John Mauldin 
 Oct 09, 2013
David Kotok, Chairman and Chief Investment Officer of Cumberland Advisors (and our host at "Camp Kotok" for the annual "Shadow Fed" fishing expedition), leads off today's Outside the Box by meticulously dissecting the roadkill that is our federal government's process for deciding whether they will continue to pay their bills and federal employees' wages.
Will the US default? David doesn't think so, and neither do I; but oh, the foolishness, even to tempt the economic fates (read: the markets) this way. David notes that global investors think differently about US default risk than we US-centric types do. Well, David Zervos is with me here at Barefoot, and we just heard that one foreign prime broker (and now maybe two?) is calling hedge funds to say they will not take short-term T-bills as collateral and will mark T-bills down to zero in the event of an actual default. The ultimate risk-free asset is now full of risk? REALLY? This is an unthinkable event. This broker is a Primary Dealer, and I assume they will very shortly get some irate phone calls; but these things start with one bank and then it turns into a herd.
David Zervos, Managing Director at Jefferies, gives us his own slant on the ups and downs and ins and outs of default in today's second OTB selection. He fills us in on some key constitutional history regarding default and makes it clear what is legal, what is illegal, and what is downright perverted about the process playing out in Foggy Bottom. David remains confident that the Fed is the "one adult in the room that can (and will) put a stop to the madness if we go down the highly unlikely path to default." We'll see.
As we confront that possibility, let's note that Social Security is a trust fund, so the money is set aside in bonds. Not to make Social Security payments would be an administrative decision, not one due to a lack of funds. Other entitlements, you can argue. It will be interesting to see what gets priority if it comes to that, as money comes into the Treasury every day, so there is plenty to cover the interest on the debt, and rollovers could be done under the limit.
However it shakes out, we can only hope that the parties who made the decision to close down the public memorials as a way to demonstrate the “costs” of the government shutdown will not be allowed to come anywhere near the decisions on prioritizing payments. Those idiots should be fired and barred from ever having any level of public responsibility. It cost far more to put up barricades and man them than it would have cost simply to leave the memorials open. To tell WW2 veterans that they cannot see their own public memorial when they have come, perhaps for the last time, to acknowledge the lives of those with whom they served, is beyond appalling. The Tomb of the Unknown Soldier? The Lincoln Memorial? These are public places that could and should have been left open. To barricade them was a petty, punitive act with the most venal of political motives.
It is one thing to disagree on budgets and process and the constitutional order of things. I know that many of my readers are very passionate about which side the bulk of the blame belongs to. But I come down on both sides with almost equal frustration. I understand the American political process and know some of the history of how business gets done in Washington, but some things are just beyond the pale. I would say to our "leaders," cultivate some perspective and get a grip.      
And since we're getting all the nitty-gritty on federal sausage-making today, I just had to toss in a note from the incomparable, indomitable Joan McCullough, who dredges up for us an esoteric but not irrelevant gem called the Feed and Forage Act of 1861. I will let Joan explain, as only she can.
I get to spend the next three days at the Barefoot Ranch, partaking of an intensive economic/investmentfestival (calling it a conference simply misses the energy in the room). All hosted Texas-style by Kyle Bass. His connectivity is astounding: the people gathered represent some of the finest thinking anywhere – and he has managed to get them in one room. Some of the names are old friends to this letter (Lacy Hunt, Niall Ferguson, Anatole Kaletski, Jon Sundt, Mark Yusko, Larry Lindsey, and David Zervos), and others are names that ride under the radar, yet run some of the best trading funds in the world. I can’t tell you how excited I am to be allowed in the room. I will report back this weekend on what I learn.
And now I'm off to try to figure out where the world is going, eat a lot of BBQ and chuckwagon food, and just have some fun. Life can be so good at times.
Your forever amazed at the US political process analyst,

