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World Bank Raises Growth Forecasts as Richest Nations Strengthen – Bloomberg

World Bank Raises Growth Forecasts as Richest Nations Strengthen – Bloomberg.

The World Bank raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery, boosting prospects for developing markets’ exports.

The Washington-based lender sees the world economy expanding 3.2 percent this year, compared with a June projection of 3 percent and up from 2.4 percent in 2013. The forecast for the richest nations was raised to 2.2 percent from 2 percent. Part of the increase reflects improvement in the 18-country euro area, with the U.S. ahead of developed peers, growing twice as fast as Japan.

The report by the institution that’s trying to eradicate extreme poverty by 2030 indicates a near-doubling of the growth in world trade this year from 2012, as developed economies lift export-reliant emerging nations. At the same time, the withdrawal of monetary stimulus in the U.S. may raise market interest rates, hurting poorer countries as investors return to assets such as Treasuries, according to the bank.

“This strengthening of output among high-income countries marks a significant shift from recent years when developing countriesalone pulled the global economy forward,” the bank said yesterday in its Global Economic Prospects report published twice a year. Import demand from the richest nations “should help compensate for the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalized.”

Photographer: Brent Lewin/Bloomberg

Produce is sold at a market in Kolkata. Growth in developing countries will accelerate… Read More

Fed Tapering

The bank’s forecasts hinge on the orderly unwinding of Federal Reserve stimulus, which is starting this month with the trimming of monthly bond purchases to $75 billion from $85 billion. If investors react abruptly in coming months, as they did in May when the central bank mentioned the possibility of tapering, capital inflows to developing economies could drop again, according to the report.

“To date, the gradual withdrawal of quantitative easing has gone smoothly,” Andrew Burns, the report’s lead author, said in a statement. “If interest rates rise too rapidly, capital flows to developing countries could fall by 50 percent or more for several months — potentially provoking a crisis in some of the more vulnerable economies.”

The bank sees a global expansion of 3.4 percent in 2015, compared with 3.3 percent predicted in June.

In the U.S., where growth is seen accelerating to 2.8 percent this year, unchanged from the outlook in June, the recent budget compromise in Congress will ease spending cuts previously in place and boost confidence from households and businesses, the bank said.

Japan’s Outlook

The bank held its forecast this year for Japan at 1.4 percent, while cautioning that the reforms of the economy promised by the government “have disappointed thus far, raising doubts about whether the improvement in economic performance can be sustained over the medium to longer term.”

It raised its prediction for the euro region to 1.1 percent for this year from 0.9 percent in June as the monetary union comes out of it debt crisis, propelled by Germany and showing improvement in fragile economies including Spain and Italy.

“The euro area is where the U.S. was a year and a half or two years ago, where growth is starting to go positive but it’s still hesitant,” Burns, also the bank’s manager of global macroeconomics, said in a phone interview. “We’re not going to be totally convinced until this gathers a little more steam.”

The bank estimates that investors withdrew $64 billion from developing-country mutual funds between June and August, with the impact most pronounced on middle-income countries includingBrazilIndia and Turkey. Not all economies were hit the same way, as China or Mexico were less affected because of stronger economic fundamentals, the bank said.

Developing World

The 2014 forecast for developing markets was cut to 5.3 percent from 5.6 percent.

The bank lowered its forecast for China this year to 7.7 percent from 8 percent, saying the world’s second-largest economy is shifting “to slower but more sustainable consumption-led growth.”

It cut projections for Brazil to 2.4 percent from 4 percent, for Mexico to 3.4 percent from 3.9 percent and for India to 6.2 percent from 6.5 percent.

Growth in developing countries will accelerate “modestly” between 2013 an 2016, at a pace about 2.2 percentage points below that of the years preceding the global crisis, according to the bank’s report.

“The slower growth is not cause for concern,” according to the report. “More than two-thirds of the slowdown reflects a decline in the cyclical component of growth and less than one-third is due to slower potential growth.”

Still, not all countries are well placed to respond to capital outflows and higher interest rates, according to the bank, which urged policy makers to prepare now for such an outcome.

To contact the reporter on this story: Sandrine Rastello in Washington atsrastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

The Negative Natural Interest Rate and Uneconomic Growth

The Negative Natural Interest Rate and Uneconomic Growth.

by Herman Daly, originally published by The Daly News  | TODAY

In a recent speech to the International Monetary Fund economist Larry Summers argued that since near zero interest rates have not stimulated GDP growth sufficiently to reach full employment, we probably need a negative interest rate. By this he means a negative monetary rate set by the Fed to equal the “natural” rate, which he believes is now negative. The natural rate, as Summers uses the term, means the rate that would equalize planned saving with planned investment, and thereby, as Keynes taught us, result in full employment. With near zero monetary rates, current inflation already pushes us to a negative real rate of interest, but that is still insufficiently negative, in Summers’ view, to equalize planned investment with planned saving and thereby stimulate GDP growth sufficient for full employment. A negative interest rate is a stunning proposal, and it takes some effort to work out its implications.

Suppose for a moment that GDP growth, economic growth as we gratuitously call it, entails uneconomic growth by a more comprehensive measure of costs and benefits — that GDP growth has now begun to increase counted plus uncounted costs by more than counted plus uncounted benefits, making us inclusively and collectively poorer, not richer. If that is the case, and there are good reasons to believe that it is, would it not then be reasonable to expect, along with Summers, that the natural rate of interest is negative, and that maybe the monetary rate should be too? This is hard to imagine, but it means that savers would have to pay investors (and banks) to use the funds that they have saved, rather than investors and banks paying savers for the use of their money. To keep the GDP growing sufficiently to avoid unemployment we would need a growing monetary circular flow, which would require more investment, which, in turn, would only be forthcoming if the monetary interest rate were negative (i.e., if you lost less by investing your money than by holding it). A negative interest rate “makes sense” if the goal is to keep on increasing GDP even after it has begun to make us poorer at the margin — that is after growth has already pushed us beyond the optimal scale of the macro-economy relative to the containing ecosphere, and thereby become uneconomic.

A negative monetary interest rate means that citizens will spend rather than save, so savings will not be available to finance the investments that produce the GDP growth needed for full employment. The new money for investment comes from the Fed. Quantitative easing (money printing) is the source of the new money. The faith is that an ever-expanding monetary circulation will pull the real economy along behind it, providing growth in real income and jobs as previously idle resources are employed. But the resulting GDP growth is now uneconomic because in the full world the “idle” resources are not really idle — they are providing vital ecosystem services. Redeploying these resources to GDP growth has environmental and social opportunity costs that are greater than production benefits. Although hyper-Keynesian macroeconomists do not believe this, the micro actors in the real economy experience the constraints of the full world, and consequently find it difficult to follow the unlimited growth recipe.

Summers (along with other mainstream growth economists), does not accept the concept of optimal scale of the macro-economy, nor the possibility of uneconomic growth in the sense that growth in resource throughput could reduce net wealth and wellbeing. Nevertheless, it is at least consistent with his view that the natural rate of interest is negative.

A positive interest rate restricts the total volume of investment but allocates it to the most productive projects. A negative interest rate increases volume, but allows investment in practically anything, increasing the probability that growth will be uneconomic. Shall we become hyper-Keynesians and push GDP growth to maintain full employment, even after growth has become uneconomic? Or shall we back off from growth and seek full employment by job sharing, distributive equity, and reallocation toward leisure and public goods?

