Geopolitics among Korea, Japan and China on the Cheonan Incident

In a tangled world, there are geopolitical concerns between the East and the West.

Of course the geopolitical dynamic is playing out among the Asians as well.

According to foreign media outlets, the third Trilateral Summit Meeting involving Korea, Japan and China over the weekend failed to induce China to take a hard-line stance against North Korea regarding the Cheonan incident.

Higher Education Bubble

Korea is not immune from this conundrum.

From The New York Times:

Like many middle-class families, Cortney Munna and her mother began the college selection process with a grim determination. They would do whatever they could to get Cortney into the best possible college, and they maintained a blind faith that the investment would be worth it.

Today, however, Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she’s been enrolled in night school, which allows her to defer loan payments.

This is not a long-term solution, because the interest on the loans continues to pile up. So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning. They and their families made borrowing decisions based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.

Meanwhile, universities like N.Y.U. enrolled students without asking many questions about whether they could afford a $50,000 annual tuition bill. Then the colleges introduced the students to lenders who underwrote big loans without any idea of what the students might earn someday — just like the mortgage lenders who didn’t ask borrowers to verify their incomes.

Ms. Munna does not want to walk away from her loans in the same way many mortgage holders are. It would be difficult in any event because federal bankruptcy law makes it nearly impossible to discharge student loan debts. But unless she manages to improve her income quickly, she doesn’t have a lot of good options for digging out.

http://www.nytimes.com/2010/05/29/your-money/student-loans/29money.html?src=me

Good Government vs. Less Government

From the Baseline Scenario:

My primary contention below is that many of these measures used in the composite Heritage Index have nothing to do with less government, and a lot more to do with good government. It is these measures of good government that correlate to economic growth and drive the overall correlation between the “Freedom Index” and positive outcomes. Secondarily, I will argue that many of the other items in the index (like investment freedom) are not causes of growth, but rather outcomes of growth.

http://baselinescenario.com/2010/05/27/heritage-index-good-government-vs-less-government/

On North Korea

From Zero Hedge:

North Korea warns of “all out war”.

http://www.zerohedge.com/article/so-much-reconciliation-north-korea-warns-all-out-war-press-conference

Samsung’s Big Bet On Chip and LCD

Samsung announced last week it would spend 26 trillion won (about 22.5 billion USD) this year on its chip, flat screen and R&D.

According to financial times, Samsung’s investment budget will be bigger than those of Intel, IBM and Sony combined.

The chairman Lee Kun-hee said in a ceremony at its new chip plant in Hwasung “Although the global economy is still uncertain and business conditions are expected to change rapidly, we have to increase investment and hire more people to take global business opportunities.”

Samsung has a good track record in betting on risky investments before.

Yet the current global economic situation is quite different from the past. We would assume that Samsung knows demand on the consumer side is dwindling worldwide for now and it would seem very unlikely that the U.S. would go on a debt-fuelled consumption binge. There is policy tightening all over the world, stimuli impacts fading. Where do they see a rise in demand for their chips and LCDs rising? Does Samsung see demand would rise in a certain area where we hope it doesn’t happen?

As for new business investment, again they know they need to go beyond a fast follower strategy and have invested in it accordingly for some time, yet they haven’t seen any fruitful outcome. As the chairman Lee admits, they have a long way to go in their new business undertaking.

On the other side of the coin, it would be a real progress for the Korean high tech sector if SMEs come up with the innovation and the Korean government provides them with incentives and infrastructure to take risks in new endeavor in a meaningful sense.

Living in Historic times

Quite a few financial experts warn us of what’s coming later this year and thereafter. Some contend the U.S. has the last bullet left. Agree or not, we seem to live in historic times for sure.

Watching what’s been going on around the globe sometimes makes us feel helpless and want to ask God if he’s going to let it happen like this.

And yet, the whole situation makes us appreciate once again how precious our lives are and realize how grateful we should be every day.