John Mauldin, Editor
Outside the Box

">Moving Chess Pieces
By David Kotok
October 7, 2013
As the political strategists move their chess pieces, the government shutdown is morphing into the bigger, long-expected fight about the debt ceiling. The agreement to pay government workers back pay, and the recall of most defense workers next week, basically means the impact of the shutdown is quite limited and no longer a political issue of great importance. The real fight is now focused on what concessions can be extracted for raising the debt ceiling and avoiding default – supposedly on October 17th, but certainly by November 1st when the next large social security payment is due.
– Michael Drury, Chief Economist, McVean Trading, October 6, 2013 
Fishing Pal and Global Interdependence Center colleague Mike Drury has correctly identified the change in pressure points. Having suffered political heat, Republicans and Democrats have found ways to shift the intensity of the budget fight. The non-game game continues as we are moving to the debt limit fight where the Republicans perceive themselves as holding a stronger advantage. They’re wrong. Obama does not run for re-election. They do. So do the Democrats, and this is all a game of finger-pointing in order to have the voters find fault with the other guy in next year’s elections. “What a country!” said the comedian Yakov Smirnoff. Talk about an understatement. 
The United States is the world’s largest debtor (almost $17 trillion), and the US dollar is the world’s reserve currency. Actual default on the payment of interest and principal is an unthinkable course of action. Tom Donlan of Barron’s writes that the US must borrow about $700 billion over the next year just to keep ”doing everything it did last year.” He then adds that it “must borrow more than $5 trillion in the next 10 years” and “more than $14 trillion over the next 25 years." These projections do not include rising “inflation, higher interest rates, slower GDP growth, longer life expectancy, and new spending programs.” Default and cascading consequences are not factored into the Donlan estimate. If we actually do fail to pay on our Treasury debt, those future years' borrowing numbers will become much larger. 
US market agents focus on the US Treasury interest rates and see them trending lower since the crisis evolved. They do not often consider how the market is pricing US default risk. Most of us are US-centric and focused only on the yield. 
Global investors think differently. We can gauge their view by examining the pricing of the credit default swap (CDS) of the US. It is denominated in euros and trades outside the US, with major market making in London. Foreigners view the US interest rate as the yield they will receive, less the cost they incur by insuring that the US does not default. That is what the CDS is about. Its price is rising and has surged up sharply over the last two weeks. It spiked again today.  Foreigners do not like what they see in Washington any more than we do. That is why they use insurance and hope they do not need it. Note that the US CDS market is not as liquid as other CDS markets, so reference prices have to be taken with a grain of salt. That said, they are certainly up from where they were before these political shenanigans started.  They are a warning sign.  Will Washington even take notice? 
Another indicator of default risk is the spike in yields on the very short-term Treasury bill. It was trading to yield a pittance of 3 or 4 basis points. It spiked as high as 20 basis points before falling back to a trading range in the 12-13 level. That was last week. Assurances by politicians that they will not let the US default have had only limited effect. 
So what is an investor to do? 
If you actually believe that the US will default, then you need to prepare for a catastrophic event. Markets could experience another TARP moment like they did about 5 years ago. 
In our view the US will not default. It has an absolute ability to pay. This is a political fight, not an economic one. The credit of the US is not the same as Detroit’s or economically risky like Puerto Rico’s. The country is not dismembering like Argentina or unable to support budgets like Greece. Comparisons between the US and these others are not valid.
That said, the US could run out of cash by November if it cannot legally borrow. We do not fully understand the October 17 date.  But we do see November 1 looming as a massive entitlement payment date and we do have November 15 as a key date for substantial payments on US Treasury bonds and notes.  No increased debt limit means the government would have to choose who gets paid and who is deferred. 
The failure to authorize borrowing would cause an immediate budgetary reduction of roughly 4% of GDP. That is an annualized rate.  That is also a massive and abrupt shift. Our citizens will not like the fallout. We would encounter a replay of the recent airport-slowdown reaction with much greater intensity. Our politicians know this, so they may play the brinkmanship game, but in the end they will not permit default. That’s our view. They never have defaulted in more than two centuries of American history. 
That said; the risk is higher than zero even though it is quite small.  We do not expect default.  But we recognize that some lunatics are driving the nations’ policy decisions and some of them are willing to experience a default.  We elected them.  Let’s not forget that…. 
In economic terms, the budget battle and debt-limit showdown, with all the political shenanigans either side can muster, will be a setback in broad-based GDP (gross domestic product) accounting terms. Since this setback takes place in the middle of a quarter, there will likely be a recovery once matters are resolved. And we know that the clock is ticking, so they must be resolved. By the middle of next year, a historian might look back at data for the fourth quarter of 2013 and conclude that very little happened. 
Meanwhile, the profit share out of the US GDP remains very high. That profit share translates into earnings momentum and reflects itself in the valuation of stocks. Stocks are neither cheap nor rich. They are sort of in the middle ground. 
The Fed (Federal Reserve) is more worried about the real economy than it is about the price of the stock market. It knows that the real economy has suffered a setback because of the political brinksmanship of Congress and the White House. That means any tapering will come slowly and tepidly. 
We expect the tapering issue to continue to surface at the Fed. Tapering, when it takes place, will be staged in incremental steps over a period of 1 year, 18 months, or even 2 years. Tapering from $80 billion to zero at a pace of $5 billion per meeting would take 2 years, given the Fed’s schedule of 8 meetings a year. Such an announcement would be well received by market agents. The Fed could reserve the ability to change the path at any time and would likely do so, but it would also start on a path of gradualism that would be calming to markets. Will they? "Only the Shadow knows." 
The Shadow may know the outcome of the debt limit and budget fight, too, but he ain’t tellin'. It is this simple: We either default, and our politicians do lasting damage to our country. Or we don’t, and markets resume a trend higher, and we go on in our unique American political way. We will know soon. I’m betting on the latter.  Right now we are holding a cash reserve and deploying it in periods of weakness.

The Perversion of the Constitution

By David Zervos
We the people are the rightful masters of both Congress and the courts, not to overthrow the Constitution but to overthrow the men who pervert the Constitution.
– Abraham Lincoln
The threat of defaulting on government obligations is a powerful weapon, especially in a complex, interconnected world economy. Devoted partisans can use it to disrupt government, to roil ordinary politics, to undermine policies they do not like, even to seek political revenge. Section Four was placed in the Constitution to remove this weapon from ordinary politics."
– Jack Balkin, Yale University (
Last week I reprinted a commentary from early 2011 that discussed the importance of Section 4 of the 14th Amendment to US Constitution in the great debate on the debt ceiling. In that note I stated that my view remains the same today as it has for the last few years: a default on a US Treasury security would be a violation of Section 4. If the POTUS instructs the US Treasury to default on a UST payment, he will be violating the Constitution. And, if the Federal Reserve does not pay a maturing UST coupon or principal payment from the Treasury general account, even if there is a zero balance, it is a violation of the Constitution.
As it stands the POTUS cannot unilaterally issue debt above the debt ceiling as that would also be a violation of the law. And the Federal Reserve cannot unilaterally extend credit to the Treasury general account as that is a violation of the Federal Reserve Act. That's the dilemma! There are of course gimmicks such as a trillion dollar coin, premium bonds and 13.3 extensions of credit by the Fed to the Treasury. But all of these bypass the problem temporarily, and create much more political uncertainty down the road. There are really only two solutions: legislation or prioritization.
Congress controls the purse and at any time they can legislate by:
1. Passing an increase in the debt limit, or
2. Passing something like H R 807 which allows debt issuance above the limit for certain payments such as interest payments, Social Security, etc. etc.
Either action would solve the problem immediately. Baring any legislative move from Congress, the POTUS and Treasury must prioritize or violate the law. There is no other choice. Of course there remains plenty of disagreement on the timing of tax receipts against timing of coupon and principal outlays, but given the creativity thus far at the Debt Management Office, one would surmise this will not be an issue (interest on the debt is still a modest portion of total tax revenues). Prioritization also solves the problem.
The real issue comes if the POTUS claims that it is impossible to prioritize and that Congress (ie the House Republicans) have forced him to instruct the Treasury (and the Fed) to default on the debt. The finger pointing would then begin – House Republicans would point to H R 807 and blame the Senate Democrats and the POTUS, while the Democrats and POTUS would say that the House Republicans did not appropriate the funds to make payments. It is not clear who wins the public relations battle, but thus far the Republicans' marketing team seems to have been schooled by the old marketing team that helped roll out "New Coke" in the 80s. A fracture in the Republican Party seems like a highly likely outcome. But sentiment could also turn sharply on the POTUS.
The fact is that both political parties are violating the spirit of Section 4. It is a disgusting display of partisanship that our Constitution has outlawed. Senators Benjamin Wade and Jacob Howard are surely rolling over in their graves. Of course, that does not mean that we cannot see this illegal, immoral and powerful activity enter the marketplace. If blowing up markets and blaming the opposition is the path to short term political success, it has to be at least priced into asset prices. That is why we are seeing some modest drops in risk asset prices and some more serious dislocations in the front end of the Treasury curve.
That said, I remain convinced that there is a less than 1 percent chance the POTUS pulls the nuclear trigger and instructs a politically motivated and entirely unnecessary Treasury default. And further, if he does the unthinkable, there is less than 0.001 percent probability the Fed will go through with it. The Fed will not be seen as the entity that pulled the trigger on a default of Constitutionally mandated outlays. As with so much of our global financial and political system, the Fed remains the ultimate backstop. So as everyone sits around thinking about how to profit from Constitutionally outlawed action by our highly partisan legislative and executive branches of government, remember there is at least one adult in the room that can (and will) put a stop to the madness if we go down the highly unlikely path to default. Good luck trading.

