most recent official data is that annual inflation in Venezuela was 63 percent in August, the fastest in the world. A more up-to-date estimate based on the depreciation of the bolivar on the black market is 183 percent, according to Steve Hanke, a professor of applied economics at Johns Hopkins University and director of the Troubled Currencies Project at the Cato Institute.

The bolivar weakened 42 percent on the black market in the fourth quarter, according to data from dolartoday.com, outpacing even the 29 percent decline in the Russian ruble. Both currencies have been pressured by declines in price of oil, which makes up 95 percent of Venezuela’s exports and is the country’s principal source of hard currency.

With no access to international capital markets and falling revenue from oil sales, Maduro is dependent on loans from allies or on printing more money to plug his growing budget deficit.

“If they continue with their social welfare and income redistribution programs, they’ll be forced to run the printing press at an ever accelerating rate,” Hanke said. “There is tremendous pressure on them to keep spending and their sources of financing have dried up.”

Venezuela’s M2 money supply, a measure of the amount of bolivars in the economy that includes bank notes in circulation as well as retail savings, rose by 64 percent in the past 12 months. That is three times as fast as any other country tracked by Bloomberg.

Curious Headline

The Bloomberg headline "Venezuelan 1,000% Inflation Seen by BofA Without Weaker Bolivar" is rather curious given a weaker bolivar and Venezuelan inflation go hand in hand.

In isolation, the headline makes little sense.

However, the article explains Venezuela is bleeding foreign reserves in an effort to defend the official exchange rate and also to provide subsidies.

Selling gasoline at 6 cents a gallon is ridiculous. Can anyone really get gas at that price? If so, how much?  Black market siphoning of gas to sell at higher rates elsewhere has to be going on.

Regardless, and as I have pointed out before, foreign reserves and hard cash from oil sales are the only things preventing a total collapse in the bolivar.

Once reserves are gone, there will not be merchandise in stores at any price, let alone the nonsensical official rate of 6.3 bolivars per dollars.

The black market rate of 172-per-dollar vs. the official rate of 6.3-per-dollar is a decline of 96.34%. That's not as bad as Zimbabwe, but Maduro is surely trying.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Gmail Dead in China, All Google Products Blocked; Reserve Currency Silliness Review

Access to Gmail in China was difficult, but not impossible. Workarounds included Outlook, Apple Mail, and third-party Gmail hosts.

Starting last Friday, the "Great Firewall" became nearly impenetrable as China’s Censors Took Final Step in Blocking Gmail.

In the six months since Google’s mail service Gmail was blocked in mainland China, users had been able to access it using third-party email applications such as Microsoft Outlook or Apple Mail.

Beijing now appears to have closed the loophole, completely shutting down access to Gmail behind the so-called Great Firewall. Google data showed Gmail appeared to have been walled off starting Friday. Google spokesman Taj Meadows acknowledged the drop in traffic and said Monday that “there’s nothing wrong on our end.”

Google clashed with Beijing in 2010 after the company decided to stop censoring its Internet search results in China. Google shifted most of its Chinese operations to Hong Kong as a result, and it has been hard since then to access the company’s services on the mainland.

As with Google search functions, Gmail users will now have to access the application through virtual private networks or other censorship circumvention channels, putting the email service on par with Facebook and Twitter in the eyes of Beijing censors.

Reserve Currency Silliness

China has no sizable bond market, no floating currency, few political freedoms, no freedom of speech, massive censorship, and questionable property rights, yet every week I see some article promoting the idea that the yuan will soon replace the dollar as world's reserve currency.

The idea is laughable. Lack of a bond market in sufficient size is enough to kill the notion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Snap Elections in Greece; 3-Year Bond Yield Tops 12%; Potential Cascade! Who Has the Upper Hand?

Despite fearmongering by Greek prime minister and the EU, prime minister Antonis Samaras fell 12 votes short of a needed majority to elect a new Greek President.

As a result, snap elections will be held on January 25.

Stavros Dimas, a former EU commissioner, captured 168 votes in Monday’s decisive third presidential ballot,12 short of the required three-fifths majority after a weekend of frantic backroom politicking failed to round up additional votes from independent lawmakers and small opposition parties.

A sombre-looking Mr Samaras said in a televised statement: “It’s time for voters to do what parliament couldn’t — end uncertainty and restore stability so that we can continue with reforms and make a decisive exit from the bailout.”

“Be optimistic and cheerful, austerity will soon be over,” said Alexis Tsipras, Syriza’s firebrand leader, as he left parliament after the vote. “The Samaras government which looted society and decided to take further austerity measures is finished.”

Along with the IMF and the European Commission, the ECB played a key role in overseeing the four year €245bn bailout of Greece. “The ECB holds the key,” said Greek finance minister Gikas Hardouvelis in an interview with Greece’s To Vima newspaper on Sunday. He added: “This key can easily and abruptly turn off bank funding and strangle the Greek economy in a split second.”

Commenting on Monday’s vote, Wolfgang Schäuble, Germany’s finance minister, said in a statement: “We want to give Greece further support on its path of reform, helping it to help itself. If Greece chooses another way, it will be difficult. New elections will not change any of the agreements made with the Greek government. Any new government must keep to the contractual agreements of its predecessor.”

Opinion polls at the weekend gave Syriza a lead of 3-4 percentage points over Mr Samaras’s centre-right New Democracy party, but pollsters say it is unclear whether this would be sufficient to ensure an outright majority at election.

Yields Soar

Greek stock and bond markets reacted with disapproval. The Athens stock market fell about 10% and Yield on the 3-year note sailed above 12%.



On August 24, yield on the 3-Year note fell to an absurdly low 3.14%. Today it sits at 12.15%.

 Potential Cascade to Spain, Italy

To prevent default on  €50 billion or so of Greek bonds, the Troika gave Greece a €245 billion bailout, a sum that will be impossible for Greece to ever pay back.

Yet, German finance minister Wolfgang Schäuble insists "new elections will not change any of the agreements made with the Greek government."

Either Germany changes its tune, or Greece may default on €245 billion. The following table shows what may happen.

Eurozone Financial Stability Contribution Weights

Country	Guarantee Commitments (EUR) Millions	Percentage
Austria	€ 21,639.19	2.78%
Belgium	€ 27,031.99	3.47%
Cyprus	€ 1,525.68	0.20%
Estonia	€ 1,994.86	0.26%
Finland	€ 13,974.03	1.79%
France	€ 158,487.53	20.32%
Germany	€ 211,045.90	27.06%
Greece	€ 21,897.74	2.81%
Ireland	€ 12,378.15	1.59%
Italy	€ 139,267.81	17.86%
Luxembourg	€ 1,946.94	0.25%
Malta	€ 704.33	0.09%
Netherlands	€ 44,446.32	5.70%
Portugal	€ 19,507.26	2.50%
Slovakia	€ 7,727.57	0.99%
Slovenia	€ 3,664.30	0.47%
Spain	€ 92,543.56	11.87%
Eurozone 17	€ 779,783.14	100%

The above table from European Financial Stability Facility

Who Has the Upper Hand?

Supposedly, Greece is responsible for 2.81% of its own default, quite illogical to say the least. Its portion would have to be spread out accordingly.

Spain's portion of a Greek default (not counting the extra spread) would be  would be 11.87%.