Two comments from Mish’s blog:

Dr. Evil says:

By now I would think we all would realize that we have no say. There is no longer a republic. This is so obvious that it should not even need to be pointed out. We are now without any real money (a crime) are directly taxed (a crime) have had most of our rights turned into privilages (a crime) and yet no one seems to even notice. Protests, petitions, voting does nothing. After the bailouts you would think we would "get it" but no, we keep going down the same pointless road. Lts face it the globalists have won - so much so that we wll not even aknowlege they exist and have enslaved us. If you want to keep on doing the same thing for another 20 years that you did for the last then please go ahead - you will get the same result

Rebel Farmer says:

Dr Evil, everything you say is true. And sometimes this knowledge immobilizes me. And the knowing that I can't do anything about it sometimes makes a little tear form up in my eyes. Then I get a grip on my emotions. Yes, I know it is futile, but I still call my congress critters at least once a week. I sign the petitions and send the emails. Some day there will be enough of us for the inevitable revolution. I have to stay sane and engaged until that day comes.

Deflation vs. Inflation

Many of us are well aware of the whole inflation/deflation debate.

We know the current state of the global economy. We also know what governments and central banks around the globe have been doing. We know what has been driving the worldwide equity markets. We know what’s been going on in the private sector as well.

For the next 6 months or so, we would seem to face the deflationary trend globally. As for inflation, let’s just worry about it later.

Let’s remember how grateful we are for being able to live every day to the fullest.

Korea's Sovereign Default Risk and Standoff on the Korean Peninsula

Two widely read econ blogs in the U.S., Mish’s Global Economic Analysis and Zero Hedge discuss Korea’s sovereign default risk and mounting tension on the Korean peninsula.

Watch for a correction in global stock markets.

http://www.zerohedge.com/article/spain-italy-and-korea-default-risk-spikes-more-20

http://www.zerohedge.com/article/global-markets-plunge-both-koreas-put-war-readiness

http://www.zerohedge.com/article/north-korea-severs-all-relations-south-korea-50-bps-ecb-rate-cut-rumor

http://globaleconomicanalysis.blogspot.com/2010/05/tensions-mount-in-asia-north-korea.html

Korea’s Looming Deficit Concerns

According to the data by the Ministry of Strategy and Finance, Korea’s fiscal deficit in March grew sharply by more than 7 trillion won (roughly 5.8 billion USD) from a month earlier.

Korea’s fiscal deficit stood at 19.51 trillion won (16.3 billion USD) at the end of March.

This figure is similar to the 21.9 trillion won budget shortfall recorded in March of last year during the height of the financial crisis.

Signs of a Declining Economy

From an economic standpoint, there are several signs of a declining economy. Mounting debt and decreasing savings rate are among them.

It is interesting to note that while the household savings rate in China and India has increased, Korea’s has fallen as mentioned in a previous post. China’s household savings rate reached 28% in 2008, consistently rising from 1991.

As for sovereign debt, Japan’s sovereign debt rose to a record 883 trillion yen as the fiscal year ended in March. I’ll do a post on Korea’s deficit figure in March.

We all know sovereign concerns in advanced economies including the U.S and euro zone countries.

South Korean President Lee Says Will Use Self-Defense Measures in Case of Future North Korean Provocations

Why does one of the mostly read economic blogs like Zero Hedge keep bringing up the topic on North Korea?

From Zero Hedge:

From South Korea's president Lee Myung-bak: "If our territorial waters, airspace or territory are violated, we will immediately exercise our right of self-defense. Under these circumstances, any inter-Korean trade or other cooperative activity is meaningless. I solemnly urge the North Korean authorities to do the following. Apologize immediately to the Republic of Korea and the international community. Immediately punish those who are responsible for and those who are involved in the incident" Is this the last warning before war? While we await North Korea's response, now that the ball is again in its court, we have to score one for the South Korea's communist neighbors who once again have manage to bully it (and the US) into nothing but more posturing.

http://www.zerohedge.com/article/south-korean-president-says-will-use-self-defense-measures-case-new-north-korean-provocation

Korea’s Total Savings Dwindling

According to data by the Ministry of Strategy and Finance and Statistics Korea, Korea’s savings rate fell to its lowest level in 26 years due to people’s stagnant incomes and less interest in savings.