Why would we allow growth to carry the macro-economy beyond the optimal scale? Because growth in GDP is considered the summum bonum, and it is heresy not to advocate increasing it. If increasing GDP makes us worse off we will not admit it, but will adapt to the experience of increased scarcity by pushing GDP growth further. Non-growth is viewed as “stagnation,” not as a sensible steady state adaptation to objective limits. Stimulating GDP growth by increasing consumption and investment, while cutting savings, is the only way that hyper-Keynesians can think of to serve the worthy goal of full employment. There really are other ways, and people really do need to save for security and old age, as well as for maintenance and replacement of the existing capital stock. Yet the Fed is being advised to penalize saving with a negative interest rate. The focus is on what the growth model requires, not on what people need.

A negative interest rate seems also to be the latest advice from Paul Krugman, who praises Summers’ insights. It is understandable from their viewpoint because in their vision the economy is not a subsystem, or if it is, it is infinitesimal relative to the total system. The economy can expand forever, either into the void or into a near infinite environment. It does not grow into a finite ecosphere, and therefore has no optimal scale relative to any constraining and sustaining environment. Its aggregate growth incurs no opportunity cost and can never be uneconomic. Unfortunately, this tacit assumption of the growth model is seriously wrong.

xx

Larry Summers and other growth-obsessed economists are calling for negative interest rates.

Welcome to the full-world economy. In the old empty-world economy, assumed in the macro models of Summers and Krugman, growth always remains economic, so they advocate printing more and more dollars to expand the economy to take over ever more of the “unemployed” sources and sinks of the ecosystem. If a temporary liquidity trap or zero lower bound on interest rates keeps the new money from being spent, then low or even negative monetary interest rates will open the spending spigot. The empty world assumption guarantees that the newly expanded production will always be worth more than the natural wealth it displaces. But what may well have been true in yesterday’s empty world is no longer true in today’s full world.

This is an upsetting prospect for growth economists — growth is required for full employment, but growth now makes us collectively poorer. Without growth we would have to cure poverty by redistributing wealth and stabilizing population, two political anathemas, and could only finance investment by reducing present consumption, a third anathema. There remains the microeconomic policy of reallocating the same GDP to a more efficient mix of products by internalizing external costs (getting prices right). While this certainly should be done, it is not macroeconomic growth as pursued by the Fed.

These painful choices could be avoided if only we were richer. So let’s just focus on getting richer. How? By growing the aggregate GDP, of course! What? You repeat that GDP growth is now uneconomic? That cannot possibly be right, they say. OK, that is an empirical question. Let’s separate costs from benefits in the existing GDP accounts, and develop more inclusive measures of each, and then see which grows more as GDP grows. This has been done (ISEW, GPI, Ecological Footprint), and results support the uneconomic growth view. If growth economists think these studies were done badly they should do them better rather than ignore the issue.

The leftover Keynesians are correct in pointing out that there is unemployed labor and capital. But natural resources are fully employed, indeed overexploited, and the limiting factor in the full world is natural resources, not labor or capital as used to be the case in the empty world. Some growth economists think that the world is still empty. Others think there is no limiting factor — that capital is a good substitute for natural resources. This is wrong, as Nicholas Georgescu-Roegen has shown long ago. Capital funds and natural resource flows are complements, not substitutes, and the one in short supply is limiting. Increasing a non-limiting factor doesn’t help. Growth economists should know this.

Although the growthists think quantitative easing will stimulate demand they are disappointed, even in terms of their own model, because the banks, who are supposed to lend the new money, encounter a “lack of bankable projects,” to use World Bank terminology. This of course should be expected in the new era of uneconomic growth. The new money, rather than calling forth new wealth by employing all these hypothetical idle resources from the empty world era, simply bids up existing asset prices in the full world. Most asset prices are not counted in the consumer price index, (not to mention exclusion of food and energy) so economists unconvincingly claim that quantitative easing has not been inflationary, and therefore they can keep doing it. And even if it causes some inflation, that would help make the interest rate negative.

Aside from needed electronic transaction balances, people would not keep money in the bank if the interest rate were negative. To make them do so, the alternative of cash would basically have to be eliminated, and all money would be electronic bank deposits. This intensifies central bank control, and the specter of “bail-ins” (confiscations of deposits) as occurred in Cyprus. Even as distrust of money increases, people will not immediately revert to barter, in spite of negative interest rates. Barter is so inconvenient that money remains more efficient even if it loses value at a rapid rate, as we have seen in several hyperinflations. But transactions balances will be minimized, and speculative and store-of value-balances will be diverted to real estate, gold, works of art, tulip bulbs, Bitcoins, and beanie babies, creating speculative bubbles. But not to worry, say Summers and Krugman, bubbles are a necessary, if regrettable, means to boost spending and growth in the era of newly recognized negative natural interest rates — and still unrecognized uneconomic growth.

A bright silver lining to this cloud of confusion is that the recognition of a negative natural interest rate may be the prelude to recognition of the underlying uneconomic growth as its cause. For sure this has not yet happened because so far the negative natural interest rate is seen as a reason to push growth with a negative monetary interest rate, rather than as a signal that growth has become a losing game. But such a realization is a reasonable hope. Perhaps a step in this direction is Summers’ suggestion that the old Alvin Hansen thesis of secular stagnation might deserve a new look.

The logic that suggests negative interest also suggests negative wages as a further means of increasing investment by lowering costs. To maintain full employment via GDP growth, not only must the interest rate now be negative, but wages should become negative as well. No one yet advocates negative wages because subsistence provides an inconvenient lower positive bound below which workers die. On this “other side of the looking glass” the logic of uneconomic growth pushes us in the direction of a negative “natural” wage, just as with a negative “natural” rate of interest. So we artificially lower the wage costs to “job creators” by subsidizing below-subsistence wages with food stamps, housing subsidies, and unpaid internships. Negative interest rates also subsidize investment in job-replacing capital equipment, further lowering wages. Negative interest rates, and below-subsistence wages, further subsidize the uneconomic growth that gave rise to them in the first place.

The leftover Keynesians tell us, reasonably enough, that paying people to dig holes in the ground and then fill them up, is better than leaving them unemployed with no income. But paying people to deplete and pollute the Creation on which our lives and welfare ultimately depend, in order to expand the macro-economy beyond its optimal or even sustainable scale, is surely worse than just giving them a minimum income, and some leisure time, in exchange for doing no harm.

An artificial monetary rate of interest forced down by quantitative easing to equal a negative natural rate of interest resulting from uneconomic growth is not a solution. It is just baling wire and duct tape. But it is all that even our best and brightest economists can come up with as long as they are imprisoned in the empty world growth model. The way out of this trap is to recognize that the growth era is over, and that instead of forcing growth into uneconomic territory we must seek to maintain a steady-state economy at something approximating the optimal scale. Since we have overshot the optimal scale of the macro-economy, this will require a period of retrenchment to a reduced level, accompanied by much more equal sharing, frugality, and efficiency. Sharing means putting limits on the range of inequality that we permit; it has huge moral and social benefits, even if politically difficult. Frugality means using less resource throughput; it results in less depletion and pollution and more recycling and efficiency. Efficiency means squeezing more life-support and want-satisfaction from a given throughput by technological advance and by improvement in our ethical priorities. Economists need to replace the Keynesian-neoclassical growth synthesis with a new version of the classical stationary state.

Audit slams World Bank agency – Features – Al Jazeera English

Audit slams World Bank agency – Features – Al Jazeera English.

 

Disputes over land in Honduras’ Bajo Aguan Valley have led to the deaths of 63 people, mostly peasants [AP]
An internal World Bank investigation says the bank’s private lending arm violated its own social and environmental rules in approving a $30m loan to a Honduran palm oil magnate allegedly tied to the forced eviction and deaths of dozens of land activists.

