"Aerial view in front of the Willard Hotel at 14th Street and Pennsylvania Avenue, Washington, D.C., showing pedestrians and rather dense traffic in autos and streetcars"
A Japanese warrior may demonstrate hardened values of "honor" and "loyalty" to the members of his tribe, but he can never become a true Samurai without first learning to wield the sword with precise form and discipline. It takes years of study, practice and, most of all, an unflinching perseverance towards becoming the best warrior in your tribe.
Many claim that the last true Samurais died out with the industrialization of Japan in the mid-19th century, and perhaps with the unsuccessful Satsuma rebellion against the Japanese Imperial Government (although there are reports that those in the rebellion used modernized weaponry to fight). . The Samurai tradition may have largely disappeared in its technical form, but it has continued on in a symbolic form to this day.
Our current global economic system is the last vestige of a dying art - the art of material exploitation and oppression. Every technological gain since the Industrial Revolution has come at the expense of people's lives, livelihoods and cultural values. Insightful thoughts from the likes of Henry Ford, Robert Oppenheimer or Bill Gates cannot miraculously manifest themselves into new inventions without the net energy and material resources required for the production process.
These resources are neither unlimited in quantity nor evenly spread throughout the various political entities on Earth, so one would not expect them to be voluntarily relinquished in large amounts by those who exist in their surroundings. Yet, they always seem to leave their place of origin with increasing velocity and end up in fewer and more distant locations around the world.
Indeed, where there's oil, gas and minerals, there are lakes and rivers of blood. The current global financial system is the Samurai class of the industrial warrior society; an appendage of the mechanistic state that has honed its skills of material exploitation to near perfection. If this process of exploitation is a dying art, then its practitioners are the last living members of an endangered species.
In Japan, the birthplace of the Samurai tradition, the government and central bank have been relegated to the class of bumbling warriors for some time now. The latest environmental and nuclear disasters there have merely exposed the extreme level of their incompetency at maintaining the illusion of economic stability.
There is perhaps only one seasoned practitioner of the art remaining, and its skills with the blade set it a league apart from all of the clumsy novices and decrepit old geezers - the Federal Reserve. This lethal organization is currently at war with the natural and creative forces of institutional destruction.
By all accounts from the surface of the battlefield, it is winning. The tradition of the "Samurai Fed" is best represented by the U.S. currency (debt-dollar) and the massive U.S. treasury market. Their value must be defended by the Fed at all costs, or else the wealth of global financiers evaporates and the crucial battle is lost, which, in turn, may cost it the entire war.
The Fed's sharpened steel is now nothing more than a credit-printing press and the executive authority to purchase debt assets from banks in the "open market". Private credit markets have been thoroughly neutralized by the ongoing siege of debt deflation, and national governments must therefore pump increasing amounts of liquidity into these markets to maintain global order. However, there is only so much liquidity to go around, and the funding requirements of national/local governments are only getting exponentially larger.
Many analysts point to Europe's sovereign debt crisis and the all-encompassing mess on Japan's plate as evidence that governments around the world are losing the crucial funding battle, and therefore the U.S. will soon follow in their footsteps and the Fed will lose control of the treasury market. It is important to remember, however, that all of these states involved do not necessarily belong to the same tribe of warriors.
For the right to control the flow of credit-based liquidity, perhaps still the most precious resource in our complex global economy, they are more than willing to wage battle with each other on the jagged edges of the abyss. The major weaknesses in the bond markets of Europe and Japan are strengths for the U.S. bond market, as investment capital will rapidly navigate away from perceived risk towards perceived short/medium-term safety.
While correlated stock and real estate markets around the world continue to implode, the world's largest bond market will still provide at least an iota of positive return and investment security. In addition, the Fed has already surpassed China to become the largest creditor of the U.S. government , and it can easily scoop up any treasury paper dumped off by countries in desperate need of cash.
None of the above is to suggest that the U.S. economy will suddenly become healthy, asset values will stabilize or that anyone will be particularly receptive to further sword play by the Fed. However, public opinion is the last thing that matters to such an institution now (or the politicians it controls), and it will most likely be willing to sacrifice both the U.S. stock and real estate markets for the sake of the greater "cause".
This cause has always been to transfer productive wealth from the workers, savers, taxpayers, etc. to a select group of corporations and individuals, while protecting core structures that allow the exploitative system to continue functioning. The U.S. bond market and currency will be defended by the Fed simply because the financial elites have not yet divested themselves of their numerous debt-dollar assets, and prepared themselves for a wholesale bond market collapse.
But what price will the Fed be forced to pay for taking such a bold stand against the forces of systemic decay. The Samurai warrior lives most of his life by the merciless sword, and he is sure to die by it as well. The Bank of Japan and its government are beginning to face that inevitable fate now, as well are the various central banks of Europe. Those in "emerging market" countries such as Brazil, India and China were just starting to show off their swordsmanship, but now realize that they lack the high level of discipline and natural talent expected of the Samurai.
These warriors have struggled mightily with their systemic adversary of debt deflation, but they all have fallen to the force of its overpowering blows, or will fall soon enough. That leaves only the Fed left standing on the vast battlefield; surveying the terrain, readying its sword and preparing to make one final stand, after which it will finally lay claim to its destiny. The ensuing battle will certainly be short, but it will also be epic.
Economists: Gridlocked Congress 'Playing With Fire' As Failure To Legislate Could Devastate Economy
by William Alden - Huffington Post
Political infighting in Washington may seem irrelevant to many Americans. But in the coming weeks, as Congress attempts to pass a budget and debates whether to increase the federal debt limit, these rivalries now have the potential to devastate the U.S. economy. If lawmakers don't reach an agreement to fund the government by Friday, an array of programs will shut down. The freeze, if it lasts for several weeks, could wound Americans' confidence enough to tip the economy into recession, Mark Zandi, chief economist of Moody's Analytics, said last week.
But even that scenario wouldn't be as damaging as if the government defaulted on its debt, a consequence that could come sometime in the next several months if lawmakers, locked in a political stalemate, fail to increase the federal debt limit.
A government shutdown has the potential to cause a recession if it lasts long enough, experts say. A default would likely ravage the economy almost immediately. Both could be caused by gridlock in Congress. "It would be a big, big, big deal" if the United States defaulted on its debt, said Nariman Behravesh, chief economist at IHS Global Insight, a financial and economic analysis firm. "It could mean the collapse of the dollar. People would run away from the U.S." "That's playing with fire," he added.
At stake is the ability of the United States government -- and indeed of all of its citizens -- to borrow money cheaply, something Americans have long taken for granted as an essential feature of their first-world economy. If interest rates rise high enough, the economy essentially grinds to a halt. "People playing chicken think it's a good idea to put at risk something that the country paid a dear price to preserve for so many years," said Gary Burtless, a former Labor Department economist and a current fellow at the Brookings Institution, in Washington. "For a rich country to play these types of games does strike me as being foolish in the extreme."
For months, top economic officials in the Obama administration have warned of the perils of refusing to increase the federal debt ceiling, while Republicans in Congress have portrayed the limit as a means of enforcing fiscal austerity. The U.S. government continuously issues new debt to pay principal and interest on older debt, which means that if the debt burden isn't allowed to grow, the U.S. could be forced to miss payments to creditors. If lawmakers fail to legislate, the debt ceiling will likely be hit.
But in the current political climate, legislation has been met with a fierce, protracted stalemate. In the past few weeks, lawmakers on both sides of the aisle have dug in their heels, generally refusing to compromise on a budget bill. Gridlock could lead to a shutdown on Friday. A month later, the costs of not legislating will be even more dire.
Treasury Secretary Tim Geithner testified before the Senate appropriations subcommittee on Tuesday, laying out the dangers of inaction. Failing to raise the debt ceiling would send the country into crisis mode by May 16, he said, at which point the government would resort to emergency measures to stave off default for a few more weeks. "Default by the United States would precipitate a crisis worse than the one we just went through," Geithner said, according to a transcript of his remarks. "I think it would -- it would make the crisis we went through look -- look modest in comparison."
A default by the United States could set off a dangerous chain reaction. It would likely cause interest rates to rise and the value of bonds to fall, as what is arguably the world's safest security would now be perceived as risky. Those higher rates would ripple throughout the economy, raising borrowing costs for homeowners, students, car-buyers, entrepreneurs, investors and all types of businesses. Financial markets everywhere would likely be thrown into panic.
Credit ratings agencies would likely be forced to lower the United States' top ranking, a seal of approval that investors across the world take for granted. The Federal Reserve's massive asset-purchase program, designed to lower interest rates to encourage the flow of money through the economy and stimulate a recovery, would likely be undermined. As the United States would scramble to calm investors, the government would be forced to cut payments to the military, Geithner said. The full ramifications, moreover, cannot be foretold.
"That would be absolutely catastrophic and very likely set the stage for the U.S. economy to have a relapse into recession," said Bernard Baumohl, chief economist of the Economic Outlook Group. "That is the worst possible kind of outcome that we could have from Washington. It would be absolutely irresponsible."
In the event of a government shutdown, payments for struggling families could be delayed. In the case of a federal default, something similar could happen, but on a far larger scale. Investors across the nation and around the world hold U.S. government paper. If that debt weren't paid, myriad investors -- from retirees just scraping by to the biggest Wall Street firms -- would see their investments suffer.
Eventually, these investors would almost certainly be made whole. But even a brief hiccup on the part of the U.S. government could trash the nation's borrowing ability for years to come. "There's no question people will be paid back on their bonds," said Mark Vitner, a senior economist at Wells Fargo. "The risk to the economy is: Does the stature of the U.S. debt market suffer because people misinterpret a temporary glitch in the Treasury market?"
That glitch could be ruinous. "It's a hell of a mess," Vitner said.
To Contain Future Budget, US Must Raise Taxes By 35%, Cut Entitlements 35%
by Ian Talley - Wall Street Journal
To restrain the U.S.’s future budget crisis, the federal government must raise taxes by at least 35% and cut entitlements such as health care and Social Security by 35%, International Monetary Fund economists warned Monday in a new working paper.
While the projected ballooning of future costs of entitlements as the so-called baby boomer generation enters old age isn’t new, the IMF paper’s quantifying just how much the federal government will have trim its balance sheets sheds fresh light on the political hurdles ahead. Raising taxes and cutting spending on health care, Social Security, Medicare and Medicaid are some of the most sensitive issues for voters.
The IMF paper, written by Nicoletta Batini, Giovanni Callegari and Julia Guerreiro, shows that if the government doesn’t cut entitlements, it will have to raise taxes by 88% to pay for their costs. Since the federal government has historically collected around 18% of gross domestic product in taxes, the mandatory entitlement programs may absorb all federal revenues as early as 2026, when the cost of servicing the debt is included in the calculation, the economists say.
The IMF officials use the Congressional Budget Office‘s most realistic scenario for future U.S. budget outlooks, which say that President Barack Obama‘s new health-care law will save some costs, but the ability of the Independent Payment Advisory Board to slash costs will be limited. Also, the IMF assumed that existing tax cuts remain until 2020, given that many analysts say it will be nearly impossible for the government to raise taxes. The IMF’s baseline scenario only describes how to contain future deficit bloating, not how to actually balance the budget.
