Japan’s Wrong Way Out

Adair Turner

Shibuya, Japan


LONDON – Financial markets were surprised by the Bank of Japan’s recent introduction of negative interest rates on some commercial bank reserves. They shouldn’t have been. The BOJ clearly needed to take some new policy action to achieve its target of 2% inflation. But neither negative interest rates nor further expansion of the BOJ’s already huge program of quantitative easing (QE) will be sufficient to offset the strong deflationary forces that Japan now faces.
 
In 2013 the BOJ predicted that its QE operations would deliver 2% inflation within two years.
 
But in 2015, core inflation (excluding volatile items such as food) was only 0.5%. With consumer spending and average earnings falling in December, the 2% target increasingly looks out of reach.
 
The unanticipated severity of China’s downturn is the latest factor upsetting the BOJ’s forecasts. But that slowdown is the predictable (and predicted) consequence of debt dynamics with roots going back to 2008.
 
Excessive private credit growth in the advanced economies before 2008 left many companies and households overleveraged, and their attempted deleveraging after the global financial crisis erupted that year threatened Chinese exports, employment, and growth. To offset that danger, China’s rulers unleashed an enormous credit-fueled investment boom, pushing the debt/GDP ratio from around 130% to more than 230%, and the investment rate from 41% of GDP to 47%. This in turn drove a global commodity boom, and strong demand for capital-goods imports from countries such as South Korea, Japan, and Germany.
 
But the inevitable consequence within China was wasteful construction investment and enormous overcapacity in heavy industrial sectors such as steel, cement, and glass. So even though service-sector expansion supports strong employment growth (with 13.1 million new urban jobs created in 2015), the Chinese industrial sector is in the midst of a hard landing.
 
Indeed, official survey results suggest that manufacturing has contracted for six months in a row. This, in turn, has reduced demand for commodities, driving countries such as Russia and Brazil into recession, and posing a major threat to African growth. Lower industrial imports are having a major impact on many Asian economies as well. South Korea’s exports fell 18% year on year in January, and Japan’s fell 8% in December.
 
In the eurozone, annual inflation is running at 0.2% – still far below the European Central Bank’s target, and German exports to China are down 4%. As a result, at its March meeting, the ECB’s Governing Council may also consider moving interest rates further into negative territory, or increasing the scale of its QE program.
 
But it is increasingly clear that ultra-low short and long-term interest rates are not boosting nominal demand. Nor should that surprise us. Japan’s experience since 1990 teaches us that once companies feel overleveraged, pushing low interest rates still lower has little impact on their investment decisions. Cutting Japan’s ten-year yield from 0.2% to 0.1%, and Germany’s from 0.5% to 0.35% – the movements over the last week – just doesn’t make a significant difference to consumption and investment decisions in the real economy.
 
The BOJ’s announcement of a negative interest rate certainly did produce a currency depreciation. But a lower yen would help Japanese exporters only if China, the eurozone, and South Korea – all themselves struggling with deflationary pressures – do not match Japan’s rate cuts.
 
At the global level, currency depreciation is a zero-sum game – we cannot escape a global debt overhang by depreciating against other planets. And if multiple currencies all depreciate against the US dollar, the resulting impact on the US manufacturing industry could slow the American economy, undermining its import demand and thus hurting the word’s exporters.

Forecasts for US economic growth have been revised downward significantly since the Federal Reserve’s interest-rate hike in December.
 
Depressed equity markets and falling bond yields worldwide in January 2016 thus illustrate the global nature of the problem we face. Demand is still depressed by the overhang of debt accumulated before 2008. Indeed, this pre-2008 debt has not gone away; it has simply been shifted between sectors and countries.
 
Total global debt (public and private combined) has increased from around 180% to more than 210% of world GDP. Faced with this reality, markets are increasingly concerned that governments and central banks are running out of ammunition to offset global deflation, with the only tools available those that simply redistribute demand among countries.
 
