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Social Theory, Finance, and Geopolitics var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); try{ var pageTracker = _gat._getTracker("UA-17673974-1"); pageTracker._trackPageview(); } catch(err) {}

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From Bank of America :

For most Americans, buying a home is the most important financial decision of their life. That’s because for most, the home represents their largest financial asset. Chart 3 highlights however a dramatic difference between middle and upper income consumer, as for the latter housing only represents about 25% of total assets. Hence, while the collapse in housing prices negatively impacted the balance sheet of all consumers, for middle income consumers the impact was much larger. That impact reflected both a higher share of housing relative to other assets as well (as Chart 4 highlights) a larger expansion of debt to finance housing acquisitions in the decade leading up to the crisis.Updating the impact of asset price collapse and some recovery since then, Chart 5 highlights the impact on the leverage ratio of consumers. Here we see that asset inflation – the recovery in stock and bond prices and the stability in housing prices – engineered by the government’s interventions primarily through monetary policy have led to an improving balance sheet picture. When considering the decline in interest rates, debt servicing likely also has improved marginally more for upper than middle income as the ability to take advantage of mortgage refinancing opportunities now depends on home equity. Chart 4 and Chart 5 highlight middle income consumers expanded mortgage debt greater than upper leaving them more exposed to a decline in housing prices leading to negative equity in their homes. Negative equity of course depends on house price relative to mortgage debt. Our figures highlight income and total assets so our conclusion is based on aggregate comparisons. Certainly within both groups, negative equity exists. However the problem of negative equity based on both debt to income and overall debt to assets appears to be more constraining to middle relative to upper income consumers. The combination of lower leverage to housing leading into the crisis and better refinancing opportunities coming out of the crisis puts the balance sheets of upper income consumers in marginally better shape than at the depths of the market declines as well as better relative to their middle income counterparts.

(Link to Complete Article Here and Earlier Article Here)

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From Economy and Society :

We can better understand the relationship between spectacle and violence, and between other apparently disparate or discordant features of the politics of oil, by following closely the oil itself; not because the material properties or strategic necessity of oil determine everything else (on the contrary, as I suggested, a lot of hard work went into producing America’s “strategic dependence” on the control of Middle Eastern oil, starting with those V8 engines); but because in tracing the connections that were made between pipelines and pumping stations, refineries and shipping routes, road systems and automobile cultures, dollar flows and economic knowledge, weapons experts and militarism, one discovers how a peculiar set of relations was engineered among oil, violence, finance, expertise, and democracy. These relations are quite different from those of the coal age. If the emergence of the mass politics of the early twentieth century, out of which certain sites and episodes of welfare democracy were achieved, should be understood in relation to coal, the limits of contemporary democratic politics can be traced in relation to oil. The possibility of more democratic futures, in turn, depends on the political tools with which we address the passing of the era of fossil fuel.

(Link to Complete Article Here)

(Image: Defamer)

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From The Economist :

A case can be made that top inequality has been soaring in part because of politics. Piketty and Saez document that the very rich today are different than those several decades ago, most importantly because they are not rentiers enjoying returns on their or their parents' capital, but W-2 earners, enjoying very, very high salaries. Recent research by Thomas Philippon and Ariel Resheff shows a concurrent increase in salaries in the financial sector relative to the rest of the economy, confirming the pattern suggested by casual empiricism that many of these very high W-2 earners are in the financial sector. But the expansion of the financial sector and the salaries therein over the last two decades may not have been just an unavoidable consequence of economic tides but a very political process. The deregulation of finance, despite the presence of implicit and explicit government guarantees to financial institutions which would have ordinarily necessitated significant regulation, appears to have been partly won by the financial industry as a result of lobbying, campaign contributions and the access to politicians that the industry enjoys (though this is not to argue that some of this deregulation did not have a compelling economic logic nor that free-market ideology played no role). If so, politics may have been the key factor in setting in motion the forces that have led to the massive rise in top inequality and also shaped the path of development of the financial industry which arguably played a central role in the making of the recent financial crisis. This underscores a particular connection between inequality and economic instability over last three decades, though both of these are in turn caused by underlying political forces. Going forward, however, politics may play out differently, creating yet even closer connections between inequality and instability. As the lie of the land as far as finance, political connections and inequality are concerned haven't changed, we may witness further increases in inequality underpinned by continuing close connections between the financial industry and politicians. And this may lead to a strong backlash, taking aim not only at the super-rich in the financial sector but also at those in other sectors.