From Yonhap News:

The country's total savings rate, or total savings divided by total disposable income, stood at 30 percent last year, the lowest since the 28.9 percent recorded in 1983, according to data by the Ministry of Strategy and Finance and Statistics Korea.

In the wake of the 1997-98 foreign exchange crisis, South Korea's total savings rate dropped as low as 30.5 percent in 2002, but it rose to 31.9 percent and peaked at 43 percent in 2004. Since then, it has been on the decline.

South Korea's investment rate, or total investment money divided by total disposable income, came to 25.8 percent in 2009, the lowest since the 25.3 percent recorded in 1998, according to the government agencies.

http://english.yonhapnews.co.kr/business/2010/05/23/26/0503000000AEN20100523000200320F.HTML

The U.S. Total Debt Load Hitting $13 Trillion; 32 States Bankrupt

From Zero Hedge:

Total US debt just hit $12,987,823,000,000, $13 billion from lucky $13 trillion. As next week the US Treasury is auctioning off another gross $140+ billion in Bonds, we will pass this totally irrelevant resistance level on May 25, when Timmy issues another $42 billion of 2 Year Notes.

http://www.zerohedge.com/article/america-will-pass-13-trillion-total-debt-next-tuesday-397-billion-debt-rolled-month-date

Another Post from Zero Hedge:

Courtesy of Economic Policy Journal we now know that the majority of American states are currently insolvent, and that the US Treasury has been conducting a shadow bailout of at least 32 US states. Over 60% of Americans receiving state unemployment benefits are getting these directly from the US government, as 32 states have now borrowed $37.8 billion from Uncle Sam to fund unemployment insurance. The states in most dire condition, are, not unexpectedly, the unholy trifecta of California ($6.9 billion borrowed), Michigan ($3.9 billion), and New York ($3.2 billion).

http://www.zerohedge.com/article/32-states-now-officially-bankrupt-378-billion-borrowed-treasury-fund-unemployment-ca-mi-ny-w

Facing an Inflection Point

Korea experienced the financial crisis before and knows well what is like to go though the IMF austerity program. The global macroeconomic environments in which the Korean economy is are worse than during the 1997 financial crisis.

Korea is heavily export-dependent, so its economy can’t decouple from the global economic conditions. The U.S. and the Europe are Korea’s major trading partners, and they are imploding. In the near term, a slowing Chinese economy could also have ramifications for Korea. Although Korean corporations have successfully made expansion into new markets, Korea wouldn’t seem to be immune to the worldwide credit bubble (or, debt bubble bursting) and a global capacity glut.

Much like the rest of the industrialized nations, the Korean government has injected stimulus into their economy. Korea has created a bubble as well. They may see it popping at some point as the rest of the developed nations is seeing. When global stock markets along with bond markets tank down the road, which many predict is an inevitable scenario, Korea (or other Asian countries for that matter) may have to deal with contracting exports and capital flight.

Korea has a lot going for it. And yet, it needs to keep a competitive structure to make a productive economy function and balance the budget. Korea needs to care about the debt load, as many parts of the world face sovereign debt problems. While corporations’ balance sheet has got healthier since the 1997 financial crisis, there are concerns over the sovereign and household debts. Innovation and production are at the crux of keeping the economy sustainable. Productive labor should be valued, jobs created in the private sector, and the wealth gap narrowed as the cases of advanced countries have shown. The overall health of the economy is the product of several forces working in a coordinated fashion.

Another Perspective on China: Betting on 1920s Japan-Like Crash in China

I found the following Newsweek article written from the Western point of view as usual.

