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.
E-cigarettes contain 10 times amount of carcinogens: Japan research (Agence France-Presse, MSN News) A new research report finds that ENDS (Electronic Nicotine Delivery System) may be far more hazardous to your health than traditional tobacco cigarettes. Only one brand was tested but all e-cigarettes will probably be in the lab very soon.
OPEC Leaves Output Ceiling Unchanged (Wael Mahdi, Maher Chmaytelli and Laura Hurst, Bloomberg) Oil plummeted in price following OPEC's decision to leave oil production limits unchanged. Brent crude, which is traded in London, dropped by as much as 8% to prices below $75. (This is not shown in the graph below.) At 4 pm the price for Brent in London was $72.94. U.S. oil (WTI, West Texas Intermediate benchmark) dropped below $70, last reported at $69 in New York. See also articles 'behind the wall' (premium content for subscribers).
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Oil is Crashing (Myles Udland, Business Insider) After Thursday's OPEC meeting resulted in the oil cartel announcing that it will not cut production, crude oil broke $70 for the first time since June 2010. The decline amounted to a 24-hour drop of 6%. Brent crude, the European reference, dropped more than 8%. See more about the consequences of falling oil prices further down below.
New Mortgage Lending Drops to 13-Year Low (Nick Timiraos, The Wall Street Journal) Not only is mortgage lending a a 13-year low it never fell faster over six quarters during the housing bubble collapse 2006-2009 than it has fallen the most recent six quarters. For more U.S. housing data see U.S. Housing Market Tracker (Renee Lightner, Andrew Van Dam and Nick Timiraos, The Wall Street Journal)
Warren Buffett Is Dumping Stocks out the Backdoor (Wolf Richter, Wolf Street) Warren Buffett is getting rid of long-held shares of publicly traded companies and exchanging them for privately held shares for which Berkshire Hathaway has 100% ownership. Ins some cases the shares disposed have gains of 1,000% (10X) or more, but there is no capital gains tax because they are exchanged for ownership of a former division or subsidiary of the parent company for which shares are surrendered. This amounts to an exchange for an "equivalent asset" (a "like-kind" exchange) under IRS rules. An example discussed in this article involves the exchange of $4.7 billion in Procter & Gamble shares for full ownership of the company's Duracell unit. As part of the deal P&G will include $1.8 billion in cash on the Duracell balance sheet, in effect reducing the accounting cost for Berkshire to $2.9 billion with the P&G infusion to Duracell of $1.8 billion. The Berkshire basis for the P&G shares "sold" is estimated to be $336 million. That is a tax-free exchange (really tax deferred) liquidating what would otherwise have been a $4.364 billion taxable sale.
The Fed concerned about "importing" disinflation (Walter Kurtz, Sober Look) With everyone else in the world easing the Fed cannot raise rates to a level that the economy can support because if would accelerate the strengthening of the dollar already aggressively underway and produce an unwanted level of disinflation. The U.S. does not exist in a vacuum.
Asian Infrastructure Investment Bank: Myths, Vested Interests, Reality (Cecilia Tortajada and Asit K. Biswas, Asia Century Institute) The new China-led Asian Infrastructure Investment Bank (AIIB) has seriously ruffled the feathers of the American and the Japanese governments and created turbulence in the cosy and smug world of the World Bank and ADB (Asia Development Bank). The AIIB will serve at least five objectives for China. First, the country could invest part of its foreign reserves of US$3.9 trillion on commercial terms rather than putting them in US Treasuries where the real value is shrinking. Secondly, it will contribute to the internationalization of the yuan. Thirdly, it will help secure contracts for Chinese firms and thus boost employment opportunities at home. Fourthly, as China has funded numerous infrastructure projects all over the world through China Development Bank and Exim Bank, some of which have created local resentment, there will likely be much less such animosity when the funds come from a regional multinational bank. And, fifthly, it will boost China's influence internationally and significantly enhance its soft power.
Japan Sees Effects of Massive QE (Walter Kurtz, The Daily Shot email, no url)
Bill Gates' solution to income inequality (Chris Matthews, Fortune) Gates says we should have a progressive consumption tax and tax away large estates. Calculate consumption as earnings minus savings, start with a 10% bracket and scale to a very high level, perhaps even 100%. If there were a basic exemption of $30,000, a family with $50,000 income and $5,000 savings would have $15,000 taxable consumption and pay $1,500 a year in taxes. A family with $1.03 million income and $500,000 in savings would pay $165,000, if brackets were as below*. A family with high income largely reinvested in the economy would pay much lower taxes than a high income family spending income on mansions, yachts and other items of conspicuous consumption. And a graduated estate tax would prevent the multigenerational accumulation of uber-wealthy rentiers. See also next article.
*($0-$50,000, 10%; $50,000-$100,000, 20%; $100,000 -$200,000, 30%; $200,000-$500,000, 40%; $500,000 - $1 million, 50%; $1 million - $5 million, 70%; $5 million to $10 million, 80%; and above $10 million, 90%.)
Sustainable Development Economics (Jeffrey Sachs, Project Syndicate) The current economic direction in the developed world is not sustainable because concentration of wealth weakens the overall system that created it. Sachs described the problem:
Free-market economics leads to great outcomes for the rich, but pretty miserable outcomes for everyone else. Governments in the United States and parts of Europe are cutting back on social spending, job creation, infrastructure investment, and job training because the rich bosses who pay for politicians' election campaigns are doing very well for themselves, even as the societies around them are crumbling.
The problem with both free-market and Keynesian economics is that they misunderstand the nature of modern investment. Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model).
Sachs thinks the solution will be attained when the proper emphasis is placed on what he calls the six kinds of capital goods: business capital, infrastructure, human capital, intellectual capital, natural capital, and social capital. Sustainable development will occur when the free-market fundamentalists and the Keynesian theorists both come to realize that both public and private investment is needed for balance. See also preceding article.
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