How the world sees Greece
The great crime scene of Greece Morning Star Online But recently he has seen something altogether different, something he thought was impossible in Greece: children picking through school trash cans for food; needy youngsters asking playmates for leftovers; and an 11-year-old boy, Pantelis Petrakis ... |
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Reburial of former king and other members of Yugoslavian royal family takes place decades after their deaths in exile
Hundreds of mourners attended the reburial on Sunday of the former king Petar II Karadjordjevic and other members of the deposed Yugoslavian royal family, decades after their deaths in exile.
Serbian leaders attended the event – seen as an important act of national reconciliation – at the Oplenac royal chapel in the southwestern town of Topola.
The bodies of Petar, his wife Queen Aleksandra, mother Queen Maria and brother Prince Andrej, had been exhumed from cemeteries in the US, Britain and Greece.
The four coffins were draped in Serbian royal flags and escorted by Serb army guardsmen.
Petar succeeded his father King Aleksandar in 1934, who was assassinated in Marseilles, France, by Croatian and Bulgarian nationalists.
After Nazi Germany invaded Yugoslavia in April 1941, Petar fled the country and spent the most of the second world war in exile in Britain. After the war, Petar was proclaimed a traitor by the communists, who abolished the monarchy.
His property was confiscated and he remained exiled until his death in the US in 1970.
Among those attending the state funeral were the Serbian president, Tomislav Nikolic, Prime Minister Ivica Dacic, Patriarch Irinej and the head of Serb Orthodox church.
The ceremony was an act of reconciliation between those Serbs who supported the royal family during the second world war and those who backed the communist forces.
Tens of thousands died in Serbia between 1941 and 1945 in a civil war between royalist guerrillas and communist partisans who also fought the German occupiers. The two camps are still at odds.
"More Serbs were killed by the Serbian hand than by the hand of the occupier," Nikolic said in a eulogy. "We cannot, we must not allow divisions and injustice anymore."
After the war, royalist supporters were killed or persecuted by the government of Josip Broz Tito.
Petar's son, Crown Prince Aleksandar Karadjordjevic, and his family were allowed to return to Serbia in mid-1990s by Slobodan Milosevic as Yugoslavia disintegrated .
"This funeral was the fulfilment of historic justice. They had to be brought home," said Zoran Kotarac, a mourner from the village of Slankamen, north of Belgrade.
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Turkish Warship Passed Eight Greek Islands Greek Reporter The Turkish warship, coming from the port of Smyrna, entered national territorial waters of Greece between the Greek islands Mykonos and Naxos, officials said. It next moved in a westerly course between the islands Sifnos and Serifos, in north ... |
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Optimism returns as Greece sees light at the end of tunnel Financial Times The new mood is bolstered by positive signals in official economic statistics. Latest figures suggest Greece is on track for modest growth of 0.6 per cent next year after a six-year recession that has seen national output shrink by almost one-third and ... |
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THE CALIFORNIAN
One Friday morning this spring, I drove to Washington’s Dulles airport at dawn, to catch the first nonstop flight to San Francisco. When I got off the plane six hours later, the morning sun still slanting through the terminal windows, my cellphone began ringing practically as soon as I turned it on.
“Okay, you’re here!” the man on the other end of the call said, cheerily. I’d been trying to arrange a visit to his office for quite a while, and just the previous evening he’d let me know that if I got there in a hurry, he’d have time to talk the next day, as well as over the weekend. As I walked through the airport, he began reeling off turn-by-turn instructions for reaching his office in Oakland in my rental car. “You’ll take the Bay Bridge to the exit for the 580 East and the 24. But don’t go all the way to the 24! That would send you out to Concord. Take the 980 West until the exit for 27th Street, and then …”
It was like a moment from a Saturday Night Live sketch of “The Californians”—which seemed appropriate, since the man I was talking with wasthe Californian, Jerry Brown. Brown began his first two terms as governor in 1974, at age 36, following one Republican former actor, Ronald Reagan. He returned to the office at age 72, following another, Arnold Schwarzenegger. In between he ran for president three times and the U.S. Senate once, all of course unsuccessfully; served eight years as Oakland’s mayor and four as California’s attorney general; and lived in both Japan (studying Zen meditation) and India (volunteering for Mother Teresa). He celebrated his 75th birthday the weekend I was in Oakland, which means that if he runs for reelection next year and if he wins, both of which are considered likely—his approval rating this year has been the envy of other politicians in the state—he could still be governor at age 80. “This is certainly a new identity for Brown, so flighty in his first ‘Governor Moonbeam’ period as governor,” Bruce Cain, a political scientist and an expert on California politics at Stanford’s Bill Lane Center for the American West, told me. “Now he is the most trusted, stable, and reliable leader around.” I asked Kevin Starr, of the University of Southern California and the author of the acclaimed Americans and the California Dream series of books, how Brown was seen in his return to office. “He is now liked,” Starr said. “Eccentric, but liked.”
Life and health are provisional, and within the past two years, Brown has undergone radiation treatment for early-stage prostate cancer (while maintaining his normal work schedule) and had a cancerous growth removed from his nose. But he moves, talks, reacts, and laughs like someone who is in no mood, and feels no need, to slow down. He is nearly a decade older than Bill Clinton but comes across as younger and bouncier.
“I love what I am doing,” he told me once I got to his Oakland office. “I love it much more than the first time. Back then I got bored because we didn’t have big problems. Now I am very enthusiastic. Everything’s interesting, and it’s complicated. There is a zest!” He likes to pound the desk or table as he talks, and this passage was punctuated: love (bang) … love (bang) … zest! (bang bangbang!). Anne Gust Brown, a former Gap executive in her mid‑50s, who became his wife eight years ago and is widely regarded as his most influential and practical-minded adviser, arched an eyebrow from the other side of the room, where she was half-listening while working at a computer. “Ed-mund!” she said smilingly, but being sure to get his attention. (His official name is Edmund Gerald Brown Jr., after his father, Edmund G. “Pat” Brown, who was governor for eight years before he lost to Ronald Reagan in 1966.) “Don’t get yourself too worked up!” As a note on nomenclature: apart from his wife’s occasional joking use of Edmund and my own antiquated sense that I should address him as Governor, every other person I heard speak about—or with—him called him Jerry.
