China hits a welcome turning point
China’s massive supply of cheap labor may at last be drying up, a development that in time will bring higher wages, inflation, a stronger yuan and help to right dangerous global imbalances.
If these trends hasten financial liberalisation they could eventually set the stage for a broader Chinese bubble. The formerly extremely unequal balance of power between workers and employers in China appears to be shifting.
Workers for a Chinese company which supplies Honda with auto parts have struck and successfully won large wage increases. Other strikes have followed, and firms have often been quick to compromise.
Hon Hai’s Foxconn, an electronics unit that supplies many leading western brands, moved to more than double many salaries as part of a series of reforms after a spate of suicides among workers at its highly regimented factories. Several regions have implemented or are debating increases to the minimum wage, a standard which didn’t even exist in China as recently as 2004.
Much of China’s economic development in the past 25 years has been built on the back, or backs if you like, of rural workers who were desperate to relocate to coastal manufacturing centers, wave upon wave of whom kept wages in check even as the economy boomed.
The one child policy and rapid development of the manufacturing base may finally be about to collide. A US Census Bureau analysis of Chinese data estimates that the number of 15-24 year olds joining the work force will fall by 29 percent over the next decade.
Of banks and euro zone default taboo
If ever you doubted that the euro zone bailout was in fact a bailout of banks, French and German banks in particular, look no further than the latest report from the Bank for International Settlements.
The trillion-dollar package of loans, backstops and emergency measures announced by the European Union, International Monetary Fund and European Central Bank in May was advertised on the basis that it would create breathing room for ailing southern European nations to impose fiscal discipline and establish a credible path to stability.
In the case of Greece, it is hard to see how it could dig its way out of its hole courtesy of a policy of austerity which was going to kick off a swingeing and long-lasting recession.
Why European authorities would contemplate doing this without at the same time making lenders bear part of the pain via a default or debt rescheduling made even less sense.
At least it did until you start to look at the data of who is exposed to Portugal, to Ireland, to Greece and to Spain.
French and German banks together had more than $950 billion in exposure to the four at the end of 2009, according to the BIS quarterly review of banking and financial markets:
http://www.bis.org/publ/qtrpdf/r_qt1006.pdf
All very true, Excellent article.
It remains to be seen, how these banks weather the storm, now the genie is out of the bottle.
Euro woes increase risk of trade wars
Europe won’t just be exporting deflation to the rest of the world, it will export serious trade tensions as well: first between the United States and China, and, possibly, eventually between Europe and the United States.
The austerity required to get Greece and other weak euro zone nations’ budgets in shape will exert a powerful deflationary force, as many countries which formerly imported more than they exported will be forced to cut back.
As well, the euro has dropped very sharply. Germany’s quixotic campaign against speculators — banning naked short selling against government debt and government credit default swaps — gave the euro its latest shove downward, but the trend has been strong for months. The euro is now about 15 percent below where it started the year against the dollar, making U.S. exports less competitive and adding to pressure on the United States to be the world’s foie gras goose: being force-fed everyone else’s exports while its own unemployment rate remains high.
That Britain is now embarking on its own round of budget cuts will only make matters worse, adding up to one more important actor trying to consume less and export more courtesy of a devaluing currency.
Perhaps the best outcome is rising trade and currency tensions between the United States and China, while at worst this could set the stage for broader conflicts and a round of tit-for-tat tariffs to match similar currency devaluations.
Michael Pettis, a professor at Peking University, explains the issue succinctly on his blog, in which he says: “Make no mistake, if southern European trade deficits decline, someone somewhere must bear the brunt of the corresponding adjustment. The only question is who?”
The scale of the adjustment is large; taken together Spain, Italy, Portugal and Greece account for about 16 percent of global trade deficits. Add in France, which will surely share some of the pain, and we get up to about 20 percent. You simply cannot have savage recessions and budget cutbacks in these countries without it exerting a powerful force on their trade partners.
it is a monopoly game played by all the major stakeholders who push global trade to new heights. It’s all about profits – certainly not to ‘save 3rd world countries’ give me a $%@$%$#% break.
Certainly agree with ‘jbemory’. Buy local. That also means boycot mcdonalds, burger king, dennys’, target, walmart, homedepot.
scary isn’t it!Are there any mom-pops left at all?
Euro zone medicine not working on banks
Fear of lending to banks is rising again in Europe, as even a 750 billion euro zone rescue package proves not enough to stem fears that the banking system will prove the weak link when southern European nations can’t meet their obligations.
Strikingly many European and British banks are now being forced to pay more to borrow money in the interbank markets than before the joint European Union, International Monetary Fund and European Central Bank package was announced two weekends ago.
