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What We Read Today 28 April 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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Articles about events, conflicts and disease around the world

Global

  • Vatican presses politicians on climate change (BBC News)  The Vatican Science Academy has challenged politicians to end their "infatuation" with a form of economic growth that is ruining the Earth.  Using GDP as a measure of economic growth is ignoring harm caused by business practices, according to the Vatican.  An Cambridge Economics professor, Partha Dasgupta, told the academy's climate conference in St Peter's Basilica:

"GDP is a disgraceful index because it does not count depreciation of our assets - including damage to Mother Nature, the most fundamental asset we have."

U.S.

  • Here's Why Democrats Don't Believe Obama's Trade Promises (Huffington Post)  A key element in Pres. Obama's appeal for support for TPP (Trans Pacific Partnership) is that the free trade arrangement will include "robust, enforceable labor protections".  The idea is that downward pressure on wages that have resulted from previous trade deals will be reduced.  Labor unions aren't buying the pitch.  Their claim is the government does not enforce international labor agreements in already existing treaties.  So the unions say what's in the treaty doesn't matter if labor protections are not enforced.
  • Homeownership rate lowest in 25 years (Diana Olick, CNBC)  Home prices are rising, and home ownership is falling. How can that be?

"There's no excuse for the kind of violence we saw yesterday.  It is counterproductive. When individuals get crowbars and start prying open doors to loot, they're not protesting. They're not making a statement. They're stealing. When they burn down a building they're committing arson, and they're destroying and undermining businesses and opportunities in their own communities that rob jobs and opportunities from people in that area."


Greece

Saudi Arabia

Iran

  • Iran Boarded Cargo Ship Inside Own Waters, Pentagon Says (Bloomberg Business)  U.S. stock markets were down and oil prices surged this morning when news bulletins announced a U.S. ship had been seized in international waters by Iran.  Later it was determined that it was an Iranian ship seized in Iranian waters under a court order, part of a domestic legal dispute between the ship operator and an Iranian port authority.

Russia

Indonesia

Guatemala

Nepal

  • Nepal earthquake: Death toll passes 4,600 as rescuers face challenges (CNN)  Injury total also rises by another thousand to 9,000.  Numbers are expected to get worse in the coming days.
  • Choppers ferry injured in Nepal; new mudslide hits village (Associated Press, Yahoo! News)  Helicopters crisscrossed the mountains above a remote district Tuesday near the epicenter of the weekend earthquake in Nepal that killed more than 4,600 people, ferrying the injured and delivering emergency supplies.  A post-quake avalanche and mud slide has occurred which obliterated a village of 250 people, their fates entirely unknown at this point. 

Debt and (not much) deleveraging (Richard Dobbs, Susan Lund, Jonathan Woetzel, and Mina Mutafchieva, McKinsey Insights & Publications)  Rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17% from $142 trillion in 2007 to $199 trillion in 2014.

change.debt.vs.debt.gdp

1  Debt owed by households, non-financial corporates, and governments.
2  2Q14 data for advanced economies and China; 4Q13 data for other developing economies.

SOURCE: Haver Analytics; national sources; McKinsey Global Institute analysis

The graph has been repeated below with added annotation.  We have been hesitant to do so because of questions about how meaningful the data is.  We have these reservations:

  • The data is a mixture of countries with sovereign currency and those that use a currency they do not control.
  • The calculation of total debt for each country is in question because of the number for the U.S.  Shown is about 240% debt/GDP (total for public, private household and non-financial corporates).  The U.S national debt/GDP is 101%.  Total debt for state and local governments, plus households, non-financial businesses and financial businesses is about 225% of GDP.  Of this about 78% of GDP is the total of financial business debt.  So, from these numbers the 240% read from the Mckinsey graphic should about 248% of GDP.  Close enough for horseshoes - but see the next two concerns.
  • Why is not the more than $14 trillion of financial system debt included?  This may be the highest risk component of the debt.
  • Why is the total U.S. national debt used in the analysis.  The debt one government agency owes to another should not be included; only the debt owned by the public is a "burden" and that is about $13 trillion or approximately 73% of GDP.

We will dig into this some more and give a further report in the future.

With those reservations we have made the following annotated version of the graphic which shows that as the data moves to the higher debt/GDP ratios, the rate of increase of debt/GDP increases.  This suggests a debt trap, if you will, which produces an accelerating spiral of more rapid debt increase once a country gets above a certain debt.GDP ratio.  The tipping poi9nt for the acceleration would appear to be between 200% and 300% (possibly) and above 300% (definitely).  A major caveat must be stated here (in addition to the reservations above).  The tipping point hypothesis is predicated on the data from a small fraction of the total number of countries in the data base (less than 15%).

change.debt.vs.debt.gdp.annotated

This would suggest that the higher regions of debt/GDP ratio have a faster rate of growth of additional debt.

We leave this at this point - but suffice it to say that we expect some qualifications for this conclusion may be in order once the data is examined in more detail.


Other Economics and Business Items of Note and Miscellanea

It's Been a Great Year to Invest In Junk-Rated Energy Bonds (Bloomberg Business)  It’s been a pretty great year to invest in U.S. junk-rated bonds of energy companies, with 6.4% return year-to-date in 2015, the best return for the period since securities rebounded from the credit crisis six years ago.  

If Only Robert Reich Actually Understood The Economics Of Labour And Wages (Forbes)  Tim Worstall criticizes Robert Reich analysis of labor compensation because Reich did not include benefits in compensation.

SolarCity: Economics Effectively Unviable (Seeking Alpha)  This is an incomplete (and possibly not competent) analysis, which is made clear by the following brief excerpt:

Despite the higher cost of solar energy, the company delivers cheaper cleaner energy primarily through "exploiting" ineffective tax loopholes, archaic energy policies, and antiquated utility rate structures.

Solar energy now has a competitive cost for generating electricity without any tax credit subsidy for many U.S. markets and will be the low cost source in virtually all markets within the next couple of years.  Why is it that many U.S. utilities are investing billions in solar energy farms?  We just gave you the reason.  Now it may be that there are problems with the Solar City business model going forward, but high cost for solar electricity is not one of them.

Millennials Are Moving Out of Basements and Into Apartments (Bloomberg Business)  After shacking up with family or friends for the past few years, millennials finally seem to be striking out on their own.  More than 3 million new households were formed in the two quarters ending 31 March 2015.

US.household.formation.2006.2015

Housing Recovery Slow and Steady in 2015, Will Pick Up Pace Next Year (National Association of Home Builders)  Solid employment gains, attractive mortgage rates, a growing economy and pent-up demand will help keep the housing market moving forward throughout 2015 and into next year, according to housing economists.  They say a key demographic to help jump-start this process should come from the millennials.  See previous article.

Duke Now: Analyzing the Blue Devils’ reloaded basketball roster  (Raleigh News&Observer)  Three weeks ago Duke won the NCAA national championship in basketball.  Then two weeks ago four of their starters left.  Now they have a new team.


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