(Link to Complete Article Here)

(Image: Boston Review)

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From The Asia Times :

What is not generally noticed is that price deflation in an emerging economy increases the purchasing power of its currency, in that the same local currency buys more goods after price deflation, provided that there is enough money available to buy goods. Thus, price deflation in the local economy drives up the PPP adjustment needed in its GDP to achieve purchasing power parity between the local currency in the local economy and the dollar in the US.  A positive PPP adjustment between the local currencies and the dollar enlarges the local GDP as measured in dollars at concurrent exchange rates. However, price deflation is generally the result of a decrease in the quantity and/or velocity of money in the economy, causing a market condition of less available money chasing after a given amount of goods to drive market prices down. Yet a decrease in the supply and/or velocity of money is generally accompanied by dampened economic activities that will lead to a rise in unemployment and to a fall in wages. Thus, workers in emerging economies may not benefit from price deflation even when the local currency buys more goods to adjust nominal GDP figures upwards, if unemployment rises and wages fall from a decrease in economic activities to yield a lower real GDP. Under such conditions, a rise in GDP may cause a fall in wages. Furthermore, for a number of complex reasons, including market inefficiency, consumer confidence, political intervention and cultural fixations, the cross-border Law of One Price applies only to certain commodities, such as oil, and not to many other goods with less universal characteristics and market accessibility. Thus for China with a PPP adjustment of four times on its GDP as measured against the purchasing power of the dollar in the US, meaning that a given amount of Chinese RMB as defined by current exchange rate between the yuan and the dollar, buys four times more in China than its dollar equivalent does in the US. A rise in oil world prices denominated in dollars will cost the Chinese economy four times the equivalent in other goods not affected by the Law of One Price, or in lost purchasing power of Chinese wages for oil than equivalent dollar wages in the US economy. Should the Chinese economy be hit with deflation-driven falling wages because of a slow down of the export sector, the PPP adjusted GDP of China may rise while Chinese wages shrink with rising unemployment. The larger the PPP differential between a local currency and the dollar benchmark, the more severe is the tyranny of dollar hegemony in widening purchasing power disparity between dollar wages in the US economy and yuan wages in the Chinese economy, both nominally and in purchasing power for dollar denominated commodities.

(Link to Complete Article Here)

(Image: Time)

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From Mother Jones (h/t Steve Waldman):

Will Wilkinson points out that liberals and libertarians remain pretty far apart. So far apart, he says, that most liberals won't even accept this third-best not-even-very-libertarian proposition: "It’s best to just maximize growth rates, pre-tax distribution be damned, and then fund wicked-good social insurance with huge revenues from an optimal tax scheme." Will is right too! I don't accept this. I think there are two big problems here. First, it contains an implicit conviction that libertarian notions of tax and regulatory structures will maximize growth rates. This is practically an article of faith on the right, but there's virtually no empirical evidence to support it. As it happens, I'd argue that my preferred brand of the modern mixed economy is, on the whole, probably more efficient than a stripped down libertarian state, even one that includes lots of centrally-directed income redistribution. But not by much. Personally, I'd be pretty happy if both sides accepted the notion that within a fairly wide range of modern capitalist systems — from Sweden to the U.S., say — overall growth rates change very little. For the most part, we're really arguing about other things. Second, I suspect there's no feasible path to Will's state of the world. The problem is that a system that generates enormous income inequality also generates enormous power inequality — and if corporations and the rich are allowed to amass huge amounts of economic power, they'll always use that power to keep their own tax rates low. It's nearly impossible to create a high-tax/high-service state if your starting point is a near oligarchy where the rich control the levers of political power. I am, fundamentally, old fashioned about this stuff: I think of the world as largely a set of competing power centers. Economics matters, but power matters at least as much, and I think that students of political

(Link to Complete Article Here)

