Econintersect: Here are some of the headlines we found to help you start your day. For more headlines see our afternoon feature for GEI members, What We Read Today, which has many more headlines and a number of article discussions to keep you abreast of what we have found interesting.
Asia stocks jump, yen weakens as BOJ stuns with negative rates (Reuters) Asian shares jumped and the yen swooned after the Bank of Japan stunned markets on Friday by adopting negative interest rates in its boldest step yet to reinflate the economy. Spreadbetters predicted the cheer would spread to European markets, with Britain's FTSE 100 .FTSE seen opening 0.4% higher, Germany's DAX .GDAXI expected to rise 0.5% and France's CAC 40 .FCHI seen gaining 0.6%. The yen fell across the board and the yield on the benchmark Japanese government bond plunged to a record low after Japan's central bank said it would charge 0.1% for excess reserves parked with the institution, an aggressive policy pioneered by the European Central Bank. The dollar surged about three yen to a session high of 121.495. It was last up 1.7% at 120.92 yen. The euro slipped about 0.2% to $1.0913, on track to gain about 1.1% for the week. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS added 1.8%, up 2.7% for the week. The Shanghai Composite Index .SSEC rose 2.9%, while the CSI300 index .CSI300 (the largest listed companies in Shanghai and Shenzhen) added 3.2%, bouncing from steep losses early in the week.
Economics Might Be Very Wrong About Growth (Bloomberg) Has the world entered a period in which economies simply won't grow at the rate they once did? Radical as the thought may seem, it might not be radical enough. For two decades now, a lesser-known group of mostly German economists has been making a more extreme argument: that the standard model of exponential growth -- in which an economy can be expected to expand by a given percent every year, no matter how big it gets -- is fundamentally flawed. Rather, these economists claim that while exponential growth fits some young economies, mature economies tend, as a rule, to grow much more slowly -- in a linear way, meaning that the percentage growth rate would constantly decline. For a new study supporting this hypothesis see Do Mature Economies Grow Exponentially? (PDF, Cornell University Library).
Is U.S. Economy Facing Risk of Recession? (Bloomberg) Jim Rickards (who has contributed to GEI) thinks the Fed is likely to double down on their mistake of raising rates in December with two more hikes in the first half of 2016, which will hasten the onset of the next recession.
"You only need an emergency brake if you have lost control. What people want is to get back control. The only safe vote in the referendum is to vote Leave."
Bank of Japan adopts negative interest rate policy (CNBC) The Bank of Japan adopted negative interest rates for the first time at the end of its two-day policy review on Friday, buckling under pressure to ease concerns about the health of the world's third-largest economy. In a move that was signaled by the Nikkei business daily minutes ahead of the decision, the BOJ said it will apply a rate of negative 0.1% to excess reserves that financial institutional place at the bank and introduce a three-tier system on rates. The news saw the benchmark Nikkei shoot up 3%, the yen slide 2% against the greenback and U.S. stock futures rally 1%. No changes were made to the bank's government bond purchases or exchange-traded funds (ETFs).
Struggling Chinese companies turn to P2P exchanges to boost cash flow (Financial Times) Troubled companies in China are turning to the under-regulated internet finance industry to ease their cash flow problems, using peer-to-peer exchange platforms that match unpaid bills with debt collection agencies at a big discount for the vendors. The rapid rise of P2P lending in China comes as debts are mounting in its traditional banking system - overall private debt is 230% of GDP. (Note: Not specified in the article, this appears to be the 2014 number.) See next article. Econintersect: If this produces a reduction (a write-off) of debt it will be a positive thing for the Chinese economy. But the negative side is that some zombie companies will survive, at least for a time longer, and this will be a drain on the economy as unproductive resources will be maintained, providing a hindrance to productive economic activity. Whether this will be a net positive or negative remains to be seen.
This Could Be A Problem: China's Debt-To-GDP Rises To A Gargantuan 346% (Zero Hedge) Many were shocked when they read that China's total debt/GDP had risen by 125% in under 7 years, hitting 282% as of Q2 2014. (See preceding article.) Those same people may be just as shocked to learn that according to the head of financial markets research Asia Pacific at Rabobank, Michael Every, not only has China not begun to delever at all, but since McKinsey's update, its debt has risen by another 70% of GDP! Econintersect: That is a rise about 17% a year (or more if the Every number is not year-end 2015) while China's GDP has been rising between 4% (some independent estimates) and 7% (official government reports). ZH continues:
According to Every, China's 2015 debt-to-GDP might be as high as 346%, and while that is in line with wealthier developed economies but is "vastly higher" than any EM peer.
Cited by Bloomberg, Every adds that the time-frame for debt accumulation pre-crisis varies, but what always follows is a major currency drop afterwards, as has happened even with reserve currencies such as dollar, yen, euro and pound.
He also adds that nominal GDP needs to rise faster than debt for a sustained period if deleveraging is to truly be under way, aka Dalio's beautiful deleveraging thesis. The problem, however, is that with even Goldman admitting that China's real GDP growth rate is about 4.5%, China's debt load is rising orders of magnitude faster than its underlying economy and is on the daily verge of entering the final phase of the Minsky Moment breakdown.
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