History will rue US and Europe debt woes
by Kenneth Rogoff - Financial Times
Will 23rd-century historians look back on today’s fiscal follies with the same mixture of bemusement and disdain with which we now view the financial affairs of 18th-century French kings? Policymakers throughout the world are trying to find ways to stabilise government debts, now approaching record postwar levels. As US legislators fumble towards a budget deal, there is the laudable bipartisan Bowles-Simpson commission report. But too many remain sceptical of the need for prompt action at all.
Throughout industrialised nations, debate continues over how fast to withdraw post-financial crisis stimulus. Too many want to follow the lead of the US, which has consistently increased its dependency on debt finance. Too few follow the UK, whose government aims to stabilise debt-to-income levels over several years, while also scaling back a crisis-accelerated explosion of government spending.
Normalising fiscal policy in the long aftermath of a deep financial crisis is a delicate task. The key is to see the bigger picture. Even if today’s government bonds seem pristine by the standards of pre-revolutionary France, future scholars will see our tax systems as Byzantine labyrinths funnelling money to powerful interests, creating staggering inefficiencies. They will surely be incredulous to see pensions and health insurance financed via Ponzi schemes as transparently unsustainable as the 1700s South Sea bubble. And will they believe that, back in the 21st century, there was no mechanism for putting insolvent financial institutions into bankruptcy?
According to my recent research with Carmen Reinhart, debt-to-income ratios are already at, or near, postwar highs across advanced economies. Many are close to the roughly 90 per cent debt-to-income threshold which, historically, begins to be associated with lower growth. And this does not account for the adverse demographic trends or hidden debts that inevitably jump on to the books when a crisis unfolds.
Unusually low interest rates currently keep the carrying costs of these debts modest, and make it seem as if the day of reckoning is far off. Sadly, debt can be worked off only slowly, while rates can rise suddenly. Such a rise, if sustained, would be extremely painful for the national budgets of many countries, including those struggling in Europe. Research on sovereign default shows that markets also seldom anticipate problems in advance. By the time they lose confidence, it is too late: the option to tighten from a position of strength has evaporated.
Those who would be blasé about government debt must remember that the world is complex and unpredictable. Consider the tragedy that has befallen Japan, whose long-term debt trajectory was already dubious, even before the tsunami. True, spreads on eurozone periphery bonds are already high. But this is because it is clear that there will have to be some large and significant debt restructurings, even if eurozone officials prefer to insist default is unthinkable. And as yet, the markets have not even begun to think about what might, and could, happen elsewhere – even in the US.
Seen from the future, this lack of caution will look foolish. How could they think themselves advanced economies, the future student will ask, when their governments kept such opaque accounts, and gave only minimal co-operation to international agencies attempting to review them? Nonetheless, there are a range of reforms we could introduce today to ward off history’s judgment.
Simplifying tax systems, stripping away tax expenditures (a device the French kings would have admired), and lowering marginal rates are vital. Entitlement growth must be contained. Long-term productivity can be enhanced by improving education. The potential gains from applying technology and private competition are also staggering, especially if public education is rightly construed to include libraries, the internet and public media.
At the core of contemporary financial crises, however, are financial systems that remain primitive relative to classroom constructs of perfect markets. The lesson from the financial crisis is that we must become less reliant on crude, non-indexed debt. More sophisticated instruments indexed to measures of economic performance (such as those proposed by Yale’s Robert Shiller) are an idea, though these may also need strong independent fiscal councils to monitor government data claims.
Look on the bright side. If things are going so well in the 23rd century that future historians have the luxury of thinking us primitive, humanity must have done something right. But it would be even better to give them some reason to note our wisdom today. It is going to take many years of determined effort and huge reform to close the gaping window of vulnerability out of which the US and Europe now find themselves staring. And it would surely be better if the 21st century was looked back on as a halcyon period of financial stability future generations struggled to emulate.
IMF Chief: 'Black Swans' Still Haunt Global Finance
by Ian Talley - Wall Street Journal
The global economic recovery is still fragile, uneven and "beset by great uncertainty," the head of the International Monetary Fund said late Monday.
Growth in rich countries is too low and unemployment too high, Europe's piecemeal approach to resolving its sovereign debt and growth crisis is aggravating its problems and high commodity prices amid lower revenues and investment is threatening to undermine economic restructuring in the Middle East, Dominique Strauss-Kahn said in remarks to George WashingtonUniversity students. "Great uncertainty still prevails," Mr. Strauss-Kahn said. "Indeed, numerous black swans are now swimming in the global economic lake."
His comments come ahead of spring meetings of the IMF, the World Bank and finance ministers of the Group of 20 largest industrialized and developing nations next week in Washington. Among the highest priorities the G-20 and the IMF plan to tackle include how to level growing imbalances in the global economy, effective ways to manage massive international capital flows that risk overheating emerging countries and the potential impact of Japan's catastrophe and political turmoil in the Middle East.
Mr. Strauss-Kahn said he was concerned that cooperating seen at the peak of the financial crises was waning, saying he's worried that political coordination necessary to address the world's economic problems "will not be sustained." He added that the the IMF is not seeking to restructure Greece's debt, responding to a media report saying the fund thought restructuring is necessary. "I want to deny this," Mr. Strauss-Kahn said. "We are supporting the Greek government in its position that it doesn't want a restructuring of the debt." Restructuring—paying debt holders a fraction of the original value of their loans—would in no way solve Greece's biggest problem: competitiveness, Mr. Strauss-Kahn said.
The joint European Union-IMF bailout "tries to put back Greece on track as soon as possible without the need of any kind of default," he said. A report in Germany's Der Spiegel magazine over the weekend said that senior IMF officials believe Greek debt restructuring is necessary, and that they have spoken with European government representatives in recent days to push for rapid action.
European banks in further capital calls
by Patrick Jenkins, James Wilson and Rachel Sanderson
Two European banks announced plans to raise a combined €13.25bn ($19bn) of fresh equity on Wednesday, taking to nearly €25bn the total capital raisings unveiled since the start of the year by institutions across the continent. Commerzbank, Germany’s second-largest bank by assets, plans to raise €8.25bn from investors through a placement of securities followed by a rights issue.
The bank will also convert into equity €2.75bn of existing non-equity instruments owned by the government following the bank’s state government bail-out. The transaction will leave the bank with a core tier one ratio – the key measure of financial strength – of 8.8 per cent, with 8 points of that comprising equity. Eric Strutz, chief financial officer, said the bank was also "getting into shape for Basel III", the new international bank capital rule book. He said investor demand was "very strong," adding: "There is particularly good demand to take part in the upturn in Germany."
At the same time, Intesa Sanpaolo, Italy’s largest retail bank by assets, will undertake a rights issue of as much as €5bn as it seeks to shore up its core tier one ratio ahead of stress tests. It said its board had approved the rights issue at a cost of €0.52 a share, a steep discount to the current price of €2.14. The move would raise its core tier one ratio by 150 basis points to about 8.5 per cent. Intesa is the third Italian bank to announce an equity raising, following the example set by UBI Banca and Banco Popolare. The Bank of Italy, the country’s central bank, has been putting acute pressure on banks to improve their capital ratios.
The moves come as European regulators embark on a process to stress test the financial strength of about 90 of the region’s biggest banks, with the results set to be published in June. Analysts and bankers expect several more banks, such as Raiffeisen, to come to the market for fresh equity in the coming weeks. Kian Abouhossein, banks analyst at JPMorgan, said: "We believe there is still a capital deficit of €120bn across the European banking sector", adding that the number included close to €80bn of government-related investments being unwound.
The drive comes against the background of the so-called Basel III rules, being phased in by 2019. As part of that, large "systemically important financial institutions", or Sifis, will have to hold more capital than the new minimum capital ratio of 7 per cent equity as a proportion of risk-weighted assets. Another international regulatory body, the Financial Stability Board, signalled late on Tuesday that it would be November before any headway was made on deciding which institutions would be defined as Sifis and how much additional capital they would be required to hold.
Banks still Germany’s Achilles’ heel
by James Wilson and Gerrit Wiesmann - Financial Times
Angela Merkel was firm with her audience of German bankers: taxpayers must never again be asked to fund a bail-out. "Market economy rules also apply to financial institutions," the chancellor told them in Berlin last week. "Banks, like everyone else, have to show responsibility."
As the financial crisis spread in 2008, Germany offered up to €500bn ($710bn) in liquidity guarantees and capital to its teetering institutions. But has the money offered brought an increase in their ability to withstand future crises? Speaking a week earlier in Frankfurt, Ms Merkel admitted that the banks had "still not comprehensively proved their competitiveness".
It would be unthinkable for her to say the same of her country’s thriving carmakers or machine tool manufacturers. But while the stock of German industry has rarely been higher, its banks remain the Achilles’ heel of Europe’s largest economy and – thanks to their cross-border exposure – a big obstacle to cleaning up the eurozone’s financial and fiscal crisis. "The German economy has a remarkable asymmetry. On the one hand, many companies that are ... world leaders. On the other side, only one globally successful German bank," says Josef Ackermann in a reference to Deutsche Bank, the country’s biggest banking group, which he heads – and which the chancellor exempted from her criticism.
The €24bn in extra capital requirements revealed last week at Irish banks, and the latest pressure on Portugal’s borrowing costs, emphasise how a round of sovereign defaults and European bank failures would have dismal consequences for German banks. They are among the biggest holders of eurozone sovereign debt – with €46.5bn of bonds from the governments of Greece, Ireland, Portugal and Spain combined, according to the most recent data from the Bundesbank, the country’s central bank. The banks have another €91bn of exposure to those countries’ banking sectors.
German banks also have an unusual reliance on hybrid capital: the oddly named "silent participations" (stille Einlagen), which global regulators will no longer consider as up to scratch. If the London-based European Banking Authority does decide to disqualify much of this capital from imminent stress tests that it is to conduct, the result promises to be damning for some German banks, which are fighting any such plan.
Just as problematically, Germany has made little progress on a task that should have been a consequence of the financial crisis: to massage viable banks quickly back to life while taking failing institutions from the market. None of the four banks that received a direct injection of federal capital is yet free of it. Of some €30bn provided, only a tiny fraction has been repaid, although Commerzbank was expected on Wednesday to announce plans to repay some of its €18.2bn of government capital. Another €40bn of liquidity guarantees remain in use. Only two took advantage of a window to offload toxic assets into "bad banks" last year.
Critics say Germany is allowing lame institutions to stagger along, wagering that time will either restore the eurozone to balance or at least allow banks to avert collapse. "We have not seen so far that Germany really wants to the get the banking system back on a sound track through adequate triage or restructuring," says Nicolas Verón of the Bruegel think-tank in Brussels.
Altogether, €7,600bn of German banking assets are supported by less than €350bn of equity and reserves, according to DIW, a Berlin think-tank. Franz-Christof Zeitler, deputy president of the Bundesbank, on Tuesday confirmed a November estimate that the sector needed an extra €50bn in core tier one capital by 2018 to meet forthcoming international regulations known as Basel III. "At the moment there is nothing to suggest the new quotas cannot be met," he added.
German officials often perceive a hostile "Anglo-Saxon" strain in criticism. Many individual institutions – from Deutsche to small savings banks and mutual lenders – survived the crisis well. The government is confident that a tougher regulatory environment will strengthen the system and that stricter requirements of Basel III will bring owners of troubled banks – the regionally owned Landesbanken in particular – to sell, consolidate or pump in more capital. Pressure from European Union competition authorities on banks that received state aid may also help to revamp the sector.
