How a China Slowdown/Collapse Could Play Out - 2014

China:

Buys Treasuries

Sells Treasuries

weakens Yuan

strengthens Yuan

improves competitive stand point

becomes less competitive, purchasing power increases relative to US Dollar

exposed to inflationary pressures if dollar weaker

deflationary

finances trade with US, more exports to US

removes financing, less exports to US

large depreciating effect on USD since interest rates controlled at short end by FED with ZIRP policy in place

China Collapse

Real Estate values plunge; corporate defaults

mass exodus of capital

Much weaker Yuan

spike in inflation especially food & energy prices

government hikes interest rates & sells treasuries

->

China: energy/food value of imports surge, exports decline, trade deficit widens but total trade declines

Sells Treasuries

strengthens Yuan

becomes less competitive, purchasing power increases relative to US Dollar

deflationary; stabilizes input costs; Chinese companies forced to become more efficient; higher unemployment

removes financing, less exports to US

large depreciating effect on USD since interest rates controlled at short end by FED with ZIRP policy in place

end result: CHIMERICA =

weaker dollar & yuan relative to world

higher interest rates on sovereigns

more competitive globally, lower labour costs

increased capacity utilization in China; yet higher unemployment as companies become more efficient

increased CAPEX and FDI in US due to lower labor costs, weak currency, cheap local energy, stability, etc., lower unemployment, short term inflation spike, insufficient skilled labor pool

immediate result of China Collapse

stronger dollar; weaker yuan; stronger gold & silver

collapse in treasury interest rates

spike in interest rates on China sovereigns; spike in defaults

market crashes, everywhere

some selling of treasuries by countries to stabilize currencies balanced by rush out of financial assets into safe havens

the future of banking?

Court reverses ruling on swipe fees in favor of banks

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By Danielle Douglas, Friday, March 21, 11:51 AM E-mail the writer

A U.S. appeals court on Friday struck down a district court decision that ordered the Federal Reserve to rewrite its rules governing fees that banks collect each time a debit card is swiped, a victory for the banking industry.

The ruling reverses a decision by U.S. District Court Judge Richard Leon, who said in July that the central bank improperly set the cap too high under pressure from the banking lobby. The Fed gave banks the thumbs-up to charge retailers as much as 21 cents a transaction, a few cents lower than the previous 23-to-25-cent charge per swipe.

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Court reverses ruling on swipe fees in favor of banks

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Merchants argued that being charged more per transaction by banks leads to higher prices for consumers.

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The appeals court decision is a blow to merchants who have fought for nearly four years to limit the interchange fee, or “swipe fee.” Merchants have argued that consumers are the ultimate victims of these fees because the costs are usually passed on to them in the form of higher prices.

“The Fed ignored congressional intent and worked to shield debit card companies and big banks. A self-described victory for the banks usually results in higher costs for consumers,” said Mallory Duncan, general counsel of the National Retail Federation.

The banking industry applauded the appeals court’s decision, which will eventually funnel billions of dollars back into their coffers. Before the cap, interchange fees totaled nearly $17 billion in 2009, according to the Fed. Banks have argued that they need the fees to offset the cost of providing checking accounts and other services.

“Reasonable minds have prevailed,” said Richard Hunt, president and chief executive of the Consumer Bankers Association, a trade group. “Any further changes to the currently allowed interchange rates would only pile on the negative consequences for consumers. Consumers must come first in this process, not the bottom line of retailers.”

The appellate court said the Fed reasonably interpreted the 2010 Dodd-Frank financial overhaul law, which directed it to revise the way banks charge merchants for accepting debit cards. It determined that the Fed did its best to overcome the “ambiguity” of an amendment authored by Sen. Richard Durbin (D-Ill.) to limit swipe fees to the actual cost of processing debit card transactions.

Although the Fed proposed a cap of 12 cents per transaction, the final rule took an array of expenses into consideration, including the cost of fraud-prevention technology and equipment. The appeals court deemed inclusion of those costs to be in line with the spirit of the amendment.

