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What We Read Today 07 July 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

U.S.

EU

  • After the ‘No’ Vote: What Can the EU Do About Greece Now? (Bloomberg)  Euro-area leaders and finance ministers met today (Tuesday) in Brussels to discuss how Greece can stay in the common currency. It was the first round of serious talks since Greek voters resoundingly rejected the terms of a prior bailout offer that expired on June 30.  But what can be done is far from an easy question.  See next article.  See also European economist Constantin Gurdgiev's discussion at GEI Analysis:  What's Next for Greece?

Greece

  • Greece to Make Official Request Keeping Chances of Aid Alive (Bloomberg)  Greece steered clear of an immediate collision with creditors by promising to put its economic proposals in writing as German Chancellor Angela Merkel warned that “only a few days” are left to reach a deal.  Euro-area finance chiefs will discuss Greece’s request on a conference call Wednesday morning, the first step toward restarting negotiations that Greece broke off late last month. The rapprochement lessens the risk that the European Central Bank will pull the plug on Greek banks, which are bleeding cash and have been shut for seven business days.  See also What's Next for Greece?
  • Greece fails to offer new bailout plan at summit (The Washington Post)  Greece left its European partners empty handed Tuesday after failing to present written bailout proposals at an emergency meeting in Brussels, dealing a possible setback to attempts at salvaging the country’s financial rescue before banks run out of cash.  The surprise twist further complicated Greece’s last-ditch effort to renew the flow of European funds and keep the country from slipping deeper into financial chaos, which could lead to an exit from the common currency.  The Troika Institution expected a proposal to further cut pensions.  See also next article.
  • Yes, Greece’s pension system is bloated, but pensioners are still broke (Quartz)  Ahead of Sunday’s referendum, prime minister Alexis Tsipras vowed to deny any further cuts to Greece’s pension system, something creditors have said might be necessary for Greece to repay its debts. But monthly pensions have already shrunk to an average of €833 from an average of €1,350 in 2009, according to the Greek Labor Institute (INE-GSEE), the organization behind Greece’s largest union.  That's a 38% cut in nominal terms over a period of time when the accumulated inflation is approximately 5%.  So in inflation adjusted terms the average pension has shrunk by 45%.  A report compiled by The Wall Street Journal’s Matthew Dalton found that, when adjusting data for demographic makeup and looking at pension spending as a percentage of GDP, Greece actually spends less on citizens over the age of 65 than Luxembourg, Austria, the Netherlands, France, Finland, Belgium, Ireland, Italy, or Germany. It also spends less than the Eurozone average.  Econintersect:  We could not find one word in this article to explain the use of the word 'bloated' in the title.
  • How a Chaotic Grexit Could Wipe Out $1.4 Trillion in Global M&A (Bloomberg)  The fallout of a Greek exit from the euro could wipe out as much as $1.4 trillion in future mergers and acquisitions, according to a study by law firm Baker & McKenzie.  Another study says a disorderly ‘Grexit’, where the financial impact spreads unconstrained across global markets, could stymie about $250 billion of dealmaking next year in Europe, excluding the U.K., according to the study, which is based on financial modeling by Oxford Economics.

Iran

China

  • Goldman Sachs Says There’s No China Stock Bubble, Sees 27% Rally (Bloomberg)   China’s biggest stock-market rout since 1992 has done nothing to erode the bullish outlook of Goldman Sachs Group Inc.  Kinger Lau, the bank’s China strategist in Hong Kong, predicts the large-cap CSI 300 Index will rally 27% over the next 12 months.  Goldman Sachs is sticking with its optimistic forecast in the face of record foreign outflows, the biggest-ever selloff by Chinese margin traders and a chorus of bubble warnings from international peers.  The call hinges on the assumption that the government will take actions to support the market and will be successful.
  • Nearly 25% of Chinese stocks have stopped trading (CNN)  Over 700 Chinese companies have halted trading to "self preserve," according to the state media. That means about a quarter of the companies listed on China's two big exchanges -- the Shanghai and Shenzhen -- are no longer trading.  Over 700 Chinese companies have halted trading to "self preserve," according to the state media. That means about a quarter of the companies listed on China's two big exchanges -- the Shanghai and Shenzhen -- are no longer trading.