The months-long investigation found the bank’s International Finance Corporation (IFC) failed to properly vet Honduran powerbroker Miguel Facusse’s Corporacion Dinant, a palm oil and food giant embroiled in one of Honduras’ deadliest land conflicts in recent history.

The IFC said it was “deeply saddened” by the loss of life resulting from the land conflicts – risks the agency determined were “manageable” when it initially assessed the palm oil project in 2008. Both the IFC andDinant said they disagree with parts of the audit released Friday but that they are taking the allegations seriously.

Due diligence

The audit by the Office of the Compliance Advisor Ombudsman (CAO) says a standard news search required by the World Bank revealed damning allegations against Facusse. Public news articles show Facusse allegedly misused his political influence, was accused of involvement in the murder of an environment activist and land disputes with indigenous communities, had an arrest warrant issued in relation to environmental crimes, and had his properties used for drug trafficking.

The search, the CAO said, shows “IFC staff either knew about these allegations and perceptions and failed to deal with them as required … or did not conduct the required news agency searches”.

David Pred, executive director of Inclusive Development International, said the case shines a spotlight on the kind of “dirty business” the World Bank is increasingly engaged in as it expands its investments in high-risk environments.

“This audit, and the Bank’s response to it, shows that IFC’s social and environmental requirements, touted as the ‘gold standard’, come with a wink and a nod that companies like Dinant can literally get away with murder and still boast the World Bank’s stamp of approval,” Pred said in an email to Al Jazeera.

A history of conflict

The blood is being shed in Honduras’ northern Aguan Valley, where land disputes are age-old. Agrarian reforms of the 1970s saw indigenous-held land redistributed to farmer cooperatives. Those cooperatives ended up in bankruptcy with neoliberal reforms, and in the 1990s, the government and cooperatives sold the land to a few wealthy Hondurans, including Facusse.

Instead of the accurate, adequate, and objective assessment of the allegations its policies require, the IFC is leaving the job to the fox that raided the chicken coop in the first place.

– Jessica Evans, Human Rights Watch

Activists claiming ownership of Dinant properties are known to play a game of cat and mouse with security forces, occupying disputed properties, being evicted, and then returning. The confrontations often turn violent, according to groups like the International Federation for Human Rights, which have monitored the conflict.

The CAO audit notes the murders of at least 102 people affiliated with the peasant movement in the Aguan Valley between January 2010 and May 2013, according to civil society groups. Forty of those deaths, the CAO said, were specifically linked by human rights groups to Dinant properties and security forces.

The audit also notes allegations that at least nine Dinant security personnel were killed by affiliates of the peasant movement.

Dinant’s spokesman Roger Pineda has denied the company’s involvement in violence against anyone embroiled in land disputes surrounding Facusse’s property. He told Al Jazeera Dinant’s security forces are the victims of attack by armed invaders trespassing on the palm plantations. Pineda also rejected allegations Facusse’s landing strips were used to transfer drugs. He told Al Jazeera that drug traffickers had forcibly taken over the property and that Facusse surrendered his airstrip to local military authorities until recent months.

Accountability

The five-point plan issued by the IFC in response to the audit said it would help Dinant conduct a massive security review and that the company would collaborate with local authorities to investigate credible allegations of unlawful or abusive acts.

“Moving forward, we will continue to monitor the implementation of Dinant’s environmental and Social Action Plan, and look to bolster our procedures in relation to environmental and social risks in fragile and conflict-affected areas,” the IFC said in response to the audit.

Leaving the job of investigating abuses to the people allegedly complicit in them is wrong, according to Jessica Evans, senior international financial institutions researcher and advocate at Human Rights Watch.

“Instead of the accurate, adequate, and objective assessment of the allegations its policies require, the IFC is leaving the job to the fox that raided the chicken coop in the first place,” Evans said. “Human lives and livelihoods are at stake here. The IFC should demand an external, expert investigation that could create a framework for Dinant to remedy any violations of its responsibility to respect human rights.”

The IFC said Dinant would lose its funding if it doesn’t comply with the action plan. The lending agency already put a hold on half of its $30m loan to Dinant in mid-2010, following human rights complaints by the Washington-based group Rights Action.

However, that did not stop the IFC from calling Dinant owner Facusse a “respected businessman” and later approving a $70m investment in one of Dinant’s biggest lenders, Banco Financiera Comercial Hondurena (Ficohsa). The investment will give the IFC a 10 percent stake in the Honduran bank.

‘Smart’ risks

The Word Bank watchdog found the IFC’s “deficiencies” are a by-product of its culture and incentives that measure results in financial terms.

“In a risk-averse setting, accountability for results defined primarily in financial terms may incentivise staff to overlook, fail to articulate, or even conceal potential environmental, social and conflict related risks,” the CAO said. “The result, however, as seen in this audit is that the institution may underestimate these categories of risk.”

The case is considered a test of World Bank President Jim Kim‘s leadership. Kim has staked his reputation on taking “smart risks” to end poverty, and on learning from past mistakes.

The CAO is conducting another investigation into how smart the risks were in another IFC project in Honduras. Its query into the human rights impact of the IFC’s investment in Ficohsa, and its relationship to Dinant, is due to be completed in June.

India Savings Deposit Scam Collapse Leaves Thousands Penniless – Bloomberg

India Savings Deposit Scam Collapse Leaves Thousands Penniless – Bloomberg.

Sudipta Sen was on the run when police arrested him on April 23 at Hotel Snow Land, a resort with views of the Himalayas in Sonamarg, India, about 2,700 kilometers northwest of his Kolkata base.

Sen’s Saradha Realty India Ltd., the anchor of an empire that took in small deposits and promised payouts of land, apartments or a refund of clients’ money with interest rates as high as 24 percent, was defaulting on thousands of deals. Employees of Sen’s media companies hadn’t gotten paychecks in months. As cash dried up, 1.74 million customers saw savings vanish, Bloomberg Markets magazine will report in its February issue.

The upheaval didn’t end with Saradha. Panicked depositors rushed to pull money from similar companies. Since April, more than 34 people have committed suicide, 13 of them Saradha agents and investors. A 50-year-old domestic helper south of Kolkata in Baruipur, one of many hubs of Sen’s activities, set herself ablaze after losing 30,000 rupees ($482).

Saradha Group, the parent of Saradha Realty, was among hundreds of unlicensed deposit-taking enterprises that serve India’s poor — and skirt regulators.

Clients scraped up as little as 100 rupees a month in a country where the World Bank’s Global Financial Inclusion Database found just 35 percent of adults had a bank account and 8 percent borrowed through formal channels in 2011.

Saradha Group Chairman and Managing Director Sudipta Sen was arrested on April 23 as…Read More

Goat Farmers

India requires such quasi-banks to register with state or federal authorities. Many don’t. Saradha and others avoid oversight by disguising themselves as real estate developers, goat farmers and emu raisers, says U.K. Sinha, chairman of the Securities and Exchange Board of India, the nation’s capital markets regulator, known as SEBI.

Sen, chairman and managing director of Saradha Group, said he owned 160 companies. About 15 operated as real firms, Sen’s lawyer Samir Das says.

Unlawful deposit companies proliferate in India. Saradha took in at least $200 million based on preliminary figures, Sinha says. Actual numbers may be bigger, he says. Such firms have raised a total of more than $2 billion, Sinha estimates.

Sen has been jailed since his arrest. Police have filed 155 charge sheets, formal documents of accusation, against Sen, Das says. Sivaji Ghosh, additional director general of the West Bengal police’s criminal investigation department, said in mid-December he expects a special court that will handle all Saradha-related cases to be set up soon.