To comprehend what China has been doing, one may have to look into its long term dynamics at the confluence of its social/political system, its culture, and economic/technological development trajectory, and international politics.

From BusinessWeek:

“There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed,” said Hendry, 41, whose firm manages $420 million in assets. “China could precipitate a much greater crisis elsewhere in the world.”

Japan’s export boom collapsed after the war amid excess global capacity, slashing growth and sparking a stock-market crash and bank runs.

Hendry’s flagship Eclectica Fund, a global macro hedge fund with $180 million in assets, may gain almost $500 million from its options if China’s economy plunges into a recession, he said. The options cost the fund about 1.5 percent of its net asset value annually, Hendry said.

China’s vulnerability to a crash comes from the “inherent instability” created by a lending binge for infrastructure projects that’s “unprecedented in 400 years of economic history,” Hendry said. The country is also exposed to exports to a U.S. economy that could shrink from $14.6 trillion at the end of March to $10 trillion within 10 years, he said.“

China’s at the mercy of a credit bubble,” Hendry said. “Once you’ve unleashed the genie it’s out there. They are ultimately unstable and it’s that instability that creates their demise.”

China’s bubble may burst within a year or it may take three years, as Citigroup Inc. economists Willem Buiter and Shen Minggao estimate, Hendry said.

Widening the Income Gap

According to Statistics Korea, the income gap between the rich and the poor is widening with the monthly salary of those in the high-income brackets jumping by over two million won during the past five years, while low-income earners only received a 170-thousand won bump.

Korea’s wealthiest 10 percent earned over 10 million won (about 8,700 USD) a month during Q1, whereas the poorest 10 percent made only 580 thousand won.

Meredith Whitney’s Bearish Prediction

Some may think that Whitney is not telling us anything we don’t already know.

From the Wall Street Journal Online:

The next several weeks will be critically important for politicians, regulators and the larger U.S. economy. First, over the next week Capitol Hill will decide on potentially game-changing regulatory reform that could result in the unintended consequences of restricting credit and further damaging small businesses.

Second, states will approach their June fiscal year-ends and, as a result of staggering budget gaps, soon announce austerity measures that by my estimates will cost between one million to two million jobs for state and local government workers over the next 12 months.

http://online.wsj.com/article/SB10001424052748703460404575244394011199892.html?mod=rss_Today%27s_Most_Popular

Interview with Maria Bartiromo of CNBC

Partial Transcript

Meredith: One of my biggest concerns over the last few years is you have a lot of regulatory change being crammed into the system, just at the time when you need more liquidity.For example, banks obviously price for risk. But they have been told by the card act that they cannot effectively price for risk anymore. You have already seen $1.5 trillion in credit lines cut from the system. The proposed amendments are going to make it even more difficult to price for risk. ... I think you will see at least another $1.3 trillion sucked out of the system.

Maria: You write that massive job cuts at the state level between 1 and 2 million over the next 12 months could also be part of this.

Meredith: That's our estimate. You look at how grossly underfunded state and local budgets are 2.5 times what they were after the dotcom crash. There is no way to resolve this. ... We are going to have a really dangerous, chronically high unemployment situation on our hands for a very long time. This is exactly what politicians ought to be focused on, not jamming down last minute regulation to appear to be tough on banks.

Maria: What's your sense of the European banking situation? Would you put any new money to work in any of the European banks given this selloff?

Meredith: Not in a million years. The European banks are still underfunded, still carry assets that are worse marked than even the US banks. You have hundreds of billions of dollars of recaps that need to take place in Europe.

Maria: What kind of second half are you expecting for the stock market.

Meredith: I think it's going to be bleak. I think that you have really no end demand from the consumer. I think you are going to see the double dip in housing take place in the second half and it's going to be rocky sledding.

