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What We Read Today 05 February 2015

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.

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Staples agrees to buy Office Depot for $6.3 billion (Yashaswini Swamynathan, Reuters, MSN Money)  The No. 1 U.S. office supplier,Staples (NASDAQ:SPLS), agreed to buy nearest rival Office Depot Inc (NASDAQ:ODP) in a $6.3 billion cash-and-stock deal to better compete against online and big-box retailers - read Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT).  The deal will value ODP at $11 a share (based on SPLS closing price 02 February), a premium of 44% over its closing price 02 February 2015 (Monday).  Questions exist about anti-trust clearance from the FTC (Federal Trade Commission) - see next article.


Office Depot-Staples Tie-up Would Test How Regulatory Thinking Has Evolved (Brent Kendall, The Wall Street Journal)  Nearly 20 years ago the FTC (Federal Trade Commission) succeeded in blocking a previous merger attempt between Staples (NASDAQ:SPLS) and Office Depot (NASDAQ:ODP) on anti-trust grounds.  Today significant competition in the office supply space from Amazon (NASDAQ:AMZN), Target (NYSE:TGT) and Walmart (NYSE:WMT) are likely to overcome any questions about control of the market.  See next article.


For Staples and Office Depot, a Merger of Equal Problems (Paul Vigna, MoneyBeat, The Wall Street Journal)  Both companies have had falling sales in recent years.  Peak sales for Office Depot came in 2007 and for Staples it was 2011.  According to this article, loss of competition can not be a concern because the two companies today combine for only 6% of the office supplies market.  Here is an excerpt:

This isn’t a deal that’s being executed from a position of strength, and the benefits being touted – about $1 billion worth of cost cuts and promises of new strategies to boost sales – seem relatively tame. An FTC report from the time of the 2013 tie-up of Office Depot/OfficeMax – itself a combination of two struggling companies – made it clear that these companies are not in control of their market anymore.


Articles about events, conflicts and disease around the world

Iceland

Greece

Serbia

Saudi Arabia

Iraq

Ukraine

India

Central Banks in India and Australia Take Steps to Lift Growth (The New York Times)  India cuts bank reserve requirements just over a week after cutting interest rates.

China

North Korea

Brazil

Canada


Greece: Think Flows, Not Stocks (Paul Krugman, The New York Times)  Krugman says that the Greek national debt is an accounting fiction.  He says that because if it is given an accounting status the implication is that it is an amount that will be repaid.  The Greek national debt will never be repaid.  The austerity forced on Greece by the "Troika" (The ECB, the EU and the IMF) has the country producing a fiscal surplus of 4.5% of GDP.  The idea is that if that amount of money is taken out of the Greek economy through taxes the debt will be reduced.  But the problem is that running a fiscal surplus necessarily reduces GDP, perhaps by even more than the debt is reduced.  (Krugman refers to a multiplier which is the ratio between size of the fiscal balance and the GDP change.)  And also, debt is reduced by less than the surplus because interest on the debt is paid out of the surplus.  Krugman's point is that if the rate of surplus accumulation was slowed the benefit to the Greek economy would be substantially more than than the amount of austerity removed from the fiscal balance.  He uses a multiplier of 1.3 for discussion purposes.

This is a fact that has been observed by Steve Keen for many years:  Aggregate demand = the sum of GDP plus the change in debt.  Keen points out that this means that the rate of change of aggregate demand = rate of change of GDP + the second derivative (acceleration) of debt.  For an example of Keen's analysis see (from 2010):  Deleveraging with a twist (Steve Keen's Debt Watch).  For a more detailed analysis from 2011 see Modeling a Multisectoral Economy (Steve Keen, GEI Analysis) which contains a lengthy bibliography including Keen's publications on the functional structure of aggregate demand (AD) back to 1995.

Perhaps the simple differential equations will be a clearer statement to some.

AD = GDP + d(Debt)/dt

d(AD)/dt = d(GDP)/dt + d^2(Debt)/dt^2

What the second equation above says is that, if the rate of debt growth is negative, a slowing of the negative growth (a positive acceleration) increases aggregate demand even as the debt contraction continues at the slower rate.  This is what Krugman is saying although he speaks with less specificity in generalizing the effect.  For some data see the next three articles.


Greece: National debt from 2004 to 2014 (in billion euros) (Statista.com)  Note:  Statista is a daily contributor to GEI.  The trend is down for the Greek national debt since 2011.  From 2011 to 2014 the national debt has shrunk by 10.8%.

Statistic: Greece: National debt from 2004 to 2014 (in billion euros) | Statista
Find more statistics at Statista


Greece GDP (Trading Economics)  Greek GDP has been declining since 2009.  Since 2011 the decline in GDP has been 17.9%.  Greece has been loosing ground in debt to GDP ratio even as debt has declined because GDP has come down faster, by a ratio of 1.66 for these four years.  So perhaps Krugman's multiplier of 1.3 (article discussed above) is too low?

greece-gdp-2006-2014


Three myths about Greece's enormous debt mountain (Mehreen Khan, The Telegraph)  The three myths discussed are (1) the Greek debt can never be repaid; (2) Greece is paying punitive interest; and (3) Greece won't recover without debt forgiveness.

On the first myth, never is a very long time.  Khan doesn't say it exactly this way but we loosely paraphrase:  Never say never.

For the second myth, Greece actually is in a much better interest payment burden situation than some other eurozone countries.

euro-debt-interest-payments

Regarding the third myth, Khan quotes Krugman's calculations to demonstrate that accommodative fiscal action can enable Greece to recover without further debt forgiveness.  The conclusion of the article:

None of this is to deny that Greece would hugely benefit from a significant debt cancellation. But the politics of the eurozone means that this is virtually impossible.

However, there do seem to be other ways that Greece could start tackling its enormous debt mountain.

There is an interesting graphic included in the article showing the distribution of Greek sovereign debt.  The biggest chunk is owed to the Eurozone, which we take to mean Eurozone sovereigns and the largest position would be with the biggest exporter, Germany.  That should make clear why Germany is playing hardball here.  Note:  The majority of Eurozone positions are through the EFSF (European Financial Stability Facility).  See next article.

greek-debt-holders


 Greece Seeks Third Debt Restructuring: Who’s on the Hook? (Nikolaos Chrysoloras, Bloomberg Business)  Here is a different breakdown of the Greek sovereign debt than seen above:

Germany's stake in the EFSF is 27.1% (Wikipedia).  From what we have discussed so far, it is not clear how much more German sovereign interest in Greek debt is held beyond the €38.4 billion with the EFSF (27.1% of €141.8 billion).


Don't miss GEI News today:  Greek Negotiating Problem Explained in One Picture


Other Economics and Business Items of Note and Miscellanea

The Problem With Middle-Class Populism (The New York Times)  The problem?  The middle class is getting smaller.

10 Tax Facts the IRS Doesn’t Want You to Know (The Fiscal Times)  You may know many of these but the list is still worth a read-through.

FCC Chairman Tom Wheeler: This Is How We Will Ensure Net Neutrality (Wired)  FCC would regulate internet as a utility.

Tillis’ hands get a second look after comments on washing them (Raleigh News & Observer)  The context:  Tillis said that restaurants should be given a choice:  Require employee hand washing or post a sign saying they didn't.  Then the "free" market could decide the value of hand washing.  Isn't simply requireing hand washing simpler.

AG's Office: Raped teacher should have known better (Arizona Republic)

The Polygraph Has Been Lying for 80 Years (The Daily Beast)



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