"The German banking market is better than its reputation in some foreign countries," says Steffen Kampeter, a deputy finance minister. "There may be a need for capital in some cases, for example. But I think we’re moving in the right direction on those issues. Remember that we don’t feel that the state needs to intervene everywhere. We believe much can and should indeed come from normal market processes."
. . .
What Berlin has done is to develop one of Europe’s first bank restructuring acts, approved in recent months along lines proposed for all of Europe by the European Commission. The law is intended to create the conditions for failing banks to be reorganised without spooking markets, "bailing in" creditors by enforcing debt-to-equity swaps if needed, and winding down the businesses. Ralph Brinkhaus, an MP from Ms Merkel’s Christian Democrats, says: "We’ve created a mechanism which will allow us to take banks that fail from the market as smoothly as possible. That’s a big advantage today over 2008 and 2009."
Yet normal market processes are what many critics believe are most lacking in Germany’s banking system, which is thick with public sector institutions. The main problem are the Landesbanken, which lack stable funding streams such as retail deposits, and which tried to compensate for low profits with a sally into the structured securities that turned out to be at the heart of the financial crisis. Berlin is prodding one bank, WestLB – which over two decades has gone from international rival to Deutsche to byword for German banking mishaps – towards a break-up and partial market exit. But Joaquín Almunia, EU competition commissioner, has lambasted the lack of a comprehensive action plan, while the government has not engineered a consensus for reform of WestLB’s peers.
The other set of banks badly hit were property and public sector lenders such as Hypo Real Estate and Eurohypo, a Commerzbankoffshoot: they were big financiers of foreign property and eurozone debt. Daniel Zimmer of the University of Bonn – who headed a commission convened by the government to examine its bank "exit strategy" – says: "Particularly in property finance and public sector finance, you have too much capital and too much competition. Of course competition is desirable but here it is a structural problem."
In the case of HRE, which has been nationalised, Ms Merkel’s government has signalled it will ignore the advice of Prof Zimmer’s group, which suggested winding down the property lender, and work towards a reprivatisation. Carsten Schneider, budget spokesman from the opposition Social Democrats, says: "Chances have not been taken simply to take some banks out of the market." Germany’s financial strength and credibility with investors has allowed a wait-and-see approach. With Berlin behind them, banks have had better access to liquidity than Ireland’s banks, which are backed by a much more fiscally stretched government. Spain has also begun the reform of its caja public savings banks after pressure from financial markets.
But it is equally clear that Berlin is praying its financial support is repaid so it avoids a loss for taxpayers. The €3bn of capital put into WestLB is at risk if the bank is largely split up. Alexander Bonde, the Green party’s budget spokesman in parliament, says: "There is still billions of euros of risk for taxpayers bound up with the state’s support for banks." The government has also taken €250bn of assets spun off by HRE and WestLB into "bad banks" on the government’s balance sheet. Mr Schneider says: "We are still probably going to need 20 or 30 years, and have to absorb €20bn or €30bn of losses, to wind down the bad banks."
. . .
The crisis has brought a degree of change, with Dresdner Bank, Postbank and SachsenLB taken over. Among Landesbanken, risk-weighted assets have fallen by one-third since mid-2008. Tier one ratios have improved.
However, even with some assets parked in bad banks, there are huge remaining risks from lending. The banks have €2,240bn in foreign exposure, according to the Bundesbank, including some €895bn to eurozone states, of which €136bn is to Spain – illustrating why Madrid is "too big to fail". Commercial property loans are another concern. The Bundesbank’s latest estimate is that banks have €325bn of such loans – more than three times their tier one capital.
Moreover, while ratios may be improving, they still include substantial slugs of hybrid capital. Some will be ineligible as core tier one when Basel III comes into force, although some public sector bankers are confident that hybrid instruments can be tweaked to meet the new criteria. European leaders have said banks failing the stress tests will receive more capital, though how this would happen in Germany is unclear. Critics say more state exits would help to create a sounder system. But as Mr Verón says: "Banking reform in Germany, more than in any other European country, is inseparable from the political discussion. It makes everything much more intractable."
One push may come from Brussels. WestLB’s mooted break-up – reducing it to a rump service provider for savings banks – would cut its ties to the North Rhine-Westphalia government, a significant break. Prof Zimmer says: "This should be a signal for other regional governments that this period of 30 or 40 years during which they were big participants in the banking system has come to an end." Brussels is also set to issue verdicts in the coming months on what BayernLB, HSH Nordbank and HRE must do to compensate for their receipt of state help. Their owners want to privatise them but the chances of doing so soon are slim, even though all three are back in profit.
While federal and regional governments mull their options – and Ms Merkel lauds the restructuring law as a guarantee that failing banks will not be propped up by taxpayers – Prof Zimmer fears a longer-term risk: that Berlin’s continued role will increase the distortions that have caused so many problems in the first place. "If the government tries to wait until ... the banks where it is invested [are] fit and healthy, there is a danger that they will give an advantage to those banks for several more years. It will simply perpetuate competition problems, weaken and marginalise competitors, and risk causing more failures further down the line," he says. "I think the government has a strategy to deal with the banks – but it is a strategy that is based very much on hope."
‘It will take imagination and political will to overcome these hurdles’
In the soap opera that is German banking, the savings banks or Sparkassen are like the friendly neighbour who has a skeleton tucked away in the wardrobe. According to the slogan of the association binding the 430 locally owned banks into a network with 250,000 employees, assets of almost €1,100bn ($1,400bn) and pre-tax profits of €4.5bn last year, the Sparkassen are "Good for Germany". They trade on customer relationships and concern for their districts, where they provide substantial backing for sports and the arts. For supporters, their bread-and-butter lending and deposit-taking make them a model of responsible, reliable banking.
Savings banks "were very important in financing the German recovery with their loans", says Steffen Kampeter, deputy finance minister. "We never experienced the credit crunch that some people feared we’d get." A more doubtful picture emerges when one considers their relationships to the Landesbanken, the other main group of public sector banks and Germany’s most troubled institutions. Historically, savings banks have owned about half of the Landesbanken alongside regional governments, using them as central banks for services they were too small to support themselves.
Post crisis, the Landesbanken model of funding themselves by borrowing cheaply on capital markets and lending at competitive rates looks broken. They would love access to retail deposits as a source of funds. But, aside from a few isolated cases, they have been kept away from this by the savings banks. Savings banks are "taking responsibility" for events at many Landesbanken, says Heinrich Haasis, president of DGSV, the savings banks association – whether by injecting capital or shouldering risks.
A recent policy paper from Frankfurt’s Goethe university, co-authored by two former Landesbank chief executives, puts it differently. The writers say: "The savings banks seem to be intent on losing no time in retreating from all responsibility for financial burdens associated with their commitment as owners and creditors vis a vis Landesbanken." Aside from the problem of exposure to Landesbanken, the report says savings banks are too reliant on trying to boost margins by using cheaper short-term funds to finance long-term lending – a claim rejected by Mr Haasis – and face growing competition from the likes of Deutsche Bank and from foreign competitors.
The solution, the authors say, is reform of public-sector banking. They propose moulding Landesbanken and some bigger metropolitan savings banks into regional institutions that offer a wider, and more stable, range of banking activities. But they admit that "it will take no little imagination and a strong political will to tackle and overcome these hurdles in a structured manner". Loosely translated, that probably means the plan has no chance in a country where many savings banks have close ties to important local politicians.
Mr Haasis sees massive legal obstacles. In addition, he says: "It would totally change the system that has been so stable in the crisis – why should we?"
'One in seven' chance that nations will abandon euro
by Emma Rowley - Telegraph
The risk is roughly one in seven that Europe's ongoing debt crisis will push member nations to abandon the shared currency, raising the spectre of the "effective end of the euro area," the Economist Intelligence Unit has warned.
Attempts to restore investors' confidence in debt-laden nations' ability to honour their commitments could see the weaker eurozone members grow ever wearier of the demands placed on them, according to a new report from the research body.
Meanwhile, those countries whose finances are in better shape could lose patience with propping up other member nations, in this worse case or "ultimate risk" scenario. The pressure on politicians from voters at home to leave the shared currency could then become "irresistible", resulting in either stragglers like Portugal or Ireland or a robust economy such as Germany deciding to leave, before other members follow suit.
"This scenario posits that sooner or later, the cement that has held European countries together for decades cracks and the progression towards ever-closer union comes to a spectacular halt," said researchers, who gave it a likelihood of 15pc. The report's central scenario - put at a 50pc probability - is that the eurozone will muddle through the crisis, with the most indebted countries accepting the harsh reforms needed to cut their deficits and stronger members reluctantly offering enough support to contain the crisis.
However even this relatively benign resolution of the crisis expects some countries to default on their debt, with Greece seen as the most likely. The least probable scenario, put at a 10pc likelihood, is that the eurozone will undergo a resurgence as countries manage to rein in their public finances, researchers thought. The European Central Bank is on Thursday expected to raise interest rates to fight inflation across the eurozone, but there are fears it will make conditions even harder for the struggling periphery.
Portugal sees "irreparable damage" in debt cost
by Shrikesh Laxmidas and Andrei Khalip - Reuters
Portugal's caretaker government, fighting to avoid a bailout, said on Wednesday a political crisis had caused "irreparable damage" after borrowing costs rocketed as it sold a billion euros in short-term debt.
The sale of 6- and 12-month treasury bills brought some temporary relief for a country grappling with soaring rates, political uncertainty, rating downgrades and a warning by local banks they may no longer be able to buy government debt. But the yield on 12-month T-bills spiked to 5.902 percent from 4.311 percent three weeks ago, and on six-month bills to 5.117 percent from 2.984 percent, highlighting the financial pressure ahead of big redemptions this month and in June.
"I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure," said Peter Chatwell, rate strategist at Credit Agricole. Portugal's cost of credit has leapt since the minority Socialist government resigned last month after a parliamentary defeat on tougher austerity measures, casting the country into political limbo. An early general election is set for June 5.
The finance ministry said the auction was a confirmation of the deterioration caused by the rejection of the austerity plan and promised to take all measures necessary to ensure liquidity and financing for the economy. But it denied talking with the European Union about how to meet borrowing needs. "Current interest rates make it possible to conclude that the damage caused by the rejection of the austerity plan is irreparable," a ministry statement said.
The government has previously held out hope that by steadily meeting budget goals and cutting spending it could regain investor confidence. It admitted last week that the 2010 budget deficit had hit 8.6 percent of gross domestic product, far above its 7.3 percent target, but said this year's goal of 4.6 percent would be met. Local banks delivered an unprecedented warning to the government on Monday to seek a short-term emergency loan to sooth market concerns ahead of the election, saying that under current conditions they cannot continue buying government debt. "There has been a very important signal from the banks for the future," said BNP Paribas analyst Ioannis Sokos. "Portugal can still make it through April, but probably won't get to June without a bailout."
Moody's Downgrades Banks
Adding pressure on banks, Moody's rating agency followed up a one-notch sovereign downgrade and cut the creditworthiness of seven local banks by one or more notches, citing concerns over the banks' own situation and the government's ability to support them. EU finance ministers meeting in Budapest at the end of this week will try to clarity from the caretaker administration on what sort of support, if any, it can seek ahead of the election.