An excerpt from "Numbahs Plus"

By Joan McCullough
October 7, 2013
Social security checks are funded automatically. What about the people who process them? That’s where it gets dicey. Because one side of the equation would have you think that they are “non-essential”. And the other side will be citing the Feed and Forage Act of 1861. (To keep these employees working as well as others.You’ll see.) This popped up during the Civil War. Some story about the troops scroungin’ around the countryside, “borrowing” groceries. You get the picture. The Union soldiers just ate your crops. And watered their horses. Although there was no funding in place to pay for this. No problem once the Feed and Forage Act of 1861was cited. They weren’t stealin’, just tryin’ to stay alive. Dig?  
Huh? Right. The last time this gem popped up was back in 2007.When the Bush WH pulled it out of the hat. Why? Related to a supplemental appropriations bill to fund military campaigns in Iraq and Afghanistan.  
Under the guise of wanting to “feed” our troops (which in modern times is more than grits and H2O, i.e., it encompasses all kinds of supplies), they cited this gem.
Here’s the problem with that: 
The Feed and Forage Act of 1861 “turns the federal budget world on its head. The standard procurement process is for obligations to be incurred by a federal department or agency only after an appropriation is enacted.” ... Source:
See the deal here? The Feed and Forage Act of 1861 is viewed as an emergency gig. And so it allows the executive branch to run up a tab in emergency situations only ... before the appropriation has been voted in by Congress. Who is supposed to control our purse strings.  
Can you make any case into an “emergency”? Absolutely. Think back now to the Exchange Stabilization Fund. Opened by Roosevelt to stabilize the buck. Rubin raided it. To stabilize those massive US funds who got caught in Mexican debt with their pants down. Wise guy that he is, he cited stabilization of the Peso which, in turn, would stabilize the dollar. And bingo, nobody said “boo” about this abuse.  
Allow me to digress for clarity. Lucius Wilmerding, Jr. wrote a book back in 1943 called “The Spending Power: A History of the Efforts of Congress to Control Expenditures”. In that book, he coined a phrase known as “coercive deficiency”. This is perfect. Because it means that the executive branch goes out and makes a deal. For which there has been no appropriation yet agreed by Congress. But once Congress gets backed to the wall by this brazen tack, they cave and vote the appropriation positively, having been coerced/embarrassed by the executive branch.

Copyright 2013 Mauldin Economics.f

Reforms proposed by the Securities and Exchange Commission (SEC) threaten money market funds and short-term, commercial paper rates -- even for companies with excellent credit ratings.
General Electric (GE), Coca Cola (KO), JPMorgan Chase (JPM), State Street (STT) and Wells Fargo (WFC) depend on money market funds for cheap, short-term financing. Banks mentioned rank among the largest money market fund operators and face a potential double whammy if the proposed reforms are implemented.
The success of money market funds
Rapid inflation and high interest rates of the 1970s and early 1980s left banks in a tough spot. Regulation Q prevented their payment of interest on demand deposits (i.e. checking accounts) and so banks offered money market funds paying dividends.
By early 1983, money market funds were experiencing net cash outflows. In July 1983, however, the SEC revised the accounting rules governing money market funds to provide them with a stable net asset value. The cash then poured into money market funds as never before.
"Since that rule [Rule 2a-7] was adopted, money market fund assets have grown from about $180 billion to $3.9 trillion as of January 2009," according to the Investment Company Institute.
(click to enlarge)Even as the restriction on banks paying interest on demand deposits loosened, interest rates on traditional bank products remained low. The reason: Money market funds helped banks to skirt "reserve requirements and capital rules that would apply if the bank took deposits and made loans." The "shadow banking system" this created made some banks "too big to fail."
The SEC's "Indecent Proposal"
The SEC's proposed money market reform would turn back time and make money market funds much as they were when net asset values still floated. Among the proposed changes are restrictions on withdrawing money during times of market stress and a requirement for floating net asset values.
State Street summarized the proposed reforms in a September letter to the SEC.
"The first ("Alternative 1") would require all prime, institutional funds to operate with a floating net asset value ("NAV"). The second ("Alternative 2") would, at board discretion, impose a system of redemption fees and gates on all prime funds in times of market stress. The Commission suggests a final rule could include either, or both, of these suggested alternatives,..."
The sum of all corporate fears
If these reforms were enacted, the size of the money market industry would shrink and JPMorgan Chase, State Street, Wells Fargo and major industrials including General Electric and Coca-Cola would pay much more on short-term commercial paper purchased by money market funds. (Money market funds purchase 40% of short-term commercial paper.)
For example, the prime rate in summer 2012 was 3.15% versus the 6 month commercial paper rate, which was 0.24%. Had JPMorgan Chase, State Street, Wells Fargo, General Electric and Coca-Cola been forced to pay the prime rate on their collective short-term commercial paper held by money market funds, they would have paid $2.7 billion in interest as compared to $206 million.
In the circular announcing the proposed money market reforms, the SEC actually said money market demand for commercial paper could erode away:
"Because prime money market funds' holdings are large and their investment strategies differ from some investment alternatives, a shift by investors from prime money market funds to investment alternatives could affect the markets for short-term securities."
(click to enlarge)
Banks have an even more serious addiction
According to 2013 asset rankings, JPMorgan Chase, State Street and Wells Fargo were among the largest operators of institutional money market funds. (See chart at right.) These same banks were also among the top 50, non-government issuers of corporate debt held in the universe of all money market fund portfolios in 2012. (See chart above.) Were this short-term financing to disappear, global banks and financial institutions would find themselves in a world of hurt.
In June 2012 testimony before the Senate Committee on Banking, Housing, and Urban Affairs, Harvard Business School Professor David S. Scharfstein estimated global financial institutions such Bank of America (BAC), Citigroup (C), Goldman Sachs, JPMorgan Chase, Morgan Stanley (MS) and Wells Fargo relied on money market funds for 25% of their short-term, wholesale funding. However, in April 2013, Scharfstein raised the estimate 10 percentage points to 35%.
(click to enlarge)
The Investment Company Institute estimates that in 2012 prime money market funds accounted for 22% or roughly $258 billion of the short-term liabilities of major banks. (See chart above.)
(click to enlarge)
The money market tsunami
JPMorgan Chase, State Street and Wells Fargo worry the proposed floating net asset value would destroy the money market business for them.
In a September 2013 comment letter to the SEC, State Street wrote in support of the status quo.
". . . we believe that a stable $1.00 per share NAV is the fundamental characteristic of money market funds, and if money market funds were unable to provide that stable NAV, investors would transition their cash investments to other vehicles and threaten the viability of money market funds as an investment option."
JPMorgan Chase struck a similar chord:
"Many of these investors, based on their organizations' objectives and investment guidelines, will not consider investing in a MMF with a floating NAV."
Wells Fargo cautioned:
"A variable NAV requirement would likely have a significant negative impact on investors. Some investors, including corporate liquidity managers, municipalities and trustees, may face hurdles, such as governing investment guidelines, that may prevent them from investing in anything but a stable value money market fund." (Note:The quote is from the company's 2009 letter, which it included by reference in its 2013 letter to the SEC on the same subject.)
Federated Investors' (FII) legal counsel wrote the SEC on the proposed reforms with cost concerns.
"Federated estimates that the initial nationwide costs of implementing a floating NAV would be in the range of at least $4 billion to $7 billion."
State Street echoed the concern:
"In the absence of extremely costly (probably cost-prohibitive) system enhancements, we are concerned that adoption of this Alternative [to require a floating NAV) will significantly limit the utility of money market mutual funds as short-term investment vehicles for a broad range of institutional investors."
The IRS concern
Most financial firms are concerned over what the unresolved tax implications shifting to a floating net asset value could mean. The Internal Revenue Service has held preliminary discussions with the SEC on the idea of exempting money market funds from capital gains, but nothing as of yet has been decided. Were money market fund investors forced to account for all their gains and losses, it would be a monumental accounting assignment far greater than the benefit of the increased yield provided by money market funds.
There is still time to act
The SEC could render a decision on money market fund reform later this year. If the decision is to impose floating net asset values, it would be a devastating blow to money market funds.