While the pricing of interchange has dominated the conversation around the Durbin amendment, the rule also addressed the lack of competition in the payment system. The law said merchants must have multiple networks to conduct debit card transactions. The Fed required that each debit be processed on two independent networks for verification — one for PIN and one for signature.

Merchants argued that the law was supposed to give them more flexibility and choice. They wanted at least two signature options, which Leon permitted. The reversal of his ruling puts the kibosh on the argument.

Fed officials could not be reached for comment.

Despite being pleased with Friday’s outcome, Carrie Hunt, senior vice president of government affairs at the National Association of Federal Credit Unions, said the Fed’s rule imposes below-cost caps on interchange fees and fails to provide for a reasonable return.

The race to the bottom - coming to you from Bangalore & China, to the US and Japan.

Bangalore - TOYOTA
“Some of the Toyota workers resorted to go slow, abuse as well as sabotage which forced us to resort to lock out.” Viswanathan said he expected the Government to appreciate the fact that discipline on the shop floor cannot be compromised under any circumstances.

He pointed out that the company had offered an increase of ₹3,050 in wages to the employees and would stick by that figure.

The workers’ union had sought ₹4,000 more, which is same as last year’s wage increase.

http://www.thehindubusinessline.com/companies/toyota-blames-workers-stir-for-production-loss-of-2000-units/article5796972.ece

China - 

In 2013, the wages for Chinese migrant workers increased 13.9 per cent from the previous year. It was nearly twice the growth rate of China’s GDP. For the country’s 269 million migrant workers, their average wages in 2013 were 2609 Yuan, or $480 a month. Though this may not seem to be a terribly large sum of money, it is a far cry from the mystical two dollars a day.

In fact, Chinese wages increased most dramatically around the time of the global financial crisis. Between 2009 and 2013, Chinese wages surged 5.7 per cent, 19.3 per cent, 21.2 per cent, 11.8 per cent and 13.9 per cent, according to data from National Bureau of Statistics.

Why is this important? Because Chinese wages are arguably the single most important price in the world. More important than the price of a barrel of crude oil, the Federal Reserve’s interest rates or value of American dollar.

China’s total labour force is about 800 million. The dramatic increase in wages in the past four years strongly indicates that China is running out of surplus labour or has reached the Lewis turning point in its industrialisation process. 

USA - SUBWAY

SAN ANTONIO — A local franchisee for Subway, Great American Cookies and Marble Slab Creamery is facing a federal lawsuit that alleges he didn't pay employees for overtime or work performed off the clock.

The lawsuit was filed Tuesday in San Antonio by five former workers, but seeks certification as a collective action on behalf of an estimated 125 food-service workers currently or formerly employed by various defendants.

USA - McDonald's

McDonald’s workers in California, Michigan and New York filed lawsuits this week against the company and several franchise owners, asserting that they illegally underpaid employees by erasing hours from their timecards, not paying overtime and ordering them to work off the clock.

The lawsuits were announced Thursday by the employees’ lawyers and organizers of the union-backed movement that is pressing the nation’s fast-food restaurants to increase wages to at least $15 an hour.

In two lawsuits filed in Michigan against McDonald’s and two Detroit-area franchise owners, workers claimed that their restaurants told them to show up to work, but then ordered them to wait an hour or two without pay until enough customers arrived.

Those lawsuits also argued that a McDonald’s requirement that employees pay for their uniforms illegally reduced their pay below the federal minimum wage of $7.25 an hour.

USA - Obama - Overtime & Minimum Wage

On Thursday, the president will direct the Labor Department to revamp its regulations to require overtime pay for several million additional fast-food managers, loan officers, computer technicians and others whom many businesses currently classify as “executive or professional” employees to avoid paying them overtime, according to White House officials briefed on the announcement.

Mr. Obama’s decision to use his executive authority to change the nation’s overtime rules is likely to be seen as a challenge to Republicans in Congress, who have already blocked most of the president’s economic agenda and have said they intend to fight his proposal to raise the federal minimum wage to $10.10 per hour from $7.25.

Japan

Japanese labor unions said they clinched their biggest raises in years as Prime Minister Shinzo Abe calls for companies to boost wages to help put the world’s third-largest economy on a path to sustainable growth.