The European Commission said on Wednesday there were no discussions about releasing aid because Lisbon has not applied for assistance. The caretaker has said it will resist any bailout or a loan as they would impose tough conditions on the country. It has also said that as a caretaker administration it lacks the power and legitimacy to seek outside help -- a point hotly disputed by opposition politicians.
Lisbon's partners are anxious lest the financing problems reach a point of no return before a new government is in place, sapping confidence in the euro zone, but they cannot force Prime Minister Jose Socrates' hand. IMF Managing Director Dominique Strauss-Kahn told Spanish daily El Pais on Wednesday the country needs to show it is taking the right steps. "The situation is in the hands of the Portuguese government... it has to prove to its creditors that it is taking the right steps," Strauss-Kahn said.
Two business newspapers said the public social security fund has been selling overseas financial assets in the last few days to help finance the state by buying sovereign debt at auctions. Jornal de Negocios and Diario Economico said the Social Security Financial Stabilization Fund planned to buy T-bills in Wednesday's auction. But a Labour Ministry spokesman denied the fund bought any treasury bills at the auction.
Analysts say the high yields, which are higher than 10 percent for five-year bonds, are unsustainable. The fall in the value of the bonds also undermines its banks, who have been substantial buyers of government debt. "The rating actions follow the downgrade of Portugal's debt ratings and also reflect the weakened standalone credit profile of most Portuguese banks," Moody's said in a statement.
The banks concerned included Caixa Economica Montepio Geral, Caixa Geral de Depositos, Banco Comercial Portugues, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Banco Portugues de Negocios. Portugal has to repay over 4.2 billion euros in maturing bonds on April 15, and then another 4.9 billion euros in June. Including coupon payments and deficit financing, its requirements until June are put at 12 to 15 billion euros.
"From the pure cash perspective, April should be OK, even with coupons and deficit financing, but then if the domestic bid disappears, there's not much room for maneuver," said David Schnautz, debt strategist at Commerzbank. Portugal's benchmark 10-year bond yield hit a euro lifetime high of over 9 percent on Tuesday.
Moody’s adds to pressure on Portugal
by Peter Wise - Financial Times
Moody’s has cut Portugal’s credit rating in the latest of a series of downgrades following a political crisis that has pushed the country to the brink of an international bail-out.The agency said it expected the next Portuguese government, which is to be chosen in a snap election on June 5, would seek a financial rescue "as a matter of urgency".
Moody’s cut Portugal’s long-term government bond rating by one notch from A3 to Baa1 and placed it on review for a further possible downgrade. However, its rating remained two levels above recent downgrades of Portugal to triple B minus, one level above "junk" status, by rival agencies Fitch and Standard & Poor’s. Yields on Portugals 5-year government bonds rose closer towards 10 per cent as the belief grows that the country needs an international rescue to fend off a sovereign bond default. By mid-morning in Lisbon the yield had reached 9.99 per cent, higher than levels seen in Ireland when Dublin was bailed out in November.
The cost of insuring Portuguese government debt rose 5 basis points to a record 585 basis points, meaning the cost of insuring €10m of Portuguese government debt is €585,000, according to CMA prices. Equity market losses were contained to just a few points, with the PSI 20 index in Lisbon trading 0.1 per cent lower. Bank shares were the biggest losers, however, with Banco BPI, Millennium BCP and Banco Espirito Santo all down by about 1 per cent.
Moody’s cut comes ahead of an auction of up to €2bn in short-term government debt on Wednesday, seen as a crucial test of market sentiment following the resignation of José Sócrates, the prime minister, on March 23. In a television interview on Monday night, Mr Sócrates said he would do "everything in his power" to avoid a bail-out, but warning he could not guarantee that Portugal would not need a financial rescue before the election. Moody’s said the downgrade reflected greater "political, budgetary and economic uncertainty" that increased the risk that Portugal would be unable to meet "ambitious" deficit reduction targets.
Aníbal Cavaco Silva, Portugal’s president, has called an election two years ahead of schedule to resolve the crisis caused by the defeat of the minority Socialist government in a key vote on austerity measures. Moody’s said it had not cut the rating further because it was confident that other eurozone countries would support Portugal if it needed emergency financing before it could negotiate a full rescue package with the European Union. Fitch downgraded Portugal by three notches on Friday. S&P also cut the country’s long-term rating by three levels in two separate actions over the past 10 days.
Moody’s said the crisis had reduced "the speed and decisiveness of policy-making" in Portugal. The country also faced funding challenges as the European Stability Mechanism, the EU’s permanent crisis resolution mechanism due to come into operation in 2013, envisaged debt restructuring as a "distinct possibility". It was "very unlikely" that long-term debt markets would reopen to the Lisbon government or Portuguese banks until a new government was able to dispel doubts about the country’s commitment to fiscal tightening, the agency said.
Portugal state pension fund plans to buy country's sovereign debt
by Shrikesh Laxmidas - Reuters
Portugal's social security fund has been selling overseas financial assets in the last few days to help finance the country by buying its sovereign debt at auctions, two daily business newspapers reported on Wednesday. The Social Security Financial Stabilization Fund (FEFSS) plans to buy Portuguese T-bills at an auction of up to 1 billion euros by debt agency IGCP on Wednesday, Jornal de Negocios and Dirio Economico reported without citing sources.
Portugal's leading banks, largely seen as key buyers of the country's debt, on Tuesday threatened to stop buying government debt, urging the caretaker cabinet to seek a short-term loan to tide it over a pre-election limbo. The social security fund, which runs a contingency plan to cover possible deficits in the state pension fund system, has 9.2 billion euros on its books. The prospect of it buying the debt suggests that the government may have some more breathing space even given the threat of the buying strike by the banks.
Diario Economico quoted FEFSS head Manuel Baganha as saying that the fund's financial operations are confidential, but added that it is "normal practice" for it to buy and sell assets. Filipe Garcia, economist at Informacao de Mercados Financeiros consultants in Porto, said: "It's normal for a fund to buy sovereign debt, so long as it adheres to certain rules on the rating levels of those it buys from, and distributes its buying across issuers and maturity to hedge risks."
He warned, however, that news of the fund selling assets to buy sovereign debt in the current context of the debt crisis raises some concerns. "The independence of the fund's management could be at risk. Though it is in the state's perimeter, the fund is designed to make pensioners' contributions more sustainable, not necessarily help the debt agency in its financing program," he said. "The other worry is that after a possible bailout, Portugal may not be able to ring-fence its pension fund, much like Greece after its rescue package. By using the fund to buy debt now, the state may lose any argument to protect it later," he added.
Neither newspaper referred to how much debt the fund had bought in the last weeks or plans to buy in Wednesday's sale. Diario Economico added that insurance companies belonging to state-owned bank CGD have also recently been pressured into buying more sovereign debt than normally fits their risk profile, again without citing sources.
Super-Rich CEOs are killing your retirement
by Paul B. Farrell - MarketWatch
Headlines race across the web: "Jamie Dimon Worries That Financial Regulation Will Doom Banks, Forever." Doom? Forever? Settle down Dimon, this sounds like an over-the-top B-movie promo for "Vampire Chronicles."
Suddenly the boss of $2 trillion J. P. Morgan Chase is our newest "Dr. Doom." Last week he was preaching his mantra to the U.S. Chamber of Commerce choir, warning that financial reforms would be a "nail in the coffin for big American banks." Nail in the coffin? Yes, and that’s exactly what the American public wants. Stuff Wall Street’s Vampire Squids back in their coffins, nail the lids shut, bury them forever.
Seriously, nationalize our incompetent Super-Rich Banks. We made a historic mistake not doing it in 2008. Should have let the vampires go bankrupt, reinstated Glass-Steagall. Instead we sat passively letting our double-dealing Treasury Secretary, former Goldman boss Hank Paulson, protect his Wall Street cronies as he conned Congress and taxpayers into making the worst economic blunder in American history, bailing out Wall Street’s "too-greedy-to-fail" banks.
Warning: Soon our Super-Rich Vampires will sink the economy deeper than 2008. Worse, they even believe we’ll bail them out again. We blinked in 2008, so they’ll try sucking out more bail-out blood next time.
The scene’s pathetic: Here’s one of America’s Super-Rich CEOs, a guy worth $260 million, coming across like a crybaby, whining because a tough-as-nails gal like Harvard law professor Elizabeth Warren and her Consumer Financial Agency just might take away his toys for being a bad boy … might try to limit his ability to rip off cardholders … might limit his high-risk gambling with depositors’ cash, limit him playing in the $700 trillion global derivatives casino … might force his bank to put up more reserves to prevent the next meltdown … might even awaken his lost moral consciousness and get him to think about the public welfare instead of the tens of millions he makes squeezing the public.
Wall Street’s Super-Rich CEOs killing financial reforms
But will Wall Street have an epiphany? Change? Never. No, won’t happen. Why? America’s Super-Rich Vampire CEOs are already doomed, forever. Our too-greedy-to-fail banks are back to their old pre-2008 tricks, bankrolling a billion dollar "kill reform" drive. J. P. Morgan Chase, Goldman Sachs, Citigroup, Bank of America and Morgan Stanley have invested megabucks in lobbyists and politicians to water down, defund and effectively kill Warren’s CFA, the SEC, Dodd-Frank and every other attempt to protect the public.
These guys love running the Fed and Treasury as their own little piggy banks. As Spencer Bachus, the GOP chairman of the House Financial Services committee put it, government regulators "exist to serve banks." So, unfortunately, for a while you will have to listen to Dimon’s incessant whining as he keeps replaying his overly dramatic Dr. Doom story. Until Wall Street pounds all their nails in the coffin of financial reform, while resurrecting their self-destructive Reaganomics vampire that sank its fangs and triggered the 2008 meltdown.
But watch out Wall Street: Next time, American taxpayers won’t support bailouts and trillions more debt. We will sink into the Great Depression 2 and a new American Revolution next time. No bailout, we’ll just nationalize all banks. Then, poor little Jamie and his Super-Rich buddies will lose their jobs, having destroyed American capitalism. Unfortunately, the great irony is that these insatiable greedy, incompetent CEOs will personally survive well after the collapse, living off the millions they’ve stashed away while sabotaging America with their bankrupt Reaganomics ideas.
Dimon becomes our newest Dr. Doom
Dimon really loves his new role as a Dr. Doom. Plays a tragic drama queen very well. That "nail in the coffin" speech fits perfectly with the Chamber’s kill-reform strategies. Some may say Wall Street’s short-term thinking CEOs are too myopic to be on the same stage as our long-term thinking Dr. Dooms. But you decide: Here’s a criteria from Barron’s, offered by legendary money manager Jeremy Grantham, referring to the 2008 crash: "Why is it that several dozen people saw this crisis coming for years." Several dozen Over four years. But "the bosses of Merrill Lynch and Citi and even Treasury Secretary Paulson and Fed Chairman Bernanke, none of them seemed to see it coming."
Why? Grantham’s answer is simple: Wall Street and Washington’s leaders are "management types who focus on what they are doing this quarter or this annual budget." Their myopia "guarantees that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it." Yes, and they’ll miss the next crash. Guaranteed. Here’s what other long-term thinking Dr. Dooms predict:
1. This time is never, never different with insatiable greed
In "This Time Is Different: Eight Centuries of Financial Folly" economists Carmen Reinhart and Kenneth Rogoff warn that as economies "improve there will always be a temptation to stretch the limits. … A financial system can collapse under the pressure of greed, politics and profits ... Technology has changed ... but the ability of governments and investors to delude themselves … seems to have remained a constant."