Where is Spain supposed to get €29 billion or Italy €44 billion?

Yes, the IMF and EU could ruin Greece. But if Greece wants to play hardball, it actually has the upper hand.

One way or another, sooner or later, a significant portion of that €245 billion bailout (not of Greece, but of bondholders) will not be paid back.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

China's Zombie Factories Provide Illusion of Work and Prosperity; Rebalancing Chinese Style

China has zombie malls and even zombie cities, so zombie factories can hardly be a surprise. And as the malinvestments pile up, so do unrealized shadow bank losses.

The Financial Times reports China Zombie Factories Kept Open to Give Illusion of Prosperity.

In the shadow of a group of enormous smokestacks and abandoned foundries, a peeling sign welcomes visitors to the Wenxi Steel Industrial Park.

Highsee stopped paying its 10,000 employees six months ago. Local officials estimate the plant supported indirectly the livelihood of about a quarter of Wenxi county’s population of 400,000. Highsee was the biggest privately owned steel mill in Shanxi, accounting for 60 per cent of Wenxi’s tax revenues. For those reasons, the local government was reluctant to allow the company to go out of business, even though it had been in serious financial difficulties for several years.

“By 2011 Highsee was already like a dead centipede that hadn’t yet frozen stiff with rigor mortis,” says one official who asks not to be named because he was not authorised to speak to foreign reporters. “More than half the plant shut down, but it was still producing steel even though its suppliers wouldn’t deliver anything without cash up front and it was drowning in debt.”

In the past month alone Chinese media have reported on at least nine large steel mills that appeared to be suspended in limbo after halting production but which are forbidden from going formally bankrupt.

“There are large numbers of companies across China that should go bankrupt but haven’t done so,” says Han Chuanhua, a bankruptcy lawyer at Zhongzi Law Office, a Beijing legal practice. “The government doesn’t want to see bankruptcy because as soon as companies go bust, unemployment spikes and tax revenues disappear. By stopping companies from going bankrupt, officials are able to maintain the illusion of local prosperity, economic growth and stable taxes.”

The outstanding volume of non-performing loans in the Chinese banking sector has increased 50 per cent since the beginning of 2013, according to estimates from ANZ, the Australian bank, but the sector-wide NPL ratio remains extremely low, at just over 1.2 per cent.

In private, however, senior Chinese financial officials admit the real ratio is almost certainly much higher, obscured by local governments trying to prop up companies.

Rebalancing Chinese Style

As part of China's rebalancing effort, growth must slow (or an even bigger crash will come later), and shadow banking losses recognized. So far, all we see is the slowdown in growth.

Even then, China recently cut interest rates hoping to keep the illusion alive (as some might see it), or smooth the transition (as others might see it).

Regardless how one sees it, these closures are at the back end of a collapse in commodity prices as China moves from an investment (malinvestment) driven pattern of growth, to a consumer-driven pattern of growth.

The transition will not be easy. The SOEs (state-owned-enterprises), the regional governments, and all those who got wealthy from the prior boom will not let go easily.

Nor it seems will the central government. Failure to recognize absurdly high deposit rates are proof enough.

For a look at unsound deposit rates, please see Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits.

For more on rebalancing implication, please see Pettis on Strains in China's Banking System; Avoiding the Fall.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Read More

Spain to Issue €55 Billion in New Debt, 72% to Roll Over Existing Debt; Interest Rate Perspective

Spain's regional and local governments are struggling to pay back debts. The central government has not made much progress either.

El Economista reports 72% of Treasury Issuance in 2015 to Refinance CCAA and Municipalities.

Of estimated €55 billion debt increase for 2015, 72 percent of that amount will be to regional governments and municipalities through new mechanisms created to ease the burden of regional debt and also provide liquidity to local authorities for other policies (through the Fund Management, targeting the most indebted and Economic Promotion Fund for sustainable investments).

The €55 billion debt increase announced Friday is the same as last year, but is €8 billion superior to that which was announced last September.

Debt Increase Year by Year

Guru Huky has some interesting charts in his post Spain will Increase National Debt by €55 Billion.

.

Since 2008, Spanish debt has increased by €600 billion.

Guru notes "Since 2012 we had a tax increase that completely screwed the middle class of this country. And yet we continue with a cruising speed of new debt generation of more than €50 billion a year."

Interest Rate Perspective



click on chart for sharper image

In spite of the fact that yield on the 10-year government bond is a record low 1.67%, Spain tacks on more debt year after year.

For comparison purposes, the yield on 10-Year US notes is 2.25%.

Like Japan, Europe cannot stand higher interest rates.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Russia Debt One Grade Above Junk With Downgrades Coming, How Likely is Default?

All three rating agencies are expected to downgrade Russia's debt to junk soon and bailouts to Russian banks are on the rise, but how likely is default?

The Financial Times reports ...

Russia trebled the size of its bailout of troubled lender Trust Bank to Rbs99bn ($1.9bn) on Friday, laying bare the growing financial fallout from its currency crisis and the slump in the price of oil, its main export.

The rapidly rising cost makes the rescue of Trust bank, which foundered as the rouble collapsed early last week, the second-largest seen in Russia. It has now consumed a tenth of the money earmarked by the government last week for bank bailouts.

The authorities also said they would spend Rbs320bn ($5.9bn) propping up two other banks. Anton Siluanov, finance minister, said state-owned VTB, the second-largest lender by assets, could receive Rbs100bn before the end of this year and another Rbs150bn in 2015, while Gazprombank could be allocated Rbs70bn.

Trust Bank was the first financial institution to fall victim to the currency crisis as it suffered a run on deposits by customers panicked by the steep drop in the rouble’s value, which at one point on December 16 plummeted to an all-time low of 80 against the dollar.

The central bank said that the state-run Deposit Insurance Agency would provide Trust Bank with up to Rbs99bn. It would give an additional Rbs28bn loan to Bank Otkritie, one of Russia’s largest private lenders, to restructure Trust Bank, with the two then merging by the end of 2020.

Foreign Reserves

Although US and EU sanctions make it difficult for Russian companies to obtain financing, and although the Russian banking system is a mess, sovereign default will only occur if Russia cannot meet its foreign debt obligations.

Russia has about $400 billion in foreign currency reserves, lowest since 2009, but foreign currency obligations for 2015 total about $120 billion.

On that score, the immediate risk seems slim. In fact, one has to wonder if the impending downgrade to junk is politically motivated.

Regardless, the US severely underestimates the fallout, especially to Europe, should default occur.

Sanctions are economic madness and Obama's claim they are working is preposterous. For further discussion, please see Russia Under Attack: Letter from CEO of Genoil to CEO of JPMorgan Chase on US Foreign Policy Blowback

Addendum:
Typo of $4000 billion corrected to $400 billion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Read More

Russia's Overnight Lending Rate Hits 19%, as Mistrust of Banks Spreads; Ruble Up Again

In Russia, the overnight lending rates between banks has soared to 19%, a sign of widespread and warranted mistrust between banks, as one bank has failed. To stabilize the situation, Putin is considering bank deposit insurance up to an amount equivalent rate of about $26,000.

Meanwhile, and although Russia is still burning through currency reserves, the value of the Ruble has been rising.

CNN Money reports Russia Empties the Vault to Prop Up Ruble.

