Tag: economics

China’s Lehman Bros

China has discovered the concept of “too big to fail” with the Evergrande disaster:

As of the end of June, Evergrande had nearly 2 trillion yuan ($309 billion) of debts on its books, plus an unknown amount of off-books debt. The property giant is on the verge of a dramatic debt restructuring or even bankruptcy, many institutions believe.

A bankruptcy would amount to a financial tsunami, or as some analysts put it, “China’s Lehman Brothers.” The venerable American investment bank’s 2008 collapse helped trigger a global financial crisis.

Evergrande, one of China’s three biggest developers, has a giant footprint in China. Its liabilities are equivalent to about 2% of China’s GDP. It has more than 200,000 employees, who themselves and many of their families have invested billions of yuan in the company’s WMPs. The company has more than 800 projects under construction, more than half of them halted due to its cash crunch. There are thousands of upstream and downstream companies that rely on Evergrande for business, creating more than 3.8 million jobs every year.

Like many of China’s “too big to fail” conglomerates, Evergrande’s crisis has fueled speculation over whether the government will step in for a rescue. Several state-owned enterprises, including Shenzhen Talents Housing Group Co. Ltd. and Shenzhen Investment Ltd., both controlled by the Shenzhen State-owned Assets Supervision and Administration Commission (SASAC), are in talks with Evergrande on its Shenzhen projects, according to people close to the talks. But so far, no deals have been reached.

A potential default by Evergrande could spread to markets outside China as it has huge, high-interest offshore bonds. Some of its offshore bonds carry interest rates as high as 15%, a person close to the Hong Kong capital market said. UBS estimates that $19 billion of Evergrande’s liabilities are made up of outstanding offshore bonds.

Evergrande has been frantically selling properties at discounts this year. In late May, it offered certain homebuyers 30% to 40% off if they paid entirely in cash. In the first half, the company reported 356 billion yuan of contracted sales, slightly higher than 349 billion yuan for the same period last year. Average selling prices in the first six months declined 11.2%. Meanwhile, payables increased 14.7% to 951 billion yuan, and sales and marketing expenses increased 30% to 17.8 billion yuan. In response to the market environment, the company increased sales commissions and marketing expenses, the company said.

Compared with its competitors, Evergrande has higher capital and human costs but lower selling prices, an industry participant said. “How can it make money?” the person said.

The developer reported a 29% slide in profit for the first half. Its 10.5 billion yuan of profit mainly reflected an 18.5 billion yuan gain from the sale of some shares and marked-to-market holding in internet unit Henten Networks. It reported a loss in its core property business of 4 billion yuan.

Evergrande’s extremely high debt ratio, high financing cost and repeated delays in payments to suppliers, partners and local government show that its liquidity has always been tight, but on the other hand, the fact that it has survived years under this model indicates that it has always been able to generate money, a veteran investor said.

Now everyone is watching whether it can dodge the bullet once again.

I would not assume that the Chinese government will follow the lead of the US government and bail out Evergrande and the banks whose failure it threatens. First, Xi Jinping hates corruption with a passion and he is not likely to care one little bit about saving the wealth and careers of all the bankers and businessmen at risk. Second, China has seen how the 2008 financial crisis weakened the USA, and how the US failing to burn the dead wood in the financial sector had terrible consequences for its real economy.

We know the Chinese were paying very close attention to the 2008 situation and its aftermath, because the strategic guideline of Tao Guang Yang Hui established under the Deng regime was officially revised for the first time after the global financial crisis, which the Chinese interpreted as marking the end of the USA as the singular superpower.

So my guess is that unlike the US government, the Chinese government will protect the common people at the expense of the financial sector.