2. Fed’s new easy money is fueling new bubble, new meltdown
In the 400-year history of the stock market "there has been a long succession of financial bubbles," says financial historian Niall Ferguson. The culprit? The Fed: "Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks." And with the rate near zero, Bernanke is becoming the biggest bubble-blower in American history.
3. American ‘Empire’ has peaked, is on a rapid downward spiral
Savvy Hong Kong economist Marc Faber says "the average life span of the world’s greatest civilizations has been 200 years … Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline."
4. Wall Street has created a very ‘short respite’ before new crash
Nobel economist Joseph Stiglitz warned that unless Wall Street’s incentive system is drastically reformed, "the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis."
5. First dot-coms, then subprimes; ‘third episode’ dead ahead
Remember a decade ago in "Irrational Exuberance" Yale’s Robert Shiller predicted the dot-com crash. More recently he warned: "Bubbles are primarily a social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode." And everything since 2008 guaranteed the "third episode."
6. America’s ‘running out of time’ before the Great Depression 2
Former IMF chief economist Simon Johnson waned: "We’re running out of time … to prevent a true depression … the financial industry has effectively captured our government" and is "blocking essential reform," and unless we break Wall Street’s "stranglehold" we will be unable prevent another Great Depression. Failure to reform Wall Street guarantees a depression. Unfortunately, Dimon just doesn’t get it.
7. Fed’s haunted by ghost of Greenspan’s failed Reaganomics
When Obama reappointed Bernanke, "Black Swan’s" Nicholas Taleb warned that Bernanke was an economist who "doesn’t even know he doesn’t understand how things work." Now the Fed’s Greenspan clone is feeding the GOP’s self-destructive Reaganomics ideology, blindly focused on saving a dying banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown.
8. Hedgers made billions shorting dumb politicians, dumber bankers
Hedge funds make fortunes betting on the utter stupidity of Washington politicians and Wall Street CEOs gambling with the Fed’s self-destructive cheap-money policies. In fact, AR Magazine just reported that the top hedge fund manager made $4.9 billion shorting our clueless leaders, after making $3.4 billion in 2008, the year of the crash.
9. Dollar’s dead as reserve currency, killing our retirement system
In George Soros’s "New Paradigm:" America’s 25-year "superboom … led to massive deregulation ... blindly chasing free markets ... unleashed excessive greed ... created the dot-com and credit meltdowns" and a "shadow banking system" of derivatives. "The system is broken … the end of an era of credit expansion based on the dollar as the international reserve currency." Warns Soros: "We’re now in a period of wealth destruction."
10. Sell everything, hide in the hills with seed, fertilizer, drugs, guns
Barton Biggs 2008 bestseller, "Wealth, War and Wisdom" warns us to prepare for a "breakdown of civilization … Your safe haven must be self-sufficient and capable of growing some kind of food ... well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. … a few rounds over the approaching brigands’ heads would probably be a compelling persuader that there are easier farms to pillage." Biggs is no anarchist militiaman; he’s a former Morgan Stanley research guru, now a top hedge fund manager.
11. Nations ignore obvious till too late, then collapse rapidly
Yes, the end will be swift. Why? Few can take the warnings of geniuses like evolutionary anthropologist Jared Diamond. In "Collapse: How Societies Choose to Fail or Succeed," Diamond warns that societies fail because they’re unprepared, in denial till it’s too late: "Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power." Just two decades. America hit its peak in 2000, with Bush’s election. Our two-decade reprieve will soon be up.
Obvious warnings were everywhere long before the 2008 meltdown. But a tragic Reaganomics dogma created a blind spot in Greenspan, Bernanke and Paulson. Today that blind spot is even stronger with a new crop of Reaganomics ideologues. And again, the warnings are everywhere. Again ignored. Tragic figures like Dimon, Bernanke, Geithner as well as Bachus, Bachman, Palin, Trump, Koch Brothers and even Obama have that blind spot. They simply cannot hear any warnings … won’t till it’s too late.
Households sink under a sea of debt
by Jeremy Warner - Telegraph
All eyes will be on Marks & Spencer for its fourth-quarter trading update on Wednesday for a glimpse of what's happening at one of the coal faces of the UK economy.
Long gone are the days when M&S was thought of as a bellwether for the British high street, but the company is still far and away the UK's largest clothes retailer, and a significant foods chain to boot. What the chief executive Marc Bolland has to say ought to be a reasonably reliable snap shot of what's been happening to household consumption in the round since the turn of the year.
A combination of careful news management and the blood curdling screams of other retailers has already prepared the ground for a dire set of numbers. Compared with the same period last year, sales will be well down. That's partly because of the inclusion of fewer Christmas trading days than the year before, but the underlying picture scarcely looks much better. Consumption is being badly squeezed as the full force of rising inflation and the Government's austerity measures exact their punishment on disposable incomes; the high street is hurting again.
Don't forget, it only requires everyone to reduce their spending by what might seem a relatively small amount for it to have a disproportionately large effect on the retailer; small individual cutbacks collectively add up to big shortfalls. Sir Stuart Rose, the former M&S chairman, used to say that you could tell a high street recession in the making from the quantity of shoes sold. When people are belt tightening, shoes are the first item of discretionary spending to go. I was at London's Westfield shopping centre at the weekend, and there weren't many shoes being shifted.
All of which makes forecasts from the Office for Budget Responsibility for reasonably strong growth in household consumption both this year and the four years thereafter, something of a puzzle. There are plenty of grounds for scepticism. It's not until the middle of 2013 that the OBR expects a resumption in real wage growth, and even then, households might be expected still to be exercising a degree of precautionary thrift given the uncertainties around them. To arrive at its conclusion that household consumption will by then be rising fairly robustly, the OBR makes a couple of very questionable assumptions – that to maintain spending and living standards, UK households will both reduce their savings rate and increase their borrowings.
Given that UK households are already the most indebted in the world, that's quite an ask. Dig down into the detail of the OBR forecasts and things look pretty frightening. Overall household debt rises from £1.62 trillion last year to £2.13 trillion in 2015, or from 160pc of income to an astonishing 175pc. In other words, consumption growth, a key part of the OBR's overall forecast for growth, is only maintained by taking on more debt. History seems to be repeating itself, for that's what happened in the run up to the crisis. Far from being cured, the underlying problem is being made worse still.
The OBR's forecasts should perhaps be taken with the same sack full of salt as everyone else's, yet though plainly undesirable and potentially dangerous, this further rise in indebtedness is not quite as incredible as it first appears. Relative to income, household debts have been here before. Just ahead of the crisis, they were at roughly the same level. The erosion since is caused largely by the effect of rising wages on the same quantity of nominal debt. Well those wage rises have now largely ceased, so if they can, households may feel inclined to borrow the difference. Is it not precisely this sort of psychology that caused the crisis – borrowing, rather than earning, the money to spend?
Policymakers say they want to achieve a rebalancing of the UK economy away from consumption to investment and trade, but here's the OBR relying for its forecasts of continued growth on consumers going back to dangerously high levels of leverage.
Whether desirable or not, the OBR views it as a matter of economic determinism. If benefits are slashed and taxes are raised, then households will compensate for the loss by borrowing to spend so that in aggregate demand remains the same. This is only the mirror image of what happened in the downturn, when a collapse in private demand was partially offset by fiscal expansionism, thereby leading to a precipitous increase in public indebtedness. Now, according to the OBR, the scales will be tipping back the other way again.
That's the theory, but practice is frequently different. And in any case, it's not really what anyone wants to happen. The nub of the economic problem is surely not just the fiscal deficit, but overall indebtedness, both public and private. If the crisis was at root caused by an excess of debt, merely swapping one form of it for the other doesn't seem much of a solution.
The main hit to output during the recession was not consumption - which was partially supported by cuts in interest rates and taxes - but business investment. It's that element of the economy policymakers need to stimulate. But it's chicken and egg; business won't switch on the scale necessary from net lender to net borrower until it is confident there's sufficient demand in the economy to justify it.
Business investment is rising again, but is still well below pre-crisis levels in most advanced economies. To the extent that there's any demand left in the economy at all, it remains highly reliant on fragile household consumption.
As if all this were not sufficiently toxic a mix of anti-growth ingredients, the UK Government has thrown in a further dose of poison by determining to "do something about the banks". The radical structural reform being considered by the Independent Commission on Banking hangs like a pall over the entire sector at a time when the economy desperately needs to move on and begin the process of fuelling some decent private sector demand.
Even accepting that the ICB is right in its prescriptions for preventing future financial crises – and that's a big if - this is not the time to be pursuing the holy grail of risk free banking. Now obviously, banking reform is necessary and not unique to Britain. The squeals coming out of New York over the Dobbs-Frank bill are just as loud as those we hear from the City. Yet in the US, there is a sense in which they've managed to put the banking crisis behind them. The public money has been repaid, dividends resumed, and the banking system has been substantially healed. In the UK, by contrast, everything is on hold while the ICB ponders how best to return finance to the stone age.
It's not clear that you can unilaterally impose significant structural reform on one of the world's leading financial hubs without blowing a very considerable hole in the heart of the host nation's economy. From Paris to Shanghai, they cannot believe the UK's appetite for self harm. Yet amazingly there are those in the Cabinet who still cheer the ICB on from the sidelines with the chorus of "good riddance" to the financiers.
In the meantime, the economy at large is slowly dying from lack of demand.
'Worse off Wednesday' starts a year that will cost UK households £2.3 billion
by Philip Aldrick - Telegraph
Tax and spending changes that come into effect on Wednesday will cost households £2.3bn this year, economists have warned. Dubbed "Worse off Wednesday", changes to personal taxes will shrink household income by £500m this year while welfare cuts remove a further £1.8bn, according to Capital Economics. Coming on top of soaring inflation, the fiscal squeeze will have the effect of reducing real pay this month by 1.5pc.
Not everyone will be worse off. The personal tax allowance in being increased from £6,475 to £7,475, taking 880,000 people out of tax and gifting 23m basic rate taxpayers up to £170 each. However, the cut is being paid for by an decrease in the higher rate threshold from £43,875 to £42,475, lifting 750,000 people into the 40p tax bracket, as well as a 1p rise in National Insurance.
Higher earners will be hit by a new stamp duty rate of 5pc on £1m properties and a reduction in pension tax relief from £255,000 to £50,000. Welfare changes, such as switching to less generous inflation indexing, will cost those on benefits £2.7bn. Including January's VAT rise, everyone is worse off. The squeeze comes on the back of the first official annual decline in household incomes since 1981 last year.
Fed Help Kept Banks Afloat, Until It Didn’t
by Binyamin Appelbaum and Jo Craven McGinty - New York Times
During the frenetic months of the financial crisis, the Federal Reserve stretched the limits of its legal authority by lending money to more than 100 banks that subsequently failed. The loans through the so-called discount window transformed a little-used program for banks that run low on cash into a source of long-term financing for troubled institutions, some of which borrowed regularly from the Fed for more than a year.