But the fact is that central banks and governments together never run out of policy ammunition to offset deflation, because they can always finance tax cuts or increase public expenditure with printed money. This is precisely what the Japanese authorities should do now, permanently writing off some of the BOJ’s huge holdings of Japanese government bonds and canceling the planned sales-tax increase which, if it goes ahead in April 2017, will further depress Japanese growth and inflation.
 
Such a policy, as I set out in a paper at the IMF’s 16th Annual Research Conference in November, is undoubtedly technically possible. And it does not, contrary to some objections, involve commitment to perpetually low interest rates. Rather, it is the only way by which Japan can now escape from a debt trap so deep that only zero interest rates make it sustainable.
 
There are no credible scenarios in which Japanese government debt can ever be repaid in the normal sense of the word “repay”: and none in which the bulk of the BOJ’s holdings of Japanese government bonds will ever be sold back to the private sector. The sooner that reality is admitted, the sooner Japan will have some chance of meeting its inflation targets and stimulating total demand, rather than seeking to shift it away from other countries.
 

Read more at https://www.project-syndicate.org/commentary/bank-of-japan-negative-rates-mistake-by-adair-turner-2016-02#6SJf06mAcwCB8i8x.99


Football Leaks

Whistleblower Exposes Top Players' Contracts

By Rafael Buschmann and Michael Wulzinger

Photo Gallery: A Football Industry in Turmoil

 
Online whistleblower Football Leaks has attracted global attention for publishing the contracts of stars like Germany's Mesut Özil. For its latest exposés, the platform has provided SPIEGEL with access to around 60 documents that contain new revelations such as the annual salary paid by Real Madrid to Toni Kroos.

The man feared by football's dubious dealmakers, a man who is by now probably even hated by the bosses at Real Madrid, is somewhere in Portugal. He doesn't allow visitors -- only emails.

When asked if he can be reached by phone, a reporter is told it would be better not to. The man calls himself John.

John writes: "We unfortunately cannot reveal much about our identity to you. As you can imagine, we have some pretty powerful enemies."

Powerful, indeed.

John is one of the creators of the online whistleblowers platform Football Leaks, a secret group that has been publishing spectacular details about the contracts of top international football players, including the amount paid by Arsenal London for Mesut Özil, the transfer sum paid for Brazilian forward Hulk by Zenit Saint Petersburg and the special agreement between AS Monaco and Manchester United over French player Anthony Martial. Football Leaks has the contracts, is familiar with the sums and is posting them on the Web. The football industry is in turmoil.

The platform scored its most recent coup just over two weeks ago, when Football Leaks published the agreement Real Madrid reached two and a half years ago for the transfer of winger Gareth Bale from Tottenham Hotspur to its team. The site also published the transfer fee: €100,759,418 ($112.5 million).

Bale, as we now know, is the world's most expensive football player. But we also know that Tottenham and Real have a non-disclosure agreement in place that forbids them from going public with these details of the true sum and that they will instead state the amount of €91.6 million. The reason for this may have been a desire not to bruise the ego of another Real superstar, Cristiano Ronaldo, who was previously the world's most expensive footballer. He transferred from Manchester United to Real in 2009 for €94 million.

'We Want a More Transparent and Credible Sport'

Be it the absurd money flows or the bizarre vanities, Football Leaks is mercilessly posting every insane aspect of professional football -- exposing both legal and illegal doings.

SPIEGEL has established written contact with John. "We want a more transparent and credible sport," he writes. "Some clubs simply have no respect for the fans and keep too much secret.

Everything has become taboo: salaries, contracts, clauses." He says the aim of Football Leaks is to clean up the transfer system and to rein in the influence of player's agents and investment funds.