THE MAN
“Jerry to me is still the most interesting American politician,” Nathan Gardels, the editor of New Perspectives Quarterly, in Los Angeles, and a longtime friend of Brown’s, told me. “He is the only one I know who is ruthlessly practical but with a civilizational outlook. Kind of a combination of Erasmus and Machiavelli”—the latter meaning that Brown is highly skilled rather than evilly manipulative.
As a reporter, I have never encountered a politician more willing to talk with, as opposed to talk at, other people than Jerry Brown. “I think as I speak,” he told me early this year, underscoring the obvious, when I met him in Washington. He and his wife were in town for the National Governors Association conference. As I waited for them in the conference-center lobby on a Sunday morning, I saw governors from modest-size states bustle through, each with an earpiece-equipped security detail and a covey of aides. When the Browns arrived, they were alone.
“I find that a lot of people are more invested in position-taking than they are in the inquiry,” he continued. “Generally speaking, I am in the inquiry. I live in the question. People have so many positions, and usually the evidence is not strong enough for them really to be so confident in those conclusions. There are just a lot of things that are not certain.” He rattled off a list of decade-by-decade fads and gimmicks for “saving” America’s struggling school system, most recently No Child Left Behind and the “teacher accountability” movement. “The question you have to ask yourself is, if teacher accountability is really the whole key, how can it be that from Comenius”—a 17th-century European pioneer in education—“through John Dewey and Horace Mann, and going back to the Greeks, everybody missed this secret, and we figured it out just now? I’m skeptical of that—and of you, and Washington, and myself.” This was the “civilizational” outlook Nathan Gardels was referring to. Then, the practicality: “The world is so rich and diverse, and there is this technocratic imperative to impose rules, by small minds.” I realize that on the page this could look airy or pompous. In real conversation, Brown gives a convincing impression of weighing thoughts and evidence as he goes.
“Do you know what ‘metonym’ means?” he asked out of the blue one time. Unfortunately, I didn’t. (To spare you my embarrassment: it’s a name used as a reference for something else, like “K Street” for Washington’s lobbying culture, or “Silicon Valley” for the tech industry.) The surprise, coming from a politician, was that he was actually asking for information rather than testing me or pretending he already knew. “Me neither,” he said after my admission, “but I know it’s very big with the deconstructionists.” I did better when he asked whether I knew where the phrase “no country for old men” had come from. Yes! It’s the first line of Yeats’s “Sailing to Byzantium,” which became the title of a novel by Cormac McCarthy, which was in turn the basis for a 2007 movie by the Coen brothers. Brown said that he was wondering because he’d just talked with a Washington media grandee who used the phrase without knowing that it had any history. “Jerry didn’t know there was a movie,” his wife said.
Another time he was telling me that “deracination,” and the loss of local loyalties like the ones he felt as a fourth-generation Californian, made it hard to create political consensus. “But California was built by deracinated people, who keep on coming here—and America was too,” I broke in, being careful to add “Governor.” “Right, maybe I’m going too far,” he answered, thinking as he spoke. “But …” and he proceeded with a slight revision of his point.
Brown’s State of the State address this year, which he wrote with the help of his wife (he ad-libs most speeches and has no writers or “message people”), included an account of a party of Spanish explorers, led by Gaspar de Portolá, who in 1769 went from Baja California to Monterey Bay. Classing up a speech with historical nuggets is a standard political move. But usually speakers like to imply that the quote from Mark Twain or insight from the Punic Wars is something they’ve known since earliest tutelage rather than something they recently happened across. In speeches and in conversation, Brown emphasizes his ongoing discoveries. “I was just reading about Cicero, and did you know they chopped his head off and put it on a pike—and a lady put a pin through his tongue with a sign saying Enough of his eloquence?,” Brown, who was a classics major at Berkeley, said to me. “I’ve been reading a lot about how screwed-up the Roman Republic was.”
THE STATE
As for the problems Brown and his state are wrestling with, they are America’s problems—but worse. Here we leave the governor for a moment to consider the environment he is working in, which is both emblematic of and surprisingly different from America as a whole.
You can go too far with the idea that California shows how all of America will look a few years from now. The state’s population is already more heavily Hispanic than the U.S. population might ever be: Hispanics, at nearly 40 percent, are about to overtake California’s “non-Hispanic white” percentage to become the largest ethnic group in the state. (Nationwide, Hispanics are about 17 percent of the population.) Relative to the country as a whole, Asians also make up a larger share of California’s population—roughly 15 percent of the state, versus about 8 percent of the country—while blacks and whites represent smaller shares. (California is about 40 percent white and 6 percent black, versus 63 percent and 12 percent, respectively, for the United States.) Largely because of these demographic shifts, the Republican Party, which a generation ago relied on California as the largest element of its Sunbelt base, now barely bothers to mount statewide races except those self-financed by political-novice millionaires like Meg Whitman, who lost badly to Brown in 2010, and Carly Fiorina, who lost badly to Barbara Boxer for the U.S. Senate that same year. In 2012, Barack Obama beat Mitt Romney by 3 million votes in California—and by only 2 million more in the other 49 states combined. In both houses of the state legislature the Democrats have, for now, a two-thirds “supermajority” that allows them to prevail even against California’s version of the filibuster. “The Republicans appear to have no power,” Jerry Brown told me. “Some of them are nice people, but they aren’t needed for any votes [in the legislature], and they don’t participate.”
In other ways tangible and subjective, California is an outlier. Its median income is much higher than America’s—but so is its unemployment rate. Its prison system is large and fantastically expensive. Two of its sizable cities (Stockton and San Bernardino) have filed for bankruptcy. And it has myriad other problems. Still, California is usefully representative of the country in one very important way. What is good, and bad, about America is better, and worse, in its most populous state.
So, what is strongest about America relative to other societies and economies—its ability to attract and absorb outside talent, its university-based research system, its advantages of scale and natural resources, its acceptance of risk and second-chance-taking, its fecundity in creating new companies, industries, and products—is, across the board, stronger still in California. The state’s brand names and the creativity and wealth they signify—Apple and Intel, Google and Facebook, Disney and Fox, Stanford and Berkeley, Sunkist and Napa/Sonoma, the nuclear technologies of Lawrence Livermore and the biotech centers of San Diego—outshine those of most nations. It is one of the few states whose range of economic strengths, from agriculture to manufacturing to mining to services to education to tourism to medicine and nearly every subsector in between, mirrors that of the country.