The central bank took little risk in making the loans, protecting itself by demanding large amounts of collateral. But propping up failing banks can increase the eventual cleanup costs for the Federal Deposit Insurance Corporation because it keeps struggling banks afloat, allowing them to get even deeper in debt. It also can clog the arteries of the financial system, tying up money in banks that are no longer making new loans.
County Bank, the largest bank in Merced County, California, took a $4.8 million loan from the discount window in March 2008 after announcing the first annual loss in its 30-year history, news that prompted depositors to withdraw $52 million. By the fall of 2008, the bank was borrowing regularly from the Fed, taking more than two dozen loans in amounts that peaked above $60 million. It continued borrowing until the day it failed, taking a final loan for $55 million on Friday, Feb. 6, 2009.
Thomas Hawker, the former chief executive, said that the loans helped keep the bank in business, providing needed cash as deposits dwindled. But he said that it was clear in retrospect that County Bank was dead on its feet the whole time, thanks to its once-lucrative focus on financing construction of new homes in the Central Valley of California. "I think in most cases it is a lifeline that kind of provides a bridge to survival," said Mr. Hawker, who left the bank in 2008. "In the case here, Merced County was ground zero for everything that could possibly have gone wrong with the economy."
The discount window is a basic feature of the central bank’s original design, intended to mitigate bank runs and other cash squeezes. But access to it historically has been limited to healthy banks with short-term problems. Those limits moved from custom to law in 1991, when Congress formally restricted the Fed’s ability to help failing banks. A Congressional investigation found that more than 300 banks that failed between 1985 and 1991 owed money to the Fed at the time of their failure. Critics said the Fed’s lending had increased the cost of those failures.
The central bank was chastened for a generation but in 2007, facing a new banking crisis, the Fed once again started to broaden access to the discount window. It reduced the cost of borrowing and started offering loans for longer terms of up to 30 days. More than one thousand banks have taken advantage. A review of federal data, including records the Fed released last week, shows that at least 111 of those banks subsequently failed. Eight owed the Fed money on the day they failed, including Washington Mutual, the largest failed bank in American history.
The Fed has said that it complied fully with the law in all of its emergency loans, and that its actions, including lending from the discount window, were intended to limit the impact of the crisis. Charles Calomiris, a finance professor at Columbia University who has studied discount window lending during previous crises, said the Fed had not released enough information for the public to determine whether some of the recipients were propped up inappropriately and should have been allowed to fail more quickly.
"Do we know whether the Fed did that? No, we don’t," he said. "But the Fed has become more politicized than at any point in its history, and I do worry very much that a lot of Fed discount window lending may just be part of a political calculation."
In some cases the Fed’s lending had clear benefits, whether or not the loans meant going beyond the mandate. The F.D.I.C. almost always seizes banks on Friday evenings, so the new owners have two days before reopening. In some cases the Fed kept banks alive until the next Friday. The Bank of Clark County in Vancouver, Wash., took its first discount window loan on Monday, Jan. 12, 2009. It borrowed $8 million Monday, Tuesday and Wednesday, then $14 million on Thursday and Friday. Then the F.D.I.C. closed its doors.
In other cases, the Fed stopped lending to banks as the extent of their financial problems became clear. Alton Gilbert, a former official at the Federal Reserve Bank of St. Louis who wrote a widely cited study of the Fed’s discount window lending in the 1980s, said that few banks failed with Fed loans on their books during the recent crisis. The central bank often suspended lending several months before they failed.
Still, some experts said additional scrutiny was warranted for a subset of banks that received sustained support even though they faced clear problems. The most frequent visitors at the window were three subsidiaries of FBOP, a bank holding company based in Oak Park, Ill.
Park National Bank in Chicago borrowed regularly from April 2008 until the day of its failure in October 2009, taking 129 loans in amounts that peaked at $345 million — the longest period of sustained support for any bank that failed during the crisis. Park used some of the money to finance the acquisition of assets from other banks, expanding its own balance sheet and potentially increasing the cost of its eventual failure. Bloomberg News first reported the details of the Fed’s discount window lending to the company.
Two other failed banks owned by FBOP also took more than 100 loans from the discount window, California National Bank of Los Angeles and Pacific National Bank of San Francisco, although both stopped borrowing several months before failing.
Marvin Goodfriend, a professor of economics at Carnegie Mellon University, said that such lending placed the Fed in the inappropriate position of deciding the fate of individual banks, choices that he said should be made by elected officials. "What I think is the lesson from this is that the Congress needs to clarify the boundaries of independent Fed credit policy," Professor Goodfriend said. "There should be a mechanism so that the Fed doesn’t have to make these decisions on behalf of taxpayers."
Crisis at Japan Nuclear Plant Shifts to New Blast Risk
by VOA News
Workers are pumping nitrogen into one of the reactors at Japan's damaged nuclear plant in an attempt to prevent an explosion caused by dangerously overheated fuel rods. Wednesday's crisis at the Fukushima plant came after technicians finally stopped a leak of highly radioactive water from the power station that dramatically increased the amount of radiation found in nearby ocean waters.
Chief Cabinet Secretary Yukio Edano said the water leak stopped before 6 a.m. Wednesday local time. Until then, water samples in the vicinity had shown radiation levels up to 7.5 million times the allowable limit. However, Edano said it is too early to say with confidence that the problem has been solved, and that officials from the Tokyo Electric Power Company are trying to determine whether radioactive water is leaking from any other location.
Radioactive water dumping continues
The government official apologized to neighboring countries for Japan's failure to notify them before it began pumping thousands of tons of low-level radioactive water into the sea near the plant - an issue separate from the water leak into the ocean.
Edano said the pumping will continue, possibly until Friday, in order to drain a storage area that will be used to hold much more dangerous water - up to 200,000 times as radioactive - from inside the reactor. He said steps have been taken to ensure better communication with nearby countries before such action is taken in the future.
The chief Cabinet secretary also said authorities are considering compensation payments for fishermen affected by the disaster, as well as whether to adjust the criteria for acceptable radiation levels within the 20-kilometer evacuation zone around the reactors. After pumping began Tuesday to transfer 11,500 tons of lightly radioactive water from the number-two reactor into the sea, South Korea protested the action as a possible violation of international law.
Officials at TEPCO, which operates the Fukushima plant, said a dangerous hydrogen buildup is taking place at its number-one reactor. Japan's NHK television quoted officials saying hydrogen is accumulating inside the reactor's containment vessel - an indication that the reactor's core has been damaged.
Hydrogen explosions destroyed the outer housings of two of the plant's six reactors during the first days of the nuclear crisis that followed the earthquake and tsunami on March 11.
And highly radioactive water has accumulated in lower levels of several reactors, following weeks in which workers pumped in massive amounts of water to prevent fuel rods from overheating. The water needs to be removed before workers can complete repairs to the permanent cooling systems.
National police said Wednesday the confirmed death toll in the March 11 disasters now stands at 12,468, with more than 15,000 people still unaccounted for.
U.S. Sees Array of New Threats at Japan’s Nuclear Plant
by James Glanz and William J. Broad - New York Times
United States government engineers sent to help with the crisis in Japan are warning that the troubled nuclear plant there is facing a wide array of fresh threats that could persist indefinitely, and that in some cases are expected to increase as a result of the very measures being taken to keep the plant stable, according to a confidential assessment prepared by the Nuclear Regulatory Commission.
Among the new threats that were cited in the assessment, dated March 26, are the mounting stresses placed on the containment structures as they fill with radioactive cooling water, making them more vulnerable to rupture in one of the aftershocks rattling the site after the earthquake and tsunami of March 11. The document also cites the possibility of explosions inside the containment structures due to the release of hydrogen and oxygen from seawater pumped into the reactors, and offers new details on how semimolten fuel rods and salt buildup are impeding the flow of fresh water meant to cool the nuclear cores.
In recent days, workers have grappled with several side effects of the emergency measures taken to keep nuclear fuel at the plant from overheating, including leaks of radioactive water at the site and radiation burns to workers who step into the water. The assessment, as well as interviews with officials familiar with it, points to a new panoply of complex challenges that water creates for the safety of workers and the recovery and long-term stability of the reactors.
While the assessment does not speculate on the likelihood of new explosions or damage from an aftershock, either could lead to a breach of the containment structures in one or more of the crippled reactors, the last barriers that prevent a much more serious release of radiation from the nuclear core. If the fuel continues to heat and melt because of ineffective cooling, some nuclear experts say, that could also leave a radioactive mass that could stay molten for an extended period.
The document, which was obtained by The New York Times, provides a more detailed technical assessment than Japanese officials have provided of the conundrum facing the Japanese as they struggle to prevent more fuel from melting at the Fukushima Daiichi plant. But it appears to rely largely on data shared with American experts by the Japanese.
Among other problems, the document raises new questions about whether pouring water on nuclear fuel in the absence of functioning cooling systems can be sustained indefinitely. Experts have said the Japanese need to continue to keep the fuel cool for many months until the plant can be stabilized, but there is growing awareness that the risks of pumping water on the fuel present a whole new category of challenges that the nuclear industry is only beginning to comprehend.
The document also suggests that fragments or particles of nuclear fuel from spent fuel pools above the reactors were blown "up to one mile from the units," and that pieces of highly radioactive material fell between two units and had to be "bulldozed over," presumably to protect workers at the site. The ejection of nuclear material, which may have occurred during one of the earlier hydrogen explosions, may indicate more extensive damage to the extremely radioactive pools than previously disclosed.
David A. Lochbaum, a nuclear engineer who worked on the kinds of General Electric reactors used in Japan and now directs the nuclear safety project at the Union of Concerned Scientists, said that the welter of problems revealed in the document at three separate reactors made a successful outcome even more uncertain. "I thought they were, not out of the woods, but at least at the edge of the woods," said Mr. Lochbaum, who was not involved in preparing the document. "This paints a very different picture, and suggests that things are a lot worse. They could still have more damage in a big way if some of these things don’t work out for them."
The steps recommended by the nuclear commission include injecting nitrogen, an inert gas, into the containment structures in an attempt to purge them of hydrogen and oxygen, which could combine to produce explosions. On Wednesday, the Tokyo Electric Power Company, which owns the plant, said it was preparing to take such a step and to inject nitrogen into one of the reactor containment vessels. The document also recommends that engineers continue adding boron to cooling water to help prevent the cores from restarting the nuclear reaction, a process known as criticality.
Even so, the engineers who prepared the document do not believe that a resumption of criticality is an immediate likelihood, Neil Wilmshurst, vice president of the nuclear sector at the Electric Power Research Institute, said when contacted about the document. "I have seen no data to suggest that there is criticality ongoing," said Mr. Wilmshurst, who was involved in the assessment.
The document was prepared for the commission’s Reactor Safety Team, which is assisting the Japanese government and the Tokyo Electric Power Company. It says it is based on the "most recent available data" from numerous Japanese and American organizations, including the electric power company, the Japan Atomic Industrial Forum, the United States Department of Energy, General Electric and the Electric Power Research Institute, an independent, nonprofit group.
The document contains detailed assessments of each of the plant’s six reactors along with recommendations for action. Nuclear experts familiar with the assessment said that it was regularly updated but that over all, the March 26 version closely reflected current thinking.