DISCUSS ON SG

An Induced Economic Coma

Fabio Vighi explains why the fake pandemic was necessary in the eyes of the global elite, and how it is less a well-orchestrated plan to take permanent control than a desperate measure of last resort to attempt to salvage some vestiges of the neoliberal world order:

Joining the dots is a simple enough exercise. If we do so, we might see a well-defined narrative outline emerge, whose succinct summary reads as follows: lockdowns and the global suspension of economic transactions were intended to 1) Allow the Fed to flood the ailing financial markets with freshly printed money while deferring hyperinflation; and 2) Introduce mass vaccination programmes and health passports as pillars of a neo-feudal regime of capitalist accumulation. As we shall see, the two aims merge into one.

In 2019, world economy was plagued by the same sickness that had caused the 2008 credit crunch. It was suffocating under an unsustainable mountain of debt. Many public companies could not generate enough profit to cover interest payments on their own debts and were staying afloat only by taking on new loans. ‘Zombie companies’ (with year-on-year low profitability, falling turnover, squeezed margins, limited cashflow, and highly leveraged balance sheet) were rising everywhere. The repo market meltdown of September 2019 must be placed within this fragile economic context.

When the air is saturated with flammable materials, any spark can cause the explosion. And in the magical world of finance, tout se tient: one flap of a butterfly’s wings in a certain sector can send the whole house of cards tumbling down. In financial markets powered by cheap loans, any increase in interest rates is potentially cataclysmic for banks, hedge funds, pension funds and the entire government bond market, because the cost of borrowing increases and liquidity dries up. This is what happened with the ‘repocalypse’ of September 2019: interest rates spiked to 10.5% in a matter of hours, panic broke out affecting futures, options, currencies, and other markets where traders bet by borrowing from repos. The only way to defuse the contagion was by throwing as much liquidity as necessary into the system – like helicopters dropping thousands of gallons of water on a wildfire. Between September 2019 and March 2020, the Fed injected more than $9 trillion into the banking system, equivalent to more than 40% of US GDP.

The mainstream narrative should therefore be reversed: the stock market did not collapse (in March 2020) because lockdowns had to be imposed; rather, lockdowns had to be imposed because financial markets were collapsing. With lockdowns came the suspension of business transactions, which drained the demand for credit and stopped the contagion. In other words, restructuring the financial architecture through extraordinary monetary policy was contingent on the economy’s engine being turned off. Had the enormous mass of liquidity pumped into the financial sector reached transactions on the ground, a monetary tsunami with catastrophic consequences would have been unleashed.

As claimed by economist Ellen Brown, it was “another bailout”, but this time “under cover of a virus.” Similarly, John Titus and Catherine Austin Fitts noted that the Covid-19 “magic wand” allowed the Fed to execute BlackRock’s “going direct” plan, literally: it carried out an unprecedented purchase of government bonds, while, on an infinitesimally smaller scale, also issuing government backed ‘COVID loans’ to businesses. In brief, only an induced economic coma would provide the Fed with the room to defuse the time-bomb ticking away in the financial sector. Screened by mass-hysteria, the US central bank plugged the holes in the interbank lending market, dodging hyperinflation as well as the ‘Financial Stability Oversight Council’ (the federal agency for monitoring financial risk created after the 2008 collapse), as discussed here. However, the “going direct” blueprint should also be framed as a desperate measure, for it can only prolong the agony of a global economy increasingly hostage to money printing and the artificial inflation of financial assets.

At the heart of our predicament lies an insurmountable structural impasse. Debt-leveraged financialization is contemporary capitalism’s only line of flight, the inevitable forward-escape route for a reproductive model that has reached its historical limit.

A SELF-FULFILLING PROPHECY: SYSTEMIC COLLAPSE AND PANDEMIC SIMULATION, 16 August 2021

There are a number of implications that follow from this interpretation of events. First, the attempt to blame China for the “China virus” are almost certainly false. China has been at war with the neoclowns and the banking elite as well as with their government and military tools for the last 20 years, but it took until 2013 and Xi Jinping unexpectedly consolidating his power in the CCP for the elite to realize it. What we’re experiencing appears to be fallout from the global war between the Sino-Russian alliance and the neoclown-occupied West; notice how there have been no lockdowns in China, Russia, or any of the nations allied with them.