The Myth of Insolvency

If one looks at how some countries get insolvent, thereby the IMF riding in to the rescue, that seems to be straightforward: they spent more money than they had, so the credit market shut them out.

As the case of Japan (or perhaps China, too) shows, as long as there are sufficient private savings and a surplus from international trade and capital flows, insolvency may not be an imminent issue.

Japan’s massive debt load has been a drag. And yet, they have been able to export into a global credit expansion period. As long as their exports hold up, their pretend and extend may continue, while they may have to live with the repercussions in the long term.

However, the world economy is sluggish and running on cheap credit is dangerous since sooner or later bubbles would pop. Japanese policy makers didn’t do enough to retool the economy and continue to “extend and pretend.” Who is suffering more from these policies?

The Korean economy crashed during the 1997 financial crisis. Most Korean banks went bankrupt technically during the 1997 financial crisis. Are Korean banks now solvent enough to weather the worldwide credit bubble?

This may be why we need moral leadership to make the hard choices.

Otherwise, the consequences of “extend and pretend” may be harsh.

The Perils of Big Government

The cases of the U.S. and Greece demonstrate what could happen when the size of governments and the government handouts get bloated.

As the economy deteriorates, government revenue decreases, but its spending could increase through monetary and fiscal stimulus. In the case of the U.S., we are seeing the most massive monetary and fiscal stimulus ever applied to a major economy. Who is going to bailout a near-bankrupt country? IMF, the EU? It doesn’t seem to matter that much because this isn’t going to be “one off” rescue. Japan has monetarily capitalized its economy, yet still heavily mired in huge layers of debt.

The thing is unless a country’s total debt load is reduced to a considerable degree and the broken system is reformed, stimulus alone could conceal the reality of the economic debacle, propping up inefficient companies, distorting markets, and impeding new business formation. This is why the stimulus program in the U.S. is not working to stimulate the real economy.

It appears that too many people in the U.S. have become dependent on the government. When a majority of population is clamoring for government benefits rather than engaging in productive activities in the private sector and public policies are geared toward benefiting a few, those are signs of a declining economy.

Excessive government spending tends to cause all sorts of problems. When a government is trying to pour its public funds into covering losses in financial institutions without restoring balance to the economy, then its economy is in for trouble.

Any government needs to bring the budget within sustainability.

Changes in the World Economic System

If one looks at what is going on in the euro zone and the Greek bailout, or the U.S, one may sense there are changes in the global economic system.

While the world economy is entering a new phase, the modern nation state seems to be weakening.

The economy is out of balance, and MNCs are becoming more independent of the state.

One may need to understand the dynamics of the events unfolding in light of the bigger picture in historic times.

Silver Curtain

From Zero Hedge:

http://www.zerohedge.com/article/silver-curtain

Sarkozy Threatened to Pull France out of the Eurozone

Both Germany and France are exposed to the Greece/Southern Europe fiasco. The eurozone problems (and the eurozone system itself) won’t go away easily. Of course there are conflicts between national interests and the common EU’s.

From The Guardian:

Share prices have dropped across Europe and the euro has slid to an 18-month low against the dollar on fears that the eurozone bailout of Greece will fail and reports that French president Nicolas Sarkozy threatened to pull his country out of the single currency altogether to force Germany to agree to the rescue plan.

The markets were initially unsettled by news that the French president had threatened to pull France out of the eurozone. The startling threat was made at a Brussels summit of EU leaders last Friday, at which the deal to bail out Greece was agreed. according to a report in El País newspaper quoting Spanish Prime Minister José Luis Rodríguez Zapatero.
Zapatero revealed details of the French threat at a closed-doors meeting of leaders from his Spanish socialist party on Wednesday.

Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro," according to one source cited by El País.

“Sarkozy went as far as banging his fist on the table and threatening to leave the euro," said one unnamed Socialist leader who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."