So far this year the central bank has burned through more than $110 billion in foreign currency supplies. That's more than a quarter of what it has in reserves right now.

Spending has ramped up in the last few weeks. Since the start of December, the central bank has blown through more than $21 billion.

That, along with a series of other measures to support the banking sector, has helped to stabilize the ruble.

[Mish comment: Actually, blowing through reserves is destabilizing, but other measures such as the huge hike in interest rates is indeed stabilizing]

Russia is working on a plan to pump one trillion rubles ($18.6 billion) into Russian banks next year, and wants to establish deposit insurance to guarantee savings up to 1.4 million rubles ($26,000).

The ruble climbed nearly 6% against the U.S. dollar on Friday.

Still, Sberbank CIB chief economist Evgeny Gavrilenkov said the central bank's strategy of spending down foreign reserves was "not ideal," and pointed to stresses elsewhere in the financial sector.

[Mish Comment: Once again, I highly doubt the "strategy" is to spend foreign reserves to prop up the ruble. Rather, spending of foreign currency reserves is needed due to declining oil revenues. I suspect there are some seasonal influences in play as well.]

"The liabilities of banks and servicing [refinancing] debt is very costly now, so the banking system is vulnerable," he said.

Last week a local bank collapsed, and the rates Russia banks lend to each other have jumped. Overnight rates are now nearly 19%, indicating just how serious the funding crisis has become.

Spotlight on the Ruble



The Ruble is up from 79.917-per-US$ to 53.911-per-US$ since December 15 when I reported Moscow Hikes Interest Rates to 17% from 10.5% in Emergency Middle-of-Night Action.

That is a rise of about 48%. And hiking rates is how you stabilize a currency.

Deposit insurance, although I fundamentally disagree with it, should also stabilize things. All that remains is for Russia to stop the hemorrhaging foreign reserves and for oil to stabilize. Both will eventually happen.

I like the Ruble here and the Russia stock market as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Pettis on Strains in China's Banking System; Avoiding the Fall

In his last email of the Year Michael Pettis takes stock of the current state of China's rebalancing. It's an 18 page PDF, with no online link.

Taking Stock of China’s Transition by Michael Pettis

Special points to highlight in this issue:

• While policymakers almost certainly understand that the interest rate cuts announced by the PBoC two weeks ago will slow the pace of rebalancing, the asymmetry of the change in rates was designed to minimize the adverse impact on rebalancing, and indicate just how complex China’s adjustment is likely to be.
• Next year will be a very important year for China because possible strains in the banking system and the intensity with which the reformers present their case will give us a better sense both of how much debt capacity the country retains and of how well positioned Xi Jinping and his allies are to implement the needed reforms.
• The completion of [prior] reforms [under Deng Xiaoping] left China ready for an investment-driven growth model that delivered astonishing increases in wealth. It also delivered unprecedented imbalances. China’s leaders under Xi Jinping will once again have to liberalize the economy and dramatically change the institutional structure of power in spite, once again, of elite opposition.

I should start by saying that I was a little disappointed, but not terribly surprised, by the PBoC’s announcement two weeks ago that it would cut interest rates. The fact that rates were cut, even though many reformers within the administration were very much opposed, exemplifies the challenges that Beijing will face in 2015.

As China’s economy continues to slow, a lot of sectors, especially among the more heavily indebted, are suffering losses and running into cashflow problems. There have been calls by the tradable goods sector to depreciate the currency and even more urgent calls by the capital-intensive sector to cut interest rates. At the same time, however, there is also recognition that either move would slow the pace of rebalancing and increase the risk that China run into debt capacity constraints.

We are going to see this argument replayed many times in 2015.

All the various measures of inflation have dropped this year, with Monday’s data showing that the producer-price index dropped 2.7% in November, completing nearly three years of monthly declines. Consumer prices rose 1.4%, even lower than the 1.6% increase in October. As a result, real lending rates are strongly positive and real deposits rates are also probably positive.

I don’t expect either a sustained housing rebound or stable growth at current levels. The interest rate burden on Chinese businesses and state-related entities has certainly been much higher in 2014 than it was for most of this century.

While the benchmark deposit rate was officially lowered from 3.00% to 2.75%, the upper limit that banks can pay for deposits remained unchanged at 3.30%. It may seem strange to have both a benchmark rate and a “floating range” that establishes a cap, instead of just setting a cap, as was the case until very recently. The official reason for separating the two is that the “floating range” represents a partial liberalization of deposit rates. By widening the floating range, we are told, the PBoC is gradually eliminating the deposit cap until eventually banks will be able to set any rate they want.

Because banks were always allowed to set deposit rates below, but never above, the benchmark rate, so that it was effectively the cap until recently, the logic seems a little faulty, and it is hard to see why this represents the gradual liberalization of deposit rates. But there could nonetheless be a real impact on deposit rates that depends on a kind of “benchmark illusion”.

At first, the new deposit rate rules set last week seem to have had the expected effect. Within two weeks, however, three of the big four banks raised rates back to the upper limit, suggesting that the competition for deposits may be pretty fierce.

Reducing Consumption Will Not Increase Prices

It is widely accepted in most economies that lowering interest rates is an appropriate response to fending off deflationary pressures, which are a huge potential problem for a country whose local governments and major institutions are as heavily indebted as those of China, but as I have argued many times before, the mechanism that converts monetary easing into inflation in countries like the US works very differently in China.

In fact lower interest rates are likely to be disinflationary in China, not inflationary, and for the same reasons I have been arguing for the last two years that a depreciating yen would be disinflationary for Japan. In either case they reduce consumption demand relative to production.

Normally, lower interest rates are likely to increase consumption in two ways. They lower mortgage and consumer financing costs for households, who represent a substantial portion of total borrowing, allowing them greater spending power. They also tend to be associated with rising stock and real estate markets, which, by making households feel wealthier, encourages higher consumption. If together these two effects increase demand faster than lower rates increase production (as businesses take advantage of cheaper financing to expand production facilities), there is likely to be upward pressure on prices. Depreciation can also be inflationary, but in a different way. It causes the price of imported goods to rise and these can feed into local inflation.

But in cases where consumption is a relatively small part of total demand, in which household savings are high and tend to occur in the form of bank deposits, and especially if most new credit is allocated to producers rather than consumers, lower interest rates actually reduce consumption by reducing household income (lowering the return on savings), and increase production by lowering financing costs for producers. The same can happen with currency depreciation, which reduces disposable household income by raising import prices while subsidizing the tradable goods sector. In cases like China and Japan, the net effect is more likely to increase total production of goods and services by more than it increases total consumption, so that the pressure on prices is disinflationary, not inflationary.

For years we have seen massive monetary expansion in China accompanied by low consumer price inflation, and most of that inflation was anyway driven by higher food prices, which were caused not by loose money but rather by agricultural shortages. For the past three years we have also seen the yen depreciate by nearly 40%, and yet not only has there been no corresponding increase in Japanese inflation, but we are constantly surprised by much weaker-than-expected consumption. Disinflation and even deflation, in other words, is going to be very hard to fight.

Why is it so hard to implement policies that rebalance an unbalanced economy? Part of the reason of course may simply be that policymakers rely on faulty economic analysis, and it is clear that even as late as 2010-11 most China specialists did not understand the systematic nature of China’s unbalanced growth and the dangers of its over-reliance on investment. Even today, while most economists have finally come around to acknowledging that China has a debt problem, it is rare to see in any of their medium-term economic growth projections assumptions that explicitly incorporate debt and the deleveraging process into their models.