Based on negotiations across 43 union groups, companies agreed to increase base wages by an average of 1,950 yen ($19) a month in the coming year, the Japanese Trade Union Confederation, known as Rengo, said yesterday in Tokyo. The union group, the nation’s biggest, said the increment was significant enough to rank as the biggest raises won since at least the turn of the century.

Ron Paul - Ukraine, Russia, and a debt-ridden US

Submitted by Ron Paul via The Ron Paul Institute,

Officially, US debt stands at more than $17 trillion. In reality, it is many times more. The cost of the US invasion of Afghanistan and Iraq may be more than six trillion dollars. President Obama’s illegal invasion of Libya cost at least a billion dollars and left that country devastated. The costs of US regime change efforts in Syria are likely thus far enormous, both in dollars and lives. That’s still a secret.

So who in his right mind would think it is a good time to start a war with Russia over Ukraine? And worse, who would commit the United States to bail out a Ukraine that will need at least $35 billion to survive the year?

Who? The president and Congress, backed by the neocons and the so-called humanitarian interventionists!

The House voted overwhelmingly last week to provide $1 billion in loan guarantees to Ukraine. That is just the beginning, you can be sure. But let’s be clear: this is not money for the population of that impoverished country. The Administration is sending a billion dollars from US taxpayers to wealthy international bankers who hold Ukrainian debt. It is an international bank bailout, not aid to Ukrainians. And despite the escalating anti-Russia rhetoric, ironically some of that money will likely go to Russia for Ukraine’s two billion dollar unpaid gas bill!

So what happened in Ukraine? The US government and media claims that the US must save Ukrainian democracy from an invading Russian army that is threatening the country’s sovereignty. But in reality the crisis was instigated in part by US meddling. Remember the intercepted telephone call in which two senior Obama Administration officials discussed plans to replace the elected government in Ukraine with US puppets? That is exactly what happened. Is that not a violation of Ukraine’s sovereignty? Is that what democracy is all about?

The Obama Administration’s policy toward Ukraine is hypocritical. The overthrow of the government in Kiev by violent street protests was called a triumph of democracy, but when the elected parliament in autonomous Crimea voted last week to hold a referendum to decide its future, President Obama condemned it as a violation of international law. What about the principle of self-determination, which is also enshrined in international law?

I have long thought that a referendum to reorganize Ukraine into a looser confederation of regions might help reduce tensions. I still believe this could help, but it seems the US government is not so enthusiastic about democracy when there is a chance for an outcome it opposes.

I strongly believe that Crimeans have every right to transfer sovereignty over their peninsula to Russia if they wish. The only question that remains is whether there will there be an honest election, and I don’t see any reason there can’t be.

The US government tells the rest of the world, “We want you to be good democrats and have elections,” but if they don’t elect the right people then we complain about it and throw them out, like we did in Egypt. In Crimea they want to have an election to determine their future. President Obama condemned those plans for a vote by saying, “We are well beyond the days when borders can be redrawn over the heads of democratic leaders.” Does he not remember that the authorities in Kiev were installed just weeks ago after a US-backed coup against the Ukrainian constitution?

Congress next week will likely vote for sanctions against Russia. Though many mistakenly believe that sanctions are a relatively harmless way of forcing foreign countries to do what we say, we should be clear: sanctions are an act of war.

Cooler heads in the United States are not currently prevailing. There is a danger of an unimaginable conflict between the US and Russia. We must demand a shift away from a war footing, away from incendiary rhetoric. We are broke and cannot afford to “buy” Ukraine. We certainly cannot afford another war, especially with Russia!

globalization and imbalances

Money is a store of value and a medium for exchange. Globalization, the race to the bottom, and the resulting concentration of wealth is deflationary because it produces an overabundance of savings and investment. The profits (in excess of those due to productivity gains) are simply excess debt taken on by consumers due to a lack of labor bargaining power in the race to the bottom. These types of excess profits were in essence garnished wages that have already been spent and will likely never be repaid. The 'wealth' is illusory and those debt instruments such as MBS, student loans are not worth 100 cents on the dollar. Companies are fooling themselves in thinking their savings in many outstanding debt instruments, including the US dollar, is a good store of value. CEOs will get paid due to these above average profits, albeit illusory and will not suffer in the one year when the market falls out.