Second, unlike Xi and Putin, Donald Trump never succeeded in breaking free of the globalist influence. This is hardly a surprise, in light of the 2020 election fraud and the way he inexplicably permitted himself to be constantly surrounded by hostile Deep State figures, but it does explain the constant alarm with which the media and the corrupt institutions regarded his administration.

Third, this radical treatment is not a viable long-term solution. The economic forces that have stretched the neoliberal world order and the global economy to a breaking point have neither been addressed nor have they disappeared, they’ve merely been held at bay for a period of time. When the emergency structure fails – and it will fail – it is unlikely to the point of inconceivability that the same parties who have resolutely refused to address the core problems will have done anything but make the situation worse.

Fourth, there will be more lockdowns, shutdowns, and other attempts to interfere with the economic forces that are putting pressure on the central banks to write off bad loans and deflate the credit market. The entire effort is focused on refusing to let organizations that are only financially viable on paper go bankrupt; it’s an attempt to prop up the entire global economy with nothing more than word spells and will. But this sort of magickal thinking failed in the real world of Afghanistan and Syria, and sooner or later, it will fail in the markets too.

Fifth and finally, I am more convinced than ever that the entire neoliberal system, including the political entity known as the USA, will fail within 12 years, as I first predicted 17 years ago. There is nothing, literally nothing, to suggest that the historical trends I observed then concerning the lifespan of currencies will not play out according to the historical norms.

DISCUSS ON SG

A Severe Shortage

The medical corporations are learning that disemploying the unvaccinated is going to hurt them worse than those they unjustly fired:

Jennifer Bridges knew what was coming when her director at Houston Methodist hospital called her up in June to inquire about her vaccination status.

Bridges, a 39-year-old registered nurse, responded “absolutely not” when asked if she was vaccinated or had made an effort to get vaccinated. She was terminated on the spot.

“We all knew we were getting fired,” Bridges, 39, told CBS News. “We knew unless we took that shot to come back, we were getting fired today. There was no ifs, ands or buts.”

Bridges was one of more than 150 hospital workers fired by Houston Methodist hospital.

“All last year, through the COVID pandemic, we came to work and did our jobs,” said Kara Shepherd, a labor and delivery nurse who joined Bridges and other workers in an unsuccessful lawsuit. “We did what we were asked. This year, we’re basically told we’re disposable.”

Shepherd and her colleagues may be disposable in the eyes of hospital administrators, but they are perhaps not as easily replaced as she or Houston Methodist thought.

Two months after firing unvaccinated hospital staff, Houston Methodist is one of several area hospitals experiencing a severe shortage of medical personnel. Media reports say hospitals have “reached a breaking point” because of a flood of COVID-19 cases.

Never get vaccinated just to keep a job or preserve a career. The law of supply and demand is on your side. You may have to be patient, you may have to be flexible, and you may have to change jobs. But sooner or later, the corporations will either relent or they will collapse.

Notice that the airline industry is already demonstrating that vaxxed personnel are more vulnerable and less reliable than the unvaxxed. It’s been eight weeks and daily flight cancellations are holding steady at more than 10x the historical average. These labor shortages are not going to go away, they are almost certainly going to get worse.

DISCUSS ON SG.

Flirting with debt default

It’s going to happen sooner or later. Might as well get it over with; if repeated defaults didn’t destroy Argentina, it won’t destroy the USA.

The Treasury Department will begin conducting emergency cash-conservation steps on Monday to avoid busting the federal borrowing limit after a two-year suspension of the debt ceiling expired at the end of July.

Economists say those so-called extraordinary measures will allow Treasury to pay off the government’s bills without floating new debt for two to three months. After that, Congress will need to either raise or suspend the borrowing limit or risk the U.S. defaulting on its obligations.

The limit, a facet of American politics for over a century, prevents the Treasury from issuing new bonds to fund government activities once a certain debt level is reached. That level reached $22 trillion in August 2019 and was suspended until Saturday. 