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From n + 1 Magazine :

Whether the golden age came to an end, and whether our own leaden age has persisted, because the wage bill of the international working class ran too high or too low can’t be settled here. But the illicit prestige that economists have enjoyed in recent years—a byproduct of so much forbidding mathematics, occupational arrogance, and coincidence with speculative bubbles—should not lead us to believe that the question has been answered among conferring neutral experts. Last year I had the chance to ask Nouriel Roubini—a disciplinary eclectic known for the breadth of his reading and the independence of his views, and world-famous for having predicted the financial crisis with extraordinary accuracy—if it might be that unemployment and wage stagnation on an international scale lay at the bottom of the global recession. His reply is worth quoting in full. “Even without being Marxian,” Roubini said, “income is allocated between labor and capital. Capital has a greater marginal propensity to save out of that income, and labor has a greater marginal propensity to spend. And it’s a fine balance, because if there is too much capital accumulation and you produce too many goods, and the final demand is not there because wage earners don’t have enough income, then you can be in an equilibrium of low growth. That is the big conundrum we have to think about. If you want to take the more radical view, you say wages were not growing fast enough, capital income was growing fast, and the only way you got enough final demand is by allowing people to borrow against income they didn’t have. For a while, demand was sustained by equity and housing bubbles. Right now the reckoning has arrived, people have to live within their means, real wages are not growing fast enough, therefore we may be in—unless there is a change in distribution of income and wealth—a period of subpar growth. It’s a possibility, a hypothesis. I wouldn’t say it’s for sure true. The years to come are going to test it.”

(Link to Complete Article Here)

(Image: Foreign Policy)

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From The American Scene :

If you look at the energy on the radical left today, it’s still derivative primarily of the New Left of the 1970s, not the Old Left of the 1930s. It’s animated by a distrust of power rather than a desire to seize power on behalf of the powerless. The folks who protest the WTO or who vote for the Greens don’t want government to nationalize industry for the benefit of the working class. They want to weaken industry. They don’t want a strong government to serve as a balance against global corporate power. They want corporate power broken. As I said before in a different context, radical critiques can be extremely useful. But they are critiques, not programs in their own right. And I think that explains part of what Freddie [DeBoer] observes about the nature of the commentariat. For a young member of the commentariat, a big part of the appeal is going to be feeling like one is in the arena – having an influence on events through one’s commentary. The powerful radical thinkers on the left – folks like Noam Chomsky – are not especially useful for this, because they are not advancing a program for taking and using power, but rather opposition to power as such. And if one is going to have influence from a position of opposition to power, one is much more likely to be effective as a vituperative liberal like Glenn Greenwald, whose most powerful attacks involve bringing a liberal political order face to face with its most egregious violations of its own purported ideals. Guys like Ezra Klein and Matt Yglesias are the proper heirs to the confident managerial liberals of the 1960s establishment. They want to see a strong government serve as a check on massive corporate power. They want to build a “great society.” They’ve internalized the 1970s-era criticisms of right-wing-liberals toward that managerial state – a preference for market mechanisms over command-and-control solutions, danger of regulatory capture and self-dealing by managers, etc. – but with a view to making that state work better. And Barack Obama is cut from similar cloth. It’s worth meditating a bit on Obama’s career, because he started out as somebody asking questions not dissimilar to those Freddie [DeBoer] is, implicitly, asking. Obama’s orientation, throughout his life, has been toward power: how does it work, how can it be captured, how can it be wielded. Alinsky’s whole body of work revolves around this question: how to organize the powerless so they can acquire power and wield it on their own behalf. And Obama’s initial political experience was working for an IAF affiliate organization.