History has seen worse economic collapses than the depression Greece is now experiencing (Elena Holody, Business Insider)  RBS Economics tweeted out a chart that shows the largest falls in real gross domestic product in currently advanced economies since 1870.

real.gdp.largest.declines.JPG


Could the U.S. Government Default on Its Debt? (Jim Bach, Money Morning)  Jim Bach has contributed to GEI. Could the U.S. go the way of Greece and Puerto Rico?  Could the U.S. government default on its debt?  The simple answer is yes, the U.S. government can default on its debt, but not in the same manner as Greece or Puerto Rico.  You see, Greece and Puerto Rico both issue debt in currencies they themselves have no authority to print. Greece's debt is denominated in euros. Puerto Rico's debt is denominated in dollars.  And of course the U.S. creates its own sovereign currency (although it has "sub-contracted" that job to the banks, but that is a story for another day).  The U.S. can default on its debt by choice, not because if cannot find the money.

us.pub.sector.defaults


Breadth terrible, A/D line now below the March lows. (Josh Brown, Twitter)


Gold Falls to 15-Week Low, Silver Sags as Dollar Gains (Debarati Roy and Eddie Van Der Walt, Bloomberg Business)  Gold fell to a 15-week low and silver slumped to the cheapest in seven months after Greece’s economic crisis boosted haven demand for the dollar, eroding the allure of precious metals as stores of value.

gold.2015.july.2.7


35 Years of Gold (Investing.com

gold.1979.2015.july.07


The Price of Gold Adjusted for Inflation (Eddy Elfenbein, Crossing Wall Street)  Chart prepared July 2013.

gold.inflation.adjusted.1967.2013.july


This Chart Shows How CEOs Get Rich by Dumping Cash on You (Alex Barinka, Bloomberg)  Buybacks and dividends are rising to records in the U.S., and for many chief executives, that means a fatter pay check -- even if sales aren’t growing.  Eleven of the 15 non-financial U.S. companies that spent the most on buybacks last year base part of CEO pay on earnings per share or total shareholder return, or both, according to data compiled by Bloomberg. These metrics get a boost when businesses return cash to investors, giving companies like International Business Machines Corp. and Cisco Systems Inc. added incentive to dole out cash to stockholders.  Econintersect: The process is called "maximizing shareholder value" which supposedly aligns executive incentives with shareholder gain.  Based on a 1962 theory by Milton Friedman in Capitalism and Freedom, further specified by Friedman in 1970 (The Social Responsibility of Business is to Increase its Profits) and elaborated by Michael C. Jenson and William Meckling in Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure (1976), the 'beautiful theory' had serious unanticipated risks.  As the concept has played out, it has developed into a process whereby executives have become corporate raiders of their own companies.  By manipulating the stock price for quarterly and annual gains, these executives 'maximize shareholder value' through use of available cash flows to 'reward investors' right now - instead of building company value by investing for future growth.  This is a manifestation of the growth of financialization at the expense of less growth in production of goods and services.  The former (financialization) provides limited jobs, even in the age of increased automation, compared to the latter (production).  If the purpose of the firm is to provide goods and services then maximizing shareholder value is counter productive.  This becomes a philosophical question:  Is the purpose of a capitalistic economy to (a) create rapid wealth accumulation for a few or (b) to efficiently produce goods and services for the needs of society?  If one choses philosophy (b) as operative, then the implementation of maximizing shareholder value that has been experienced is a fraud, what Bill Black has called accounting control fraud.  The question comes down to the purpose of capitalism.  For further reading see also Buybacks at $46 Billion a Month Dwarf Everything in U.S. Market (Joseph Ciolli, Lu Wang and Oliver Renick, Bloomberg Business).

ceo.comp.2014

tim.johnson.bloomberg.video


  • OECD: Broken “Diffusion Machine” Is Slowing Productivity (The Wall Street Journal)  We haven’t stopped having good ideas, but those we do have aren’t spreading as quickly as they once did.  So argues the Organization for Economic Cooperation and Development in its latest attempt to explain the slow growth of productivity in the years leading up to and following the financial crisis. Its suggested remedy is an intensification of global competition among businesses that will cull the old and the weak, and allow newer, more dynamic rivals to thrive and grow.

Inequality between the wealthiest and poorest American neighborhoods grew most substantially in the largest commuting zones between 1990 and 2010, according to a new report by the Urban Institute, a nonprofit and nonpartisan policy group. (Commuter zones are defined by the Census Bureau as urban areas where people work and live.) “High wealth and income in big commuting zones do not trickle down,” says Rolf Pendall, director at the Urban Institute’s Metropolitan Housing and Communities Policy Center and lead author of the report.

  • US appeals court upholds EPA plan to clean up Chesapeake Bay; farmers call it a power grab (Associated PressU.S. News & World Report)  The 3rd U.S. Circuit Court of Appeals on Monday approved a federal plan to limit pollution in the Chesapeake Bay despite objections from farmers, builders and others who accused the Environmental Protection Agency of a power grab.  The ruling upheld restrictions on farm and construction runoff and wastewater treatment, and has the support of environmentalists and officials in the six states in the Chesapeake Bay watershed.


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