Category Archives: Globalization

UK About to Implement Massive Tax Break for Banks; Is the US Far Behind? (Updated)

The UK is about to implement a tax code change that amounts to a massive subsidy for large corporations, most of all big banks. The remarkable bit is that this is taking place when the UK is projected to fall short of its budget targets, at a time when the government professes to take that sort of thing seriously. Although we don’t hew to the logic of austerity in the wake of a financial crisis (the better course of action is to encourage debt renegotiations/writedowns, and offset the contractionary impact with fiscal stimulus), a big tax break is contrary to the official policy stance.

For those in the US who have steered clear of the budget drama on the other side of the pond, a story from from the Financial Times just over a week ago will give you a sense of the state of play:

George Osborne says he has little option but to push on with the harshest public spending cuts in living memory because a reversal would alarm the bond markets and plunge Britain into “financial turmoil”.

Alexander Gloy: What a taifun in Vietnam taught me about the Euro crisis

By Alexander Gloy, CIO of Lighthouse Investment Management

As I was traveling through Vietnam in the mid-nineties our bus drove through an area visited by a taifun. The road was running on a slightly elevated dam, so initially there was no obstacle to continue the journey. Looking out of the window there was water on both sides as far as the eye could see. Eventually the water rose to overflow the road, but the bus kept going.

A Volkswagen transporter, after having passed the bus in a moment of exuberance, was soon found in the ditch with water up to the roof – there was no way to tell where the road ended and the ditch began. The water rose further and started entering the bus through the front door. Still, the driver kept going. I was amazed at how little damage occurred despite the vast flooding. The flood waters slowly receded towards the ocean. Uninhibited by any dams, the water had enough space to expand.

At one point, the water had washed out the elevated road, and a gaping hole forced even our bus to stop. I thought this to be the end of the trip. Miraculously, a bunch of locals showed up, and, with the help of a bulldozer, quickly filled the hole with large rocks. All passengers were asked to de-board as the bus slowly wiggled across the rocks. And we were ready to resume our trip. Closer to the coast we saw the effects of wind damage; at least every third home had been cut in half by a fallen palm tree. Pigs and chicken ran around disoriented, as their barn had probably disintegrated. Despite the damage there was no feeling of this being a catastrophic event; the houses would probably be repaired (they were covered with palm leaves) within a few days, and life would get back to normal.

Compare this to what happens in our “developed” countries when house prices decline by 10 or 20 per cent: the wheels of the entire financial system come off.

I am not suggesting we all live in thatch covered huts. But building higher and higher dams with flimsy sandbags just increases the pressure (and leads to much greater damage when the dam finally breaks).

Look at how Euro-zone politicians and central bankers are increasing the risks by building higher and higher dams with flimsy sand bags.

A Whole Bunch of Prominent Economists Backs the Use of Capital Controls

A letter signed by over 250 economists opposing restrictions on capital controls is more of a shot across the bow than it might appear to be. The letter with signatories appears here, and it includes highly respected trade and development economists like Ricardo Hausmann, Dani Rodrik, Joe Stiglitz, and Arvind Subramanian; we are reproducing the text below:

John Bougearel: Claims the Job Market Will Boom Are Entirely Unsubstantiated

By John Bougearel, author of Riding the Storm Out and Director of Financial and Equity Research for Structural Logic

A decade ago, the Bureau of Labor Statistics predicted that the U.S. economy would create nearly 22 million net jobs in the 2000s.

Obama said with the benefit of his stimulus measures, the US economy would create three million jobs in 2010. The actual number of jobs created in 2011 was 1.12 million (before final benchmark revisions). Now, the CBO is projecting 2.5 million jobs will be created annually from 2011 to 2015.

Faith in the US gov’t’s ability to create 2.5 million jobs for the next 5 yrs (one of the several silly and preposterous CBO projections) is sorely misplaced. The CBO has sugarplums dancing in their heads. Their 2011-2016 forecast for the US jobs market is disingenuous, misleading poppycock.

What if China’s GDP is Seriously Overstated?

Michael Pettis has released one of his carefully reasoned posts, this one on the dark art of guesstimating what China’s GDP really is, given the notorious unreliability of its official data.

The strength of Pettis’ approach sometimes works to his advantage. He does a great job in breaking down his arguments to clear, easy to understand, step-by-step reasoning. That tends to make his posts pretty long. In this case, that meant that the part I though was most provocative came towards the end, when impatient readers might have figured they had gotten the drift of his gist and moved on.