This makes their models almost useless. Nearly all the historical precedents suggest that highly indebted economies grow well below potential because of the impact of financial distress, while logic suggests that if growth was boosted by credit expansion, credit contraction must have the opposite effect. Economists even seem to have misinterpreted the pro-cyclical nature of rapid credit expansion. Rapid credit expansion is highly self-reinforcing because it both creates and responds to rising growth expectations.

For this very reason, the fact that Chinese growth regularly surprised on the upside during the phase of rapid growth should imply that it will also surprise on the downside as the economy slows. And yet most analysts have interpreted the former as implying that policymakers in China were especially capable, and so they assumed that the same high-quality economic management would ensure that the subsequent slowdown would be much less than expected. This isn’t the first time, of course, that the balance-sheet dynamics during a growth miracle have created unrealistic evaluations about the quality of policymaking.

Pettis provides a great deal of information I skip in these excerpts about the transition of China's growth, and expectations about that growth.

The four stages he sees are as follows.

Stage 1: The first period of liberalizing reforms under Deng Xiaoping
Stage 2: The investment growth period
Stage 3: The overinvestment period where "miracle" GDP growth was accompanied by a far greater expansion of debt to the point of saturation and malinvestment
Stage 4: The second period of liberalizing reforms under Xi Jinping

We are currently in state four. Pettis Continues ...

Under its new president, Xi Jinping, China must implement a second round of liberalizing reforms that in many ways will replicate Deng Xiaoping’s reforms. There is one major difference however between Deng’s reforms and the reforms Xi must implement. Although both sets of reforms should lead to an immediate improvement in real productivity growth, it is very unlikely that China’s adjustment under Xi will result in spectacularly high GDP growth rates the way Deng’s reforms almost immediately did. The reason has to do with debt.

When Deng began his reforms Chinese debt levels were low. As he eliminated the institutional constraints and distorted incentives that prevented Chinese from behaving productively, the resulting increased productivity showed up immediately as higher growth. But high debt levels change the impact of more productive behavior in at least three important ways. First, by distorting the distribution of earnings, high levels of debt almost always impede growth. This process, called “financial distress” in finance theory (and for some reason still barely understood by economists), ensures that until debt is written down, reforms aimed at unleashing productivity will result in far less wealth-creation than expected. It is not an accident that highly indebted economies always grow much more slowly than projected, even after implementing productivity-enhancing reforms – Argentina during Domingo Cavallo’s second term and Spain under Mariano Rajoy are examples that immediately come to mind – although in every case the failure of the reforms to speed up growth is inevitably blamed on insufficient reform.

Second, high levels of debt require that the Chinese economy deleverage, and except in an economy in which all resources, including labor, are fully and productively utilized, deleveraging always reduces growth. Finally, because the Chinese banking system has not recognized the economic losses its lending has generated, China’s GDP has been substantially overstated by the amount of these bad loans. This overstatement will automatically be amortized over the adjustment period, necessarily lowering future reported GDP by the amount past reported GDP had been overstated. Because so much investment in China is non-productive, higher investment causes the country’s already excessive debt burden to rise further. But attempts to slow investment would force up unemployment unless consumption growth can pick up the slack. Because China’s low consumption share is mainly a consequence of the extraordinarily low share of GDP retained by Chinese households, to increase consumption rapidly, Beijing must force up household income at the expense of state-owned enterprises and local governments.

This is the heart of China’s adjustment choices. Rebalancing the Chinese economy ultimately requires that Beijing choose an optimal balance among three difficult options – rapid credit expansion, higher unemployment, and wealth transfers from the state sector to Chinese households. As long as banks are able to continue funding enough new investment, Beijing can prevent unemployment levels from rising in the short-term by forcing up investment. But because banks cannot redirect lending quickly enough away from non-productive borrowers to productive borrowers, higher investment leads directly to higher debt levels.

If rapidly rising debt causes China to reach its debt capacity limits, it can no longer trade off more investment for less unemployment, in which case any shortfall in consumption must lead to unemployment. There is no accurate way of determining how much longer China can maintain current levels of credit growth, but while some optimists suggest it may have around decade, my own view is that it doesn’t have much more than 3-4 years, after which credit simply cannot grow fast enough both to roll over unrecognized bad debt and fund new investment.

How will China rebalance? President Xi has only just begun the reform process and his task will not be easy. His first steps in government have been to consolidate power and to weaken and frighten potential opposition. This was always going to be necessary if the reforms were going to be implemented.

So far he seems to have been successful, but we should expect continued political opposition to rebalancing the Chinese economy and continued attempts by Beijing to undermine the power of local governments and state-owned enterprises. It took highly centralized power under Deng Xiaoping to implement the liberalizing reforms of the 1980s, and it will probably take highly centralized power under Xi to implement a new set of liberalizing reforms. Unlike Deng, however, Xi will not be able to point to an almost immediate surge in growth to justify his reforms.

While I am relatively optimistic about the likelihood of Beijing’s engineering a successful economic rebalancing, my expectations come with a high variance. So far President Xi has followed the script for a successful transition fairly closely. Both the slowdown in GDP and the deceleration in credit growth since 2012 have come in close to what I would have expected in a successful transition. But the real test will be his ability implement the reforms that explicitly undermine the power of local governments, SOEs and powerful families, after many years in which they befitted disproportionately from China’s growth.

It will probably take a year or so before we can say with any confidence that these more difficult reforms are taking place, and this is what we should be watching for. The events of 2014 have been fairly easy to understand, in my opinion, because they fit very clearly into the long-term rebalancing script whose potential paths were listed in my 2013 book, Avoiding the Fall.

I would have liked that, along with wishing my readers happy holidays and all the best for 2015, I could promise you that events in 2015 will be equally easy to interpret, but because many of the most important events will take place within the black box of elite politics, I suspect there will be a lot more confusion and wild guessing than in the past. We are probably going to have to be especially creative in trying to extract information from as we assess the rebalancing process and the administration’s ability to do what it needs to do. It will be confusing, but happy New Year anyway.

Michael Pettis is always a great read. Inquiring minds may wish to pick up a copy of his book Avoiding the Fall, China's Economic Restructuring.

For more on strains in China's banking system please consider Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Read More

Merry Christmas

Been on the road today visiting friends and family.
Merry Christmas and best wishes to you and all your loved ones.

Mish

Read More

Round Two of Greek Presidential Election Fails; One More Chance or National Elections

Rounds one and two of Greek presidential elections ended in failure. Recall that it takes a super-majority of 60% of parliament (200 votes), to elect a president, in the first two attempts. The third and final chance takes 180 votes.

Even though this is a ceremonial position, should parliament fail to elect a president in three rounds, parliament dissolves and new national elections for prime minister and parliament take place.

That has the nannycrats in Europe concerned. Alexis Tsipras, leader of opposition party Syriza, has vowed he will demand a sizeable write-off of Greece’s sovereign debt if elected. Syriza is in the lead so fearmongering by the EU has been extreme.

The Financial Times reports Greek Parliament Fails to Elect President in Second-Round Vote.