The new debt limit will include Washington’s additional borrowing since summer 2019. The Congressional Budget Office estimated in July that the new cap will likely come in just north of $28.5 trillion.

Remember, debts that can’t be paid, won’t be paid. 

Banks not tanks

People often accuse China of being imitative rather than creative, and stealing techniques and technology rather than inventing it. Well, it looks like they learned a rather nasty new trick from the West’s globalist bankers and are applying it effectively with vigor around the world:

Perched atop massive cement pillars that tower above Montenegro’s picturesque Moraca river canyon is an incomplete highway that threatens to bankrupt the little Balkan nation. 

China Road and Bridge Corporation, the state-owned company which is building the bridge with imported Chinese workers, has not yet finished constructing the first section of the 270-mile highway to the Serbian capital Belgrade. 

The first instalment on a $1 billion loan from China’s state bank is due this month but it’s unclear whether Montenegro, whose debt has soared to more than double its GDP because of the project, will be able to pay it back.  

A copy of the loan contract reviewed by NPR shows that if Montenegro misses the deadline, Beijing has the right to seize land inside the country – as long as it doesn’t belong to the military or is used for diplomatic purposes. 

Furthermore, the country’s former government green-lighted for a Chinese court of arbitration to have the final say on any contractual disputes.  

The World Bank and the International Monetary Fund have been engaging in debt-trap diplomacy for decades. The Chinese offer is actually less burdensome and less controlling… unless the country defaults. Which is how China is going to snap up very inexpensive property all around the world and there is literally nothing that the globalists – who invented the scheme – can do to stop it.

Nationalism and the ability to default has been the only answer to this sort of financial predation, but even nationalism won’t help much when the lender holding the collateral has a massive military to back up his legal claims.

It’s always more efficient to invade-and-occupy using banks rather than tanks.

The numbers leak

 As I mentioned previously, it’s going to be increasingly hard for the governments to hide the evidence of vaccine injuries as the monetary costs of them become evident through everything from flight cancellations to unemployment claims.

What if the injury rate — significant injury — is closer to 1 in 50 or 1 in 100 than the one in a hundred thousand we have been told?

What if that means that for anyone who isn’t old and infirm the math doesn’t pencil out and the very real financial and personal consequences are hammering people?

What if the insurance companies know this, and the Obamacare premium proposals being submitted right now for next year are up 30{cc08d85cfa54367952ab9c6bd910a003a6c2c0c101231e44cdffb103f39b73a6}?  Because, from what I’m hearing, they are.  Of course that’s an opening bid from the insurance companies but that sure isn’t all roses and rainbows, is it?

What if the labor department published a jobs report that shows a wildly rising — and at an accelerating rate — disability rate among all people 16+ in the workforce, totaling close to 3 million newly disabled people since January?  Because just Friday, they did!

There are 2.8 million more disabled workers than there were six months ago. The very reasonable question that Karl Denninger is asking is: what started happening in January that could have rendered that many workers unable to work? 

The role of debt

Yesterday, we launched Steve Keen’s EconComics on Arktoons. If you’re inspired to dig a little deeper in order to understand the very important role that debt plays in the economy, I would encourage you to read this extended essay on the subject written by the greatest living economist.

You may wish to keep in mind that Steve is a Man of the Left, whereas I am a Man of the Right, to the extent those labels even apply to economics anymore. What that means, in practical terms, is that while our perspective on the optimal solutions tend to differ, our perspective on the current state of things tends to not only be very similar, but to have far more in common than either of us do with the average Neo-Keynesian economist like Paul Krugman or Neo-Classical economist like Thomas Sowell, neither of whose models even begin to take debt into any account at all.

Regardless, Steve is on the very, very short list of people whose opinions I always take seriously and seek to understand, no matter how extraordinary or unlikely they may strike me at first glance.

Below is a selection from his interview with GQ Spain, so read the whole thing there.