That deal, which should insulate highly indebted countries such as Greece, Spain and Portugal from funding pressure for the next two years or so, was effective in driving down the extra interest those countries had to pay to borrow as compared to Germany. Tellingly, it was less effective, even counter-productive, in restoring calm to the markets in which banks fund their short-term borrowing needs.
While the mutual distrust is still far less than the utter panic during the crisis following the collapse of Lehman Brothers in 2008, it is very significant that the bailout of the weak links in the euro zone is having far less of a multiplying effect than earlier infusions of cash and liquidity into solvency shortfalls.
It may be simply a passing tremor. It may be a result of structural weakness in the euro zone, as investors bet that when push comes to shove a politically fractured Europe will find it impossible to agree on how to underwrite and fund the rescue of banks facing losses if Greece and its peers default.
It might, even more interestingly, be a sign that the medicine of government rescue packages works less well the higher and higher you go up the world’s capital structure. After all, the banks two years ago were rescued by governments, which were bigger. Small governments are now being rescued by bigger governments. Will Mars or Saturn have cash to contribute when it is Britain, or, whisper it, the United States, which needs help?
WILL BANKS BE LEFT HOLDING THE BAG? The three-month dollar London interbank offered rate (LIBOR), a compilation of the costs banks report they must pay to borrow, rose to 0.46 percent on Monday, having risen steadily since concern over Greece became acute, its highest level since last summer. Also rising markedly is the spread between LIBOR and an overnight indexed swap (OIS), a measure of unwillingness to lend that, because it strips out interest rate fluctuations, is considered a more pure indicator of bank solvency fear. It now stands at about 24 basis points, about double the rate in February but far below its crisis peaks.
It is not “quite likely” that Greece will be forced to restructure its debts in the medium term…
The assets of the Greek state are higher in value than its total debt of 300bn. Current cash deposits in Greek commercial banks are also almost equal to the same amount.Finally,total private external and internal debt is much smaller that in any other Eurozone country and the actual size of the Greek economy is at least 40% larger than official data.
It is amazing how shallow are almost all analyses and how unfounded are most predictions about the future of the Greek economy!
Europe shambles as Greek fire spreads
Europe desperately needs to get out in front of its solvency problem, Greek edition; not because it is right, not even because it will work in the long term, but to stem rapid and costly contagion through financial markets to other weak links in the euro zone, not least to banks.
Whether euro zone institutions will have the agility and resolve to quickly put in place out-sized measures for Greece is doubtful.
That Greece on Wednesday was paying more than 20 percent, or about double the rate of Hugo Chavez’s Venezuela, to borrow money for two years showed that investors were expecting either a default or very large burden sharing by existing creditors, and possibly a, by definition, disorderly exit from the euro by Greece. Spain joined the list of sovereign downgrades, as Standard & Poor’s cut its rating a notch to AA, a day after the debt rating agency slashed Greece to junk status and cut Portugal to AA.
The moves prompted rapid widening of Spanish and Portuguese debt, and hit financial markets world-wide. Investors, lulled by an apparently miraculous government-underwritten escape from the banking crisis, and aware of how badly things would go if Greece were not bailed out, had been operating on a cheerful if lazy assumption that this crisis too would be made to disappear, because the alternative is too horrible.
Month has followed month, meeting has piled upon meeting and even with broad consensus there is still huge lack of clarity about who in the European Union is going to do what exactly to whom.
It has, frankly, become surreal. German Chancellor Angela Merkel opined on Wednesday that, “We are on a good path now,” while in the next breath saying “I think the handling of the Greece case shows that everyone knows we cannot allow the same situation with countries as with Lehman Brothers.”
Everyone may well know it, but not everyone, including many politicians in Germany, are acting that way and dropping the L-word without already having a massive, credible plan to brandish is foolish in the extreme.
I agree with the other posts. Slave labor is essential to the US economy. Illegal immigrants are vital. Nothing makes me happier than to see people living in abject poverty and working for less than slave labor wages. Especially on construction sights, where legal immigrants and citizens could make a living wage hanging sheet rock or laboring. No, no…it is much more beneficial to pay people $250 per week for 80 hours of work. They are never late to the job when they are living in their van in the parking lot. Yeah illegal immigration!
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.
In economics the concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don’t understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
Don’t bank on clients to punish Goldman
So remind me, why will clients continue to do business with Goldman Sachs?
I know, it is a stupid question; investors and corporations will continue to do business with Goldman even after the bank has been charged with an alleged fraud for the same reasons they always have: because they hope, like every gambler, to beat stacked odds and because they flatter themselves that they are not the sucker at the table. (more…)
That anyone would still throw in their lot with Goldman – or any other similar white-collar clip joint – bespeaks greed, indeed.