Stavros Dimas, the governing coalition’s candidate, won 168 votes, eight more than in last week’s first-round ballot, following a last-ditch appeal for consensus by Antonis Samaras, the prime minister.

But the former European environment commissioner now appears unlikely to capture the 180 votes needed in the third and final ballot on December 29.

The additional support for Mr Dimas came only from independent MPs, while the moderate Democratic Left and rightwing Independent Greeks resisted the appeal for consensus to complete talks on leaving Greece’s four-year bailout and securing a new credit line from international borrowers.

The coalition government’s chances of staying in power depend on persuading MPs from the Democratic Left and Independent Greeks to switch sides in the final ballot.

Fotis Kouvelis, the Democratic Left leader, and a potential presidential candidate under a Syriza-led government, has told senior party members he is about to announce an electoral alliance with Syriza — a move that prompted one of his 10 MPs to leave the party on Tuesday.

“It’s time for the country to turn a page. Society wants this to happen, we need a change in Greece,” Mr Kouvelis said after Tuesday’s vote.

Mr Samaras on Sunday offered to bring forward a general election to late 2015 and open up his coalition government to smaller parties as a way of persuading recalcitrant MPs to back Mr Dimas for the presidency.

In an unscheduled television address on Sunday, Mr Samaras called for a “consensus” vote for Mr Dimas, urging MPs to “listen to the voice of conscience, national interest and common sense”.

Some analysts have argued the prime minister would have needed to notch up at least 170 votes in Tuesday’s second-round vote to give him a reasonable chance of winning the final ballot on Monday.

Bribes to the Rescue?

On December 9, I said Snap Elections May Pave Way for Eurozone Exit; Expect Bribes.

Certainly the political class in Greece, in Germany, in France, in the US and for that matter everywhere will be out in full force denouncing Syriza.

Nonetheless, Samaras will fail on the first two presidential votes. It's the third vote that matters. In the past, the IMF, EU, and other outside influences swayed enough politicians to matter. It's by no means certain they can do so again.

Expect Bribes

If it appears the final vote for president is headed the wrong way, watch German Chancellor Angela Merkel come out with some wishy-washy praise for Samaras including some small offer of debt relief or other favors.

If threats and praise do not work but the vote is close, there's always money under the table to buy a few needed votes.

Should bribes fail, expect the stock and bond markets to react with even greater volatility ahead of the next national election because Syriza party leader, Alexis Tsipras, threatens to renegotiate Greek debt.

Greek Bribery Charges

Last Friday, Pavlos Haikalis of the Independent Greeks party said at a news conference he been offered about €700,000 ($860,000) in cash and help in repaying an outstanding bank loan, as well as advertising contracts to vote for the government’s candidate. He estimated the total package to be worth €2 million to €3 million.

The Wall Street Journal said Greek Bribery Claims Dismissed for lack of evidence.

I am suspicious of the amount, and also because the vote does not seem close enough, at least yet.

Then again, I expected bribes, favors, threats, and fearmongering, so had this occurred, it would hardly be shocking.

In addition to the claims by Haikalis, Reuters points out "Prosecutors have been investigating similar accusations of political bribery in recent weeks but have not laid charges against anyone."

Of course, the party in power never prosecutes itself for offering bribes. Had the charges gone the other way, there would have been an investigation with much fanfare, media attention, and flag-waving.

Fearmongering and Interference

On December 14, and as predicted, the Guardian reported EU Finance Chief Flies into Athens as Grexit Fears Mount.

In response, Leftwing leader Alexis Tsipras cried foul over ‘fearmongering and interference’ from Brussels.

The third and final vote is on December 29. If this thing is at all close, expect more bribes. Even if it's not close, fearmongering by the EU and current prime minister Antonis Samaras is 100% guaranteed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Belarus Imposes Moratorium on Rising Consumer Prices; Get Out While You Can

Economic illiteracy has absolutely no bounds. The top example of the day comes from Belarus.

For those unfamiliar with the country, this map of Belarus will help put things into perspective.



For the economic illiteracy of the day, please consider Belarus Imposes Moratorium on Rising Consumer Prices.

"The moratorium is aimed at preventing consumer prices from rising and ensuring a wide range of goods in the consumer market, explains the Council of Ministers press office."

Reader Richard who sent me the link suggested the article sounds like The Onion.

Indeed it does. But it appears to be the real deal. In addition, "The State Customs Committee and the interior ministry have been strictly ordered to effectively prevent illegal imports of goods," as if that will stop prices from rising.

"The government’s decision to impose a 30-percent fee on foreign exchange purchases, which was announced on Friday and in fact meant a 23-percent fall in the Belarusian rubel’s value, led to a rush to buy consumer durables, especially imported ones."

Get Out While You Can

Foreign exchange fees of 30% may sound excessive but any government stupid enough to take the above actions will see their currency drop to worthless in short order.

Price controls never work, they only exaggerate shortages, then huge growth in black markets.

"Get out while you can, any way you can, if you still can" is my message.

Websites Blocked

My message may not get through.

Belarus News reports a "Media Law Allows That Website Blockages" will come into force only on January 1, 2015.

Belarus News already reported it will be blocked, and I am sure to follow.

Russia's Problem

In Belarus’s Russian Problem, the Wall Street Journal says "Putin alternative to the European Union stumbles on the ruble."

The Russian ruble’s downward spiral has claimed a new casualty: neighboring Belarus and its heavily Russia-dependent economy. The regime of Alexander Lukashenko, one of Moscow’s closest allies, has begun blocking independent news sites and several online-shopping outlets in an apparent attempt to prevent a bank run and shore up the Belarusian ruble.

Internet censorship is par for the course in Mr. Lukashenko’s Belarus. It follows the enactment earlier this month of a new law granting the Minsk regime broad authority to ban websites, similar to the power Mr. Lukashenko already wields over traditional media. That law hasn’t gone into effect yet, according to the Index on Censorship watchdog, but then there’s a reason the former Soviet republic has long been known as Europe’s last dictatorship.

What about the crash of the Ukrainian Hryvnia? Is that Russia's problem or Europe's problem in general?

Regardless, Belarus appears doomed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Florida Becomes 3rd Largest State Following California and Texas, New York Drops to 4th; Political Implications

The US census bureau reports Florida Passes New York to Become the Nation’s Third Most Populous State



I added the dashed red line to show the stagnation in Illinois.

The Bureau Reports ....

By adding an average of 803 new residents each day between July 1, 2013 and July 1, 2014, Florida passed New York to become the nation’s third most populous state, according to U.S. Census Bureau state population estimates released today. Florida’s population grew by 293,000 over this period, reaching 19.9 million. The population of New York increased by 51,000 to 19.7 million.

California remained the nation’s most populous state in 2014, with 38.8 million residents, followed by Texas, at 27.0 million. Although the list of the 10 most populous states overall was unchanged, two other states did change positions, as North Carolina moved past Michigan to take the ninth spot.

Another milestone took place in Georgia (ranked 8th), which saw its population surpass 10 million for the first time.

North Dakota was the nation’s fastest-growing state over the last year. Its population increased 2.2 percent, followed by the 1.7 percent growth in Nevada and Texas. Each of the 10 fastest-growing states was in the South or West with the exception of North Dakota.