El País also quotes Sarkozy as having said, according to another of those who met Zapatero, that "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense".

http://www.guardian.co.uk/business/2010/may/14/nicolas-sarkozy-threatened-euro-withdrawal

Samsung and LG Head Race for New Growth Engine

Samsung announced the ambitious investment plans aimed at driving future growth on Monday. In a statement, it will invest 23 trillion won (roughly 20 billion USD) in five emerging businesses areas by the year 2020: solar cells, rechargeable batteries for hybrid cars, LED technology, biopharmaceuticals and medical equipment. There has been uncertainty over the company’s future business direction for some time. Lee Kyn-hee, the son of the company’s founder, returned as the chairman in March.

Meanwhile, LG will invest $18 billion between now and 2020 to develop environmentally friendly products and reduce its emissions by 40 percent. LG already started producing solar cells earlier this year and will open another factory next year.

While Samsung and LG have been the world’s most competitive corporations in certain areas such as LCD and mobile phones, they have engaged in fast follower strategy. If they succeed in this new endeavor, they will mostly likely be recognized as truly innovative companies.

EU Announces a Record Rescue Package

The EU unveils a record financial stabilization plan worth 750 billion euros (more than 109 trillion Korean won), aimed at stemming the spread of the sovereign debt crisis from Greece to other euro zone countries.

The Baseline Scenario explains the three main elements of the plan:

1. 750bn euros in a fiscal support program, with 1/3 coming from the IMF (although this was apparently news to the IMF).

2. The European Central Bank promises to buy bonds in dysfunctional markets.

3. Swap lines with the Federal Reserve, to provide dollars.

http://baselinescenario.com/2010/05/10/eurozone-the-kitchen-sink-goes-in-now-it’s-all-about-solvency/

Denninger argues that the ECB learned nothing from the U.S.

Catholics Gathered in Protest of the Government’s Four Rivers Restoration Project

Thousands of Catholics gathered at Myeongdong Cathedral in Seoul on Monday in protest of the government’s four rivers restoration project. It was the first mass protest held at the cathedral since 1987 when massive revolts occurred.

The Catholic Bishops’ Conference of Korea, which is a representative body of the country’s five million Catholics, and civic groups have criticized the project, citing environment concerns.

How Would Global Economic Conditions Affect the Korean Economy?

In response to the Greek financial predicament, foreign investors sold substantial positions in the Korean equity market.

As for real economic activities, Korea’s economy has been heavily dependent on exports

Demand is dwindling worldwide: China is shutting down lending; The American middle class are broke; Europe is facing a weak Euro. China, the U.S. and some nations in Europe are Korea’s major trading partners.

The world may be in a deflationary spiral.

The current economic conditions may have the significant impact on Korean corporations that do business in Europe, the U.S., Japan, and China in the short and long term.

One needs to get the big picture and take the long view.

The U.S. Equity Plunge and Other Market Gyrations

The Dow Jones Industrial Average lost as much as 998.5 points before paring its drop to 347.8 points in New York. An investigation is underway to determine why the U.S. equity market went into complete freefall for about twenty minutes.

There were market gyrations across many markets. Japan has pumped $21 billion of emergency liquidity into the market overnight.

We have seen the growing disintegration between the world’s financial markets and the productive economy, thereby pointing to the downside, sooner or later.

Would this drop be only a taste of what’s to come down the road?

Is the Greek Predicament Going Global?

Leo Kolivakis claims that “The global debt supercycle exacerbated income inequality, and the revolts we are now seeing in Greece will eventually spread throughout the world.”

Would the Greek predicament be a trigger point in the next credit contraction worldwide?

Nowadays, any economy doesn’t operate in a vacuum. Again, we live in a global economy.

When will people ever learn the lessons of history?

Greek Revolt

Workers across Greece went on strike over harsh spending cuts. Three people died inside a bank set ablaze by protesters in Athens, Greece.

The Greeks cooked the books on their external debt.

Reality has hit the general public to some degree.