But what is weakest about America—the squabbling paralysis of the governing structures, the relentless pressure on the middle class, the steady decline of public schools, roads, parks and the simultaneous rise of the public-security state—is weaker and worse in California. Taxes are high, school performance is low, classrooms—and, most glaringly, prisons—are jammed, and the bridges and freeways that, when brand-new, enabled California’s expansion under Pat Brown in the ’50s and ’60s are now crumbling constraints on its potential.
Anyone with ties to California has personal illustrations of this shift, and here is one of mine. As a small-town Southern California schoolchild in the Pat Brown era, I had barely heard of such a thing as a private school, nor an overcrowded road, nor of any reason being in California could be a minus rather than a plus. For my two sons, as they build their businesses and start their families there, “California” has become a metonym for high taxes, rigid bureaucracies, substandard schools and services, and an overall drag on rather than boost for the businesses that nonetheless continue to emerge there. The city government of San Francisco has the manpower to put spray-painted markings around cracked parts of the public sidewalks, and to note which buildings have been tagged with graffiti—but not to fix the problems it identifies. Instead, it sends notices to the owners of homes and buildings saying that they face stiff penalties if they do not repair the sidewalks or remove the graffiti themselves. The kind of urban-dystopia stories I heard from Manhattanites in the 1970s or about Washington, D.C., in the 1980s come from Californians now.
America’s dynamism and ingenuity have kept it ahead of its public-institution paralysis, so far. The same is true, barely, for California. “The idea that people are really going to move their companies to Nevada because of taxes is nonsense,” Paul Saffo, a longtime technology analyst based in Northern California, told me. “Silicon Valley has always been a high-cost place to operate and, like the state, has always been in danger of drowning in the products of its own success.” Jerry Brown told me about a Look magazine cover story from the mid-1960s, which after the Watts riots in Los Angeles and Free Speech Movement upheaval at Berkeley declared California a “failed state.” Since that time Look magazine has disappeared, California’s population has doubled, and its economy has grown larger than those of Brazil and Spain.
Still, California’s challenge is America’s: how to manage public business competently enough—collecting taxes, covering costs, educating children, fostering research, protecting the environment, maintaining order—to allow the creative carnival of its private activities to go on. And this is where Jerry Brown’s accomplishment seems most impressive. Arnold Schwarzenegger left office with a budget deficit of about $27 billion, having covered some of the state’s obligations during his final year in office with IOUs. This year’s budget shows a surplus of at least $500 million. “We are governable!,” Brown told me, emphasizing it because so many people have argued the reverse. “We balanced our budget. Arnold just borrowed money, but we’re paying down our debts. We’re coming back.”
That is what I’ve been going back to my home state to ask about. Is the turnaround real? Has California’s brokenness been fixed? And do the answers, whatever they are, make any difference to the country as a whole?
THE COMEBACK—OR THE REPRIEVE
The easiest question to answer is how California has pulled its way out of its budgetary disaster. Three things have happened since Jerry Brown replaced Arnold Schwarzenegger: the overall economy got better, so more people paid more taxes; state spending went down, largely at Brown’s insistence; and California’s voters approved a significant tax increase, mostly on annual incomes higher than $1 million.
Each of these has its fine points. California depends more on income tax, especially from rich taxpayers (even before the new increase) than it used to. This makes its revenues notoriously volatile. They fall very fast when the state economy is contracting—Brown had 10 percent less money to work with in his first year than Schwarzenegger had had in his last—but also rise quickly when conditions improve, as they have begun to do. One other aspect of the state’s tax structure compounds its problems. The fastest-growing parts of its economy are those classified as “services,” from entertainment and health care to infotech and finance. But most of these are untaxed. In the words of a recent report on the state’s finances, “California’s tax code is so outdated that nearly $1 trillion—that is, roughly half—of the state’s economic output is not taxed.” And this despite the state’s image as being overtaxed.
The budget cuts have been substantial, and came at Brown’s insistence to an often skeptical Democratic-dominated legislature. This may be the place to note a difference between state and national budgets. During economic slowdowns, national governments do and should run budget deficits, to keep unemployment from getting worse. Otherwise public-sector layoffs intensify, rather than offset, what is already happening in the private economy. It is different for state governments. Many, though not California’s, have constitutions forbidding deficit spending. And not even California can view deficits as a state-level stimulus program, since so much of the spending sloshes out beyond state borders.
During Brown’s first stretch as governor, details of his austere personal life—unglamorous Plymouth, sparsely furnished apartment, mattress on the floor instead of a bed—seemed merely part of his oddball ex-seminarian image. (Brown entered a Jesuit seminary at age 18 and spent several years there. He frequently quotes lines from his Jesuit training about learning to limit one’s demands and thus be happy with less.) His main working office is in a third-story loft in an old Sears, Roebuck building in the “uptown” area of Oakland, the revival of which was one of his projects during his years as mayor. (Many modern governors have maintained only a token presence in Sacramento; through most of his eight years in office, Arnold Schwarzenegger commuted from his home in Los Angeles rather than spend the night in what is still an out-of-the-way town.) The most luxurious aspect of Brown’s current life is the house he and his wife bought six years ago in the Oakland Hills, which is valued at about $1.8 million.
Brown has also inherited a share of what was once his great-grandfather’s 2,700‑acre ranch in Colusa County, in the foothills of the Sierra Nevada. This forebear, his father’s maternal grandfather, August Schuckman, was born in Westphalia but left after the revolutions of 1848 and made his way across North America by wagon train during the California Gold Rush. “He’d lend money to people, and when they couldn’t pay, he’d get their land instead,” Brown told me. “That’s how he put together this big spread.” Brown said that when he was a boy, his father, then an aspiring politician headed toward the governorship, would take the family up to see the property. “I never cared about it then. It was too hot. Too many rattlesnakes. Now, as I get older, I go more and more and think about what it took my great-grandfather to get there.”