GQ SPAIN: What is the role of public debt and private debt in the next great financial crisis?

STEVE KEEN: If conventional economics were correct, then there shouldn’t have been a crisis at all in 2007—and this is exactly what mainstream economists said at the time. In June 2007, two months before the crisis began, the Chief Economist of the OECD predicted that “sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment” (Cotis 2007 , p. 7).

Since there was a crisis—the worst since the Great Depression before Covid hit—there must be something wrong with conventional economic thought. And there is, because it asserts that the actual details of money don’t matter to macroeconomics—that the macroeconomy can best be understood by ignoring money, and treating the economy as a barter system. To quote a Neoclassical economist on Twitter:

Most people who teach macro do it by leading people through simple models without money …You can even do banks without money [yes!]. And it’s better to start there. Then later, study money as it superimposes itself and complicates things, giving rise to inflation, exchange rates, business cycles.

With this belief, they have never built a framework for analysing how money is actually created. Instead, they developed a “supply and demand” model of lending called “Loanable Funds”, where savers lend more when interest rates are high, and borrowers demand more when interest rates are low, and the market sets both the quantity lent and the interest rate. In this model, banks act as “intermediaries”, taking in deposits from savers and lending them out to borrowers. In their model, if the government enters the market as a borrower, then it adds to the demand for money, thus driving up interest rates and “crowding out” private investment, which lowers the rate of economic growth.

In 2014, the Bank of England categorically declared that this model was wrong: banks do not take in deposits from some customers and lend them out to others, but instead, “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” (McLeay et al. 2014, p. 1). This means that private lending doesn’t cancel out, as the mainstream still believes. Instead, rising bank debt creates new money and causes a rising amount of spending, while falling bank debt destroys money and contracts spending. This is obvious in the data: when credit is positive and rising, unemployment falls; when credit is negative and falling, unemployment rises.

America shows the same pattern: rising credit, falling unemployment; falling credit, rising unemployment.

It’s also obvious when you look at the actual way in which money is created: I invented a software program to enable that, called Minsky. It very easily shows that mainstream economics have things backwards: rather than bank loans shuffling existing money between savers and borrowers, bank lending increases the money supply; and rather than government deficits adding to the demand for money, they add to the supply of money.

The process of money creation is actually very simple, as the Bank of England pointed out. Most money today is in the form of bank deposits. To create money therefore, you have to do something that adds to bank deposits. Both bank lending and government deficits qualify, but in different ways.

Bank lending increases deposits while repaying debt reduces deposits, so if net lending is positive, bank deposits increase, and hence so does the money supply.

Since people borrow in order to spend, rising private debt stimulates aggregate demand and asset prices, making the economy—and the government—look great to conventional eyes. The economy booms, unemployment falls, and booming tax receipts make the government look like it is responsible by running a surplus. But if the rate of growth of private debt—otherwise known as credit—turns negative, then everything unravels. The economy goes into a recession, unemployment rises, asset prices fall, and government debt increases—and if it didn’t, the recession would be far deeper.

This is because, as well as being wrong about what banks do, the mainstream is also wrong about government deficits and government debt. Rather than deficits meaning that the government has to take money away from the private sector—which is what the mainstream thinks the government does when it sells bonds to cover a deficit—the deficit creates money by increasing the bank deposits of the private sector.

In simple terms, by not studying the accounting involved in government deficits, they have wrongly classified them as increasing the demand for money, when in fact they increase the supply of money. So all the arguments they make have it back the front: deficits crowd in private spending and investment by increasing the supply of money and, if anything, they drive down the interest rate, rather than driving it up.

Monday PM Arktoons

GUN GHOUL Episode 9: Take Him Down!

ECONCOMICS Episode 1: The Truth about Economics

Arktoons is not only about entertainment, but education too! We’re very pleased to introduce a comic written by the greatest living economics, Steve Keen. And yes, I absolutely do plan to talk to him about a related comic based on that famous champion of free trade, Ricardo Retardo.