Do the people of Greece really know who owns the majority of Greek debt? Who would be the real beneficiary of the rescue package?

Not Just Greece, Spain, and Portugal; Are the U.K., France & Germany As Well in for Economic Turmoil?

Is it bubble busting time again?

What will the derivatives bubble lead to?

From Zero Hedge:

Portugal... Spain...Greece...these are all last week's news based on CDS trading patterns. Indeed, this week saw the biggest trade unwinds of all top 1000 CDS entities (including all corporates) precisely in these three names. As the PIIGS implosion is finally being appreciated by everyone and their grandmother, the "speculators" are booking massive profits: the net cover/rerisking in Portugal and Spain was a massive $500 million net notional unwinds in each in the week ended April 30. Also known as taking profits. Greece and Ireland were also in the top 5, so as we have repeatedly claimed, the market will no longer make the news in Club Med. So where will it? No surprise there - the UK, France and Germany. The smartest money in the world is now actively betting the core of the eurozone is where the next CDS blow up will take place. With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names. The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million. Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net notional derisking. This week the number is even higher: $558 million. There is now over $1 billion in net risky bets made that the UK may not last. And Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.

http://www.zerohedge.com/article/cds-traders-verdict-uk-deep-shit-are-france-and-deutschland

What’s in the Bailout Package for Greece and Will It Work?

Martin Wolf at the Financial Times points out that “Greece is being asked to do what Latin America did in the 1980s. That led to a lost decade, the beneficiaries being foreign creditors.”

Korea had to accept IMF austerity measures during the 1997 financial crisis. Seeing what’s going on in Greece reminds us how beneficial or disadvantageous that program had been to Korea.

From FT:

So what is the programme? In outline, it is a package of €110bn ($143bn) (equivalent to slightly more than a third of Greece’s outstanding debt), €30bn of which will come from the IMF (far more than normally permitted) and the rest from the eurozone. This would be enough to take Greece out of the market, if necessary, for more than two years. In return, Greece has promised a fiscal consolidation of 11 per cent of gross domestic product over three years, on top of the measures taken earlier, with the aim of reaching a 3 per cent deficit by 2014, down from 13.6 per cent in 2009. Government spending measures are to yield savings of 5¼ per cent of GDP over three years: pensions and wages will be reduced, and then frozen for three years, with payment of seasonal bonuses abolished. Tax measures are to yield 4 per cent of GDP. Even so, public debt is forecast to peak at 150 per cent of GDP.

In important respects, the programme is far less unrealistic than its intra-European predecessor. Gone is the fantasy that there would be a mild economic contraction this year, followed by a return to steady growth. The new programme apparently envisages a cumulative decline in GDP of about 8 per cent, though such forecasts are, of course, highly uncertain. Similarly, the old plan was founded on the assumption that Greece could slash its budget deficit to less than 3 per cent of GDP by the end of 2012. The new plan sets 2014 as the target year.

Two other features of what has been decided are noteworthy: first, there is to be no debt restructuring; and, second, the European Central Bank will suspend the minimum credit rating required for the Greek government-backed assets used in its liquidity operations, thereby offering a lifeline to vulnerable Greek banks.

For other eurozone members, the programme prevents an immediate shock to fragile financial systems: it is overtly a rescue of Greece, but covertly a bail-out of banks. But it is far from clear that it will help other members now in the firing line. Investors could well conclude that the scale of the package required for tiny Greece and the overwhelming difficulty of agreeing and ratifying it, particularly in Germany, suggest that further such packages are going to be elusive. Other eurozone members might well end up on their own. None is in as bad a condition as Greece and none has shown the same malfeasance. But several have unsustainable fiscal deficits and rapidly rising debt ratios (see chart). In this, their situation does not differ from that of the UK and US. But they lack the same policy options.

The attempted rescue of Greece is just the beginning of the story. Much more still needs to be done, in responding to the immediate crisis and in reforming the eurozone itself, in the not too distant future.