The assessment provides graphic new detail on the conditions of the damaged cores in reactors 1, 2 and 3. Because slumping fuel and salt from seawater that had been used as a coolant is probably blocking circulation pathways, the water flow in No. 1 "is severely restricted and likely blocked." Inside the core itself, "there is likely no water level," the assessment says, adding that as a result, "it is difficult to determine how much cooling is getting to the fuel." Similar problems exist in No. 2 and No. 3, although the blockage is probably less severe, the assessment says.
Some of the salt may have been washed away in the past week with the switch from seawater to fresh water cooling, nuclear experts said. A rise in the water level of the containment structures has often been depicted as a possible way to immerse and cool the fuel. The assessment, however, warns that "when flooding containment, consider the implications of water weight on seismic capability of containment."
Experts in nuclear plant design say that this warning refers to the enormous stress put on the containment structures by the rising water. The more water in the structures, the more easily a large aftershock could rupture one of them. Margaret Harding, a former reactor designer for General Electric, warned of aftershocks and said, "If I were in the Japanese’s shoes, I’d be very reluctant to have tons and tons of water sitting in a containment whose structural integrity hasn’t been checked since the earthquake."
The N.R.C. document also expressed concern about the potential for a "hazardous atmosphere" in the concrete-and-steel containment structures because of the release of hydrogen and oxygen from the seawater in a highly radioactive environment.
Hydrogen explosions in the first few days of the disaster heavily damaged several reactor buildings and in one case may have damaged a containment structure. That hydrogen was produced by a mechanism involving the metal cladding of the nuclear fuel. The document urged that Japanese operators restore the ability to purge the structures of these gases and fill them with stable nitrogen gas, a capability lost after the quake and tsunami.
Nuclear experts say that radiation from the core of a reactor can split water molecules in two, releasing hydrogen. Mr. Wilmshurst said that since the March 26 document, engineers had calculated that the amount of hydrogen produced would be small. But Jay A. LaVerne, a physicist at Notre Dame, said that at least near the fuel rods, some hydrogen would in fact be produced, and could react with oxygen. "If so," Mr. LaVerne said in an interview, "you have an explosive mixture being formed near the fuel rods."
Nuclear engineers have warned in recent days that the pools outside the containment buildings that hold spent fuel rods could pose an even greater danger than the melted reactor cores. The pools, which sit atop the reactor buildings and are meant to keep spent fuel submerged in water, have lost their cooling systems.
The N.R.C. report suggests that the fuel pool of the No. 4 reactor suffered a hydrogen explosion early in the Japanese crisis and could have shed much radioactive material into the environment, what it calls "a major source term release." Experts worry about the fuel pools because explosions have torn away their roofs and exposed their radioactive contents. By contrast, reactors have strong containment vessels that stand a better chance of bottling up radiation from a meltdown of the fuel in the reactor core.
"Even the best juggler in the world can get too many balls up in the air," Mr. Lochbaum said of the multiplicity of problems at the plant. "They’ve got a lot of nasty things to negotiate in the future, and one missed step could make the situation much, much worse."
India bans Japan food imports, says radiation spreading
by Ratnajyoti Dutta - Reuters
India has imposed a three-month ban on imports of food articles from the whole of Japan on fears that radiation from an earthquake-hit nuclear plant was spreading to other parts of the country, becoming the first country to introduce a blanket ban. The ban comes in the fourth week of unsuccessful attempts to safely secure the Fukushima nuclear power plant in central Japan crippled by an earthquake and tsunami in what could be the world's biggest nuclear disaster in a quarter of a century.
"Import of food articles coming from Japan stand suspended with immediate effect for a period of three months or till such time as credible information is available that the radiation hazard has subsided to acceptable limits," a statement from the Ministry of Health and Family Welfare said. "After detailed discussions, it was concluded that since the radiation is spreading/expanding horizontally in other parts of Japan, it may result in further radioactive contamination in the supply chain of food exports from Japan," the statement added.
India mainly imports a small volume of processed food items, fruits and vegetable from Japan. Japan said on Tuesday it was considering imposing radioactivity restrictions on seafood after contaminated fish were found in seas well south of the damaged nuclear reactors. A number of countries have imposed bans on dairy products, meat, fish and other produce from areas near the crippled nuclear power plant. Many others are monitoring radiation levels in goods imported from Japan. Weekly reviews will be carried out by India's food safety authority, the statement said.
Japanese fishermen warn of trade’s ruin
by Gwen Robinson, Lindsay Whipp and Amy Kazmin - Financial Times
News that engineers had plugged a leak of radio?active water into the sea from the crippled Fukushima nuclear power plant has been welcomed in Japan, amid growing concern about food safety and protests by fishing groups against the damage done to fishing grounds. Official confirmation on Tuesday that small fish called sand lance, caught off the coast of Ibaraki, south of the nuclear plant, were contaminated with higher than acceptable levels of radioactive iodine and caesium has dealt a further blow to Japan’s fishing industry.
Tests on 1kg of the fish revealed they contained 526 becquerels of caesium, exceeding Japan’s legal limit of 500, according to Japan’s ministry of agriculture, forestry and fisheries. On top of seafood imports, worth about $17bn in 2005, total seafood sales accounted for about $105bn in 2005, according to Thomson Business Intelligence, which projected sales of $142bn for 2010. Leaders of local and national fishing co-operatives criticised Tokyo Electric Power’s release of radio?active water into the sea, which the company defended as the only choice to allow it to free capacity to store water with higher levels of radiation.
Zengyoren, or the Japanese federation of fisheries co-operatives, said on Wed?nesday that Tepco’s "aggressive" discharge of contaminated water could "usher in the destruction of the fishing industry in Japan". Nearly all fishing has duly been suspended in Ibaraki, Japan’s fifth largest seafood producer, according to the prefectural branch of Zengyoren. But despite growing consumer anxiety, sand lance is the only type of seafood so far that has shown higher than legal limits of radioactive contamination, following regular testing by authorities.
Since the earthquake, tsunami and resulting nuclear plant crisis, seafood sales have plunged. Tokyo’s central Tsukiji fish market, one of the biggest in the world, reported that fish sales by volume fell an annual 44 per cent in the week to March 24 and an annual 21 per cent the following week. Compounding the problems are continuing power conservation measures that are limiting refrigeration capacity. Sushi restaurants have seen business slide, with those in inner-city districts such as Ginza and Shinbashi reporting a sharp fall in customers since March 11. Since Monday’s reports of radioactivity in seawater, one sushi proprietor in Roppongi said customers had "almost disappeared".
Foreign governments are also taking decisive action against any perceived threat to food safety. India on Wednesday became the first country to announce a three-month ban on imports of all Japanese food products shipped after March 11. Countries including the US, Australia, China, Hong Kong, South Korea and Singapore have imposed bans or restrictions on food imports from the north-east region, primarily the four prefectures of Ibaraki, Fukushima, Gunma and Tochigi. In some cases, such as Australia and Hong Kong, the curbs include a fifth prefecture, Chiba.The European Union will reinforce radiation controls on imports of food and animal feed from the affected regions.
Japan's ocean radiation hits 7.5 million times legal limit
by Kenji Hall and Julie Makinen - Los Angeles Times
The operator of Japan's stricken Fukushima nuclear plant said Tuesday that it had found radioactive iodine at 7.5 million times the legal limit in a seawater sample taken near the facility, and government officials imposed a new health limit for radioactivity in fish.
The reading of iodine-131 was recorded Saturday, Tokyo Electric Power Co. said. Another sample taken Monday found the level to be 5 million times the legal limit. The Monday samples also were found to contain radioactive cesium at 1.1 million times the legal limit. The exact source of the radiation was not immediately clear, though Tepco has said that highly contaminated water has been leaking from a pit near the No. 2 reactor. The utility initially believed that the leak was coming from a crack, but several attempts to seal the crack failed.
On Tuesday the company said the leak instead might be coming from a faulty joint where the pit meets a duct, allowing radioactive water to seep into a layer of gravel underneath. The utility said it would inject "liquid glass" into gravel in an effort to stop further leakage.
Meanwhile, Tepco continued releasing what it described as water contaminated with low levels of radiation into the sea to make room in on-site storage tanks for more highly contaminated water. In all, the company said it planned to release 11,500 tons of the water, but by Tuesday morning it had released less than 25% of that amount. Although the government authorized the release of the 11,500 tons and has said that any radiation would be quickly diluted and dispersed in the ocean, fish with high readings of iodine are being found.
On Monday, officials detected more than 4,000 bequerels of iodine-131 per kilogram in a type of fish called a sand lance caught less than three miles offshore of the town of Kita-Ibaraki. The young fish also contained 447 bequerels of cesium-137, which is considered more problematic than iodine-131 because it has a much longer half-life.
On Tuesday chief cabinet secretary Yukio Edano said the government was imposing a standard of 2,000 bequerels of iodine per kilogram of fish, the same level it allows in vegetables. Previously, the government did not have a specific level for fish. Another haul of sand lance with 526 bequerels of cesium was detected Tuesday, in excess of the standard of 500 bequerels per kilogram. Fishing of sand lances has been suspended. Local fishermen called on Tepco to halt the release of radioactive water into the sea and demanded that the company compensate them for their losses.
Fishing has been banned near the plant, and the vast majority of fishing activity in the region has been halted because of damage to boats and ports by the March 11 tsunami and earthquake. Still, some fishermen are out making catches, only to find few buyers because of fears about radiation. It was unclear what Tepco might offer the fishermen, but the company did say Tuesday that it had offered "condolence payments" totaling 180 million yen ($2 million) to local residents who had to evacuate their homes because of radiation from the Fukushima plant. One town, however, refused the payment.
The company has yet to decide how it will compensate residents near the plant for damages, though financial analysts say the claims could be in the tens of billions of dollars. Tepco's executive vice president Takashi Fujimoto said the company's decision on damages hinges on how much of the burden the government will share. Edano urged the company to accelerate its decisions on compensation.
For now the company has offered to give 20 million yen ($240,000) to each of 10 villages, towns and cities within 12 miles of the plant, Fujimoto said. "We hope they will find it of some use for now," he said. Namie, a town of 20,600 located about 6 miles north of the plant, refused to take the money. Town official Kosei Negishi said that he and other government officials were working out of a makeshift office in Nihonmatsu city, elsewhere in Fukushima prefecture, and that they faced more pressing issues.
"The coastal areas of Namie were hit hard by the earthquake and the tsunami but because of the radiation and the evacuation order we haven't had a chance to conduct a search for the 200 people who are missing," said Negishi. "Why would we use our resources to hand out less than 1,000 yen ($12) to every resident?" Tokyo Electric Power's Fujimoto acknowledged that there was a "gap" in the views of company and Namie officials.
Tepco's shares dropped to an all-time low Tuesday, falling by the maximum daily trading limit -- about 18% -- to 362 yen, below the previous record low of 393 yen reached in December 1951. The company's share price has lost 80% of its value -- nearly 1.1 trillion yen -- since the quake and tsunami, according to the Tokyo Stock Exchange. "We take the stock price decline very seriously," Fujimoto told reporters. Fujimoto said the company's annual earnings report, which was originally scheduled for April 28, would be postponed, but he declined to give any other details.
Scientists: Arctic ozone depletion 'unprecedented'
by Stephanie Nebehay - Reuters
U.N. agency says region sees loss of about 40 percent from beginning of winter
Record loss of the ozone — the atmosphere layer that shields life from the sun's harmful rays — has been observed over the Arctic in recent months, the World Meteorological Organization said on Tuesday. "Depletion of the ozone ... has reached an unprecedented level over the Arctic this spring because of the continuing presence of ozone-depleting substances in the atmosphere and a very cold winter in the stratosphere," the WMO said in a statement.