Photographer: Subhankar Chakraborty/Getty Images

Sudpita Sen has been jailed since his arrest in April. A special court may be set up to… Read More

Saradha Fallout

What makes Saradha’s collapse noteworthy is the turmoil it spread across six states, a territory the size of Spain in eastern India, where access to banks is limited.

Depositors protested and mobs ganged up on agents. Abhimanyu Nayak, who worked for another unregistered collection firm called Seashore Group, jumped in front of a train in Odisha state in May as investors hounded him for their cash.

Saradha and its aftermath hurt so many people that the government had to step in, says Pratip Kar, who served as SEBI’s executive director from 1992 to 2006 and now works as a World Bank consultant.

“Ponzi schemes like Saradha create widespread havoc, like a tsunami,” says Kar, describing ploys in which companies repay depositors with money from new investors. “When the shopkeeper and the household helper and the rickshaw pullers are robbed of their minuscule savings, it is painful.”

New Powers

The Saradha fiasco sparked an overhaul of SEBI’s powers. The regulator has shut 15 companies and barred the owners from the capital markets. It’s investigating 20 more, Sinha says.

That’s a fraction of India’s fraudulent collection businesses, says Prithvi Haldea, chairman of researcher Prime Database in New Delhi.

“There are countless scams currently in operation in various sizes, shapes and forms,” he says. “Saradha led to a new law and that’s a good thing, but is it geared toward conquering all scams? Certainly not.”

In India, several regulators supervise banks and financial companies — creating gaps that scammers exploit. SEBI monitors so-called collective investment schemes, known as CISs, which typically deal with money pooled from customers.

SEBI, which had power to investigate but not enforce, can now search and seize property and recover wrongful gains, Sinha says. The government can also classify pools of more than 1 billion rupees as CISs and put them under SEBI’s purview. In the past, no threshold existed.

‘Nothing Escapes’

As for smaller scams outside SEBI’s radar, Sinha says, some states have passed a measure to protect depositors against unauthorized money raising. SEBI will share information with states, the corporate affairs ministry and the Reserve Bank of India to help fight fraud.

“We want to ensure nothing escapes,” Sinha says.

The reforms don’t go far enough, says Satyajit Das, author of a dozen books on financial risk, including “Extreme Money: Masters of the Universe and the Cult of Risk.”

“The regulatory infrastructure doesn’t actually keep up with reality,” he says, adding that scammers will simply create dozens of small companies to avoid the 1 billion rupee threshold.

“The authorities need to accept that in the modern financial system, these quaint distinctions between banks, nonbanks and CISs are a complete waste of time,” he says. Das says India needs one powerful financial regulator.

Ajay Shah, an economist at the National Institute of Public Finance and Policy in New Delhi, says hasty laws may not address the scope of a malfeasance.

‘Ponzi Schemes’

“Laws are enacted as a knee-jerk response to an event and often poorly thought through,” he says, commenting about the government’s reactions to financial scandals. “Ponzi schemes like Saradha are a visible sign that the government’s strategy is fundamentally broken.”

Lax law enforcement and India’s slow judicial system aid fraudulent companies, says Prime Database’s Haldea, who is also an investor-protection activist with a website listing economic offenders.

“People assume that they will never be caught or will get off lightly,” he says. “Ultimately, the fear of law has to go down the throats of fraudsters.”

Financial scams are hurting India as it battles an economic slump. The central bank predicts growth will remain at 5 percent in the 12 months ending on March 31, the same pace as in the previous fiscal year and the slowest growth in a decade.

Undermining Confidence

Harm to small investors undermines confidence in the financial system. When Indians lose cash, they put money into physical assets such as gold, which India imports, Shah says. That reduces household capital that powers the economy.

India raised the tax on gold imports three times in 2013 to curb demand and tackle a record $87.8 billion current-account deficit that weakened the rupee in August to an all-time low of 68.845 to the dollar.

“Beyond the actual dollars lost, these Ponzi schemes contaminate people’s confidence, and the financial markets become weak,” Shah says. “To have a comprehensive, vibrant economy, you need to have households that have confidence in an array of financial institutions and products, whether it’s a bank or mutual funds.”

Tuku Biswas lost her life savings to Saradha. Biswas, a sex worker in Kolkata’s Sonagachi neighborhood of multistory brothels, was 28 in 2012, when she discovered she had the HIV virus.

‘Sister’s Future’

Determined to support her 11-year-old sister, Biswas deposited 7,500 rupees a month with Sen’s Saradha Tours & Travels Pvt. Biswas expected a lump sum of 131,250 rupees — including the promised 17 percent interest — by August 2013. When Saradha imploded in April, she got nothing.

“That money was my sister’s future,” she says. “All I want is my money back. I don’t know how long I have left to live.”

Saradha lured clients with an array of pitches. Saradha Realty took cash as an advance for properties that the company didn’t identify at the outset, according to an April 23 statement from SEBI.

Investors chose land, an apartment or a refund of their money with average interest of 12 to 24 percent at the end of the agreement. Saradha also took as little as 100 rupees a month for 12 to 60 months. Some investors put in 10,000 to 100,000 rupees for 15 to 120 months or lump sums for 12 to 168 months.

Sen documented his own downfall in an April 6 letter to India’s Central Bureau of Investigation, four days before he fled Kolkata.

‘Women, Wine’

He said he made a costly foray into the media industry by acquiring television channels and newspapers in 2011. Close aides kept a major chunk of depositors’ money, he wrote. And marketing officials who recruited agents were illiterate, he said.

“They only understood money, women and wine,” Sen wrote.

Sen described his aspirations in the letter. “I never thought about my limitations,” he wrote.

“A few of my well-wishers cautioned that it is not possible to organize a big empire. But I did not hear anyone’s advice.”

Starting as a property agent in the 1990s, Sen became the owner of Saradha Construction Co. in West Bengal, according to local newspapers.

In July 2008, he established Saradha Realty as his deposit-taking business, hiring thousands of agents in four months. Saradha paid them about 30 percent of the cash they brought in — sparking a stampede for customers.

SEBI began questioning Sen’s business in 2010. He went on a takeover spree, his letter and corporate filings show.

Bogus Factory

He bought debt-ridden motorcycle assembler Global Automobiles Pvt. and kept 150 employees on the payroll, who pretended to work when people visited. The factory never produced a single motorcycle, former employee Lakhinder Ram says.

Sen denied to SEBI that he was running a collective investment scheme. He handed over 63 cartons of irrelevant information in 2012 to delay the regulator, according to SEBI’s statement.

In an April 1 letter, Sen again denied Saradha was running CISs, saying he was receiving money from sales and advance bookings with the help of brokers — a claim SEBI rejected.

Sen was with two associates when he was arrested in April, including Debjani Mukherjee, who joined Saradha Tours in 2008 and by 2011 was a director of 38 companies. As of early December, clients and employees had filed 390 so-called first information reports against Sen and his aides to police, which set criminal investigations in motion.

As officials dissect Sen’s enterprise aided by expanded powers, economist Shah says the lesson for India must extend beyond Saradha.

“Our entire approach to financial regulations today is completely wrong because it hurts the people and the economy,” he says.

To contact the reporter on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net

Bank of Finland Warns Debt Level Poised to Double: Nordic Credit – Bloomberg

Bank of Finland Warns Debt Level Poised to Double: Nordic Credit – Bloomberg.

The Bank of Finland is warning that the euro area’s best-rated economy risks sliding down a path that could see its debt burden rival Italy’s.

Finland has little room to deviate from a proposal to fill a 9 billion-euro ($12.3 billion) gap in Europe’s fastest-aging economy if it’s to avoid debt levels doubling in the next decade and a half, according to the central bank.