Wealth Transfer and the Dangers of Bailouts

The following graph presents the current level of inequality of income distribution in the U.S., which has not been seen since the 1920s.
What has facilitated this wealth transfer and concentration? What kind of impact has this trend had on real economic growth?

The U.S. economy is heavily consumer driven. When the wealth is concentrated into the hands of the very few, the overall purchasing power is dwindling, resulting in depressed markets, reduced investments, and the destruction of jobs and businesses.

As the U.S. has sent the low paying jobs overseas, culminating in the demise of U.S. labor, and shifted its economy from an industrial economy to a service economy, income redistribution has accelerated.

Overconcentration of power and wealth distorts the system. It obstructs a free and fair market principle.

History has repeatedly taught us that without the fundamental reform of the troubled institutions, the bailout alone does nothing to resolve the problems that persist.

Throughout the bailout process, the losses of private entities are transferred to the general public. This rigged capitalism makes a country a failed state.

How are we going to rebalance the concentration of wealth? We know the answer, but moral leadership wouldn’t seem to rise up to such a challenge.

Greece Gets a Bailout Package

Greece gets a rescue package from the EU and the IMF.

A $146 billion bailout package will be enough to prevent Greece from defaulting. Or will it keep Greece going a bit longer?

In the meantime, Dr. Roubini says that the U.S. is worse shape than Greece.

From Bloomberg:

Euro-region ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece to prevent a default and stop the worst crisis in the currency’s 11-year history from spreading through the rest of the bloc.

The first payment will be made before Greece’s next bond redemption on May 19, said Jean-Claude Juncker after chairing a meeting of euro-region finance ministers in Brussels yesterday. The 16-nation bloc will pay 80 billion euros at a rate of around 5 percent and the International Monetary Fund contributes the rest. Greece agreed to budget measures worth 13 percent of gross domestic product.

“It’s an ambitious program, it’s austere but it’s absolutely necessary,” Juncker told reporters. European Central Bank President Jean-Claude Trichet, speaking at the same press conference, said Greece’s plan will “help to restore confidence and safeguard financial stability in the euro area.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=alJWdKeR1TDU&pos=1

ABC News Lays Off 25% of Staff

There was a time when I watched “World News with Peter Jennings” almost every evening to understand the American affairs and culture.

As I get to understand the U.S. systems and broaden my perspective, I’ve been disappointed at the quality of the U.S. media reporting to a large degree. For instance, what role has the major media played to enlighten the public on the current state of the U.S. economy and what needs to be done to get it back on track? The underlying problems are complex including media consolidation.

Of course, the same question can go for other countries as well.

As in other sectors, there seems to be a lack of integrity to one extent or another in the field of journalism.

Journalism is close to my heart for various reasons.

From the New York Times:

If “Good Morning America” or “World News” look any different in the coming weeks, it might be because ABC News is employing nearly 400 fewer people.

Earlier this week, ABC News, a unit of the Walt Disney Company, largely completed one of the most drastic rounds of budget cutbacks at a television news operation in decades, affecting roughly a quarter of the staff. The cutbacks promise to change ABC both on- and off-camera.

The business of news is a particularly ugly one these days, and news outlets across the country have trimmed their staffs. But it is exceedingly rare for a newspaper or a network to shed a quarter of its employees all at once, as ABC has done.

In the future, more segments will be reported, filmed and edited by jacks-of-all-trades, called digital journalists, internally. They may lack the polish that a traditional four-person crew can provide, but they are much less expensive. Sometimes two of the digital journalists will team up for reports.

Inside ABC News, it is widely believed that the cutbacks were mandated by Disney. The cuts came shortly after CBS News, one of the other three network news divisions, lost about 70 staff members. The third division, NBC, is in a much better financial position because it has a cable news arm, MSNBC.

http://www.nytimes.com/2010/05/01/business/media/01abc.html?partner=rss&emc=rss