“By the time he returned as governor, he still had an image as an ascetic person,” Bruce Cain told me. “That image was consistent with his message that he would be careful with your money.” Brown’s current role as the Democrat who is cutting budgets brings up the inevitable “Nixon goes to China” analogy, but I think the more important comparison is to an earlier Republican president, Dwight Eisenhower. The most admirable part of Eisenhower’s policy, in retrospect, was his effort to push big infrastructure and national-greatness efforts—the interstate highway system, more money for schools and basic research, much of it of course with a Cold War rationale—while holding the line on other spending, including the Pentagon’s. I’m oversimplifying the story of the ’50s to make the point that the Jerry Brown of 2010 comes closer to that part of Ike’s balance than anyone else I’m aware of.
“For me to get the budget cuts these past two years, I had to go to the legislature and say ‘Please, please, please!’ ” he told me. “The Democrats”—who control the legislature—“didn’t like it, but they agreed as part of getting the tax increase.” In California, the governor has line-item-veto authority—one more indication of the legislature’s feebleness—and Brown says he will use his veto power to resist spending increases. “The budget is more or less balanced,” he told me. “To unbalance things now, they have to come through me. That is a real shift in power.” Meanwhile, Brown’s reduced and balanced budget includes more spending for what he considers the big challenges of the future: clean-energy initiatives, an expensive (and controversial) north-to-south high-speed-rail project, new canals and aqueducts, even California-based medical-research projects beyond those sponsored by the National Institutes of Health.
For students of California politics, Brown’s most surprising achievement was persuading the legislature to eliminate urban “redevelopment agencies” against the bitter opposition of nearly every big-city mayor in the state, most of them Democrats. “Redevelopment agencies” were a stratagem that one San Francisco analyst has described as “the California equivalent of the national military-industrial complex.” Without getting into the details, their effect was to channel a certain share of tax money into a special fund that mayors and local officials could use to finance housing projects, malls, and similar efforts. In theory this was a step toward wholesome decentralization, but in practice the agencies were often wasteful and occasionally corrupt. “This was Brown’s really interesting move,” Joe Mathews, of the Los Angeles–based civic group Zócalo Public Square, told me. “These had turned into a racket, and he understood that and was able to unplug it.” Most state legislators had no idea why these agencies mattered, or how much money was involved. Brown, a two-term mayor, knew just what was at stake.
“I think the root of his transformation was his being mayor of Oakland,” Lou Cannon, a longtime reporter for The Washington Post and the author of several books about Ronald Reagan, told me in Los Angeles. During the 1970s and ’80s, Cannon had often criticized Brown’s performance as governor. “He did a very good job as mayor, and obviously has learned a lot about the realities of government.” Brown has tried to cut spending so much that the main complaints about him are from the left, and budget-related—especially about his resistance to federal court orders to spend more on California’s enormous and overcrowded prison system. “Fiscal discipline is not the enemy of our good intentions but the basis for realizing them,” he said in this year’s State of the State speech, justifying a hard line against letting spending increases sop up new revenues. “It is cruel to lead people on by expanding good programs, only to cut them back when the funding disappears.”
“This time Brown has been on the sensible side of every fiscal issue,” Lou Cannon told me. “There are people who will want to spend like crazy, and Brown will use his line-item-veto power to resist.”
The third and most publicized part of the California budget turnaround was Brown’s success last fall in winning passage of Proposition 30, which (among other things) raised high-end tax rates for several years, with a commitment to use the money to avoid cuts in school funding and to pay down the state debt. Everyone I asked said that Brown’s personal stumping for the measure made the difference in its relatively easy win (by a 55–45 margin), and that the extra money it is expected to bring in—$6 billion or more a year—will make a difference in the budget. The higher rates will last for seven years, and Brown in his speeches told the biblical story of Joseph, Pharaoh, and the seven fat years and seven lean years. “The people have given us seven years of extra taxes,” he said in his State of the State speech. “Let us follow the wisdom of Joseph, pay down our debts, and store up reserves against the leaner times that will surely come.” I cannot think of another prominent Democrat who would put it just that way, especially the final few words.
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The Mother Of All Painted-In Corners
Alice laughed: "There's no use trying," she said; "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
– Alice in Wonderland, Lewis Carroll
I wrote several years ago that Japan is a bug in search of a windshield. And in January I wrote that 2013 is the Year of the Windshield.
The recent volatility in Japanese markets is breathtaking but characteristic of what one should come to expect from a country that is on the brink of fiscal and economic disaster. I don't mean to be trite, from a global perspective; Japan is not Greece: Japan is the third-largest economy in the world. Its biggest banks are on a par with those of the US. It is a global power in trade and trade finance. Its currency has reserve status. It has two of the world’s six largest corporations and 71 of the largest 500, surpassed only by the US and comfortably ahead of China, with 46. Even with the rest of Asia's big companies combined with China's, the total barely surpasses Japan's (CNN).
In short, when Japan embarks on a very risky fiscal and monetary strategy, it delivers a serious impact on the rest of the world. And doubly so because global growth is now driven by Asia.
Japan has fired the first real shot in what future historians will record as the most significant global currency war since the 1930s and the first in a world dominated by true fiat money.
At the risk of glossing over details, I am going to try and summarize the problems of Japan in a single letter. First, a summary of the summary: Japan has painted itself into the mother all corners. There will be no clean or easy exit. There is going to be massive economic pain as they the Japanese try and find a way out of their problems, and sadly, the pain will not be confined to Japan. This will be the true test of the theories of neo-Keynesianism writ large. Japan is going to print and monetize and spend more than almost any observer can currently imagine. You like what Paul Krugman prescribes? You think he makes sense? You (we all!) are going to be participants in a real-world experiment on how that works out.
(Note: This letter will print longer than usual as there are a lot of graphs.)
But first, I want to mention a very special event, that is of great relevance to this discussion, and that will be coming your way in just a couple weeks. I'm going to get together in New York with five of the most powerful investing minds in the world – Kyle Bass, Mohamed El-Erian, John Hussman, Barry Ritholtz, and David Rosenberg – and we're going to totally take apart the New Normal environment in which we all find ourselves and then rethink and rebuild it in a way that will help you not only survive it but profit from it. Investing In the New Normal will feature a full hour of our unfiltered conversation and uncensored analysis. It will come to a computer screen near you on Tuesday, June 11, and you will want to be there! The event is free, and you can register here. Seriously, a full hour with those five guys. How cool is that? I will make sure you get a few powerful take-away s that will impact your thinking and your investing. And now, let’s take a look at that hard windshield and that big bug.