The northernmost euro member risks joining the bloc’s most indebted nations if the government fails to reform spending, according to calculations by the Helsinki-based Bank of Finland. Without the measures, debt could exceed 110 percent of gross domestic product by 2030, according to the bank. The ratio was 53.6 percent in 2012. Success with the plan would help restrain debt levels to about 70 percent by 2030, the bank said.

The central bank’s assessment shows that the government’s plan would have a “real impact,” Finance Minister Jutta Urpilainen said in an e-mailed response to questions via her aide. Structural reforms are needed if “the Finnish welfare state has a chance to survive,” she said.

Stable AAA

The only euro member with a stable AAA grade at the three main rating companies, Finland’s economy is struggling to emerge from the decline of its paper makers and its flagging Nokia Oyj-led technology industry. Export demand has failed to offset weak consumer demand, as companies fire workers and the government responds to deficits with cuts. Lost revenue is hampering government efforts to set aside funds needed to care for the fastest-aging population in the European Union.

In the period August to November, Finland’s six-party coalition put together a package to streamline and reduce public spending to eliminate a gap of more than 9 billion euros in public finances by 2017. The package consists of several different measures, each to be sent to parliament independently. Some of the measures, including changes to pensions and health-care providers, are still being drafted.

Finland’s “costs related to aging will grow faster than elsewhere within the next two decades,” Petri Maeki-Fraenti, an economist at the Bank of Finland, said in an interview. Aging costs will be “decisive” in accelerating debt growth after 2020, he said.

Forecasts Cut

The government reduced its economic forecasts on Dec. 19 for the 10th time since coming to power in June 2011. Even as exports look set to recover and rise 3.6 percent in 2014, GDP will grow only 0.8 percent after declining 1.2 percent in 2013, the Finance Ministry said.

The Bank of Finland’s calculations assume an average economic expansion of about 1.5 percent in the long term, compared with an average of 3.7 percent during 2003 to 2007, according to a February 2013 report by economists Helvi Kinnunen, Maeki-Fraenti and Hannu Viertola.

“We must get used to slower economic growth for an extended period of time,” Maeki-Fraenti said.

The average debt level in the euro area shot up more than 25 percentage points in five years after hovering around 70 percent for the majority of the last decade. Finland has followed suit, with the Finance Ministry estimating its debt-to-GDP ratio rising to 60 percent this year from 33.9 percent in 2008.

Debt Load

Euro-area debt reached 93.4 percent of GDP at the end of the second quarter, according to theEuropean Central Bank. Italy reduced its government debt to 103 percent of GDP in 2007. Since the debt crisis, its debt has begun mounting again, rising to 134 percent of GDP this year, the European Commission forecast Nov. 5.

Debt levels exceeding 90 percent hurt economic growth, Harvard University economists Carmen Reinhart and Kenneth Rogoff argued in a 2010 paper. Three years later, their claims were refuted by University of Massachusetts researchers, citing “serious errors” that overstate the significance of the boundary.

The World Bank set a similar “tipping point” at 77 percent in a 2010 paper, while a 2011 studyby the Bank for International Settlements identified a sovereign debt threshold of 85 percent. An IMF report from 2012 found “no particular threshold” that would consistently precede low growth.

Finding an absolute threshold for debt after which economic growth starts slowing is “quite impossible,” Bank of Finland’s Maeki-Fraenti said. Addressing sluggish growth and public debt is necessary for Finland due to the pressure from aging and the decline of its cornerstone industries, he said.

“As the debt level is still relatively tolerable and our unemployment hasn’t shot up in the same way, it has perhaps led some to believe that the problems shall be fixed on their own as export demand revives,” he said. “Our view is slightly more pessimistic.”

To contact the reporter on this story: Kasper Viita in Helsinki at kviita1@bloomberg.net

To contact the editor responsible for this story: Christian Wienberg atcwienberg@bloomberg.net

The Private Sector Is Borrowing Again – And That’s Not Good

The Private Sector Is Borrowing Again – And That’s Not Good.

Since at least the 1980s, US policy has been to convince us to borrow as much as possible on pretty much anything we could think of. This worked brilliantly until 2008, when homeowners, consumers and businesses hit a wall and private sector defaults began to exceed new loans. Another Great Depression was imminent.

But instead of allowing this natural cleansing process to run its course, governments around the world stepped into the breach themselves, borrowing tens of trillions of dollars to replace evaporating private sector debt. The idea, to the extent that there was one, was to buy time for traumatized consumers and businesses to relax a bit and start borrowing again.

This appears to be happening. The latest Fed Z.1 report shows overall US debt growing again, with the private sector leading the way.

US debt growth percent change 2013 v1

It’s not surprising that near-zero interest rates and trillions of dollars of newly-created currency would get people borrowing again. What is surprising is that anyone thinks this is a good thing. In 2013 total US debt, equity prices, household net worth, large-bank assets and derivatives books, and a long list of other debt-related measures pierced the records they set in 2007. In other words we’ve recreated the conditions that prevailed just before the world nearly fell apart.

Will the result be different this time? It’s hard to see how, especially since developed-world governments now have roughly twice as much debt as they did back then, so their ability to ride to the rescue will be limited.

As this is written the Fed is announcing that it will scale back its debt monetization to only $75 billion a month, or $900 billion a year. Its balance sheet, which just hit $4 trillion, will grow by nearly 25% in 2014, to nearly $5 trillion, which is a measure of how much new currency it is creating and pumping into the banking system.

The next stage of the plan is to get the banks to start lending this money, which would, through the magic of fractional reserves, produce loans in some large multiple of the original amount. So we might be on the verge of trading a nasty-but-comprehensible Kondratieff Winter for something a lot wilder.

 

The Emerging New World Order – Part 2. The End of Sovereignty » Golem XIV – Thoughts

The Emerging New World Order – Part 2. The End of Sovereignty » Golem XIV – Thoughts.

The Emerging New World Order – Part 2. The End of Sovereignty

by  on DECEMBER 12, 2013 in LATEST

In part one I wrote, ” …in every country the people who run the State have largely decided they no longer wish to serve the people but prefer instead to serve the interests of a Global Over-Class”. I believe we are in the midst of an historical shift in the alignment of loyalty and political power, away from democracy. I want to make it clear I do not believe the new arrangement of political and economic power was the clear goal of some hidden cabal. I think each change had an ideological drive behind it but, to begin with at least, each change was largely opportunistic and piecemeal. These pieces have, however, added up. And as time has gone by and the different pieces have accumulated, I think some wealthy and powerful people as well as some who were ideologically driven, have seen the chance to make something they desired out of the pieces. I think those who never liked democracy-for-the-masses, but preferred something that was more like the Roman senate – a place for the sons and daughters of the already wealthy and powerful families to ensure they remained wealthy and powerful – I think those people have seen an historical chance to further their vision of the future they desire and, particularly in the last twenty or so years, have actively schemed and pushed for it. Some of them have lobbied for it from Wall Street and the City, others of the same elite have written laws for it when they were in Congress and Parliament. And always they have found affordable lackeys among our political class.

Of course no one is going to admit to this. No one wants it to be clear that this is what is happening. So what our leaders have needed for some time, is a way of  serving their new masters, while claiming to be still serving us; a way of saying,”The best, if not the only, way for the State to help you, the nation/people, is for us to first help these other people.”