(Link to Article Here Plus More Here, Here, & Here)

(Image: Platypus)

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From The Frontal Cortex :

Why does music make us feel? On the one hand, music is a purely abstract art form, devoid of language or explicit ideas. The stories it tells are all subtlety and subtext. And yet, even though music says little, it still manages to touch us deep, to tickle some universal nerves. When listening to our favorite songs, our body betrays all the symptoms of emotional arousal. The pupils in our eyes dilate, our pulse and blood pressure rise, the electrical conductance of our skin is lowered, and the cerebellum, a brain region associated with bodily movement, becomes strangely active. Blood is even re-directed to the muscles in our legs. (Some speculate that this is why we begin tapping our feet.) In other words, sound stirs us at our biological roots. As Schopenhauer wrote, “It is we ourselves who are tortured by the strings.” We can now begin to understand where these feelings come from, why a mass of vibrating air hurtling through space can trigger such intense states of excitement. A brand new paper in Nature Neuroscience by a team of Montreal researchers marks an important step in revealing the precise underpinnings of “the potent pleasurable stimulus” that is music ... The first thing they discovered (using ligand-based PET) is that music triggers the release of dopamine in both the dorsal and ventral striatum. This isn’t particularly surprising: these regions have long been associated with the response to pleasurable stimuli. It doesn’t matter if we’re having sex or snorting cocaine or listening to Kanye: These things fill us with bliss because they tickle these cells. Happiness begins here. The more interesting finding emerged from a close study of the timing of this response, as the scientists looked to see what was happening in the seconds before the subjects got the chills ... In essence, the scientists found that our favorite moments in the music were preceeded by a prolonged increase of activity in the caudate. They call this the “anticipatory phase” and argue that the purpose of this activity is to help us predict the arrival of our favorite part ... The question, of course, is what all these dopamine neurons are up to. What aspects of music are they responding to? And why are they so active fifteen seconds before the acoustic climax? After all, we typically associate surges of dopamine with pleasure, with the processing of actual rewards. And yet, this cluster of cells in the caudate is most active when the chills have yet to arrive, when the melodic pattern is still unresolved.

(Link to Complete Article Here)

(Image: Houghton Mifflin)

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From The Financial Times :

The alleged compensating virtue of the American system, that it leaves children happier, strikes Amy Chua as illusory, given the tendency of western children to drift away from parents after leaving the household. And yet there is an underside to Ms Chua’s child-rearing style, and laying it out takes up the second half of the book. Ms Chua does not want either of her daughters “to end up like one of those weird Asian automatons who feel so much pressure from their parents that they kill themselves after coming in second on the national civil service exam”. But that is not Ms Chua’s problem at all. Her problem is rather that she confuses her own Promethean egotism with an ambition for her daughters. They – with good reason – have a hard time distinguishing it from rivalry, bullying or even enmity. They call Ms Chua “insane” and compare her to Voldemort. Her own mother tells her she is going too far. The problem is not Chinese and cultural, it is American and personal. Ms Chua is trying to protect her immoderate ambition from scrutiny and judgment by misrepresenting it as an ethnic peculiarity ... Ms Chua is admirably blunt, describing the other parents at the schools her children attend as “weak-willed and indulgent”. She is blunt about herself, too, and occasionally humorous. She notes that, after she tried to drill her dog to improve its work habits, her husband “gently pointed out” that the reason people have pets “is not necessarily to take them to the highest level”. But the main thing the bluntness conveys is how much better Ms Chua and her family are than everyone around them ... This bragging is not incidental. Contempt for others is the foundation of the hyper-vigilant child-rearing that Ms Chua practises. Children tend to know how their peers are raised, and they will submit to draconian discipline only if they have a low opinion of how their schoolmates lead their lives. It helps, in fact, to hold the entire society in contempt.

(Link to Complete Article Here and More Here)

(Image: Penguin)

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From The Deal :