It's unclear how Football Leaks is getting access to the documents. They could be coming from sources linked to player's agents, from club representatives or from employees at national football associations. What's striking is the fact that so many of the documents it has exposed relate to Real Madrid, the Sporting Clube de Portugal, the country's top football association, or the company owned by Jorge Mendes, who on the side of Cristiano Ronaldo and José Mourinho, has risen in the past 10 years to become the world's most influential agent. During the World Cup summer of 2014 alone, Mendes' company Gestifute was involved in transfers of players worth more than €250 million.

"Our documents come from different sources -- we have a very good network," John writes.

According to his account, Football Leaks has spent months gathering contracts and agreements from the football industry. Football Leaks made the decision last summer to go public with its information.

He writes that the decision had been triggered by the "lies and deception" that had accompanied the transfers of Portuguese players.

"We are all Portuguese citizens," John writes. "We all live in Portugal." John does not reveal how many people are involved in the project, how old they are or their professional backgrounds. "That's too dangerous," he writes.

Some of the leaks published so far have involved indiscretions and appear to have been aimed at quenching fans' thirst for scandal. Nevertheless, the documents are still often explosive in nature. One revelation led the Dutch football association to impose a three-year ban on FC Twente Enschede -- as recently as 2010 the champions of the country's top professional league, the Eredivisie -- from European matches. Football Leaks had published documents showing that the club had sold the transfer rights for five players to a dubious sporting rights agency in Malta, a business model that international football body FIFA banned at the beginning of 2015.

New Revelations

Football Leaks also provided documents to SPIEGEL to vet and publish. At the end of last week, our editorial staff in Hamburg received around 60 documents. They include the transfer agreement between FC Bayern Munich and Real Madrid for player Xabi Alonsos dating August 28, 2014, as well as the transfer agreement between Real Madrid and FC Bayern for German national team player Toni Kroos. The transfer fee, as stated in the document, was €25 million, to be paid in full by July 15, 2016 in three installments.

This agreement, which is also signed by Kroos, is dated July 10, 2014 -- two days after Germany's 7:1 triumph in the World Cup semifinal against Brazil and three days before the victorious final match in Rio. Kroos finally signed an employment contract with Real on July 17. Kroos had hoped to rise within FC Bayern to become one of its best-paid players, but club bosses refused to promote him.

The negotiations over Kroos' salary captivated fans and media alike for months. According to this employment contract, Madrid was offering Kroos the kind of top salary he had been denied in Munich: He would enjoy gross earnings of €11.3 million during the first season and then €10.9 million a year from his second to sixth season with the team. This contract stipulated that Kroos would be paid twice a year instead of monthly, with half to be paid on Jan. 10 and the other half on July 10.

One detail that says a lot about the glamour-factor of his employer can be found on page three of the amendments to this contract. It states that the Real midfielder is to receive a one-time gross payment of €1,818,182 if he is one of the top three candidates for FIFA's World Player of the Year. Afterward, this sum would be added to his fixed salary. Kroos would be offered the same one-time bonus and the same salary increase if he were named World Player of the Year.

Toni Kroos and his adviser Volker Struth declined to comment on the terms of his contract.

Football Leaks intends to reveal the contents of Kroos' contracts online after the publication of this issue of SPIEGEL.

Dubious Business Dealings

The documents the whistleblower sent to SPIEGEL in advance also contain sensitive information.

They shed light on the dubious business dealings of the Dutch players' agent Martijn Odems, a well-networked man in Italy's Serie A soccer league. Odems, whose consulting firm Orel B.V. is based in Amsterdam, negotiated Argentine goalie Juan Pablo Carrizo's switch from Lazio in Rome to Inter Milan. According to the documents from Football Leaks, the agent assigned his fee to a company registered in Panama.

These agreements were strictly confidential. Even Inter Milan was not permitted to know anything about them. The club transferred Orel B.V. €300,000 after Carrizo's transfer in three payments. This was confirmed to SPIEGEL by an Inter Milan spokesman on Thursday. So far, so good. Odems was being paid his fee in the Netherlands.

