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What We Read Today 21 May 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.

  • China to delay Russia gas deal in blow to Putin (Lucy Hornby and Jamil Anderlini, Financial Times) Russian president Vladimir Putin has been trying to show he has alternative markets for Russia's energy exports as the Ukrainian crisis drags on. But China is not jumping for the bait. PetroChina, the listed subsidiary of state-owned China National Petroleum Corp, said Wednesday that a deal to import natural gas from Russia's Gazprom would not be signed "in the near future". It had been reported that Putin hoped to announce such a deal during a state visit to Beijing this week.

  • Credit Suisse Chief Sees Little Impact From Tax Evasion Plea (Jenny Anderson, DealBook, The New York Times) Credit Suisse pleaded guilty to tax evasion, a felony and paid $2.6 billion in penalties. Their CEO said the bank has seen no impact on their business. So it seems this is just business as usual.

Ritholtz-video


Today there are 11 articles discussed 'behind the wall'. There is a substantial discussion of Steve Keen's latest analysis of the proposed Australian austerity budget.

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Yesterday's plunge generated the first bearish impulse leg we've seen on the daily chart in nearly six weeks. But is it any more threatening than the one recorded in early April, which reversed precisely on target to produce a rally that hit new record highs? My gut feeling is that, yes, the stock market's second consecutive failure to achieve more than a marginal new high is going to weigh more heavily on investors' minds than the first.

dow-2014-may-20-600x360

  • America dumbs down (Jonathon Gatehouse, MacLeans) The rise of idiocy is well documented in this article.
  • I Don't Want to be Right (Maria Konnikova, The New Yorker) Why do people persist in believing things that are not true? Even things that are proven false? Great follow-on article for the two above.
  • The Harder They Fall (Dave Gonigam, 5 Min. Forecast) Remember when the Baltic Dry Index was all the rage as an economic indicator? Well, Shakespeare described it accurately: "Full of sound and fury and signifying nothing."

baltic-dry-history

  • What Television Will Look Like in 2025, According to Netflix (Issie Lapowsky, Wired) According to this article, in another ten years you won't be selecting your TV shows. You will just turn on your TV, computer, Kindle or whatever and Netflix will present what you would have selected had you scanned the guide. Ick!!!!
  • The Net Neutrality Wake-Up Call (Ben Thompson, stratechery) Hat tip to Barry Ritholtz, The Big Picture. The first straight-forward outline we have seen of the economic factors at play in the latest kerfuffle over net neutrality (discussed repeatedly here in the past week and in a couple of GEI News articles).
Our debt at the moment is probably around about $300 billion so that's... about two months of our activity. Is your personal debt less than two months of your activity? That's what we are as a nation. You know, we've got debts which are less than one year of our total activity. I mean that's not difficult. ("Budget based on a con: Clive Palmer")

Keen explains why the velocity of money concept promulgated by Milton Friedman has been misapplied with the result being that it is essentially that both the velocity and the quantity of money are related related to output of an economy. He then points out where money comes from:

There are basically three independent methods to increase the money supply:

  • The government can run a deficit;
  • The country can run a current account surplus; or
  • Banks can lend money to households and businesses.
Econintersect comment: This comes from elementary sectoral balance accounting which we have discussed here 'behind the wall' previously. Since quantity of money is equal to the sum of the three factors above and since Australia runs a persistent current account deficit oscillating between $9 billion and $16 billion over the most recent 48 months (which for this discussion can be taken as a constant $12.5 +/- $3.5 billion, a reduction of the government deficit (Hockey budget) requires an increase in private debt to maintain economic activity at current levels. This is by accounting identity. (All money in Australian dollars.)

So Keen says that Australia has a choice, and the Abbott government has chosen the one (austerity) where the outcomes are (1) growth through increased private sector indebtedness or (2) economic contraction. He suggests that a possible middle ground could be some of both (going further in debt for negative growth).

After a discussion of two hypothetical paths for the Australian government budget: (1) the Hockey/Abbott proposed budget requiring private debt to grow faster than GDP grows (pink 1.6% Trend in graph) or (2) maintaining the current government deficit of 2.8% of GDP which would allow the extreme private sector debt to continue to delever without an economic contraction (brown -1.0% Trend in graph). Keen's conclusion:

Australia could avoid this fate [Euro periphery] with Hockey's budget, but only if the private sector -- and primarily households -- continues to borrow. If they don't, then the monetary equation will be balanced by either a lower rate of economic growth, or a higher budget deficit than planned, or both.

Rather than setting Australia up for future growth, the Coalition budget policy puts the Australian economy in danger of contraction, and for no good reason.

australia-hypothetical-debt-projections

  • Lloyd Blankfein on the future of Goldman Sachs (Mark DeCanbre, Quartz) The Goldman Sachs CEO says that the firm will stay the course as a commodity trading, bond trading, investment banking stalwart. This is after all other big Wall Street banks have started dismantling all those businesses. Subtitle of this article: Last Investment Bank Standing.

prechter-video


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