Observations from the ground, balloons and satellites show that the region has suffered an ozone column loss of about 40 percent from the beginning of the winter to late March, according to the United Nations agency. The highest ozone loss previously recorded over the Arctic, about 30 percent, occurred in several seasons over the past 15 years or so, according to a WMO spokeswoman.
"If the ozone depleted area moves away from the pole and towards lower latitudes one can expect increased ultraviolet (UV) radiation as compared to the normal for the season," WMO said, adding that the public should check their national UV forecasts. But any increase in UV radiation over lower latitudes away from the Arctic — which could affect parts of Canada, Nordic countries, Russia and Alaska in the United States — would not be of the same intensity as one suffers in the tropics, it said.
Skin cancer link
UV-B rays have been linked to skin cancer, cataracts and damage to the human immune system. "Some crops and forms of marine life can also suffer adverse effects," the agency said. Unlike over Antarctica, large ozone loss is not an annually recurring phenomenon in the Arctic stratosphere, where meteorological conditions vary much more each year.
The record ozone loss over the Arctic comes despite the "very successful" Montreal Protocol aimed at cutting production and consumption of ozone-destroying chemicals such as chlorofluorocarbons (CFCs) and halons, the WMO said. The substances were once present in refrigerators, spray cans and fire extinguishers, but have been phased out. Nevertheless, due to the long lifetimes of these compounds in the atmosphere, it will take several decades before their concentrations return to pre-1980 levels, the target laid down in the 1987 pact, it said.
Here’s Why Hyperinflationist Lira Is Wrong
by Rick Ackerman - Zero Hedge
First, let me say that I’ve long enjoyed reading the rants of over-the-top inflationists like Jim Willie, but also the relatively subdued essays of Gonzalo Lira — even if the latter sometimes comes across as the kind of guy who could wear out a mirror. I feel a comradeship with both because, predictions about the financial endgame aside, I agree with much of what they have said — most particularly about the robust defensive role that bullion seems likely to play no matter what happens. But that is not to say that I agree with all of Lira’s and Jim Willie’s arguments. Some background is in order.
My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that "Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender." Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit.
As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
Expanding on that point alone, I could dismiss Lira’s entire argument with a wave of the hand, invoking the killer question that blogger Charles Hugh Smith has asked of overheated inflationists, to wit: Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen? The obvious answer is that they wouldn’t.
And won’t. I’ve made this point myself many times before and in many ways, sometimes asking rhetorically whether we should expect Joe Sixpack and tens of millions of other underwater homeowners to be able to retire their mortgages using the confetti money that a hyperinflation would produce. Mortgage lenders would be big losers, of course, but so would anyone hoping to ever own a home — or to borrow money, for whatever purpose.
Unbearable Cost of ‘Escaping’ Debt
One of the best places to find the inflation vs. deflation argument deconstructed to a fine science, and to confront the horrific – and, as I am about to argue, unbearable — cost of "escaping" debt via hyperinflation, is the 1993 book The Great Reckoning. Co-authors Jim Davidson and Lord William Rees-Mogg went to great lengths to refract every aspect of the debate.
It was this book, and a subsequent dialogue that I had with Jim Davidson, that hardened my deflationist ideas, convincing me – as they likely would many of you, though perhaps not Lira — that a deflationary path would at least be less ruinous than a hyperinflationary one. To be sure, vast amounts of real wealth would be destroyed in either case. But deflation would have the virtue of inflicting pain on debtors more or less in accordance with their sins, bankrupting those who most deserved it. That said, one needn’t drag in moral baggage to explain why the powers that be are extremely unlikely to pursue a hyperinflationary course.
And "pursue" is the correct word here, since, as The Great Reckoning made clear, hyperinflations don’t simply happen; they can only occur following the willful and deliberate decision of a sovereign government to hyperinflate. We need only consider the catastrophic consequences of hyperinflation to understand why such a scheme is so very unlikely to be promoted and effected by the Masters of the Universe.
For starters, savers and lenders as a class would be wiped out, since their financial assets would become as worthless as the dollar itself. Bond markets and all other institutional conduits of saving and investment would cease to function in the absence of trust – trust that would take many years for capitalists to earn back. From day one, a darkening economy would subsist on cash transactions, which in turn would bring on the hardest of times, little economic growth, and a drop in the standard of living so steep that it might take a generation to rekindle even a glimmer of the American Dream.
Deflation, on the other hand, would leave the bond and stock markets intact, sparing those with little or no debt from its worst ravages. For those who owe, a tidal wave of bankruptcies would mete out punishment commensurate with each borrower’s sins of profligacy and/or greed. Businesses would be starved for credit, but whatever savings were available would go to the most promising of them. Most advantageously for an economy on-the-mend, it would be many years before capital would be hijacked by the paper-shufflers and feather merchants. In both the public and private sphere, Americans would be forced to live within their means.
I won’t belabor Lira’s arguments where he attempts, not entirely without success, to "slice and dice" my logic when it is at its weakest. But his main criticism — that I have not made a case for deflation, only one against hyperinflation – is disingenuous. For in fact, I have stated the case for deflation thus: Someday very soon, following the precipitous failure of the world’s banks and securities markets, we will all be too broke to push the price of anything sky-high.
Hyperinflationists assume we will have vast piles of cash at-the-ready, physical or digital, to exchange for real goods in a panic or along the way to hyperinflation. But will we? Read Lira’s smug hit-job a dozen times and you will find no mention of how that cash will get into our hands, much less into our hands if the banking system should go blotto. He avers only that, well before a collapse, via quantitative easing, the government will "ram" money "into the economy." As if that hasn’t been tried to death already.
No Middle Way
If you believe that one or the other, deflation or hyperinflation, will eventually do us in, then you may find yourself won over by my argument simply on the evidence I muster against hyperinflation. Read on and judge for yourself. For what it’s worth, Lira’s ruinist essays suggest that we do see eye to eye on one thing – that there is no "middle way" that might allow us to avoid the catastrophic liquidation of a global debt bubble whose notional value has been estimated as high as a quadrillion dollars.
Let me dwell for yet another moment on this idea that Americans could go broke overnight. Lira apparently believes this unlikely, if not impossible, and he could be right. But not very, since it is beyond conjecture that the day-to-day economy would grind to a halt quickly if digital money were thrown into chaos and disrepute for more than a few days. And it’s not as though Americans are so very confident in electronic money’s soundness at this point that the banking system could withstand even a minor crisis. Unfortunately, and as we all know, there are no minor crises any more, especially in the financial realm.
We’ll All Be Broke
So, broke is what most of us will be when the dust settles, and it is perhaps only a matter of the rate at which we go broke that divides inflationist from deflationist. How quickly could the financial system come tumbling down? Last May’s "flash crash" on Wall Street demonstrated that it could occur in a trice. Picture the Morning After the next flash crash, but assume that, this time around, the Plunge Protection Team has been unable to arrest its spread into bond markets and other securities markets around the world. Hardly a stretch, right? But it’s a big stretch to imagine a hyperinflation arising from the smoke and rubble of the creditless world that would result.
Will we have gone broke without having had the chance to pay off our mortgages in snide? I say yes; Lira, for his argument to hold, is obliged to say no. I hope he’s right. Then again, maybe hyperinflation will unfold so slowly that we’ll all have time to trade piles of shrinking dollars for real stuff currently owned by…fools?
Whatever happens, I wouldn’t put much store in Lira’s assurance that even small branch-banks keep scads of cash around. Try to withdraw $25,000 from your own branch if you want to find out the truth. He’ll probably say that the banks, with a nod from Uncle Sam, could refill everyone’s account with digital money overnight. I say, think about that for a moment – about the economically fatal traffic jam this would create instantly in the world of real transactions.
Lira’s arguments, although certainly not his ungentlemanly, preening condescension, are at their weakest when he attempts to explain how quantitative easing will inject a hyperinflationary sum of dollars into the real economy. He says our bankrupt government will simply spend limitless quantities of funny money into the "wider economy." If it were that easy, why are home prices still falling after trillions of dollars worth of "stimulus"? And why have wages failed to rise? Granted, fuel and grocery prices have been going up. But how long can that trend continue with incomes stagnating and household discretionary cash plummeting? (That was not a problem in 1922 Weimar, by the way, for reason that I shall explain shortly.)
And how many seats will the airlines fill this summer if prices stay above $500? With respect to the inflation of stock-market prices, we’ll let Lira shoot himself in the foot if he wants to argue that Wall Street’s cosmic gas-bag is other than a deflationary juggernaut waiting to implode. Meanwhile, a vastly larger gas-bag in the form of a global derivatives bubble is set to implode with irresistible force. Hundreds of trillions of dollars’ worth of collateral are destined to shrink to the vanishing point. That is the true measure of deflation’s force, and when it starts to snowball again as it did in 2008, no puny multitrillion-dollar monetization by the Fed will even begin to counteract it.
Finally, we cannot let Lira evade the question of how, specifically, the government will "ram" (his word) QE3/QE4/QE5 money into the economy, especially when the state and local governments who in earlier times would have been the most eager and efficient conduits for these sums have begun to refuse them, knowing as they do that each new stimulus dollar will only create more debt for future taxpayers.
We’d like to believe that the common sense of Republican and Tea Party governors and legislators alone will suffice to smother any inflation that might otherwise seep into the economy via supercharged outlays of cities, counties and states. In fact, the deflationary opposite is happening as local and state governments expand layoffs and pare budgets to the bone. Which leaves only the private economy to receive a wage stimulus sufficient to catalyze hyperinflation. On that score, just as we’ve asked hyperinflationists to wake us when we can sell our home for a quadrillion dollars, we’ll ask them now to send us a job application when GM is paying assembly-line workers $800 an hour.
When Money Dies
Big employers effectively did so in Germany, allowing weekly wage settlements with then-pervasive trade unions to track hyperinflation almost step-for-step. But you’ll need to read Adam Fergusson’s book about the Weimar hyperinflation, When Money Dies, to understand exactly why the U.S. is legally and practically constrained from duplicating Germany’s dubious feat. If you believe otherwise — believe, as Lira evidently does, that the Fed could somehow put a google of dollars into circulation on demand — then you should be buying real estate hand-over-fist right now.
When Money Dies is a great read even for those who’d rather not be disabused of the notion that today’s USA, economically and financially, is not 1921’s Weimar. I particularly recommend a chapter that recounts how the most extreme periods of German hyperinflation occurred while the country’s money-printing presses were idled by strikes. Turns out, some of Weimar’s largest employers had been authorized by the government to print scrip in the event that crates of official money didn’t arrive in time to meet payroll. Imagine what such a policy could do for Detroit! For the whole world!
Rather than argue that this couldn’t happen, we’ll say only that if it did, it would be but a momentary blip in a deflationary collapse in real estate that Lira doesn’t even mention. Just wait till the incipient collapse in commercial property values hits full-bore. This is yet another deflationary juggernaut that the arrogant and pompous Lira has conveniently failed to notice. He will soon, though, and the shock of it may yet distract his attention from an inflation that so far has barely overflowed the lettuce bin.