The  Trickle Down ‘theory’ was an early attempt . But Trickle Down was always too clearly a political sound-bite  rather than a grand theory.  What was really needed was a new vision of what the ‘Greater Good’ should look like and a theory of how to get there. And critically it had to be something that, it could be claimed, Nations could not deliver. Not only not deliver but were actively standing in the way of. There had to be a shining future which the old order of Nation States was preventing us from reaching. And this idea has, I think, surfaced again and again in different guises, certainly since WW1, but more and more prominently  in the last three decades. The idea that Nations and nationalism are standing in the way of the progress and prosperity that only a free and unfettered global market can offer, and that the State must remedy this, by limiting the power and sovereignty of their Nations is, I suggest, one of the most powerful ideas of our age and is now maturing into  the ideology and politics the Global Over-class has been seeking.

A brief history of how the State sold out the Nation

In the aftermath of WW1 the League of Nations was created because, it was said, nations left to their own nationalistic devices could not keep the peace. The League’s stated goals were nearly all political and very little mention was made of finance or trade. Perhaps if the League had prospered it might have been adopted by the then rising power of global finance and history might have been very different. Instead the Great Depression happened and the power of global finance was set back. The regulations brought in to prevent another systemic Banking Crisis held back the unfettered growth of finance for two generations. Only finally undone at the end of the century.

After WW2, however, the idea of supra-national governance, and the inadaquacy of nationalistic governments,  rose again this time with the creation of, among other things, the IMF, World Bank, and the United Nations. This time the agenda of the supra-national powers was much more focussed on finance and trade. As US Secretary of State from 1933-44, Cordel Hull put it,

[U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war….

Trade barriers and ‘unfair economic competition’ were the creations of national governments, free trade was, therefore, the remedy and was to be championed by the supra-national, impartial IMF and World Bank. Of course in reality the IMF and WB were not impartial. Whatever their stated purpose, the IMF and WB were tools of one ideology only , the freemarket , and were the post-war means by which the powerful nations crow-barred open the economy of any poorer nation that fell into their grasp. The attack on sovereignty had begun.

But it was little noticed in the West. In part because people were too busy being comfortable and in part because the UN was the part of Bretton Woods we saw most of in the West. The UN didn’t have an ideology – so the publicity went – other than universal declarations of human rights. It was all about aid for the starving and the rule of law. Sheltered behind this public face, however, the IMF, in particular was in every way different. It was completey ideological. And its ideology was narrowly free-market. It had the mandate and the power to force governments to alter their policies in favour of open markets and international western companies.

While the UN rushed aid to the starving, the IMF forced poor nations to get rid of tariffs that tried to nurture local farmers paving the way for global agribusiness. Local economies were laid bare on every hillside where global capital picked their carcasses clean. But because it was happening over there, few of us over here gave a damn. And if anyone was tempted to see any of it as an attack on sovereignty, it was given other names, such as ‘liberalization’. We weren’t attacking the sovereignty of poor peoples, we were helping them.

Their governments, we told ourselves, were corrupt and had no vision beyond a tribal nationalism. We, on the other hand, being wealthy white people, could save them. Let our companies in and we’ll lend you the money to save yourselves from nationalism and poverty. Above the entrance to the freemarket future we may as well have put a sign which read, “Shuld Macht Frei”. But we still did not think this was ever going to be our future.

We might have been less sanguine had we been more aware of what the poor relation of the Bretton Woods era, the GATT, would one day bring us.The General Agreement on Trade and Tariffs (GATT) was created in 1947 with the purpose of regulating international trade mainly by reducing “tariffs and other trade barriers”. Those other trade barriers were anything from subsidies for local industries, to environmental requirements and labour laws. In 1995 the GATT hatched the World Trade Organization (WTO). What made the GATT and WTO quite different from the IMF and WB is that it was no longer just a matter of policy as it had been with the IMF, it was now about rolling back specific laws and tariffs. AND you didn’t have to fall into debt to find yourself subject to their rule. Your government simply had to sign away some sovereignties and “voila”, your government had made you subject to rules and a world governing body you had not elected and had no power over at all. The power in the WTO very obvioulsy and clearly lay with the corporations, their lobbyists and their experts.

Thus while the IMF and WB trampled mainly on poor nations the WTO had power over any nation including the wealthy. And it was no longer purely at the level of trade policy and politics, it now opened to corporations an avenue for them to object to and challenge specific sovereign laws and tariffs. The rules of the GATT and the WTO were specifically created in order to supercede any nation’s and region’s laws where they concerned trade.

While the Conservative (Tory) party here in Britain, would rail about Europe ‘stealing away our sovereignty’, the truth was that  those same Tory politicians had been delighted, in 1995,  to sign away far more sovereignty to GATT. The difference for them was that Europe was seen as still harbouring some vaguely Socialist ideas about environment and employment rights, while the WTO very specifically did not recognize such things and in fact regarded them as exactly the sort of barriers to trade it was there to get rid of.  Such was and is the hypocrisy of the Tories, and now UKIP (UK Independence Party), about sovereignty and Europe. Labour was at least consistent in happily handing over soverignty to anyone and everyone. And the faithful western main-stream media never bothered to say a word nor to offer even an analysis let alone a critique.

Throughout the 90′s and noughties the GATT and the WTO were the primary means whereby corporate interests in one country were able to stop or roll back any rules and regulations they didn’t like, in any other country. Suddenly westerners who had never before felt threatened by international capitslism, woke up. There were suddenly ‘anti capitalist’ protests in rich nations. People who had never bothered about what capitalism did in poor nations were suddenly outraged. Now things were being done to them in their country and that was wrong! Of course there had always been those who had fought against what was done in the developing world. I don’t meant to suggest there weren’t. I am just noting how suddenly their numbers were swelled when they realized it could happen here, to them.

BUT it was still the case under the WTO rules that corporate interests could only roll back sovereign national rules and laws via their own national governments. The companies of a country could complain to their government about a foreign law or tariff but it had to be their own government, their State, which went to the WTO and filed a complaint. Thus although more corporate than the earlier IMF and WB, the WTO is still tied to the power of the State.

Which bring us nearly  up to date. The last and by far the most dangerous part of the State’s dismantling of national sovereignty, although it has its roots back in the 1970′s, has really only taken off in the last 5 years and has only in the last few months received much attention in the main stream media.

Bilateral Investment Treaties (BITs)

If the WTO is the State acting on behalf of corporations, then Bilateral Investment Treaties and their rules for “Investor-State Dispute Settlement” give corporations the power to challenge and over-rule nations directly. They are entirely non-democratic and stand completely outside of national based law and even outside of most of international law. They are therefore a major crystalization of the shift in power from the Nation to the Corporation and of course it has been the State which has facilitated this transfer of power.

I apologize that the preceeding history took so long and that I have therefore still not written about BITs. I just felt the context of what came before and what still today makes up a large part of the over-ruling of the Nation was important enough to do properly. I promise I will write about BITs in part 3.  I hope you’ll bear with me .

 

China Is On A Debt Binge And A Buying Spree Unlike Anything The World Has Ever Seen Before

China Is On A Debt Binge And A Buying Spree Unlike Anything The World Has Ever Seen Before.

Chinese Black Dragon - Photo by Angelus

When it comes to reckless money creation, it turns out that China is the king.  Over the past five years, Chinese bank assets have grown from about 9 trillion dollars tomore than 24 trillion dollars.  This has been fueled by the greatest private debt binge that the world has ever seen.  According to a recent World Bank report, the level of private domestic debt in China has grown from about 9 trillion dollars in 2008 to more than 23 trillion dollars today.  In other words, in just five years the amount of money that has been loaned out by banks in China is roughly equivalent to the amount of debt that the U.S. government has accumulated since the end of the Reagan administration.  And Chinese bank assets now absolutely dwarf the assets of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England combined.  You can see an amazing chart which shows this right here.  A lot of this “hot money” has been flowing out of China and into U.S. companies, U.S. stocks and U.S. real estate.  Unfortunately for China (and for the rest of us), there are lots of signs that the gigantic debt bubble in China is about to burst, and when that does happen the entire world is going to feel the pain.