For many decades, Goldman quietly reveled in the joys of privacy. While firms like Merrill Lynch & Co. had public shareholders and a massive retail brokerage business, Goldman remained a partnership with an elite wholesale advisory and trading business (for years it hardly dealt with individual clients, high-net-worth or otherwise). Merrill was always the firm that took the hit when markets tumbled or retail clients took a bath. As a public company, Merrill was unusually sensitive to prosecutorial pressure. Merrill suffered the ignominy of the Orange County derivatives mess; Merrill led the way on the Long-Term Capital Management rescue; and Merrill's Henry Blodget became the poster child for Eliot Spitzer's research jihad. Goldman proceeded on its way, internally tending the memory of its own earlier bout with scandal: the role of Goldman Sachs Trading Corp. in the Crash of 1929. But, for any number of reasons, the tradeoff Goldman made between privacy and size (and profits) eroded, beginning with the public offering. For all the attention Goldman's IPO receives, it wasn't sufficient by itself to make the firm a Merrill-like lightning rod ... Then came the financial crisis. Goldman continued its wholesale ways, but by then wholesale was bleeding into retail. Goldman shorted mortgage-backed securities, and was thus tied to a profoundly retail product. Goldman declared itself a bank holding company. And both the TARP money and the AIG bailout money that found itself to Goldman represented taxpayer dollars. And now that it discovered itself mired in retail, Goldman's wholesale tradition, with its stress on privacy and opacity, came back to haunt it. Goldman's size, power and, particularly, its rectitude now became fuel for conspiracy -- made worse by the fact that so many former Goldmanites left the firm to enter (quite successfully in many cases) public life. Enter Matt Taibbi et al. Suddenly the conflicts that Goldman had grown accustomed to juggling in a world of sophisticated investors and clients, began to look as seamy as Blodget's "lipstick on a pig."

(Link to Complete Article Here)

(Image: Forbes)

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From Economy & Society :

The persistence of financialization needs a broader explanation since its theorization has been largely based on a once-for-all conception of the move from “retain and reinvest” to “downsize and distribute.” In this paper I argued that what many analysts of financialization fail to consider are the changes in the structure of production, and specifically the rise of global value chains that have provided the continued capacity of the major industrialized countries to sustain profit growth within the confines of a financialized system. Thus while a common presumption in the financialization literature is that finance is the “tail” wagging the production “dog,” it is not possible to make the case that the revolution in corporate governance or the liberalization of capital accounts caused the international vertical disintegration of production because it preceded itchronologically. The two processes have emerged in force in the past 25 years and it is more reasonable to see the two as interdependent tendencies. Financialization has encouraged a restructuring of production, with firms narrowing their scope to “core competence.” And the rising ability of firms to disintegrate production vertically and internationally has allowed firms to maintain cost markups--and thus profits and shareholder value--even in a context of slower economic growth. The argument put forth here is not that globalized production triggered financialization, but that global production strategies have helped to sustain financialization. Corporate governance and global value chain governance are linked and our understanding of each of these processes can be strengthened by a deeper exploration of this interdependence.

(Link to Complete Article Here)

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From The Guardian :

When we assess the impact of technological changes, we tend to downplay things that happened a while ago. Of course, the internet is great – I can now google and find the exact location of this restaurant on the edge of Liverpool or whatever. But when you look at the impact of this on the economy, it's mainly in the area of leisure. The internet may have significantly changed the working patterns of people like you and me, but we are in a tiny minority. For most people, its effect is more about keeping in touch with friends and looking up things here and there. Economists have found very little evidence that since the internet revolution productivity has grown ... By liberating women from household work and helping to abolish professions such as domestic service, the washing machine and other household goods completely revolutionised the structure of society. As women have become active in the labour market they have acquired a different status at home – they can credibly threaten their partners that if they don't treat them well they will leave them and make an independent living. And this had huge economic consequences. Rather than spend their time washing clothes, women could go out and do more productive things. Basically, it has doubled the workforce ... Before the invention of the telegraph in the late 19th century, it took two to three weeks to carry a message across the Atlantic. The telegraph reduced it to 20 or 30 minutes – an increase of 2,000-3,000 times. The internet has reduced the time of sending, say, three or four pages of text from the 30 seconds you needed with a fax machine down to maybe two seconds – a reduction by a factor of 15. Unless I'm trading commodity futures, I can't think of anything where it's really so important that we send it in two seconds rather than a few minutes.