The Mother of All Painted-In Corners
In no particular order, let’s look at some facets of the daunting task facing Prime Minister Abe and the country of Japan.
After the collapse of what might still be the largest economic bubble in history, in 1989, Japan is still mired in a 24-year non-recovery. Nominal GDP in 2011 was almost exactly what it was 20 years earlier, in 1991 (MeasuringWorth.com). You can find other ways to measure nominal GDP which indicate limited growth; but compared to the US and China, nominal growth in Japan has been paltry.
That lack of growth takes on special importance because when we measure national debt-to-GDP we use nominal GDP as the denominator. If debt is growing and the economy is not, that debt-to-GDP ratio can grow very rapidly. From the Financial Times at the end of March:
Japan’s central bank governor has told parliament that the government’s vast and growing debt is "not sustainable," and that a loss of confidence in state finances could “have a very negative impact” on the entire economy. The warning comes as Shinzo Abe’s administration attempts to drag Japan out of more than a decade of deflation with aggressive monetary and fiscal stimulus.
In January, weeks after taking office, the government unveiled a Y10.3tn ($109bn) spending package while leaning on the Bank of Japan to buy more of its bonds – a strategy described by Morgan Stanley MUFG Securities as "print and spend". Speaking to lawmakers on Thursday, BoJ governor Haruhiko Kuroda noted that, while the government bond market has been "stable," Japan’s gross debt to GDP ratio – expected to top 245 per cent this year, according to estimates by the International Monetary Fund – is "extremely high" and "abnormal".
Japanese households and corporations are saving even as the government runs deficits close to 10%. As a way to compare, a 10% deficit in the US would be $1.6 trillion.
Damn the Torpedoes, Full Speed Ahead!
There are two and only two ways to grow an economy in real terms. You can grow your working population, or you can increase your productivity. That’s it. Japan does not have the option of growing its population (or has not chosen to), and it is actually quite difficult for an industrial economy to grow its productivity. If your population is actually shrinking (see chart below) and productivity growth is less than 1%, then real GDP growth is just not possible. We are going to revisit this uncomfortable fact later.
Japan ran a massive trade surplus for years. Now it is running a large trade deficit. If you run a trade deficit and a fiscal deficit, either private savings has to make up the difference, or the central bank has to print massive amounts of money. That is an accounting identity; there are no other choices. Absent massive monetization, you suck all the available investment capital from your private economy. But Japan needs growth to get out of its fiscal and economic morass. That means it desperately needs more exports, since its aging population cannot be the source of significant increases in consumer spending. The Japanese elderly are savers and hoarders, almost by definition.
The Abe government and the Bank of Japan under Kuroda-san have targeted 2% inflation. Even with nominal GDP growth last quarter of 3.6% (annualized), the country was in deflation. They have been trying to generate inflation for 24 years. How will they now get 2% inflation? One way is to increase the cost of their imports. The problem is that Japan imports only about 16% of its GDP, according to recent World Bank data. That means to get to 2% inflation they would need their currency to drop by about 15-20% a year (as the effects are not one-to-one, but that takes a whole letter to explain). Easy enough: the yen has fallen that much since just the beginning of this year (see chart below). The problem is that you have to do that every year, on a trade-weighted basis, with all your trading partners.
This chart shows the fall of the yen against the US dollar. The yen closed around 101 today, from 75 less than a year ago. So mission accomplished, right?
Well, not so fast. Japan trades with the world, and what matters is the trade-weighted yen (just as the trade-weighted dollar is what makes the difference in the trade balance of the US). And while the trade-weighted yen is down over 20% against the average of the currencies of Japan's key trading partners, that is not as much as it is down against the dollar (see chart below). Australia and other Asian countries are just beginning to respond to Japan by lowering exchange rates and by other means, so the “easy” devaluation of the yen has already happened. The hard work is just starting, as other countries will increasingly feel forced to respond. No major country can export its deflation to the rest of the world without the rest of the world seeking to redress the balance.
For Japan to get that 15-20% a year currency depreciation for the next five years would be such a tectonic-plate shift for the world that it is difficult to express the magnitude of the task. That would put the yen at 200 to the dollar by 2018 or sooner. If you are Germany, can you deal with that? Korea? China?
It will not be long before you can buy a Lexus cheaper than you can buy a Hyundai, and a Panasonic flat screen will be half the price of a Samsung or LG. But of course Japan does not act in a vacuum. As I wrote last week,
Let's put the recent drop in the yen in context. The Nihon Keizai Shimbun, the main Japanese business newspaper, has reported that every one-yen fall in the yen/dollar rate will translate into a $2.7 BILLION increase in profits for the 30 largest Japanese exporters.
For every one yen the currency drops in value against the dollar, Toyota estimates that its profits will increase by $340 million. PER ONE-YEN DROP! Toyota reported $3.33 billion in profits last quarter, so that additional $340 million of profit per one-yen fall could send its second-half profits – and its stock – to the moon.
But those profits don’t just magically appear; they come from sales. Sales that are in large part due to better terms of trade and lower costs. Those profits are from sales that might have gone to other companies based in other countries and that might have been valued in euros, dollars, yuan, or won. Which is why businesses and finance ministers all over the world are not happy with Japan.
Abe and Japan are in an almost ridiculously impossible situation. Let’s look at what they have to do in the light of what we just read.
They cannot continue to grow their debt at the current rate. There is a limit. No one knows for sure what that is, but it is getting closer. And they know it. So they have to get their fiscal deficit below the growth rate of nominal GDP.
To do that they have to have both real growth and nominal growth. Real growth in a country with a shrinking population requires productivity increases on a scale not seen in any industrial country anywhere for any sustained period of time. So they have to get nominal growth, which means they absolutely must have inflation or their country will collapse in a massive debt deflation, with skyrocketing interest rates.
But 2% inflation implies that interest rates on Japanese bonds must be at least 2% if not 3% or more. That is double what they are now after the recent spike in the yield of JGBs (Japanese government bonds) from 0.5% to 1%, which sent the Japanese stock market into a tailspin on Thursday – down 7.3 percent.