Sanctions cut both ways

China calls the trade bluff of the neo-liberal world order:

There should be little doubt that the timing is intentional: China on Thursday passed its sweeping new law to ‘safeguard’ Chinese businesses and entities from Western and especially US sanctions, just hours ahead of President Joe Biden sitting down with G-7 leaders in Cornwall to argue for a common stance on curtailing China’s influence. AFP observes: “China’s quick rollout of a law against foreign sanctions has left European and American companies shocked and facing ‘irreconcilable’ compliance issues, two top business groups said Friday, despite Beijing saying the move would unlikely impact investment.”
The Anti-Foreign Sanctions Law, as we described earlier, is designed shield Chinese entities and institutions from “the unilateral and discriminatory measures imposed by foreign countries” and ultimately the “long arm jurisdiction” of the United States.  
It effectively enables the Chinese government to sanction all who comply with US/EU sanctions by drawing a bright red line, forcing entities to choose whether to comply to Washington’s side or Beijing’s side. Upon its introduction early this week in the National People’s Congress there were few details given, other than vowing that “if Chinese entities are hit with unjustified sanctions, the proposed law is supposed to crystallize actionable countermeasures against the foreign governments and institutions…expecting the legal effort to make up for losses that Chinese entities would suffer.”
With the law’s passage, details have been revealed as follows:
Countermeasures in the Chinese law include “refusal to issue visas, denial of entry, deportation… and sealing, seizing, and freezing property of individuals or businesses that adhere to foreign sanctions against Chinese businesses or officials,” according to the text published by the standing committee of the National People’s Congress, China’s top legislature.
Thus it “answers” current US tactics in a serious escalation: whereas Washington currently often seeks to punish third party entities or countries for direct or even indirect dealings with a sanctioned regime (the cases of Venezuela and Iran are clear examples, or even European companies which worked on the Russia-to-Germany Nord Stream 2 pipeline), Beijing has now given itself the ‘legal authority’ to do the same. 

This is a very smart and timely move by the Chinese government, and counteracts the US ability to put pressure on foreign firms and governments. Comply with a US-imposed sanction and you’re locked out of China.

What part of “unrestricted” is hard to understand? It wouldn’t surprise me if China expands this law to include sanctions against other nations as well, which would go a long way toward convincing countries that normally comply with US sanctions to ignore them.

Ben Shapiro hates middle class America

The Littlest Chickenhawk has always hated America, Americans, and Western Civilization, he just didn’t make it so obvious to everyone before now.

I see many people are enraged at Blackrock. Blackrock is buying homes from people willing to sell them. If you don’t like what they’re doing, target the loose governmental policy incentivizing this sort of investment.

Seriously, Blackrock isn’t going to stop investing in single-family homes because you’re mad on Twitter. But you could direct your energies toward stopping the Fed’s insane monetary policy, which is driving down the cost of loans and creating a massive bubble.

If Blackrock is willing to take the risk of leveraging up to buy single-family housing at above-market prices, that their prerogative. So long as they own the downside risk. No bailouts. Ever.

And if you’re mad at Blackrock and want to artificially prevent them from buying single-family homes, I’d like for you to explain to those who currently own the homes why you’re taking money out of their pocket.

And just to underline what a moron the little monster is, note that his advice to Americans watching the elimination of the housing stock and the destruction of the middle class is not to oppose the guilty party, but to oppose the Federal Reserve, a private corporation massively more rich, powerful, and politically influential than Blackrock.

As Lauren Witzke explains: THIS is why Ben Shapiro is promoted on all platforms. Little Ben is the official damage-control spokesman for the wicked Globalist Oligarchy.

Once I understood that debt was the center of the modern economy, I wondered how long it would take for the favored borrowers to own literally everything. Apparently we’ve now entered the accelerationist phase, that will only be stopped by a) Satan’s little servants owning everything, or b) revolution and mass deportations.

Of course, it always ends in (b), the only question is whether there is an (a) phase first.