10/09/2013 12:23 PM

Robert Reich on Shutdown

'You Can't Negotiate with Extortionists'

An Interview by Gregor Peter Schmitz and Thomas Schulz

In a SPIEGEL interview, political economist and icon of the American left Robert Reich urges President Obama to stand his ground on the country's budget crisis. He also calls for drastic tax increases for the rich to fight growing inequality.

SPIEGEL: The world is mesmerized by the spectacle of the government shutdown in Washington. To you, however, this must seem like déjà vu.

Reich: When I was secretary of labor under President Bill Clinton, we lived through the last shutdown of the US government, in 1995. I had to tell 15,000 people that they had to go home, and I didn't know when they would be paid. It was terrible, and we didn't know how long it would last.

SPIEGEL: Since then, the political culture in the US has become even more radicalized.

Reich: The members of the Tea Party are much more radical and extreme. Some of them really have contempt for the entire process of government. They're followers of people who say that we ought to shrink government down to the size that it can drown in a bathtub. They hate government viscerally. They're not in Washington to govern; they're in Washington to tear it down.

SPIEGEL: The shutdown is hurting the entire country, and there is no telling how this will effect financial markets and still-shaky economic growth. Will President Obama ultimately have to aim for a compromise?

Reich: This bill passed both houses of Congress, was enacted by the president, signed into law by the president, certified as constitutional by the Supreme Court. But instead of going through a normal legislative process of amending a piece of legislation to delay it or change it or even repeal it, the Republicans simply say: "We are going to hold the entire government of the United States ransom unless we get our way." You can't negotiate with extortionists.

SPIEGEL: Clinton won re-election after the last shutdown because the American public largely blamed the Republicans. Could Obama eventually end up the big winner in all of this, as well?

Reich: It's much more difficult. Today, you have many more Republican members of Congress in safe districts, so they're not worried about the voters being angry with them. And many of them are bankrolled by some of the richest Americans, often billionaires. They have the resources to support the demand to shrink the government. America has become the most unequal society among advanced countries, and rich people are now free to spend as much money on political campaigns as they wish.

SPIEGEL: That is the main theme of your documentary "Inequality for All," which is already being touted as an Oscar contender. In it, you paint a grim picture of the US as a country torn apart, and you warn about dramatic consequences for the economy. Are things really that bad?

Reich: The economic divide has rarely been as pronounced. The typical male worker in the US was making $48,078 (€35,400) a year in 1978; now this average annual salary is down to $39,000. At the same, the net worth of the 400 richest Americans is higher than that of 150 million Americans combined.

SPIEGEL: The idea of getting rich used to be a basic element of the "American Dream." Whoever succeeded in becoming a millionaire was admired rather than reviled.

Reich: We used to be so proud that our country offered far more economic opportunities than the feudal system in Great Britain, with its royal family, princesses and dukes. But today, social mobility in the UK is higher than in the US. Our social rift is as big as it was in the 1920s.

SPIEGEL: This didn't happen overnight; it has been decades in the making. Why was the protest against it muted for so long?

Reich: Most Americans stopped looking at what was happening through a variety of coping mechanisms -- starting with women entering paid work and then everyone working longer hours and using their homes for raising equity and generating more money through debt. The typical household basically staved off the day of reckoning. But all those coping mechanisms are now gone, and we have an economy where the median household has got to face the reality that wages are actually declining in real terms adjusted for inflation. The second reason has to do with the direct consequences of wealth in politics. The super-rich not only poured their money into politics directly but poured money into think tanks and public relations campaigns.

SPIEGEL: To say what?

Reich: To tell the public big lies, for example, that if you lower taxes on the wealthy and allow them to become even wealthier, the gains will trickle down to everybody else.

SPIEGEL: But didn't President Kennedy say "A rising tide lifts all boats"?

Reich: Well, that sounds very nice; but it never actually happened. And people are beginning to catch on to the fact that it was a big lie. The super-rich also insisted that income from investments should be taxed less than wages. That is why Warren Buffett pays a lower tax rate than his secretary. And there were related lies, like the message that you have to reduce taxes on corporations and the super-rich for them to create jobs.

SPIEGEL: But the top earners are also responsible for the largest share of tax receipts. And when wealthy people spend more, the whole economy benefits.