As Kyle Bass and others have amply demonstrated, if JGB interest rates rise 2% in Japan, then the government must pay almost 80% of its revenues (as currently received) just to cover the interest on its debt. That is, of course, not a viable business model. Even a 1% rise would be fiscally devastating.
The Abe government plans to raise taxes. Japan’s current sales tax is 5%, due to increase to 8% next year and 10% by 2015, although they will look at economic data in October to decide whether taxes will indeed rise. That is a large tax increase, and it will, of course, hurt consumer spending. But the government has to reduce its fiscal deficit at some point. The question is when and how. For two decades the answer has been "Next year." Next year may actually arrive ahead of time if the bond market starts to get nervous. Look at the drop in 10-year JGB bond prices this week (through Thursday, hat tip The King Report).While such drops have happened in the recent past, you can be sure this is cause for concern in Tokyo. There are limits, even for Japan, to what bond investors will endure.
Reducing fiscal spending will by definition (an accounting identity again) reduce GDP or at the very least make it more difficult to attain inflation of 2%. Remember, austerity is not a punishment but a consequence of past failures to control spending.
The solution that Abe and Kuroda arrived at, to the applause of mainstream economists, is massive quantitative easing. Let’s look at a paper just published by UC Berkeley Professor Christina Romer, former chairwoman of the President’s Council of Economic Advisors. (Hat tip Barry Ritholtz at The Big Picture.) I will summarize, but you can read the paperhere.
Basically, Romer (with a nod to Krugman, et al.) suggests that Abe and Kuroda have initiated what she calls a regime shift and that "it just might work." And then she proceeds to compare what Japan is doing to the policies of Roosevelt in the early '30s. Quoting from the introduction:
Last week, we witnessed one of the most exciting developments in monetary policymaking since the 1930s. The Japanese central bank staged an honest-to-goodness regime shift. The Bank of Japan went beyond vague promises and cheap talk. As I will describe in more detail later, it took dramatic actions and pledged convincingly to do whatever it takes to end deflation in Japan. The theoretical reasons why this regime shift may be important are well understood by economists. Persistent deflation and anemic growth suggest that Japan continues to suffer from a shortfall of demand. But their policy interest rate is already at the zero lower bound. Furthermore, riskier, long-term rates are also very low – suggesting that unconventional policies such as large-scale asset purchases are unlikely to do much to further reduce nominal rates. As discussed by Paul Krugman, Gauti Eggertsson and Michael Woodford, and others, if unconventional monetary policy can raise expected infl ation, this can push down real interest rates even though nominal rates cannot fall. This, in turn, can raise aggregate demand by stimulating interest-sensitive spending.
And in the conclusion she suggests that bold policies must be aggressively pursued:
In a recent paper, David Romer and I discuss that such views are potentially very destructive. We show that what are widely viewed as the two largest errors in Federal Reserve history – inaction in the wake of banking panics early in the Depression, and inaction in the face of high and rising inflation in the 1970s – were both borne of unwarranted humility. Fear that policies might not work or might be costly led policymakers to conclude that the prudent thing was to do nothing. Yet there is now widespread consensus that action would have been effective in both these periods.
We have nothing to fear but fear itself: this is the heart of Keynesian thinking. And if it is good for Japan then what of the rest of the world?
Earlier in the paper, Romer writes, after discussing recent US Federal Reserve policy actions:
But the truth is even these moves were pretty small steps. With its most recent action, the Fed has pushed the edges of its current regime. And I am sure that given the opposition in Congress and the difference of opinion within the FOMC, even those measures were a struggle. Nevertheless, the key fact remains that the Fed has been unwilling to do a regime shift. And because of that, monetary policy has not been able to play a decisive role in generating recovery. To paraphrase E. Cary Brown's famous conclusion about fiscal policy in the Great Depression: monetary policy has not been a strong recovery tool in recent years not because it did not work but because it was not tried – at least not on the scale and in the form that was necessary to have a large impact.
Wow. Double wow. Breath-taking triple wow. Read this paper. Absorb it. And then bookmark it and come back in five years. I give Romer this: she shows no unwarranted humility in this paper. She goes “all in” in backing this Japanese policy.
But I do agree with Professor Romer about one thing: this is the most serious and radical economic experiment undertaken in my lifetime by a major economic power. And the rest of the world must pay attention. If this has succeeded in working five years from now, if Japan is growing and its debt relative to GDP is shrinking and the rest of the world has allowed the yen to drop in half, then let me state here and now that I will have to rethink my understanding of economics.
But ironically, if I were Abe and faced with the question, “What do I do now with what I have inherited,” I am not sure that I could do anything else. He is a politician and a Japanese one at that. The Japanese are serious hometown players, as are the citizens of most countries. You do what is best for your hometown and don't worry about the neighbors all that much. You want to stay friends, but your first responsibility is the hometown.
If you're Abe, what are your choices? They are nothing but ugly. Perhaps the best of a very, very ugly-bad lot is that you have to try and inflate away that debt. Monetize as much as you can and then just “poof” it away. You destroy your currency in the process, but you have to destroy something. And maybe your derring do gives your exporters a boost and a competitive advantage, so you at least salvage that. Why not export your deflation? And then gamble that maybe Romer and Krugman are right. It could work! Damn the torpedoes, full speed ahead!
Now, some investing consequences. Let me repeat what I wrote months ago, that the largest single position in my personal portfolio, since January 1, is short Japan. Let me clarify that, as I am not short Japanese companies or businesses but rather short Japanese government economic policies. (I am executing that trade primarily through hedge funds, although there are ways to explore that trade in a more conventional manner.) I think the yen will still be under pressure for some time (this is a long-term trade) and that Japanese interest rates will be under pressure. But do NOT run out and short JGBs (see below)! First, let me agree with Joyce Poon of GaveKal, commenting on the recent violent moves in the financial markets in Japan (which echoes what I heard from Louis Gave at my conference):
No doubt many investors are wondering if this is the first hint that the emperor in fact has no clothes – that Abenomics is just a flash in the pan. We think it is just a reminder that riding a bull is never smooth; surely more market drawdowns lie ahead. But as Anatole recently wrote in The Arithmetic Of Abenomics, the fiscal and monetary expansion already implemented has been so extreme that there is no turning back from Abenomics. Unless Japan can achieve much faster economic growth, Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it will bankrupt the financial system and quite possibly trigger hyper-inflation. This is why Abe’s radical reforms will go forward, and in time aggressive monetary policy will be need to be backed up by larger structural reforms.