Six states lost population between July 1, 2013, and July 1, 2014: Illinois (9,972 or -0.08 percent), West Virginia (3,269 or -0.18 percent), Connecticut (2,664 or -0.07 percent), New Mexico (1,323 or -0.06 percent, Alaska (527 or -0.07 percent) and Vermont (293 or -0.05 percent).

Most Populous States



Political Implications

States like Illinois and New York continue to lose population to warmer places like Texas and Florida. Heck, Illinois tax policy is so bad, it has lost population to Indiana and Wisconsin.

Florida not only has more sunshine than Illinois, it also has no state income tax and lower taxes in general, a nice advantage for retirees.

Illinois could easily drop to 6th or even 8th, and probably will do so over the course of the next few years.

These trends have some interesting political implications given the US's electoral college voting system of winner-take-all, state-by-state.

Sunshine State Musical Tribute


link if video does not play: John Denver - Sunshine on My Shoulder

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Russia Under Attack: Letter from CEO of Genoil to CEO of JPMorgan Chase on US Foreign Policy Blowback

Just a few days ago, president Obama made the farcical claim Putin Hasn’t ‘Rolled Me,’ Economic Sanctions on Russia Have Worked.

In an interview with CNN, the president said economic sanctions on Moscow are working, crediting the American-led effort with a downturn in Russia’s economy and the decline of its currency. Even though Russia has yet to pull back from its aggressive posture in Ukraine, Mr. Obama denied that his policy has been ineffective, saying that his slow and steady course is better than the notion of “shooting first and thinking about it second.”

Worked How?

Is collapse of the ruble, more associated with the collapse of oil than sanctions, proof of anything? If so, what about the collapse of Ukraine? What about the collapse in European trade with Russia?

Does one measure pain in a one-sided manner? If Russia loses a leg and Europe an arm, is that winning or is it just plain stupid?

Let's explore that question with a viewpoint from three sources:

1. A Guardian article on the consequences of wrecking Russia's economy.
2. A Stratfor article "Viewing Russia from the Inside"
3. A private email with a subject line of "Russia Under Attack" from David Lifschultz, CEO of Genoil to a small list of very prominent people.

Lifschultz forwarded his email to Jamie Dimon, CEO of JPMorgan Chase; William Harrison, Former CEO of Chase; and Stephen Schwarzman, CEO and Co-Founder of Blackstone.

Wrecking Russia’s Economy Could Spell Disaster for the West

The Guardian proposes Wrecking Russia’s Economy Could be a Disaster for the West

Like a rudderless ship running out of fuel and buffeted in an icy storm, the Russian economy looks as if it is heading for a crash. All the graphs – the rouble-dollar rate, the slump in GDP, bank interest rates, oil prices – look like menacing icebergs. The only question seems to be how long the ship can stay afloat.

As for the west’s sanctions, they were introduced with one explicit aim – to force Putin to change tack in Ukraine. At least, that was the stated aim. But since the measures show no sign of having any effect on his thinking, and yet the west is considering even more sanctions, there is obviously another goal – to punish Putin for his actions, regardless of whether he changes his mind. Sadly, it is not Putin who feels this punishment. It is the Russian people.

The west imposed sanctions on Putin’s “cronies” and Russian banks because of the invasion of Ukraine and annexation of Crimea; and Putin responded by banning the import of western foodstuffs.

To keep repeating the same mistake again and again and expecting different results is, as they say, a sign of madness. And if by doing so you punish only ordinary Russian people, then it is also cruel – and counterproductive. Twenty years ago the dream was to rescue the former communist world and bring prosperity and democracy to its people. What we are doing now is impoverishing and alienating the Russians.

We can, of course, stick to our guns and insist that “sanctions are having an effect”. But what will we gain if the only effect is to destroy the Russian economy?

The solution is clear. Abandon the missile shield. End the expansion of Nato. And think boldly about a new security arrangement for the whole of Europe – one that will bring Russia in rather than leaving it outside feeling vulnerable. If this were done, everything I know about Putin and Russia tells me the crisis over Ukraine would be solved - and the Russian economy would not end up being needlessly destroyed, causing woe and bitterness among its people. If it is not done, we will have to deal with a resentful Russia for decades – for Putin’s successors will also demand security.

Viewing Russia From the Inside

Stratfor writer George Friedman writes about Viewing Russia From the Inside.

Last week I flew into Moscow, arriving at 4:30 p.m. on Dec. 8. ...

I thought the economic problems of Russia would be foremost on people's minds. The plunge of the ruble, the decline in oil prices, a general slowdown in the economy and the effect of Western sanctions all appear in the West to be hammering the Russian economy. Yet this was not the conversation I was having. The decline in the ruble has affected foreign travel plans, but the public has only recently begun feeling the real impact of these factors, particularly through inflation.

The Russians pointed out that economic shambles was the norm for Russia, and prosperity the exception. There is always the expectation that prosperity will end and the normal constrictions of Russian poverty return.

Russians' strength is that they can endure things that would break other nations. It was also pointed out that they tend to support the government regardless of competence when Russia feels threatened. Therefore, the Russians argued, no one should expect that sanctions, no matter how harsh, would cause Moscow to capitulate. Instead the Russians would respond with their own sanctions, which were not specified but which I assume would mean seizing the assets of Western companies in Russia and curtailing agricultural imports from Europe.

If this is so, then the Americans and Europeans are deluding themselves on the effects of sanctions. In general, I personally have little confidence in the use of sanctions. They are designed to cause pain that the West could not withstand. Applied to others, the effects may vary.

Reliable polling numbers show that President Vladimir Putin is still enormously popular.

I try not to be drawn into matters of right and wrong, not because I don't believe there is a difference but because history is rarely decided by moral principles. I have understood the Russians' view of Ukraine as a necessary strategic buffer and the idea that without it they would face a significant threat, if not now, then someday. The more important question was what will come next.

The Russians are stretched as it is. They must deal with Ukraine, and they must cope with the existing sanctions, however much they can endure economic problems. The West has the resources to deal with multiple crises. Russia needs to contain this crisis in Ukraine.

The Russians will settle for a degree of autonomy for Russians within parts of eastern Ukraine. How much autonomy, I do not know. They need a significant gesture to protect their interests and to affirm their significance. Their point that regional autonomy exists in many countries is persuasive. But history is about power, and the West is using its power to press Russia hard. But obviously, nothing is more dangerous than wounding a bear. Killing him is better, but killing Russia has not proved easy.

I came away with two senses. One was that Putin was more secure than I thought. In the scheme of things, that does not mean much. Presidents come and go. But it is a reminder that things that would bring down a Western leader may leave a Russian leader untouched. Second, the Russians do not plan a campaign of aggression. Here I am more troubled — not because they want to invade anyone, but because nations frequently are not aware of what is about to happen, and they might react in ways that will surprise them. That is the most dangerous thing about the situation. It is not what is intended, which seems genuinely benign. What is dangerous is the action that is unanticipated, both by others and by Russia.

At the same time, my general analysis remains intact. Whatever Russia might do elsewhere, Ukraine is of fundamental strategic importance to Russia. Even if the east received a degree of autonomy, Russia would remain deeply concerned about the relationship of the rest of Ukraine to the West. As difficult as this is for Westerners to fathom, Russian history is a tale of buffers. Buffer states save Russia from Western invaders. Russia wants an arrangement that leaves Ukraine at least neutral.