Reich: Only that they do not. A super-rich person featured in my movie puts it this way: "Even the richest person sleeps on only one or two pillows." The reality is that the major job creators in any economy are the people who buy, the vast middle class and the poor; if you reduce their share of the economy and yet productivity gains continue, they simply are not going to be able to buy enough to keep the economy going at or near full employment unless you have a huge net export market, which we do not have.

SPIEGEL: Your suggestion is to dramatically increase taxes. But would that not curb demand as well? In Germany, that is one of the strong arguments against government plans to raise taxes on wealthy citizens after the election.

Reich: It is a myth that higher taxes lead to less demand and slower growth. In the first three decades after World War II, US top tax rates on the wealthy were never below 70 percent. Under President Dwight D. Eisenhower, it rose to 91 percent. And the economy grew faster in those years than it has grown after President Reagan radically lowered taxes on the wealthy, partly because we heavily invested in infrastructure and education back then, which is essential to economic growth.

SPIEGEL: These days, the top tax rates are drastically lower, average earners have sinking incomes and the middle class has more and more burdens. Why hasn't a group of fed-up Americans taken to the streets to express their outrage?

Reich: There was one. It was called the Occupy movement.

SPIEGEL: But it petered out quickly, while the Tea Party is still a political factor. Has the American left lost its fighting spirit?

Reich: The Tea Party movement was bankrolled by some very wealthy people. And that bankrolling enabled it to do what the Occupy movement could never do, and that is develop a political strategy and organization. But there is some fatalism, true. One of the goals of the right in America is to make the American public so cynical about government that they give up caring.

SPIEGEL: That strategy appears to be working.

Reich: It works to a point. Social change occurs when the gap between the ideals that people hold and the reality that they see every day gets too large. So even though people may be cynical about government, there will soon be an upsurge of demand for change.

SPIEGEL: Are you trying to accelerate that process with your movie?

Reich: Look. I am a person of short stature; I was bullied constantly when I was growing up. Therefore, I have always wanted to stand up for the little guy. I am not so self-important to believe that I can solve this huge problem alone. The question is if my movie can help catalyze something that's just below the surface. If you look at the mayoral campaign of Bill de Blasio in New York, you'll see social inequality is front and center ...

SPIEGEL: The Democratic candidate has pledged to raise taxes on the rich to finance better schools for everybody else.

Reich: And that in New York, the financial capital of the world! And de Blasio is likely to win! Also, if you look at the strikes of Wal-Mart and fast-food workers around the country, there are a lot of indications that people are fed up with where things are and want fundamental change.

SPIEGEL: Still, that's far from meaning that these sentiments will also lead to political outcomes. Directly after the financial crisis erupted, there was an enormous amount of rage at the complex of Wall Street, corporations and Congress. Obama had a unique opportunity to tackle that complex …

Reich: … and he squandered it. Obama should have put far more conditions on the banks that received the bailouts. He should have told them: "You've got to agree to some severe regulations like resurrecting the Glass-Steagall Act" -- which separated investment from commercial banking -- "and you've got to refrain from providing big bonuses for your executives."

SPIEGEL: Why wasn't Obama able to get his way?

Reich: His administration has been too close to Wall Street. Too many Obama administration officials have worked on Wall Street; too many are leaving to go to Wall Street. And Wall Street is simply not attuned to the needs of average working Americans.

SPIEGEL: Wall Street is no longer the dominant industry in the US. Silicon Valley and brands like Google, Apple and Facebook have become the backbone of the American economy.

Reich: I am not so sure if that is a great development. Look more closely where the jobs are created and the profits flow. You would think that a hugely profitable company like Apple employs hundreds of thousands of people in the US. Actually, it's not even 50,000. You would also think that software giant Microsoft would pay taxes on its profits in the US. But Microsoft just bought Nokia. Why? Well, Microsoft has a huge amount of money offshore. It doesn't want to bring it home because it doesn't want to pay taxes. So buying another company is a better way to spend that money. But that doesn't help American middle class families, and it aggravates inequality here.

SPIEGEL: But isn't a certain degree of inequality also the price a country has to pay for innovation? Doesn't the incentive of great wealth foster risk-taking and creativity?

Reich: A little inequality fosters innovation, true. But there are limits. Does somebody need an annual income of $20 million to be innovative? Somebody's going to be very innovative at $10 million a year. And I am sure Mark Zuckerberg did not create Facebook to become a multi-billionaire.

SPIEGEL: Compared with how things are today, the years when Bill Clinton was president seem downright heavenly. The economy was growing; the budget was balanced. But you resigned after one term as secretary of labor. Do you regret doing so?

Reich: I was frustrated. Even though the economy did really well in these years, we didn't fundamentally change the trend toward wider income inequality.

SPIEGEL: There is a lot of chatter about a potential 2016 presidential campaign by Hillary Clinton. Could she be the kind of progressive president that her husband and Obama were not?

Reich: Perhaps. I worked very closely with her over the years.

SPIEGEL: More than that! You even dated her.

Reich: We once went out to see a movie when we both went to law school at Yale. It was one date which I did not even remember until a reporter called me about it a few years ago. But, honestly, I have enormous respect for her. However, she is wise enough to understand that a president can only lead to some extent.

SPIEGEL: Why is that?

Reich: One of the biggest problems in this country is that we are losing the intermediary organizations, such as strong labor unions. They were the backbone of our economic and democratic system, and now just 11 percent of our workforce is still unionized. Instead, we have national parties that are nothing more than fundraising devices -- and officeholders who are constantly out there trying to sell themselves, literally.

SPIEGEL: Mr. Reich, thank you for this interview.


miércoles, octubre 09, 2013



Five Years in Limbo

08 October 2013

NEW YORK – When the US investment bank Lehman Brothers collapsed in 2008, triggering the worst global financial crisis since the Great Depression, a broad consensus about what caused the crisis seemed to emerge. A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it. Financial deregulation – together with easy money – had contributed to excessive risk-taking. Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system’s total collapse. Thus, greater reliance on fiscal policy – increased government spending – would be necessary.

Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned. The European Union is just emerging from a double-dip (and in some countries a triple-dip) recession, and some member states are in depression. In many EU countries, GDP remains lower, or insignificantly above, pre-recession levels. Almost 27 million Europeans are unemployed.

Similarly, 22 million Americans who would like a full-time job cannot find one. Labor-force participation in the US has fallen to levels not seen since women began entering the labor market in large numbers. Most Americans’ income and wealth are below their levels long before the crisis. Indeed, a typical full-time male worker’s income is lower than it has been in more than four decades.