This brings us to a second, and potentially more dangerous, type of volatility in Japan: in JGBs. With Japanese banks holding huge JGB portfolios, a sharp rise in yields would generate capital losses. Indeed, according to the Bank of Japan, a 100 basis point increase in interest rates across all maturities would lead to mark-to-market losses of 20% of Tier 1 capital for regional banks and 10% for the major banks. As banks play a key role in the transmission mechanism in quantitative easing and reflationary economics, a damaged bank balance sheet can significantly reduce the effectiveness of Abenomics.
One problem is that the BoJ’s purchase operation is also crowding out other players in the JGB market, and this amplifies interest rate volatility. The reduction in JGB liquidity means that financial institutions are finding it difficult to quickly find counterparties to buy or sell large volumes of the bonds. The risk is that higher interest rate volatility could in turn induce further JGB sell-offs, completing a vicious circle of capital destruction for the banks.
To prevent a catastrophic crash of the JGB market, more BoJ action is needed. This is likely to include increased flexibility in liquidity injections, a broader range of purchase tactics and better verbal communication with the market. But shrinking liquidity, higher volatility, and even potential spillovers from rising yields globally, could continue to put upward pressure on JGB yields. This doesn’t mean the Japan bull market is over. But as we argued in our latest Five Corners, remain hedged!
Let me repeat the most important sentences, with which I totally agree:
… as Anatole recently wrote in The Arithmetic Of Abenomics, the fiscal and monetary expansion already implemented has been so extreme that there is no turning back from Abenomics. Unless Japan can achieve much faster economic growth, Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it will bankrupt the financial system and quite possibly trigger hyper-inflation. This is why Abe’s radical reforms will go forward, and in time aggressive monetary policy will be need to be backed up by larger structural reforms.
The government of Japan has no choice. They are painting themselves into the Mother of All Painted-In Corners, yet they must continue to paint or collapse. They have fired the first shot in what will be the first real currency war of our lives, not the little sandbox versions we have experienced so far. There is NO historical analogy. None. The last major currency war, in the 1930s, happened when the world was largely on a gold standard. We now live in a world awash in fiat currency. Can Europe sit by and watch the yen fall 50% from where it is today? Will Germany allow it?
What will China do? If they respond in kind, they risk inflation. If they don’t, they risk losing export sales and jobs. Malaysia is on a borrowing binge to finance its real estate growth. Indonesia? And Korea certainly can’t sit idle and watch its chaibols (the Korean version of the Japanese keiretsu) get hammered, can it?
For a time, then, major central banks are going to have to sit on their hands and do nothing, as they can’t stop printing or using monetary policy to improve their internal economic dynamics. Japan is in reality just catching up in terms of quantitative easing, as I showed last week.
Japan intends to export its deflation. And with the approval of the economic cognoscenti, it is going to do so in a manner and to an extent that the world has never experienced before. The old saw of “in for a dime, in for a dollar” will be the rule of the day. Japan cannot back down without suffering massive financial upheaval. I think they are likely to suffer no matter what they do, but this is the path to suffering they have chosen. So be it. All we can do is try and stay off the dance floor when the elephants are dancing. Or find a really good dance partner who knows the moves and follow! This will not be an environment in which to take dancing lessons. The Arthur Murray Dance School does not know the steps that will be in vogue at this party.
I can’t with any reasonable certainty tell you how all this will play out, as we are simply in uncharted territory. But I do know I want to own assets that central banks can’t print. Their actions will affect those assets, to be sure – we are going to see more volatility than we would like. But that creates opportunity. Of course, we are going to continue to look at the implications of these developments in future letters.
In closing, this is the last call to register for the upcoming webinar with my good friends Kyle Bass and Altegris President and CEO Jon Sundt. Kyle will just be back from Japan, where he has been talking with leaders, and I will be in Brussels, trying to get a view on all this from some of their leaders. I can tell you that I have never had a dull conversation with Kyle!
While we are sure to discuss Japan and the yen, we will also focus in depth on a new fund Kyle manages that was recently added to the Altegris platform. Please join us thisWednesday, May 29. If you are a qualified purchaser or a licensed investment adviser qualified to make private placement recommendations, be sure to register here for this event. Upon qualification by my partners at Altegris, you will receive an email invitation. If you are already an existing Mauldin Circle member, you will receive a separate email invitation to register for the event.
I apologize for limiting this discussion to qualified purchasers and investment advisors, but we must follow the rules and regulations. I look forward to having you at this exclusive Mauldin Circle event. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA and SIPC.)
Brussels, Washington, DC, NYC, Monaco, and Home?
I am probably on a plane to Brussels as you read this, where I will be with Geert Wellens and his team at Econopolis. They have a fascinating few days lined up for me, and I expect to learn a lot as well. The schedule looks to be quite enjoyable.
Then I am home for a few days before I head off to DC to meet with Newt Gingrich and tape a video or two, in which we will talk about our favorite topic, the positive transformation of society that is happening because of technology. Pat Cox will join us. I also have a few other meetings lined up there, and then I'll take a train with John Hussman to NYC to do the video webinar I mentioned at the beginning of the letter. Then I return home for a few weeks and enjoy Father’s Day before heading off to Monaco to speak at the GAIM conference (June 17-19). They have a nice line-up of speakers, and I get to meet with Nassim Taleb. I really do intend to review his new and very important book, Antifragility, at some point. If you qualify as an investor, you can attend for free by clicking on 19th Annual GAIM International 2013. If you are in the money-management business, you can regist er and get a 15% discount with the code VIP: FKN2355MAUL.
Finally, I will go to Cyprus, where I am hoping to meet with people who can give me insights into what is going on there. If you are in Cyprus the weekend of June 22-23, drop me a note.