But not just any old greed: the sort of greed that’s, putting it mildly, morally indictable. Such people and every vestige of the system contaminated by them in the wake of Glass-Steagall’s repeal are beyond redemption.
Bank lending and profits; a costly divergence
Don’t count on the profitability of the financial services sector as a leading indicator of anything. Well, anything other than financial services compensation.
A stupendous recovery in profits is underway at U.S. banks, brokerages and insurance companies, but the big picture shows that for the rest of us that rebound may prove sterile.
Data from the U.S. Bureau of Economic Analysis shows the sector had an absolutely cracking 2009, with profits rising in the fourth quarter by 240 percent against the same period a year before.
While overall corporate profits were up 30 percent the vast and less favoured parts of the economy outside of finance only managed to squeak out a 5.2 percent increase in profitability, and that came courtesy of an employment-savaging deflation in the costs of production.
In other words, the financial sector coined it as it benefited from cheap money, government insurance, and a steep yield curve while everybody else ate dry bread while squeezing more out of employees and holding wages down.
Financial profits in the fourth quarter are only about 8.0 percent below their 2005 peak and one-in-three dollars in profits went to the sector, which only represents about 16 percent of the corporate universe as measured by value added.
You might argue, so what? Banks are one of the main channels that carry the water of easy monetary policy to the rest of the economy, so it is natural for stimulative conditions to show their first flower in the sector.
Same old story. Fat cats get richer, while everyone else hits the unemployment lines, file bankruptcys, lose their homes in foreclosure or work at low paying jobs in fear of losing them in this recession. Nice to be rich and have friends in government to give you bailouts to cover your losses.
from James Saft:
Learning from Ken Feinberg
Sometimes it's what doesn't happen that is most illuminating.
When Pay Czar Kenneth Feinberg first slashed executive compensation at U.S. firms that benefited most from a government bailout the cry was that this would hurt these weakened firms when they could least afford it, as the best and brightest would leave for better money elsewhere, where the free market still ruled.
Well, the door didn't hit them on their way out, but mostly because they stayed rooted to their desk chairs. Feinberg evaluated the compensation of 104 top executives at affected companies in 2009, reducing pay for most to levels far below financial industry norms and their own former earnings.
Yet here we are in 2010 and about 85 percent are still working for the same firms, still toiling for the kinds of wages that may well make them wish they'd gone into the law rather than finance. Remember all those articles in glossy magazines about how impossible it is to make it in New York City on $500,000 a year?
"The argument that we hear all the time; that if we don't pay more this key official will leave, he will go to a foreign competitor," Feinberg told CNBC television.
"I've always been dubious about that argument and I think the statistics bear out the fact that most officials stay at those companies."
Feinberg announced this week that he has told AIG, General Motors Co, GMAC Inc, Chrysler Group LLC and Chrysler Financial Corp to cut cash compensation for 119 top executives by a third in 2010 and total pay by 15 percent. Bank of America and Citigroup have repaid taxpayer funds and are now subject to diminished supervision by Feinberg, whose brief is to determine if pay at bailout firms is "in the public interest."
Embrace reality, not fight speculation
Stock up on canned goods, the authorities appear to be opening a new front in the War Against Speculation; this time taking aim at the people who might profit from Greece and its European partners’ woes.
Just days after the U.S. Securities and Exchange Commission voted new limits on short selling, Germany is investigating the credit default swap trading of speculators to try to prevent them from profiting from any bailout of Greece.
“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” a source with knowledge of the efforts told Reuters.
“The result of the ‘Greek tragedy’ is that the political environment has become such that the Credit Default Swap (debt insurance) problem has come to the fore.”
French Economy Minister Christine Lagarde on Sunday said that derivative trades on sovereign debt should be tightly regulated, limited or even banned.
That’s right, apparently there is a big problem out there and it is that greedy speculators are betting that governments that look like they will have difficulties paying their debts might, well, have difficulties paying their debts. Even worse, some are betting that since there is no tenable alternative to Greece being bailed out that it will be, well, bailed out.
I’m not sure if this is a war against speculation, against lese majeste or just against reality.
Here in the UK, we were on the receiving end of a “speculative attack” in the early 1990′s. We’re still here! There are even some who think it was one of the best things that happened to us. And the money that George Soros made on Black Wednesday ended up, in part, endowing charitable and academic institutions in Easter Europe….
“Yes wages there do need to rise but when they do, watch the flood of companies relocating back to the West when wages for the lowest paid worker reach parity with the same workers in the West.”
This will never happen. At most, it will dilute the extremes. Parity? Never. It’s not just about economics. It’s about work ethics as well. And this will never change.