(Link to Complete Article Here)

(Image: Remapping Debate)

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From In These Times :

German worker control contributes to a group interaction that over time not only builds up but also protects a certain amount of human capital, especially in engineering and quality control. This kind of knowledge is not just individual but group knowledge. It's the kind of group knowledge that our efficient, "flexible" labor markets so readily break up and disperse. It's our flexible labor markets that make it so hard for the United States and the UK to compete. We spend vastly more on basic research than the Germans do -- U.S. companies are unrivaled. We spend far more on higher education. But with our flexible labor markets, we're unable to capitalize on this research and education. Sometimes we try the Japanese model of work, but we never try the German, because we don't want to cede any real control to workers. Supposedly it's a great mystery why Germans keep investing in manufacturing and even prospering, despite the claims that the German education system is broken (OK, it needs help) and they aren't spending enough on research (OK, they aren't). But they're doing something right. What is distinctive about Germany is the privileged position the worker has within the firm. And we must look to that privileged position of the worker to explain how our own middle-class way of life can survive. Putting more money into education is a waste of effort. Putting more money into basic research is a waste of effort. We already spend enough. In fact, we have every factor of production going for us: We have more land, more labor, more capital and higher levels of formal education. But with our flexible labor markets, we cannot develop the human capital or knowledge needed to wean ourselves away from turning out crap. In global competition, the United States has almost every comparative advantage over Germany, but the one great comparative advantage Germany still has over us is that it is a social democracy. Yes, I admit Germany has its problems. But we're losing our middle class, and our problems are even worse.

(Link to Complete Article Here)

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From Foreign Policy :

In essence, we need to shift from seeking labored, politically correct commonalities among cultures and work more on learning to reconcile and co-exist with people who always, inevitably, will remain strangers. This means, for example, throwing out the idea that any international model -- say, the Anglo-American version -- can be imposed or grafted onto other cultures. "What about us?" Anglo-Americans may ask. In a globalized world that speaks and writes in English, the Anglosphere retains some natural advantages. This is where the most elite colleges and universities are located, and where the top financial firms are concentrated. Equally important, the Anglosphere also controls much of what the developing countries will most need in the future -- food -- through the unsurpassed fecundity of the United States, Canada, Australia, and New Zealand. Demographics and a unique ability to absorb a wide range of immigrants make the Anglosphere economically and demographically vibrant -- a point often missed by political scientists like the late Samuel Huntington and some elements on the political right.  By 2050, the Anglosphere will be home to upwards of 550 million people, the largest population grouping outside China and India. English-speakers may not straddle the world like the 19th century empire-makers, but they are likely to remain first among equals well into the current century. Ultimately, this will depend on how the English-speaking world evolves and learns to embrace its multiracial population without losing its sense of a common identity. Ideally, the Anglosphere can offer an alternative that embraces not merely a language but a set of historically achieved values such as democracy and freedom of speech, religion, and markets. Already many of the English-speaking world's exemplary writers, artists, industrialists, and entrepreneurs hail from a vast and ever expanding array of backgrounds. It is in the melding of many into one dynamic culture that the Anglosphere may retain a powerful influence over our emerging world of tribes.

(Link to Compete Article Here)

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From The Financial Times (h/t Yves Smith) :

The average non-financial listed company in the US funds itself with 70 per cent equity. Many successful businesses, including Apple, Gap and Yahoo, are essentially 100 per cent equity financed. Given their intermediation function, banks cannot be funded entirely with equity. But there is no compelling reason for them to rely on it so little. Our financial system would work better if banks funded 15 per cent or even 30 per cent of their assets with equity. The Basel III reforms agreed last year set minimum bank equity between 4.5 per cent and 7 per cent of “risk-weighted assets”, which are significantly smaller than total assets for most banks. Triple A-rated assets require little or no equity capital. The system of risk weights established by Basel II, which distorts banks’ investments towards favourably treated assets, was mostly maintained. Under Basel III, the ratio of equity to total assets can be as low as 3 per cent. These equity requirements are dangerously low. Significantly increasing banks’ equity funding would provide many benefits to the economy, at little social cost ... The US should strive to lead the world in setting prudent standards for banks. The easiest and quickest path to better capitalisation is to require that banks temporarily withhold equity payouts. Even taking Basel III as the benchmark requirements, delaying adherence by allowing dividends now makes no sense. The tax advantage of debt is one reason banks choose high leverage ... The corrupting subsidies associated with “too big to fail” guarantees are best handled by high equity requirements, which force banks to face the full consequences of their decisions. Alternatives such as bail-in procedures, which involve regulators converting debt to equity ahead of taxpayers’ support, are unlikely to work as well. Regulators are required by this mechanism first to determine exactly when large banks, with illiquid assets around the world and complex structures on and off balance sheets, would be insolvent without debt conversion. Then they must be politically able to pull triggers, telling some creditors that their debt is converted to equity. Ahead of such a situation, market participants, including governments, are likely to exert pressure on regulators. Equity requirements are simpler and more reliable.