It was Zero Hedge that initially broke this story.  Over the past several years, most of the focus has been on the reckless money printing that the Federal Reserve has been doing, but the truth is that China has been far more reckless

You read that right: in the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!

 Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!

I was curious to see what all of this debt creation was doing to the money supply in China.  So I looked it up, and I discovered that M2 in China has grown by about 1000% since 1999…

M2 Money Supply China

So what has China been doing with all of that money?

Well, they have been on a buying spree unlike anything the world has ever seen before.  For example, according to Reuters China has essentially bought the entire oil industry of Ecuador…

China’s aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador.

Last November, Marco Calvopiña, the general manager of Ecuador’s state oil company PetroEcuador, was dispatched to China to help secure $2 billion in financing for his government. Negotiations, which included committing to sell millions of barrels of Ecuador’s oil to Chinese state-run firms through 2020, dragged on for days.

And the Chinese have been doing lots of shopping in the United States as well.  The following is an excerpt from a recent CNBC article entitled “Chinese buying up California housing“…

At a brand new housing development in Irvine, Calif., some of America’s largest home builders are back at work after a crippling housing crash. Lennar, Pulte, K Hovnanian, Ryland to name a few. It’s a rebirth for U.S. construction, but the customers are largely Chinese.

“They see the market here still has room for appreciation,” said Irvine-area real estate agent Kinney Yong, of RE/MAX Premier Realty. “What’s driving them over here is that they have this cash, and they want to park it somewhere or invest somewhere.”

Apparently a lot of these buyers have so much cash that they are willing to outbid anyone if they like the house…

The homes range from the mid-$700,000s to well over $1 million. Cash is king, and there is a seemingly limitless amount.

“The price doesn’t matter, 800,000, 1 million, 1.5. If they like it they will purchase it,” said Helen Zhang of Tarbell Realtors.

So when you hear that housing prices are “going up”, you might want to double check the numbers.  Much of this is being caused by foreign buyers that are gobbling up properties in certain “hot” markets.

We see this happening on the east coast as well.  In fact, a Chinese firm recently purchased one of the most important landmarks in New York City

Chinese conglomerate Fosun International Ltd. (0656.HK) will buy office building One Chase Manhattan Plaza for $725 million, adding to a growing list of property purchases by Chinese buyers in New York city.

The Hong Kong-listed firm said it will buy the property from JP Morgan Chase Bank, according to a release on the Hong Kong Stock Exchange website.

Chinese firms, in particular local developers, have looked overseas to diversify their property holdings as the economy at home slows. Chinese individuals also have been investing in property abroad amid tight policy measures in the mainland residential market.

Earlier this month, Chinese state-owned developer Greenland Holdings Group agreed to buy a 70% stake in an apartment project next to the Barclays Center in Brooklyn, N.Y., in what is the largest commercial-real-estate development in the U.S. to get direct backing from a Chinese firm.

And in a previous article, I discussed how the Chinese have just bought up the largest pork producer in the entire country…

Just think about what the Smithfield Foods acquisition alone will mean.  Smithfield Foods is the largest pork producer and processor in the world.  It has facilities in 26 U.S. states and it employs tens of thousands of Americans.  It directly owns 460 farms and has contracts with approximately 2,100 others.  But now a Chinese company has bought it for $4.7 billion, and that means that the Chinese will now be the most important employer in dozens of rural communities all over America.

For many more examples of how the Chinese are gobbling up companies, real estate and natural resources all over the United States, please see my previous article entitled “Meet Your New Boss: Buying Large Employers Will Enable China To Dominate 1000s Of U.S. Communities“.

But more than anything else, the Chinese seem particularly interested in acquiring real money.

And by that, I mean gold and silver.

In recent years, the Chinese have been buying up thousands of tons of gold at very depressed prices.  Meanwhile, the western world has been unloading gold at a staggering pace.  By the time this is all over, the western world is going to end up bitterly regretting this massive transfer of real wealth.

Unfortunately for the Chinese, it appears that the unsustainable credit bubble that they have created is starting to burst.  According toBloomberg, the amount of bad loans that the five largest banks in China wrote off during the first half of this year was three times larger than last year…

China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd. and its four largest competitors expunged 22.1 billion yuan of debt that couldn’t be collected through June, up from 7.65 billion yuan a year earlier, regulatory filings show.

And Goldman Sachs is projecting that China may be facing 3 trillion dollars in credit losses as this bubble implodes…

Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”

Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.

The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.

The Chinese are trying to get this debt spiral under control by tightening the money supply.  That may sound wise, but the truth is that it is going to create a substantial credit crunch and the entire globe will end up sharing in the pain…

Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy.

The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.

This could ultimately be a much bigger story than whether or not the Fed decides to “taper” or not.

It has been the Chinese that have been the greatest source of fresh liquidity since the last financial crisis, and now it appears that source of liquidity is tightening up.

So as the flow of “hot money” out of China starts to slow down, what is that going to mean for the rest of the planet?

And when you consider this in conjunction with the fact that China has just announced that it is going to stop stockpiling U.S. dollars, it becomes clear that we have reached a major turning point in the financial world.

2014 is shaping up to be a very interesting year, and nobody is quite sure what is going to happen next.

 

 

How Much Energy do we Really Need?

How Much Energy do we Really Need?. (source)

By Breakthrough Institute | Fri, 01 November 2013 23:22 |
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In the early 1920s, when my grandparents were just small children, only about 40% of Americans had access to electricity. Over the course of a generation that number reached close to 100%. Today, inexpensive, reliable and plentiful access to electricity is something that most people in OECD countries take for granted. I was reminded about this when I attended the recent annual meeting of the Colorado Rural Electric Association, a group that decidedly does not take electricity for granted. The meeting was opened by appealing to core shared values: “The greatest thing on earth is to have the love of God in your heart, and the next greatest thing is to have electricity in your house.”

Yet billions of people around the world today do not have electricity in their houses. And while most projections see energy use expanding greatly in the coming decades, they also expect 1 to 2 billion to be living without electricity even by 2035. That may very well be the future we get. But it doesn’t have to be the future we work toward. To the extent that we allow such forecasts to constrain our debates over global energy and climate change mitigation, we do a disservice to the global poor, whose future wellbeing will undoubtedly require more-robust energy access.

Related article: Institutional Investors Concerned About “Unburnable Carbon” Fallout

The US Energy Information Administration, for example, projects that world energy consumption will increase by the equivalent of about 4,000 power plants in 2035 (about 1.7% per year) — or from 500 quads to 770 quads. A “quad” is a quadrillion BTUs, or about the same energy produced over a year by 15 1-gigawatt power plants, e.g., nuclear, coal or gas. While 4,000 new power plants worth of energy consumption sounds like a lot, after taking projected population growth into account, by 2035 global per capita energy use increases only by about 23% (data from the World Bank and the United Nations). In other words, from 2010 to 2035 global per capita energy consumption is projected to grow from about the average per capita consumption of Chile today to that of Croatia today, which is not a big change.

Advancing global human development requires that we ask different questions.

Rather than starting from today and asking how much energy the world might consume in 2035, let’s turn the question upside down. Let’s postulate different levels of energy access, efficiency, and equity for 2035, and ask what it would imply in terms of required energy supply, applying an approach that policy wonks call “backcasting.”