Yes, we have done some things to improve financial markets. There have been some increases in capital requirements – but far short of what is needed. Some of the risky derivatives – the financial weapons of mass destruction – have been put on exchanges, increasing their transparency and reducing systemic risk; but large volumes continue to be traded in murky over-the-counter markets, which means that we have little knowledge about some of our largest financial institutions’ risk exposure.

Likewise, some of the predatory and discriminatory lending and abusive credit-card practices have been curbed; but equally exploitive practices continue. The working poor still are too often exploited by usurious payday loans. Market-dominant banks still extract hefty fees on debit- and credit-card transactions from merchants, who are forced to pay a multiple of what a truly competitive market would bear. These are, quite simply, taxes, with the revenues enriching private coffers rather than serving public purposes.

Other problems have gone unaddressed – and some have worsened. America’s mortgage market remains on life-support: the government now underwrites more than 90% of all mortgages, and President Barack Obama’s administration has not even proposed a new system that would ensure responsible lending at competitive terms. The financial system has become even more concentrated, exacerbating the problem of banks that are not only too big, too interconnected, and too correlated to fail, but that are also too big to manage and be held accountable. Despite scandal after scandal, from money laundering and market manipulation to racial discrimination in lending and illegal foreclosures, no senior official has been held accountable; when financial penalties have been imposed, they have been far smaller than they should be, lest systemically important institutions be jeopardized.

The credit ratings agencies have been held accountable in two private suits. But here, too, what they have paid is but a fraction of the losses that their actions caused. More important, the underlying problem – a perverse incentive system whereby they are paid by the firms that they rate – has yet to change.

Bankers boast of having paid back in full the government bailout funds that they received when the crisis erupted. But they never seem to mention that anyone who got huge government loans with near-zero interest rates could have made billions simply by lending that money back to the government. Nor do they mention the costs imposed on the rest of the economy – a cumulative output loss in Europe and the US that is well in excess of $5 trillion.

Meanwhile, those who argued that monetary policy would not suffice turned out to have been right. Yes, we were all Keynesians – but all too briefly. Fiscal stimulus was replaced by austerity, with predictable – and predicted – adverse effects on economic performance.

Some in Europe are pleased that the economy may have bottomed out. With a return to output growth, the recession – defined as two consecutive quarters of economic contraction – is officially over. But, in any meaningful sense, an economy in which most people’s incomes are below their pre-2008 levels is still in recession. And an economy in which 25% of workers (and 50% of young people) are unemployed – as is the case in Greece and Spain – is still in depression. Austerity has failed, and there is no prospect of a return to full employment any time soon (not surprisingly, prospects for America, with its milder version of austerity, are better).

The financial system may be more stable than it was five years ago, but that is a low bar – back then, it was teetering on the edge of a precipice. Those in government and the financial sector who congratulate themselves on banks’ return to profitability and mild – though hard-won – regulatory improvements should focus on what still needs to be done. The glass is, at most, only one-quarter full; for most people, it is three-quarters empty.

A Short-Term Debt Limit Increase Would Be a Disaster

President Obama shouldn't want it. Neither should John Boehner.

by Noam Scheiber

October 8, 2013

Let’s stipulate that yesterday’s acknowledgement that the White House is open to a short-term debt-limit increase didn’t deserve half the breathless coverage it received. No, White House economic adviser Gene Sperling’s statement was not a “crack” in the Democratic Party line, as Politico put it. Nor was it, as the initial Washington Post account (no longer online) suggested, an indication that the White House was open to budget negotiations tied to the debt limit, reversing a longstanding position. As my colleague Jonathan Cohn subsequently reported, the president’s position remains where it has been for months: Congress must raise the debt ceiling with no strings attached. Sperling was simply making the uncontroversial point that the size of the debt ceiling increase is ultimately up to Congress.

Having said this, it’s worth pointing out that a short-term debt limit increase is a horrible idea, and the White House shouldn’t be remotely agnostic over it. The reason the White House has been so firm in its no-debt-limit negotiation position is that it understands what’s at stake. If Republicans believe they can extract concessions from the president by threatening a debt default (the consequence of not raising the limit), then there’s no end to what they will be able to demand. Elections and the legislative process will become utterly meaningless. A minority party will be able to enact an agenda for which it lacks popular support and sufficient votes in Congress. The only way to prevent this is to make crystal clear that there will be no concessions period, rendering the whole extortion exercise utterly pointless.

The problem with a short-term debt limit increase is it muddies everything you’re trying to make clear. Suppose Congress reopened the government for six weeks under a temporary funding bill known as a continuing resolution (CR) while at the same time raising the debt limit for six weeks. Obama has said he’s happy to negotiate a fiscal deal once the government is reopened, even as he refuses to negotiate the debt limit. Under this scenario, how would he differentiate between the two? Even if the White House were absolutely scrupulous about not trading anything for the debt limit increase (that is, not making more concessions for a budget deal that includes a debt-ceiling increase than they’d make for a budget deal without one), Boehner could always turn around and tell his rank-and-file that some of the concessions came in return for the debt-ceiling measure. It wouldn’t matter if he were right or wrong. The mere belief among Republicans that they’d extracted concessions for raising the debt limit would encourage them to try again.

But the problem is even worse than this, given the context. As things stands, the White House is saying it won’t negotiate to raise the debt ceiling, while Republicans are expressing sublime confidence that the White House ultimately will deal, as it has in the past. From my own conversations with administration officials, and from all the reporting and public statements I’ve seen to this effect, I’m fairly certain the White House isn’t going to retreat. But the fact is that there’s some ambiguity out there in light of the recent history. Unfortunately, a short-term debt-limit increase would only exacerbate this ambiguity. Given that a short-term increase would make it harder to preserve the no-negotiation posture (as explained in the previous paragraph), it would be plausible to interpret the short-term increase as an indication that Democrats do in fact want to negotiate. That’s completely at odds with what Democrats want John Boehner to believe, and (as I say) with what I think the reality is. But it’s the message Republicans will take away. If there’s a short-term increase, Boehner’s going to hold out longer into the process than if there isn’t one.

Some have suggested that there’s at least one benefit to a short-term increase: It gives Boehner more time to sober up and get his head around the consequences of default (presumably with a lot of help from Wall Street and the broader business community), and more time to persuade his members why they can’t do the unthinkable. That sounds plausible in principle. But it completely misunderstands how the House GOP actually works. The reality is that Boehner understands perfectly well that a default would be catastrophic. But because of enormous pressure from his Tea Party wing, Boehner always has to appear to be completely unrelenting up until the very last minute, at which point he relents. If the Treasury Secretary says we will default on October 17, then Boehner has to sound positively Churchillian right up until the evening of October 16, at which point he will finally break it to his troops that they have exhausted all their options.