(Link to Complete Article Here)

(Image: COTO Report)

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From Crooked Timber :

If the Germans read the game as I do, then their only hope is delaying the bank-run that is coming with promises of SPVs filled with magic Euros and bailouts for the Irish and the Greeks as they slash themselves senseless. But if you know that it’s coming, then so must the bondholders. And if they do, their interests are clear. They bought sovereign debt, not the crappy corporate debt that is now bloating the balance sheets of their sovereigns and increasing their risks, so they really don’t want to take the hit for finance’s `put’ on the state. So the state put that ‘put’ on the taxpayer. But in a democracy there is only so much you can put on the taxpayer before they throw out the rascals and vote for someone that promises to put that ‘put’ elsewhere, and the only place left is back on the bondholders. So if the bondholders know that the haircut is coming, they can try and put the put back on the banks, but given the state of the bank’s balance sheets and overall business model (it’s bust – and its not coming back), that’s not going to happen. So bondholders have only one out. They pressure the EU, and the Germans in particular, by squeezing peripheral bonds to make sure that taxpayers there take the hit that they don’t want to. But this of course, has a limit. That limit is called Spain. When you put $750 billion in a bag and say ‘bailout funds’ that tells everyone how much you are really willing to lose. It’s a chunk of change and it will take care of Ireland and Greece. But if everyone is, metaphorically speaking, trying to get towards the door in case someone shouts ‘fire’ in the crowded theater, then there is no guarantee it will stop there as contagion mechanisms take hold. In which case Spain’s liabilities, dotted across the bond portfolios of major Eurozone banks, blow through the bag of cash and the limit is reached. When that limit is reached, the mother of all bank runs will begin and the endgame for not just the Euro, but also the EU, will enter its final act.

(Link to Complete Article Here)

(Image: Cambridge University Press)

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From Caixin Online :

China and Japan are supporting the euro zone by purchasing government bonds that the market shuns today. China and Japan have US$ 4 trillion in foreign exchange reserves and are capable of bridging liquidity problems that some euro zone economies are facing. What China and Japan can do is to stop market panic from leading some otherwise viable economies down a vicious spiral of rising interest rates, rising debt burdens and bankruptcy. Economies that are not viable in the first place shouldn't be helped. China and Japan's actions help themselves in two ways. First, the euro is the only alternative to the dollar for global trade, commodity pricing and storing foreign exchange reserves. If the euro falls apart, the U.S. Federal Reserve will be further emboldened to pursue inflation to decrease the U.S.'s leverage or indebtedness at the expense of dollar holders. China and Japan hold vast dollar assets. Second, Europe is the largest trading partner for China and the third largest for Japan. It is in both economies' interest for Europe to avoid a vicious cycle and remain a healthy trading partner. The watchword for monitoring developed economies is debt and, for developing economies, inflation. The market is panicking over the sovereign debt situation in some euro zone economies and is demanding high interest rates for rolling over their debts or providing new money for financing their deficits. When the interest rates rise above some level, an otherwise healthy debtor can go bankrupt. This element of self-fulfilling prophecy is a major force in speculative attack against a company or country. China recently pledged to support debt issuances by Spain and Portugal. Japan has committed to purchasing one fifth of the debt issuance by the European Financial Stability Facility ("EFSF"). China's actions were instrumental in the successful debt issuances by Spain and Portugal. Japan is taking risk behind the EFSF that is guaranteed by strong economies like Germany and France. This is not enough. China and Japan should work closely together in their European Project. They have common interests. If China and Japan stick together, they can play a critical role in preventing the euro zone from suffering unnecessary economic hardship due to financial market panic and, by extension, supporting the euro as an alternative reserve currency to the dollar.

(Link to Complete Article Here and More Here)

(Image: The Telegraph)