But for him, the matter wasn't over yet apparently, the Football Leaks documents show. The company in Panama, with which Odems had entered into a secret deal, sent three invoices totaling €277,500 to Orel B.V. for the Carrizo transfer, payable to two of its bank accounts in Vienna and London -- a move that raises suspicions of possible tax evasion.

For Odems' company in the Netherlands, receipt of the payment from Inter was cancelled out by the money transfers to the Panama firm.

The Dutch agent didn't respond to a request for comment about why he passed along the money he had received from Inter Milan to a company based in Panama. He also didn't say whether or how much of his share of the profits was paid back to him by the offshore company -- a classic move among agents. Odems obviously wasn't counting on Football Leaks to come snooping.

Enriching Themselves

"Our motivation is to put a stop to people unfairly enriching themselves from our national pastime, soccer," says John. "Our revelations spur people around the world to address these abuses." At Football Leaks, John writes, no strings are being pulled by a higher power with some vested commercial interest or malicious intent to undercut the competition. "We are totally independent and none of us is paid for working here," he writes. According to John, Football Leaks is in possession of massive troves of data that must still be evaluated. "We have more than 500 gigabytes of documents."

That's hundreds of thousands of pages.

But the pressure on Football Leaks is growing. Anyone who takes on the world's most famous soccer clubs and the consultants that help them push around millions of euros is not going to walk away unscathed. The whistleblowers' website has been brought down three times. They suspect the Doyen Sports Group is behind the hacks. It's a dubious sports rights agency which has had its financial activities laid bare by Football Leaks. The agency denies this allegation, instead accusing Football Leaks of blackmailing the company with data stolen through hacking. John counters that the accusation is "ridiculous."

The whistleblowers believe Doyen hired private detectives to spy on them in order to shut Football Leaks down. "The football lobby has very powerful people working for it. They also have significant influence over the investigative authorities," John writes.

In Portugal, Football Leaks is currently being investigated for defamation and violation of banking secrecy laws. Gareth Bale's consultant is also demanding an independent investigation into Football Leaks.

But the whistleblowers aren't allowing themselves be intimidated. "People like Edward Snowden and Julian Assange are a big inspiration for us," John writes. "They sacrificed everything for their convictions and dreams."

Football Leaks will continue to publish documents. Meanwhile, they've also switched to a server based in Russia.

 
The dotted line: trade in the Pacific
 
 
In Auckland this morning, representatives of a dozen countries spanning four continents signed the Trans-Pacific Partnership, an ambitious free-trade agreement long in the negotiation. The 12 include America and Japan, the world’s biggest and third-biggest economies in nominal terms, and together account for about 40% of the global economy. For Barack Obama’s administration, TPP has become an important part of its “rebalance” towards Asia and the Pacific—a symbol of how America, not China, can still set the rules.
 
Celebrations, however, will be tempered by the difficulties ahead. The deal is opposed by both anti-globalisation campaigners and powerful lobbies. Signature is a prelude in several countries to arduous domestic ratification processes, notably in America. This week the White House urged Congress not to delay. But it already seems too late for passage before November’s presidential and congressional elections. So TPP’s fate may hinge on American voters.


Jobs Report

Three Big Questions on the Job Market, and How January’s Numbers Answer Them

Neil Irwin    


Get used to jobs numbers like those newly reported for the United States Friday morning — if we’re lucky.

It’s not that the new data blew the lid off expectations or pointed to some radical acceleration in job growth in the opening weeks of 2016. Quite the contrary. The nation added 151,000 jobs in January, which was below analysts’ expectations and well below the revised 262,000 jobs added in December.
 
That looks an awful lot like “reversion to the mean,” and it wouldn’t be surprising if final revisions show a slower pace of job growth across the two months.
 
But while economists and financial markets have traditionally placed the greatest weight on that payroll number as the key indicator of whether economic growth is speeding up or slowing down, we’re entering a phase where some other components of the jobs report are more important.