Not sure who DvD was on Pettis' blog but this guy is spot on:

  

DvD March 7, 2014 at 9:02 pm

Weak aggregate demand, falling labor share of GDP globally, rising debt load, rising inequalities and global currency war are all the inevitable outcomes of globalisation as implemented for the past couple of decades.

According to the International Labor Organization, there were 1.56bn people working in industry and services in the world in 2000 (i leave agricultural employement aside voluntarily). In 2013, they were 2.14bn people employed globally.

Of the 1.56bn global workers in 2000, 424m were in developped countries and 1.13bn in developping countries
World population was 6.1bn in 2000 so 26% employment to population ratio
Say the 424m workers in developped countries earned an annual wage of $35k on average in 2000. That’s an annual income of $14.8 Tr
Say the 1.13bn workers in developping countries earned an annual wage of $5.5k on average in 2000. That’s an annual income of $6.2 Tr
That’s a global wage income of $21 Tr compared to world nominal GDP of $33.3 Tr, ie. a labor share of 63%

Of the 2.14bn global workers in 2013, 458m were in developped countries and 1.68bn in developping countries
World population is estimated at 7.1bn in 2013 so 30% employment / population ratio, higher than in 2000
Say the 458m workers in developped countries earned an annual wage of $45k on average in 2013 (+2% p.a. since 2000). That’s an annual income of $20.6 Tr
Say the 1.68bn workers in developping countries earned an annual wage of $11.7k on average in 2013 (+6% p.a. since 2000). That’s an annual income of $19.7 Tr
That’s a global wage income of $40.3 Tr compared to world nominal GDP of $75 Tr, ie. a labor share of 54%

I should make it clear that i don’t have exact statistics for median wage level for all countries, i’m simply using realistic orders of magnitude derived from individual countries wage level for illustration purposes. Certainly, the above back of the envelope calculation is consistent with the observation of declining labor share globally. Please let me know if you have more reliable median wage numbers.

So, in the last 13 years, labor share of GDP has shrunk materially despite higher employment / population ratio. This is due to labor arbitrage by corporations, which have pocketed the difference. Profit share of GDP has increased by the same extent as labor share has decreased. That’s where wealth inequality come from. The 1% of people in the world indexed on the profits of the top 2000 global companies are doing very well. This is amplified by the policy response consisting of offsetting lagging wage income by financial and residential asset price inflation through artificially low interest rates (the infamous “wealth effect”). So the higher corporate profits as a share of GDP are valued at a higher multiple thanks to a lower cost of capital. Home owners are richer in money terms, even though they live in exactly the same home in real terms.

If labor (consumption) share is decreasing, capex share must increase, which it has in developped countries in 2003-2006 and in developping countries in 2009-2011, resulting in overcapacity and pricing pressure in many industries globally. Now, we are at the point where capex share can’t increase much more, so net exports share must increase, which explains the on-going currency war as everybody scrambles for export surplus against everybody else. Of course, net exports add up to zero globally, by definition. If neither consumption share, nor capex share, nor net exports share can increase, then growth must slow.

Decreasing labor share, industrial overcapacities and competitive devaluations are combining into global deflationary pressures.

Meanwhile, global debt is exploding. Developped countries consumers make more purchases on credit because of lagging income. Governments in most places try to stimulate spending by infrastructure programs. Governments in developped countries have to provide social safety nets to the unemployed and the poor. Corporates in emerging markets have financed large capex progams by debt, which has been greatly facilitated by easy credit in surplus countries able to redeploy their reserves (developped countries Sovereign debt) through their own domestic fractional reserve banking system in a piling up of debt upon debt (literally speaking). Households in developping markets are borrowing more to buy real estate, often at rapidely inflating prices. Corporates in developped markets have found it a good idea to leverage high operating profits with cheap debt so as to further enhance return on equity. Finally, margin debt, carry trades and derivatives are used everywhere to fund positions in financial risk assets as the central banks put make it seem safe to pursue inherently risky yield enhancement strategies. Large financial players can anyway count on a bailout come the next crisis so they may as well enjoy the asymetric risk / reward (head, i win ; tail, taxpayer lose).

