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What We Read Today 17 March 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Top 9 Biggest Tax Scams of 2013 (Dan Berman, ThinkAdvisor) Last year, the IRS mailed out fraudulent refunds worth $3.6 billion. That was at least an improvement over the $5.2 billion doled out in 2012. Berman presents the details for the nine largest scams of 2013.

Today there are 12 articles discussed 'behind the wall', the first 5 about the state of the economy in Russia and Ukraine and how it may be reflected in the U.S. and the rest of the world. The last 7 articles are about stresses in the Chinese economy.

  • Fire-sale of US Treasuries is a warning of acute stress across the world (Ambrose Evans-Pritchard, The Telegraph) The foreign custody account at the U.S. Federal Reserve declined by $106 billion last week, the largest drop on record. It could all be Russia which is pulling out all the stops to prevent a collapse of the ruble. Seldom has Econintersect seen so much doom and gloom collected in one short news story. Here are some quotes and excerpts from this article:
One investor told me that clients in Russia are literally loading up cars with computers, machinery, and anything that will fit, and rushing them out of the country for fear that assets will nationalised. Whatever happens, nobody will forget this in a hurry.
"Countries are intervening all over the place to defend their currencies, (which means they are tightening). Their central banks built up huge war chests of reserves for a rainy day, and now it is raining," said David Bloom, currency chief at HSBC.
The international order is unravelling. Russia is of course smashing the post-Cold War order by seizing Ukraine, and blowing up the global architecture of nuclear non-proliferation. Let us not forget that Ukraine agreed to give up its nuclear weapons - the world's third biggest arsenal at the time - in exchange for a guarantee by the great powers in 1994 that its territorial integrity would be upheld. Russia was one of the signatories.

China is laying claim to large parts of the East China and South China Seas, and has established an air identification control zone over the Japanese-controlled Senkaku islands.

China and Japan are one blow - or misjudgement - away from outright military conflict. The battle on the Pacific Rim is ultimately even more dangerous than the West's clash with Russia over Ukraine.

Whether or not the wheels really are falling off the Chinese economy remains to be seen, but the discussion has crept into the market. You can smell the beginnings of fear.
Russia is committing economic suicide, there is a massive corruption scandal in Turkey, and capital outflows from China threaten to have huge ramifications.
If the US dollar were to strengthen drastically at this point, we would go straight into a global recession.
  • Fixing Ukraine's Economy (New York Times Editorial Board) Ending corruption and floating the currency (it has been pegged to the U.S. dollar) are two of the biggies.
  • Why Is Ukraine’s Economy Such a Mess? (Justin Fox, Harvard Business Review) In one word: Kleptocracy. As a result a few in Ukraine (mostly Russians) have amassed tremendous wealth but the bulk of the country has not progressed from where they were at the end of the Soviet Union.

growth-russian-satellites-1992-2013

  • China Doubles Yuan’s Trading Band Giving Market Greater Role (Fion Li, Bloomberg) The China government has opened the trading range for the yuan to 2% from the previous 1%. Lu Ting, head of greater China economics for Bank of America, is quoted as saying that the one-way bet on yuan appreciation is over and that volatility will be increasing for exchange rate.
  • China’s Big Four Banks See $70 Billion Vanish From Stocks (Ye Xie and Weiyi Lim, Bloomberg) The market has never valued the biggest Chinese banks at the current low valuation, even during the financial collapse of 2008. Market seems to think that they are in trouble with slowing growth in the economy and rising bad debts.
  • China Bond Risk Exceeds Ireland as Defaults Unavoidable (Yumi Teso, Liau Y-Sing and Fion Li, Bloomberg) Repeated from Saturday's WWRT (15 March 2014) list. Chinese government backed debt now has default premiums (CDS - credit default swaps) double those of Japan and France and are even larger than those for Ireland.
  • China and the Dangers of Debt (Atif Mian and Atif Sufi, House of Debt) From 2008-2013 China has seen an unsustainable expansion of domestic credit and a dramatic decline in the current account (which would also extrapolate to unsustainable).

china-credit-vs-current-account


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