In fact, because part of Boehner’s m.o. is to ratchet up his rhetoric as time goes by in order to sooth his looniest lunatics—he is fond, for example, of introducing various “rules” that make it logically impossible to achieve the outcome he knows he must achieve (like raising the debt limit)—extending the amount of time in which this drama plays out makes a catastrophic ending far more likely. So far, Boehner has tended to simply break his own rules when the moment of truth arrives. But it’s not hard to imagine one of these nonsensical rules tripping him up at some point. (Suppose the Tea Partiers actually, you know, hold him to his word for a change...) Bottom line: The sooner we have the final debt ceiling showdown, the fewer opportunities Boehner has to back himself further into a corner from which he may never emerge.

All of which is to say, a short-term debt limit increase will at best simply defer our current drama for another six weeks. More likely, it will substantially increase the odds of disaster. That doesn’t sound like a very good deal to me.

Noam Scheiber is a senior editor at The New Republic. Follow @noamscheiber.

miércoles, octubre 09, 2013



October 8, 2013

Brazil’s Next Steps


After a decade of fast growth and rising incomes, Brazil has hit a rough patch that is testing its government’s ability to manage the economy and satisfy the growing aspirations of its people. President Dilma Rousseff, who faces elections next year, needs to push through policy reforms and public investment projects to revive growth and bring inflation under control.

Last year, Brazil’s economy grew only 0.9 percent because private investment slowed down. Analysts expect the growth rate to recover to 2.5 percent this year, but that is still far slower than the 7.5 percent the country achieved in 2010.

In June, tens of thousands of people joined street protests that were prompted by an increase in public-transit fares but quickly became a way for Brazilians to air broader grievances about the rising cost of living, weak infrastructure, political corruption and government spending on big sporting events like the 2014 World Cup. In response to the protests, Ms. Rousseff said she would push for political reforms and investments in infrastructure, but her government has not yet delivered on those promises.

Brazil has made impressive gains under Ms. Rousseff and her predecessor, Luiz Inácio Lula da Silva. Programs like Bolsa Familia, which provides cash to families if they immunize their children and send them to school, have bolstered incomes of the poor and improved their health. About 8 percent of Brazilians lived on less than $2 a day last year, down from 20 percent 10 years earlier. Infant mortality has fallen by nearly 50 percent.

But while the incomes of the country’s poorest citizens have grown faster than those of its richest in recent years, income inequality remains high. And inflation, which erodes rising incomes, is taking a big toll on the poorest Brazilians. The country’s inflation rate was 6.09 percent in August, according to the central bank, which has raised interest rates several times this year.

People living in cities like São Paulo pay more for food, housing and other basic goods than people in other comparable countries. A big reason for the high prices is that the government has not built enough roads, railways, ports and other infrastructure to keep up with the economy’s growth. Brazil also imposes high import duties and taxes that inflate the price of many goods and services.

The country also needs to reform its education system, which does a poor job preparing young people for skilled jobs in the manufacturing and the service sector. In an international test of the reading, math and science skills of 15-year-olds, Brazilian students scored lower than their counterparts in other Latin American countries like Uruguay, Mexico and Colombia.

Brazil has such chronic shortages of skilled professionals that the government is planning to import doctors from other countries. That might be a fine temporary solution, but the government needs to build more universities and improve teaching in primary and secondary schools to make sure more students can pursue higher education.

The nation has seen social advancements in a short time, and now its citizens expect more from their leaders.

Meet The New York Times’s Editorial Board »

China’s unstoppable gold imports continue virtually unchecked

China’s gold imports through Hong Kong in August remained well above the 100 tonne level as the country remains on track to import over 1,000 tonnes of gold this year.

Author: Lawrence Williams

Posted: Tuesday , 08 Oct 2013

People have been predicting that imports of gold into China would slow down – well August figures suggest they may have, but only by a minute 3 tonnes compared with a month earlier, and the country remains on track to comfortably exceed 1,000 tonnes of known net gold imports for the year, with a total of 723 tonnes imported via Hong Kong for the first eight months.

Extrapolating this over the full year would give a total import figure (via Hong Kong alone) of 1,084.5 tonnes. On the evidence of the past six months’ import figures, the full year total could be quite a bit higher if recent momentum is sustained – and there’s no real sign of it slowing down, at least not yet – it seems more likely that the full year figure could well end up at more like 1,150 tonnes. Certainly, in past years, imports have tended to rise as the year progresses, which means that even this number could be a conservative estimate.

China net gold imports from Hong Kong 2013


January 20

February 61

March 136

April 76

May 106

June 101

July 113

August 110

Total ytd 723

But, as we have pointed out in these pages before, these figures are all based on net imports through Hong Kong alone as these are the only official figures available and are a throwback to British bureaucracy and obsession with trade statistics dating back to when Hong Kong was a British colony.

The Chinese have largely kept the old British system intact – even down to driving on the left, while the rest of China drives on the right! The old British system seems to have worked in terms of Hong Kong remaining a major global financial centre, and rather than dismantling this when they took over in 1997, the Chinese enhanced it, while using it also as a template for rebuilding their own financial centres like Shanghai, which is now rapidly overtaking the former British colony.

But the Chinese Government itself does not publish import and export statistics for gold so we rely on the Hong Kong figures to obtain a picture of how much foreign gold is entering the country – but this is perhaps not the whole picture. After all prior to 2010 gold imports through Hong Kong were virtually non existent.

It thus does seem unlikely to the writer that Hong Kong is the only import route for gold into China. There are plenty of other major ports of entry for trade into China – not least Shanghai and Beijing, and in the Shanghai Gold Exchange and the Shanghai Futures Exchange, China has rapidly built up the world’s most active physical gold exchange and the second most active gold futures market in just a few short years. Indeed the amount of physical gold traded there at times gets close to total global mine production!

China does play its gold cards very close to its chest. Few believe that China has not been increasing its gold reserves quite substantially since it last announced their virtual doubling to 1,054 tonnes just over four years ago. There have been some outspoken statements from people in China close to government and gold policy who have called for China’s gold reserves to be increased substantially – and in China few will make statements of this nature without state sanction. Although to be fair, on the converse side, there have also been those in high places who say China’s reserves are actually unchanged. But this may just be a matter of semantics and dependent on which particular government account, or warehouse, holds the gold. That is what happened four years ago with the increase in the gold reserve just being transferred from another government account in which it had previously been being accumulated. Such is the way of politicians and statistics.