In this one, he starts with the last GDP release, and in particular, the implications the fact that its alarmingly high investment rate continues to increase at a stunning clip. But he then turns to the rather tiresome debate as to when China’s economy will overtake that of the US, and discusses the possibility that the GDP figures touted now could well be overstated by a considerable degree:

Matt Stoller: The Real China Problem Runs Through JPM and Goldman

By Matt Stoller, the former Senior Policy Advisor for Rep. Alan Grayson. His Twitter feed is @matthewstoller

The Federal Open Market Committee releases its transcripts on a five year time lag. Last week, we learned what they were saying in 2005. Dylan Ratigan blogged an interesting catch: Dallas Fed President Richard Fisher expressed his frustration about Chinese imports. Not, of course, that there were too many imports, but that our ports weren’t big enough to allow all the outsourcing American CEOs wanted.

Fisher is just the latest Fed official to applaud this trend. Here’s the backstory. In the 1970s, there was a lot of inflation. The oligarchs of the time didn’t like this, because it made their portfolios worth less money. So they decided they would clamp down on inflation by no longer allowing wage increases. To get the goods they needed without a high wage work force, they would ship in everything they needed from East Asia and Mexico. The strategy worked. Inflation collapsed. Wages stopped going up. There were no more strikes. Unemployment jumped….But basically this was a way of ensuring that banks and creditors could make a lot of money that would instead go to workers.

What a “Get Tough With China” Stance Would Really Look Like

Before every get-together with China, the US goes through some ritualized complaining (the value of its currency has been the recent big talking point), the Chinese do some sabre rattling of their own, and perilous little of substance happens, except that the Chinese continue to have an economy with a substantial current account surplus, which not only works to the detriment of its major trade partners, but at this scale contributes to financial instability. So in a perverse way, China’s ongoing trade surplus is everyone’s problem.

La Niña as Black Swan – Energy, Food Prices, and Chinese Economy Among Likely Casualites

Reader Crocodile Chuck highlighted an important post at Houses and Holes, an economics-oriented Australian blog. While Australia is reeling from the immediate impact, the broader impact of 2010-11 weather patterns may have much bigger ramifications for food and energy prices in Australia and abroad.

The post focuses on the possibility, increasingly endorsed by top meteorologists, that the heavy Australian rains are the result of a super La Niña, the last of which was seen in 1973-4,the time of the last severe flooding in Queensland. Super La Niñas are hugely disruptive to agricultural production and can have other nasty knock-on effects (some contend the 1917 La Niña helped spawn the 1918 influenza pandemic).

In this case, the damage of a super La Niña will not only increase food costs at a time when price rises and food scarcity are already a major concern, but will likely extend to energy prices as well. That one-two punch would be particularly devastating to China.

Marshall Auerback: Chinese Trade Policy Must Focus on Social Consequences

By Marshall Auerback, a portfolio strategist and hedge fund manager; first posted at New Deal 2.0

Focusing on currency isn’t going to cut it for America’s workers.

You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.

Satyajit Das: European Death Spiral – Communicable Diseases

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

Communicable Diseases

European politicians and central bankers have provided useful geographical clarifications. Prior to succumbing to the inevitable, the Ireland told everyone that they were not Greece. Portugal is now telling everyone that it is not Greece or Ireland. Spain insists that it is not Greece, Ireland or Portugal. Italy says it is not in the “PIGS”. Belgium insists it was no “B” in “PIGS” or “PIIGS”.

EU pressure on Ireland to accept external “help” was to safeguard financial stability in the Euro area, as much as rescue Ireland. However, contagion is proving difficult to prevent.

Is Inflation About to Burst the Chinese Bubble?

We’ve commented before on the near-impossibilty of teasing decent inflation estimates out of China. Despite that, we were early to comment that inflation was getting out of control. From a joint post with Marshall Auerback in February:

The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.

This combination is the making of a very messy situation.

Satyajit Das: European Death Spiral – Mission Unaccomplished

In early 2010, drawing on the military leadership of President George W. Bush, European leaders declared the economic equivalent of “mission accomplished”. A bailout – whoops support! – package of Euro 750 billion had shocked and awed speculators into submission. Like the Bush pronouncement, the European prognosis provided premature. The return of European sovereign debt problems in late 2010, culminating in the bailout of Ireland highlighted the deep seated and perhaps intractable problems of some over indebted European nations.

Guest Post: Eurocrisis: We knew all we needed to know…

Yves here. The alternative title for this post could be “No ‘whocouldanode’ excuses for the Eurozone crisis.”

By Geoffrey R D Underhill, Professor of International Governance, University of Amsterdam. Cross posted from VoxEU

Many policymakers have reacted to both the financial crisis and the recent Eurozone sovereign debt problems as though they were unexpected. This column argues that we knew more than enough to anticipate both problems, that the evidence was easily accessible, and that the institutional and political weaknesses of the Eurozone were hardly a mystery either.