More wealth for the few, more debt for everybody else as the concentration of economic profits and the socialization of economic losses go to extremes. The wealth divide is reaching a point where it is now fueling tensions. Equity values are rising fast despite rising debt in a very unstable equilibrium (equity being junior to all debt, rising debt should normally compress equity values). There is a global race to debase currencies all against the others to each defend / gain competitiveness to try to keep the domestic social situation under control.

So, indeed it seems to me that globalization, as implemented over the past couple of decades, has reached a dangerous deadend. Monetary policies employed to extend that deadend a bit further are only making the situation more precarious as financial instability risks coumpouding sluggish economic developments.

The G20 is nowhere on these issues. It is not surprising as most officials from the G20 and related multilateral institutions are the same guys who pushed for and implemented globalization and financial liberalization over recent decades. They will be the last ones to admit it has not worked out as expected. Remember, trade liberalization was supposed to be mutually beneficial as per Ricardo comparative advantages theory ; financial liberalization was supposed to be advantageous as capital would be free to invest in the best projects. Actual developments are contradicting these well-meaning theories, to say the least as unemployment increase globally (6% in 2013 accoding to the ILO), debt load increase exponentially and a huge amount of investment turns out wasted. So, unable or unwilling to comprehend the huge gap between the ideals of their globalization agenda and the actual experience, the G20 is left with using the right words in their communiques to reassure the people and the markets while no changes whatsoever are contemplated to the dysfunctional world trade and monetary system.

One idea proposed already in the 1990′s by French Nobel Economic Laureate Maurice Allais to avoid such a situation would be to radically reform the current WTO framework and have free trade within regions large enough so as to ensure competitive markets but of similar living standards so as to avoid labor arbritrage and its weakening impact on aggregate demand. This is taboo as systematic propaganda has ensured that groupethink associates free trade with growth and protectionism with recession, despite the evidence of a weakening growth trend and the occurence of ever more severe economic and financial crisis since over the past 17 years as globalization accelerated.

The United States of Zombie Banks

prevent deflationary spiral and depression

1) prop up banks, serve as lender of last resort
2) eliminate FASB 157 mark to market on Level 3 assets, return to mark to fantasy
3) purchase toxic assets and by purchase i mean buy them at more than they were worth and then let the banks pay the difference between fantasy and real price, later i.e. fines etc (at gov't discretion)
4) make sure assets that Fed purchases dont' lose money; MBSs and all paper backed by houses etc must not lose money so manipulate market:
house purchasing holiday i.e. salex tax credit for new homeowners
lower Fed rate->lower mortgage lending rates->pull forward housing demand

What happened since 2009 is a deep recession, followed by modest recovery in a disinflationary environment

By bailing out Fannie Mae, Freddie Mac, banks, homes are able to be kept off the market and sold slowly as to maintain an artificially high sale price and low inventory. if a reset would've been allowed to happen debt holders would have taken a hit but a healthy housing market would have been created with disposable income going to other sectors of the economy. Instead, OER (owner equivalent rent) is shooting higher and hedge funds such as Blackrock, and the GSEs (fannie freddie) have cornered people seeking housing into choosing between an overpriced home or and overpriced rental. This is a price control over a basic human necessity, housing, to bailout banks and the government at the expense of the rest of the economy. Higher prices, fewer buyers, that's ok banks and GSEs have 0% borrowing and thus can hold onto assets/inventory forever, no need to liquidate.

To fight disinflation ex-housing the solution is more lending and more debt?


In its attempt to reflate asset prices at all costs, and succeeding with both the stock market and new housing bubble if not so much wages and the broad economy, the Fed has made housing unaffordable for the vast majority of the population (confirmed further by the plunge to 15 year lows in mortgage applications), forcing Americans to scramble for rental housing, sending rents to all time highs. This can be is seen in the OER. The problem is that with so much of monthly discretionary spending going to rental, it means there is far less in free cash flow available to be used for other purchases. Which also means that inflation away from rents is declining and getting lower with every month almost as a result of the surge in rents!