Recently, in a measured article on Chinese gold, Jan Skoyles of the Real Asset Company, commented as follows: “A 2012 paper, ‘A Study on Optimal Scale of China Gold Reserves’ co-authored by the Vice-President of the China Gold Association recommended that by 2020, China’s optimal reserves should be 5,787 – 6,750 tons. If the State Council has followed this recommendation then the PBOC should currently hold between 2,947.2 tons and 3332.4 tons of gold in reserve.” With its own gold production perhaps reaching 440 tonnes this year, this suggests Chinese gold consumption alone so far this year is already over 1,000 tonnes - and accounts for around 55% of global new mined gold output. Perhaps more if imports other than through Hong Kong are significant.

Tyler Durden of Zero Hedge reckons China may actually even have far more than 3,000 tonnes in its reserves, as do a number of others, and is only waiting until it sees the time as right before announcing yet another gold reserve uptick. But would this then even be accurate?

All this of course is surmise – and after all China is not the only country to be evasive on its true gold reserve status anyway. Even the U.S. Fed won’t allow its gold reserves to be audited, which would not seem to be an unreasonable request if the gold is really there.

But, the fact remains that China is still bringing in gold at a high rate, and the momentum of this is being maintained so far. Indeed Bloomberg inferred that the August figure might have been higher, but some of the banks and institutions able to import gold had come up against quota limits. China has just relaxed its gold import restrictions opening it up to more companies or individuals. Might this give a further fillip to gold imports through the rest of the year? We will have to wait and see.


IMF sours on BRICs and doubts eurozone recovery claims

Fund admits emerging markets have exhausted catch-up growth models after being caught off guard by rout triggered by Fed taper talk

By Ambrose Evans-Pritchart

7:14PM BST 08 Oct

The International Monetary Fund has thrown in the towel on emerging markets. After years of talking up the BRICS club of Brazil, Russia, India, China, and South Africa, it now admits that these countries have either exhausted their catch-up growth models, or run into the time-honoured problems of supply bottlenecks and bad government.

The Fund has cut its forecast for the developing economies by 0.5pc to 4.5pc this year in its latest World Economic Outlook, and by 0.4pc to 5.1pc next year.

The 2013 estimates have been slashed by 1.8pc for India, for Mexico by 1.7pc, and 1pc in Russia, compared to forecasts made in April. Similar damage is expected for Turkey, Indonesia, Ukraine, and others with big trade deficits as details are fleshed out.

The IMF was caught off guard by the ferocity of the emerging market rout when the Fed began to talk tough in May, threatening to turn down the spigot of dollar liquidity that has fuelled the booms -- and masked the woes -- in Asia, Latin America, and Africa.

In what amounts to a mea culpa, the IMF hinted that it had for long been blind to festering problems in the BRICS and mini-BRICs.

It said the economies of Brazil, China, and India will be 8pc to 14pc smaller in 2016 than had been assumed just two years ago, a revision that calls into question some of the giddiest claims that the newcomers will soon surge past the decaying West.

Since emerging markets now make up half the global economy, the IMF has had to cut its world forecast to 2.9pc this year and 3.6pc in 2014, with plenty of “downside risks”, especially in Europe.

“Global growth remains in low gear. A likely scenario for the global economy is one of continued, plausible disappointments everywhere,” said the IMF. The gloomy `tour d’horizon’ suggests once again that frothy markets fuelled by easy money have decoupled from underlying reality of stagnant output.

The report pours scorn on claims that the eurozone is safely out of the woods, warning that little has been done to change the warped structure of monetary union.

The crisis-stricken states of Southern Europe face many more years of wage cuts and “internal devaluations” to claw back lost competitiveness and reverse the huge imbalances that built up in the early years of monetary union.

The IMF warned that Europe’s debt crisis may erupt again unless the European Central Bank takes action to stop the contraction of bank credit, and EU leaders deliver on their summit pledges.

“Absent a true banking union, including a strong single resolution mechanism backed by a , fiscal backstop, financial markets remain highly vulnerable to shifts in sentiment,” it said.

At best, the eurozone is expected to grow by 1pc in 2014 after shrinking by 0.4pc this year. The Fund sketched a “plausible downside scenario” entailing a lost decade, with growth never rising above 0.5pc as far as 2018, and Southern Europe trapped in perma-slump.

“Unemployment rates would stay at record highs for many years in the euro area periphery, and concerns about debt sustainability would return to the fore,” said.

It rebuked Europe’s creditor powers failing to do their part to bridge he intra-EMU North-South gap by stimulating demand, and rebuked the ECB for its passive stance, allowing chronic problems to fester.

“The ECB should consider additional monetary support, through lower policy rates, forward guidance on future rates, negative deposit rates, or other unconventional policy measures. Since these factors reinforce each other, a vigorous response on all fronts offers the best way forward. In the absence of a comprehensive policy response, matters could easily worsen.”

Crucially, the Fund disputed claims by EU officials that Club Med states have cut labour costs and reduced current account deficits by enough to restore their economies to a viable footing within EMU.

It said better appearances are largely an illusion of the cycle, and the result of crushing internal demand. “Current account deficits could widen again significantly when cyclical conditions improve,” it said.

The harsh reality is that the net foreign positions of Greece, Ireland, Portugal, and Spain will still be minus 80pc of GDP near the end of the decade. The IMF said it will take years of hard grind to reverse all the damage, no easy task as “adjustment fatigue” sets in.

The BRICS malaise is of a different character. The IMF said the a string of economies are caught in a classic Phillips Curve trap, with sticky inflation even as growth plummets.

This mix is a sign that the problems go deeper than the boom-bust effects of the credit cycle. Their economic speed limit has slipped badly, implying “serious structural impediments”.

The IMF said “time is running out” on China’s growth model, driven by a world-record investment rate of 50pc of GDP, and now afflicted by “excess capacity and diminishing returns.”

China has picked the low-hanging fruit of catch-up growth, relying on mass migration of cheap labour from the countryside. The work force will shrink next year. The “reserve army” of peasants in the interior will have disappeared by 2020 as the “Lewis Point” bites in earnest, forcing up wage costs.

The Fund is confident that emerging market will muddle through. Growth will settle near 5.5pc, still higher than it was in the 1980s and early 1990s. What seems clear is that the roaring boom of the pre-Lehman years will never return.