For instance, consider sub-Saharan Africa (minus South Africa), which today has about 30 gigawatts of electricity generating capacity, according to Morgan Bazilian, Deputy Director of the Joint Institute for Strategic Energy Analysis. To raise the region to the average per capita electricity access available in South Africa would require 1,000 gigawatts (source here in PDF). In other words, sub-Saharan Africa would need to increase its installed capacity by 33 times to reach the level of energy use enjoyed by South Africans — and 100 times to reach that of Americans.  The scale of the energy access challenge is enormous.

For this exercise I am going to start with a focus on electricity consumption, and use three countries in 2010 as analogies — Bulgaria, Germany and the United States — to represent low, medium and high levels of energy access assuming levels of efficiency and equity similar to each. In 2010 Bulgaria saw about 4,500 kWh of electricity consumption per capita per year, Germany 7,100 and the US 13,400. For comparison, the International Energy Agency defines “energy access” to be about 250 kWh per household per year, or about 2% of that used in the average American household. The global average in 2010 was just under 3,000 kWh per capita per year.

Ambition Gap in GLobal Energy Access

The implied increase in electricity consumption by 2035 to bring the world average to Bulgaria, Germany and US 2010 levels is 88%, 200% and 460%. These represent annual increases in electricity consumption of 2.6%, 4.5% and 7.2% respectively.  Because the EIA projects electricity production to grow at a rate faster than overall energy consumption, the Bulgaria (low) scenario is similar to its projection for overall growth in global energy consumption to 2035.

Bulgaria’s 2010 GDP was $14,160 (World Bank PPP Dollars), and the world average was $11,500. Attaining a 2035 global average per capita GDP equal to that of Bulgaria in 2010 implies an annual GDP global growth rate of 0.8%, which seems low, both in historical perspective and with respect to expectations. In contrast, Germany’s 2010 GDP was $40,230 and the US was $48,820, which if were to be the global average in 2035 imply annual growth rates of 4.5% and 7.2% respectively.

Global Energy Access

Let’s try to put these numbers into perspective with respect to total energy consumption in 2035. In terms of quads, the low, medium and high scenarios imply a total 2035 consumption of 940, 1,500 and 2,310 quads, or an increase over the EIA 2035 projection of 170, 1,000 and 1,810 quads. These represent the equivalent of a doubling, a tripling and more than a quadrupling of global energy consumption in 2010. Of course, different assumptions (e.g., about electricity vs. liquid fuels, etc.) will lead to different numbers, but qualitatively much the same results. Global energy access as you and I understand the concept implies massive amounts of new energy.

Related article: Fukushima Amplifies Japanese Energy Import Dependence

Another way to evaluate these numbers is to compare them to the magnitude of the energy challenge implied by policies seeking to address climate change. Decarbonizing the global economy to a degree consistent with low stabilization targets for atmospheric carbon dioxide implies replacing about 80% of current energy – about 400 quads – and meeting all future energy demand with carbon free sources of energy.  A 2035 world which consumes energy at the level of 2010 Bulgaria implies more than a doubling of needed carbon-free energy. Germany and US equivalency implies almost a quadrupling and close to a sextupling, respectively. Is it any wonder that many stabilization scenarios used in climate policy analyses keep poor people mostly poor?

So what to take from these numbers? I suggest three conclusions.

First, a world of energy access as that concept is understood by most people in the wealthy parts of the world implies a level of energy consumption far beyond that contained in conventional projections of consumption for the next several decades. Securing such energy access will require much greater policy attention than has so far been devoted to the issue. Just as in the US in my grandparents’ generation, market forces alone will be insufficient to provide energy for all. Concerted public action, perhaps coordinated to some degree globally, will be necessary.

Second, the magnitude of the challenge of providing energy for all is at least as large as the challenge implied by accumulating carbon dioxide in the atmosphere, and perhaps many times larger. Independent of the climate issue, there are good justifications why diversifying the global energy mix beyond fossil fuels makes sense, for security, environmental, health and economic reasons.

It would therefore seem obvious that those who prioritize climate might find common ground with those who favor increasing energy access to support major new initiatives in energy innovation and deployment. Such an approach would at least address the split between rich and poor nations that has characterized international climate policies for decades. Further, a wealthier world with more equity in energy access will be far better positioned to deal with the technological challenges of decarbonization. Those in the climate movement who express frustration that their issue has not been judged important enough to motivate aggressive steps toward energy innovation have overlooked energy access as a much broader base for securing and sustaining broad support around the world for advances in energy technologies and their deployment.

Finally, independent of time scale, the world is irreversibly moving towards greater energy access – in fits and starts to be sure — but there can be no doubt about the aspirations of the almost 6 billion people in non-OECD countries who collectively consume as much energy as the 1.2 billion in OECD countries. The world of the future will consume vastly more energy than the world today. The only questions are how efficiently and effectively we get to that high energy world. Putting energy access at the center of policy discussions would be a smart first step.

By. Roger Pielke Jr.

 

Brazil’s Flaws Are Clear… | Zero Hedge

Brazil’s Flaws Are Clear… | Zero Hedge. (source)

While Eike Batista’s collapse from grace may be the poster child for the country, this deep dive into the Latin American economy concludes Brazil’s flaws are clear. Commodity prices have been volatile; global growth has been weak and inconsistent. Brazil can no longer depend on these factors for growth. A closer look reveals that internal conditions are progressively becoming Brazil’s main economic foe. Ironically this is good news as the country is increasingly in a position to take control of its destiny. What is needed is decisive leadership and effective solutions to the long-term problems plaguing the country. Short-term stimulus measures and even supply-side measures such as reduced taxes have clearly not stimulated the economy. Brazil must invest in its own future.

Via Rodrigo Serrano of RCS Investments,

Brazil’s emergence as a significant economic force over the past decade generated noteworthy investor enthusiasm. From 2003 to 2008, an amalgamation of principal factors such as: macroeconomic stability stemming from prior reforms in the country, a recovering U.S. economy from its 2001 recession, historically low global interest rates, appreciating commodity prices, and rising demand from China set the stage for a sustained period of solid economic growth in Brazil.

While most of the aforementioned tailwinds provided a sound incubator for solid economic growth across all BRIC nations during the same period; Russia, India, and China averaged 7.1%, 8.0%, and 11.3% respectably; it was Brazil that more than doubled its rate of growth from 2.0% during 1997-2002 to 4.2% from 2003-2008 according to the World Bank. This improvement was the best among the BRIC nations.

As the 2008 financial crisis approached, many prominent investors and academics, fond of the bullish long-term prospects of the BRIC nations, entertained the decoupling thesis. From the Economist: “Yet recent data suggest decoupling is no myth. Indeed, it may yet save the world economy. Decoupling does not mean that an American recession will have no impact on developing countries… The point is that their GDP-growth rates will slow by much less than in previous American downturns” (Economist: The decoupling debate).

While the American downturn and subsequent financial crisis did precipitate a global recession largely debunking the idea that BRIC nations could step in and save the world economy,investor interest in Brazil only intensified when the event seemed like it would be little more than a slight bump in the road in terms of economic growth. Brazil’s economy registered a scant contraction of 0.3% in 2009, which was then followed the following year by the strongest pace of annual growth in 25 years at 7.5%. Furthermore, Brazil’s Bovespa index rocketed higher from the nadir of its stock market crash in late 2008 by roughly 129% by the end of 2009, the second best performance among BRIC nations over that period after Russia’s MICEX index.

Despite these impressive performance statistics, since peaking in 2010, economic growth has been widely lackluster, souring investor sentiment and bringing into the spotlight the panoply of structural problems facing Latin America’s largest economy. This extensive report covers a brief economic history of Brazil, a focus on the country’s current economic impediments, and steps for positive future development.

Full report below:

RCS Investments: Brazil Special Report

 

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