I am still homeless and living in a hotel but getting closer to actually closing (or so they tell me) on my new apartments. I hope by the time I get back from Brussels everything will be ready to close. I have leased a small place in the same building to live in while my two apartments are combined into one. Construction will take 3-4 months. I am so ready to move. I am used to hotels, but not having access to my “stuff” is getting old, and the internet here is so slow it is driving me to distraction.
It is late and time to hit the send button. Have a great week!
Your looking forward to a better hotel in Brussels analyst,
John Mauldin
subscribers@MauldinEconomics.com
Copyright 2013 John Mauldin. All Rights Reserved.
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DISNEYLAND: Two days left for 'Opa' Greek celebration Press-Enterprise (blog) There are wine-tasting sessions for $3 and several food choices, including flatbread pizza for $8.99; Greek salad with candied walnuts for $7.99; “Spanakopita Swirl” for $5.75; melomakarona, orange and honey cookies for $4.39; and Mythos bottled beer ... |
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There is no evidence – and never has been – that austerity works in the fashion promised by those who support it
What do you think about George Osborne's austerity programme? No, I am not trying to be funny. When the chancellor says he is tackling Britain's large budget deficit through a mix of spending cuts and tax increases are you more or less likely to go out and spend money?
The answer to this question appears obvious to most people. Austerity makes consumers and businesses more cautious. It leads to less spending in the economy and throws deficit reduction programmes off track.
That, though is not what Osborne thinks. It is not what the European Central Bank thinks. It is not what the Tea party in the United States thinks. It is not what most mainstream economists think. What they all believe is that any pledge by governments to cut spending imparts a warm glow to those toiling away in the private sector. Confidence blossoms because individuals and businesses expect healthier public finances to result in lower taxes. Businesses will invest and this will lead to higher consumer spending.
Conversely, any attempt by governments to spend their way out of a slump is worse than useless. Perfectly rational economic agents understand that higher public borrowing today means higher taxes tomorrow, and they will prepare for that dread day by reining in investment and spending. The economy will shrink rather than grow.
Let me guess what you are thinking? You are thinking that this sounds like complete mumbo jumbo and bears no relation to the real world. You think that expansionary fiscal contraction – the economic idea used to justify austerity – is a contradiction in terms. You think that there is not one shred of evidence to support the idea that government belt-tightening in a deep slump does anything other than to make that slump deeper and longer.
And you would be absolutely right. There is no evidence – and never has been – that austerity works in the fashion promised by those who support it so vehemently. Britain – used as a laboratory rat in order to prove that expansionary fiscal contraction works – is proof of that, as are the examples of Ireland, Greece and Portugal.
The UK experiment began three years ago when the coalition came to power. The timing could hardly have been better for the new breed of expansionary fiscal contractionists at the Treasury. The deficit was at a peacetime record, the economy appeared to be on the turn and, as an excellent new book by Mark Blyth* shows, it was the time when the brief one-year dalliance with Keynesian economics had just hit the buffers.
What happened was this. In the winter of 2008-09, following the collapse of Lehman Brothers, the world economy contracted at a rate not seen since the early 1930s. Governments decided this was not the time to sit back and do nothing: they got together and co-ordinated the biggest expansion of monetary and fiscal policy on record. The Americans, the Chinese, the British, all cut interest rates and announced stimulus packages. Even the fiscally conservative Germans joined the party.
The unprecedented intervention by central banks and finance ministries prevented a second great depression, but the healing process had only just begun by early 2010. At that point, the narrative changed. As Blyth correctly points out in his book, the crisis began with the banks and it was only when states moved in to re-capitalise institutions that were on the brink of bankruptcy that a private sector debt crisis became a sovereign debt crisis. With the sole exception of Greece, the financial problems faced by western governments did not stem from the profligacy of the state but were the result of taxpayers picking up the tab to bail out the banks.
But this view was quickly challenged. Within months, as Blyth says, it was re-christened a sovereign debt crisis by political and financial elites. Why? In part, it stemmed from the ingrained belief that markets are infallible and governments can never do any good. In part, it stemmed from a genuine – if misguided belief – that government debt levels would explode to unacceptable levels unless austerity was introduced. In part, it was a way to ensure that the people who were actually responsible could shift the burden of clearing up the mess onto those who were quite blameless.
Those determined to push back against the Keynesian experiment came armed with economic evidence. The Italian economist Alberto Alesina made the case for expansionary fiscal contraction when he presented a paper to EU finance ministers in April 2010, citing examples of countries – such as Ireland in the late 1980s – where the approach was supposed to have worked. Jean-Claude Trichet, then president of the European Central Bank, was impressed. So was Osborne, who drew on Alesina's work in his emergency budget of 2010.
Blyth's book traces austerity back to its roots in the works of John Locke, David Hume and Adam Smith, but is particularly impressive in the section that takes apart claims that the last 30 years have provided examples of expansionary fiscal contraction working. Alesina's version of what happened in Ireland in 1987-9 is that an austerity minded government delivered growth by cutting welfare, taxes and the public sector wage bill, with the fiscal tightening offset by a devaluation of the punt. This explanation, however, fails to mention that Ireland's biggest export market is Britain, which at the time was going through the wild excesses of Nigel Lawson's ill-fated boom.
And so it goes on. Blyth has plenty of examples – Britain in the 1920s, for example – where austerity failed. He finds none – not even the recent case of Latvia – where it does what it says on the tin.
IMF economists have done a good job in challenging the claims of the expansionary fiscal contraction brigade. The fund found that the notion that spending cuts are less harmful to growth than tax increases – one of the chancellor's key claims – only holds true if central banks can compensate for the contraction with reductions in interest rates. When official borrowing costs are just above zero that is not possible. The IMF also says spending cuts are more painful when every country is retrenching at the same time, as now.
In short, it believes that austerity isn't working. It believes the US has recovered more quickly than the eurozone because of Washington's belief that growth leads to deficit reduction rather than the other way round. It says Britain's economic recovery is feeble and wants Osborne to boost spending on public infrastructure in order to offset the £10bn of tax increases and spending cuts he has lined up for 2013-14. So ask yourself one final question. If Osborne borrowed £5-6bn to build houses and fix potholes would that be a good or bad idea? Most of us, I would suggest, would take the former view, which is why austerity has failed and why the economic thinking that underpins it is bunk.
*Austerity; The History of a Dangerous Idea by Mark Blyth; Oxford University Press
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