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 (and sometimes longer ones) 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.
Xi and Abe in landmark meeting (Demetri Sevastopulo, Financial Times) After an icy two years of disputes over islands in the East China Sea Japan and China have "agreed to disagree" and have moved on to have a meeting between Prime Minister Shinzo Abe and President Xi Jinping, the top leaders of the two countries.
" ... stable and healthy development of Sino-Japanese ties is in line with fundamental interests of people in both countries as well as the common aspiration of the international community."
How well does the CPI measure individuals’ health care burden? (Jonathan Bernstein, Sober Look) Bernstein says that CPI estimates of household medical expenses have likely understated the costs for some time. The estimation of CPI-Med to be 5.825% of total consumer expenditures has two implications: (1) About 2/3 of medical expenses (17% of GDP) are employer paid; and (2) those who do not have employer paid health care have inflation seriously underestimated to the extent that medical inflation exceeds overall inflation. In the second case the last few years have had medical inflation relatively close to overall inflation so the impact has been less than 6-10 years ago when medical inflation sometimes doubled overall inflation. Bernstein says the value of CPI-MED in coming years will reflect how quickly employers transfer more and more health care costs to employees.
Recent articles about Scotland Independence and Similar Movements
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U.S. producers answer Saudis challenge on price (Phil Flynn, Futures Magazine) The U.S. is responding to what they are calling oil "dumping" by Saudi Arabia. Among possible actions are resumption of replenishing the U.S. SPR (Strategic Petroleum Reserve). The U.S. has also mentioned that a tax on discounted oil might be applied to discourage the "dumping". The talk on Wednesday morning produce some stability for the rest of the week. See OPEC preparing for price war (Phil Flynn, Futures Magazine).
China’s high-speed debt train picks up pace (Peter Cai, China Spectator) Cai has lots of questions after recent travels across China. He reports lots of new and empty buildings. This causes him to raise flags because this overinvestment was accompanied by a six-fold increase in local government debt from 2008 to 2013, to rmb 20 trillion ($3.8 trillion). There are maturity mismatch problems in handling this debt and the revenue for local governments is highly dependent on land sales which have to be drying up with the current real estate bubble deflation. He writes:
"... a number of factors help put the severity of the local government debt problem into perspective. There is a mismatch in maturities, the debt exposes the country's banking system and local governments are heavy reliant on land sales for revenue.
Unlike many other municipal governments in developed countries, Chinese local governments below provincial levels are not permitted to raise debt. Consequently, local governments have turned to so-called financing vehicles to raise money and it's estimated there are now around 11,000 of them.
They have sourced most of their funding from Chinese banks. These state-owned financial institutions are responsible for providing 50.8 per cent of all local government debt, 71.6 per cent of explicitly guaranteed debt and 61.9 per cent of implicitly guaranteed debt.
Because Chinese banks have been clamping down on excessive exposure to local government debt lately, many local governments have been forced to borrow from the shadow banking sector, which typically charges 10 percentage points more than banks.
So Chinese banks are heavily exposed to the local government debt both through formal lending as well as off balance sheet activities.
Apart from an over reliance on the banking sector, local governments are also dependent on land sale revenue to balance their books as well as to service their ever-growing debt."
China: Yield Curve Handwriting on the Wall (Walter Kurtz, The Daily Shot email, no url) Interest rates in China are telling a story far different from the GDP growth rate which is still above 7%. Inverted yield curves are a necessary but occasionally not sufficient predecessor to recessions. In developed countries recessions are accompanied by two quarters of negative GDP growth. If China's growth dropped to 4% or 3% would that actually feel like a recession after the country has gotten used to growth rates twice as high and more? This looks ominous: Not only is the yield curve inverted but the negative slope is increasing.
China's rebalancing is not what it seems (Peter Cai, China Spectator) Cai says that when th deflation in prices for manufactured goods and the inflation in prices for services are properly accounted for, the services share of GDP (an essential major component of the rebalancing away from investment and exports to greater consumption) is only increasing at annual rate of 0.4% over the past four years, not the 2.9% increase indicated by nominal figures. For more on deflation in China, see GEI News over the past 15 months, here and here and here and here. But President Xi Jinping doesn't see any problems: China's economic risks 'not that scary': Xi (Channel News Asia)
Europe Redefines ‘Stress’ (Raul Ilargi Meijer, The Automatic Earth) Hat tip to Yves Smith, Naked Capitalism) Very simply the numbers don't add up. The eurozone bankers can keep running their computers but the results will never balance. The system has removed the balancing mechanism as this excellent article describes.
U.S.: First-time Home Buyers are Fading (Walter Kurtz, The Daily Shot email, no url) The U.S. housing market builds from the bottom up, starting with the first-time home buyer increasing the level of demand. First-time home buyers are declining and this will dampen the move-up buying pressure in the U.S. market.
Other Economics and Business Items of Note and Miscellanea
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