Think of it this way: Millions of people lost their jobs during the 2008-2009 recession, and during the last seven years the biggest question has been how quickly they got back to work. But now that job is largely accomplished, and the United States has 4.9 million more jobs than it did at the onset of the recession in December 2007.


At work on a school bus on the assembly line at Blue Bird Corporation’s manufacturing facility in Fort Valley, Ga., last fall. Credit David Goldman/Associated Press       
 
 
Mathematically, the rate of job growth will have to slow as we get closer to full employment, simply because the number of people available to be hired can over the long term only grow in line with population growth, which would be something below 100,000 jobs a month.
 
The questions now are more subtle. Here are the questions — and the answers offered by the January data.
 
How close are we to full employment?

The jobless rate fell to 4.9 percent in January, the first sub-5 percent reading since February 2008.
 
That’s good news, particularly because the details of the survey from which the unemployment rate is derived show that the rate fell for good reasons (more people working) instead of bad ones (people dropping out of the labor force).
 
What exactly constitutes full employment is open for debate, but it’s important to note that we are now within sight of a jobless rate that matches the low point of the 2002-2007 expansion (4.4 percent, achieved in several months in 2006 and 2007).
 
Are more people joining (or rejoining) the labor forcé?

During the crisis, millions of Americans dropped out of the labor force, and a key question for understanding the United States’ economic potential is how many can be coaxed back in as the job market improves.
 
The January numbers report good news on that front. After adjusting for the updates to the Labor Department’s population estimates, the size of the labor force rose by 284,000 in January, and the ratio of the population that is employed ticked up by a tenth of a percent, as did the labor force participation rate.
 
It’s hardly enough to solve the problem of America’s missing work force, but for one month at least the numbers were pointing in the right direction.
 
Are wages finally rising?
 
With full employment within sight, the big question is less how many jobs are being added and more about how much workers are being paid. Here too there was good news in January, with an 0.5 percent rise in average hourly earnings and a small increase in the length of the average workweek.
 
That still leaves wage growth over the last year at 2.5 percent, below its pre-recession levels.
 
The silver lining is that inflation has been so low over the last year, thanks in large part to a drop in energy prices, that the 2.5 percent increase in an average worker’s pay translates into a meaningful gain in buying power.
 
As we get closer to full employment, it is inevitable that job creation will slow. But so long as these other indicators in these monthly reports keep showing improvement in 2016, it will be a good year for American workers anyway.


These Important Stocks are Trading Like a Financial Crisis Has Begun

Justin Spittler


European bank stocks are crashing.

Deutsche Bank (DB), Germany’s largest bank, has plunged 36% this year. Its stock is at an all-time low.

Credit Suisse (CS), a major Swiss bank, has plummeted 40% this year to its lowest level since 1991.

As you can see in the chart below, the STOXX Europe 600 Banks Index, which tracks Europe’s biggest banks, is down 27% this year. It’s fallen six weeks in a row, its longest losing streak since the 2008 financial crisis.

These are huge drops in a short six-week period. It’s the kind of price action you’d expect to see during a major financial crisis.



The sell-off in Europe’s banks has dragged down other European stocks. The STOXX Europe 600 Index, which tracks 600 large European stocks, is down 15% this year to its lowest level since October 2013.

• European banks are struggling to make money…

Deutsche Bank lost €2.12 billion for the fourth quarter… after making a €437 million profit the year before. Credit Suisse lost €5.83 billion last quarter… after making a €691 million profit the year before. Profits at BNP Paribas (BNP.PA), France’s largest bank, plunged 52% last quarter.

• Europe’s crazy monetary policies are starving banks of income…

Dispatch readers know the Federal Reserve has held interest rates at effectively zero since 2008.