All of the good will in the world — and there is precious little of that — cannot solve the problem of two major countries that are compelled to protect their interests and in doing so must make the other feel threatened. I learned much in my visit. I did not learn how to solve this problem, save that at the very least each must understand the fears of the other, even if they can't calm them.

Russia Under Attack

The subject matter of David Lifschultz's letter to Jamie Dimon, William Harrison, Stephen Schwarzman, and two others is "Russia Under Attack". Here are a few excerpts.

Stratfor as a close associate of the CIA doesn't outline the implications of the steps that Russia will probably take so as to avoid a panic in the western financial markets. We will not avoid that.

It is important to note that this type of crisis is like the plague. It is contagious. A free falling ruble is essentially shutting out all exports from the EU and the west to Russia. If the currency goes down 2/3, then the price of western goods triples. Therefore, all EU exports to Russia and those of the rest of the west are stopped in their tracks. This Russian agricultural sanctions are as nothing compared to these new currency sanctions based on the concerted attack on the ruble. As the EU economies are in many areas in tribulation with 25% unemployment such as Spain, etc. and rising in most cases everywhere, the EU is suffering reciprocal damage for their attack on the ruble. The western attack on the ruble essentially blocks all imports into Russia forcing them into a German self-sufficiency as in 1933, or Russia under Stalin in 1937.

Russia has not been booted out of the SWIFT payment system as Iran as the international financial system will collapse if Russia unilaterally ceases to supply energy to Europe in the form of natural gas and oil. If Europe cannot buy Russian natural gas and oil, it will die. It will drag down the entire international financial system. This time as in Lehman the issuance of trillions of dollars of credits will not save it as that cannot overcome a shortage of natural resources. The supplies of natural gas and oil from the stans and central Asia between China and Russia are essentially under Russian control. If they decide to block it, that potentially could remove 24 million barrels a day from the world economy and huge amounts of natural gas if we add to the central Asian cutoff Russia itself. What will the EU and the United States do? Launch nuclear missiles at Russia?

If Russia moves to currency controls, the concomitant step would be to declare a moratorium on the payment of interest and principle on external debt. This in itself would deliver a massive shock to the western financial institutions holding the over 600 billion in debt. It must be remembered when this happened in 1998 during the Russian financial crisis, the financial weapon of mass destruction of Long Term Capital Management imploded with 1.3 trillion in derivative exposure. The quadrillion of derivatives according to Warren Buffett contain numerous financial weapons of mass destruction that can implode the entire western financial system. Stratfor does not want to talk about it but that is what is boiling under the surface. The west has raised the ante and risked their entire financial system in this crisis.

It is true that if Russia pulled the plug on the EU by stopping their natural gas and oil exports, it would have an adverse effect on Russia. But it would have a calamitous effect on the EU.  It would trigger implosions in the quadrillion of derivatives. And Russian need only do this for three to six months to achieve the desired victorious counterattack as in war laying the west low as they are doing to them, and there is no doubt that this is war.

Economic war precedes military conflict as we saw when the United States, Britain and the Netherlands cut off 92% of the oil used by Japan through an embargo on July 25, 1941, which was a declaration of war on Japan as the west is declaring war on Russia. Anyone who does not realize this is acting like an Ostrich with his head in the sand. The west is hoping against hope that if they keep raising the ante when they have no cards, that Russia will throw their cards on the table. This will not happen. They also hope that they will be able to lower the temperature any time they want to avoid all out economic and or military conflict, but history shows that once the Pandora's box is opened it is nearly impossible to put the evils back in the box.

The catalyst of the Ukrainian situation was nothing less squalid than the western financiers who were formerly looting Russia of hundreds of billion fearing that Putin's move in the Ukraine would stop their looting operation in the Ukraine.

This fit into the Brzezinski goal of dismembering Russia, and the neocons allied with these London and New York financiers to move against Russia. Brzezinski was looking for his opening, and if it was not here, he would have found it elsewhere.

Foolish Pressure

No one knows precisely what to expect if Obama keeps pressuring Russia more and more, but whatever it is, it will not be any good.

The entire US history of foreign policy meddling has been disaster after disaster.

An Incomplete History of US Foreign Policy Disasters

• War reparations imposed by the allies gave way to German hyperinflation and the rise of Hitler.
• In 1953 the US and UK orchestrated the Iranian coup d'état in an operation called "Operation Boot" in the UK and the "TPAJAX Project" in the US. This in turn led to the US backed Shah of Iran overthrown in 1979. In August 2013, 60 years after, the American Central Intelligence Agency (CIA) admitted that it was involved in both the planning and the execution of the coup, including the bribing of Iranian politicians, security and army high-ranking officials, as well as pro-coup propaganda. The CIA is quoted acknowledging the coup was carried out "under CIA direction" and "as an act of U.S. foreign policy, conceived and approved at the highest levels of government."
• The War in Vietnam started with an outright lie from president Lyndon B. Johnson regarding the Gulf of Tonkin Incident. A document declassified in 2005 shows the US fired first, on North Vietnam. In a second episode, the US fired on "Tonkin ghosts" (false radar images) and not actual torpedo boats as claimed.
• It's pretty clear the US helped foment the overthrow of Ukraine's president Viktor Yanukovych, but the US will probably will not admit that for another 30 years.
• Bush's lies led us to invade Iraq with disastrous consequences including the evolution of ISIS.
• Finally, Bin Laden's number one reason for the attack on the US was because the US had troops on sacred Arab soil.

Poking Sticks at Bears and Hornets

The US seldom if ever views things through the eyes of others. From US drone policy, to torture, to CIA-sponsored coups, to inane wars based on lies, we make mistake after mistake.

And yet, we keep poking sticks at bears and hornets.

In the case of Russia, I do not know how Putin will respond if we increase pressure.

But I do know that sanctions are war. And they don't do any good. 52 years of silly sanctions on Cuba with zero results are proof enough. (For discussion, please see Pass the Cigars: US Lifts Some Restrictions on Cuba; Why Now?)

Blowback

As I have noted before, sanctions are a negative sum game. The very best the US can expect out of sanctions on Russia are as follows:

• Deeper European recession
• Political battles with various European leaders
• Loss of potential profit by US multinational corporations
• Ukraine in need of bigger bailouts
• Russia strengthens ties with China at expense of US and Europe
• Increasing resentment of Russian citizens toward the US, some of which may take hostile actions against the US, US citizens, or US corporate interests

Unfortunately, that is the very best that can happen!

Laughably, president Obama calls that "winning"  on the basis Russia is suffering more than Europe.

With that ridiculous definition, let's return to the questions I asked at the outset:

Does one measure pain in a one-sided manner? If Russia loses a leg and Europe an arm, is that winning or is it just plain stupid?

It's difficult to contemplate the worst that could happen, but David Lifschultz mentioned one possibility in his letter to various CEOs: The wrong reaction could "trigger implosions in the quadrillion of derivatives".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com  

Read More

New York Times Asks Obama to Prosecute Cheney; Outsourced Torture

As horrific as the CIA torture revelations were, please understand that most of the investigation is still classified. I have to wonder, what's in the report we did not see.

Although I commend senator Dianne Feinstein for making sure excerpts of the CIA torture report saw the light of day, her efforts did not go far enough.

Feinstein should have published the entire document. I suspect that would have ended the controversy once and for all. Instead we have nothing but a pack of lies about the use of the intelligence gathered from the likes of Dick Cheney.

Outsourced Terror

Even had Feinstein published the entire report, please understand there are hundreds if not thousands of horrific stories of CIA-sponsored torture that aren’t in the Senate report.

The Salon has details in its report on Outsourced Terror.

The executive summary released last week makes only passing reference to an integral component of the CIA program: the “extraordinary rendition” of prisoners to foreign custody for “interrogation” by those countries’ intelligence services—with the full knowledge that the men would be tortured.

Because rendition was beyond the report’s scope, there’s still no official account of the hundreds, perhaps thousands, of other victims of torture that the CIA is responsible for.

As the Washington Post revealed in 2005, the CIA identified two categories of prisoners for detention and interrogation: “high value” detainees that the agency held onto and “second tier” ones who were farmed out for detention and interrogation to other governments. As former CIA officer Bob Baer explained in disturbing detail, “If you want a serious interrogation, you send a prisoner to Jordan. If you want them to be tortured, you send them to Syria. If you want someone to disappear—never to see them again—you send them to Egypt.”

Mistakes Irrelevant

Of course, torturing or even killing the wrong guys does not matter to Dick Cheney. He had the gall to say "I'd do it again".

New York Times Asks Obama to Prosecute Cheney

At long last, someone besides a few bloggers like myself has taken the right stand.

I am pleased to announce the New York Times editorial board has come out with the correct assessment.

Here's the headline: Prosecute Torturers and Their Bosses.

Mr. Obama has said multiple times that “we need to look forward as opposed to looking backwards,” as though the two were incompatible. They are not. The nation cannot move forward in any meaningful way without coming to terms, legally and morally, with the abhorrent acts that were authorized, given a false patina of legality, and committed by American men and women from the highest levels of government on down.

Americans have known about many of these acts for years, but the 524-page executive summary of the Senate Intelligence Committee’s report erases any lingering doubt about their depravity and illegality: In addition to new revelations of sadistic tactics like “rectal feeding,” scores of detainees were waterboarded, hung by their wrists, confined in coffins, sleep-deprived, threatened with death or brutally beaten. In November 2002, one detainee who was chained to a concrete floor died of “suspected hypothermia.”

These are, simply, crimes. They are prohibited by federal law, which defines torture as the intentional infliction of “severe physical or mental pain or suffering.” They are also banned by the Convention Against Torture, the international treaty that the United States ratified in 1994 and that requires prosecution of any acts of torture.

So it is no wonder that today’s blinkered apologists are desperate to call these acts anything but torture, which they clearly were. As the report reveals, these claims fail for a simple reason: C.I.A. officials admitted at the time that what they intended to do was illegal.

But any credible investigation should include former Vice President Dick Cheney; Mr. Cheney’s chief of staff, David Addington; the former C.I.A. director George Tenet; and John Yoo and Jay Bybee, the Office of Legal Counsel lawyers who drafted what became known as the torture memos. There are many more names that could be considered, including Jose Rodriguez Jr., the C.I.A. official who ordered the destruction of the videotapes; the psychologists who devised the torture regimen; and the C.I.A. employees who carried out that regimen.

Starting a criminal investigation is not about payback; it is about ensuring that this never happens again and regaining the moral credibility to rebuke torture by other governments. Because of the Senate’s report, we now know the distance officials in the executive branch went to rationalize, and conceal, the crimes they wanted to commit. The question is whether the nation will stand by and allow the perpetrators of torture to have perpetual immunity for their actions.

Moving Forward

As I have noted before, "moving forward" to Obama means sweeping this all under the rug. I want every bit of this out in the open, preferably in front of an international war crimes tribunal.

At the very least the US attorney general is obligated himself to bring criminal charges.

I am pleased to be at the forefront of this issue from the beginning, years ago actually, as pertains to Cheney, Rumsfeld, and Bush.

Here's my Top 5 prosecution list.

Top Five War Crimes Candidates

1. Former Vice President Dick Cheney
2. Former President George Bush
3. Former Defense Secretary Donald Rumsfeld
4. Former CIA director George Tenet
5. President Barack Obama - for drone policy

Number 5 sure is not going to happen, but I will take any prosecutions we can get.

For further reading, please see

• New Poll Shows US Citizens in Every Demographic Support Torture (Republicans, Democrats, White, Black, Young, Old)
• Napoleon vs. Cheney: "Interrogation That Actually Works"; Icing on the "Hate-Cake"

By all means, let's move forward, complete with the knowledge that "moving forward" means sending Cheney to prison for the rest of his pathetic, disgusting life.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Read More

Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits

Chinese banks have experienced an outflow of deposits for the quarter for first time since 1999. Customers are attracted to trust funds and the stock market which has been on a tear, up 43% in the last six months.

In the first week of December, Chinese investors opened almost 600,000 stock-trading accounts, a 62 percent increase over the previous week, according to China Securities Depository and Clearing Co.

To compete for funds, Chinese banks offer anything from fresh vegetables for small deposits to a Mercedes A180 for deposits big enough and long enough. The effective yield on the Mercedes is approximately seven percent!

China Daily explains the setup in Lenders Look to Attract Deposits with Goodies.

Lenders in China, desperate to attract customers who are finding alternatives for their savings, are turning to giveaways. On offer at one branch in Beijing: An iPhone 6 Plus or a Mercedes-Benz.

Cash rebates, trips abroad, interest rates at the highest premium ever over the official benchmark rate, even free vegetables are among other goodies banks are dangling to get Chinese savers to deposit their yuan in savings accounts.

"Chinese banks are hemorrhaging their deposits," says Rainy Yuan, a Shanghai-based analyst at brokerage Masterlink Securities Corp. "There is no fix for this. All the efforts they made to win savers back will only push up the costs, so it's a losing battle to fight."

Higher returns from Internet funds and investment products such as trusts, combined with the promise of a soaring stock market, have China's banks feeling the drain. They lost 950 billion yuan ($153 billion) of deposits in the three months through September, the first quarterly drop since 1999. In the first 11 months, new deposits were 23 percent lower than in the same period last year, People's Bank of China data show.

The iPhone promotion, by Shenzhen-based Ping An Bank Co in October at a branch in Beijing, offered a 128-gigabyte iPhone 6 Plus in lieu of interest payments for depositing 38,000 yuan for five years. For parking 903,000 yuan for the same period, savers could pick one of four Mercedes-Benz models. A Mercedes A180, which costs 252,000 yuan, would give investors the equivalent of an annualized return of almost 7 percent, compared with the benchmark rate of 4 percent on five-year deposits.

The China Banking Regulatory Commission in September banned what it called "illicit" deposit-gathering practices, including gifts and rebates on deposits. Banks that flout the curbs could face punishment, the regulator said, without clarifying whether product giveaways in lieu of interest payments qualify as gifts.

Loan Financing Scheme Will Implode

Think Chinese banks can lend money at rates that exceed 7 percent safely? I don't, and if not, this scheme of attracting depositors will backfire big time.

How big this deposit-chasing scheme gets is anyone's guess, but the root cause is systemic speculation fueled by central banks' loose monetary policies that manifest in different forms in different places.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More