The European Central Bank (ECB), Europe’s version of the Fed, also cut rates after the global financial crisis. Unlike the Fed, the ECB didn’t stop at zero…

The ECB dropped its key rate to -0.1% in June 2014. It was the first major central bank to introduce negative interest rates. Today, its key rate is -0.3%.

• The ECB’s key rate of -0.3% sets the tone for all interest rates in Europe…

It forces banks to charge a rock-bottom interest rate on loans. This has eaten away at bank profits, as The Wall Street Journal reports:

Very low interest rates hurt the profits banks make on loans, especially when investors believe loose monetary policy is here to stay. Long-term rates at which banks lend then fall to be little more than short-term ones at which banks borrow.

• The idea of negative interest rates likely sounds bizarre to you…

After all, the whole purpose of lending money is to earn interest. With negative rates, the lender pays the borrower. So, if you lend $100,000 at -1%, you’ll only get back $99,000.

Negative interest rates are a scheme to get people to spend more money. According to mainstream economists, spending drives the economy. By cutting its key interest rate to less than zero, the ECB is making it impossible for people to earn interest on their savings. This discourages saving and encourages spending.

But as Casey Research founder Doug Casey says, this isn’t just wrong, it’s the exact opposite of what’s true. Spending doesn’t drive the economy. Production and saving drive the economy.

You have to save to build capital, and capital is necessary for everything.

• Negative rates haven’t helped Europe’s economy…

Europe’s economy grew at just 0.3% during the third quarter. Europe’s unemployment rate is up to 9%, nearly double the U.S. unemployment rate. And the euro has also lost 17% of its value against the U.S. dollar since June 2014.


• If you’ve been reading the Dispatch, you know negative interest rates are a new government scheme…

Until recently, negative interest rates didn’t exist. Governments invented them to push us further into “Alice in Wonderland.” That’s our nickname for today’s economy, where eight years of extremely low interest rates have warped prices of stocks, bonds, real estate, and nearly everything else.
 
For months, we’ve been warning that negative rates are dangerous. Last month, Japan, the world’s third-largest economy, joined the list of countries using negative rates. Sweden, Denmark, and Switzerland all have negative rates, too. According to The Wall Street Journal, countries that account for 23% of global output now have negative interest rates.

• This has set the stage for a huge economic disaster…

To avoid big losses, we recommend owning physical gold. Unlike paper money, central bankers can’t destroy gold’s value with bad policies. Instead, gold’s value usually rises when governments devalue their currencies…

For example, Europe’s currency (the euro) has lost 17% of its value against the dollar since June 2014. But the price of gold measured in euros is up 14% in the same period.

We recently put a short presentation together that explains the best ways to “crisis proof” your wealth. We encourage you to watch this free video here.

• A reminder: Tom Dyson’s free income training course airs today…

Tom is the editor of The Palm Beach Letter, one of the world’s most respected investment advisories.

His specialty is finding safe investments that pay steady income streams. Investors who used Tom’s strategy during the last financial crisis avoided big losses.

Like us, Tom thinks another big economic crisis is coming. To help investors prepare, he’s hosting a free training season that explains his “all-weather” strategy that generates income in up, down, or sideways markets. Over eight years, his strategy has produced a 96.2% success rate. Click here for more details.

Chart of the Day

Deutsche Bank’s stock has been destroyed.

Today’s chart shows Deutsche Bank plummeting 46% over the past year. Yesterday, it hit an all-time low.

Today, Deutsche Bank jumped 10% after the company said it’s considering a bond buyback program.

The company hopes this will ease investor concerns.

E.B. Tucker, editor of The Casey Report, doesn’t think the plan will work:

Deutsche Bank is in trouble. It barely survived the last crisis. In the aftermath, it took tremendous risks to make as much profit as possible.

But its winning streak is coming to an end… and it still has to pay for all its obligations.

Deutsche Bank also has problems beyond its control…

Europe isn’t growing. It’s also dealing with negative interest rates. This is a double whammy for big banks, especially ones that took on too much risk.