Debt: Portugal's Minsky Moment?

PORTUGUESE GOVERNMENT BONDS 10YR NOTE PORTUGAL PL (GSPT10YR:IND) - graph source: Bloomberg

Same may think that ECB's 3-year longer term refinancing operation (LTRO) has taken the Euro a step back from the cliff's edge. However in a scenario where sovereign debt borrowing costs have fallen across Europe, Portugal's 10 year bond yields rose steady, to all-time highs, despite the issuance of 2.5 billion euros of short-term treasury bills on January 18th at lower yields.

The country's 10-year yields are now close to 15%. Reuters notes that Five-year credit default swap prices implied the market was pricing in a 66.8% chance of default.

In the Euro crisis time frame, Austerity and Growth seem to be at odds with each-other and the 'confidence fairy' is nowhere to be seen! As Paul Krugman said in 2010, "somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed". For a small, open economy of the periphery, expansionary austerity cannot be expected to work in a period when the few countries with current account surplus and a trade surplus are reducing consumption. By the time the country is globally competitive, it may be too late. In the worst scenario we could be heading for a Heinrich Brüning style deflation.

Has Portugal's Minsky Moment arrived at last?

Inequality in America (and Britain)

Dr. Alan Krueger, chairman of the President’s Council of Economic Advisers, spoke yesterday at the Center for American Progress about how inequality threatens both the middle class and the economy at large.

The chart below, from his Powerpoint presentation, illustrates how America became the Western World champion of Income Inequality and more surprisingly of lack of intergenerational mobility. The children of the poor stay poor. The American Dream is dead. 

Furthermore, it is not a shock to see that the former colonial power, Britain, now the most American part of Europe, comes a close second to the US.

“The Great Gatsby Curve” - Higher income inequality associated with lower intergenerational mobility

Economist Alan Krueger, Chairman of the Council of Economic Advisers and his boss, a certain Hussein Obama

Note on the graph:

Originally from a paper by Miles Corak,  professor of economics with the Graduate School of Public and International Affairs, University of Ottawa’s, it shows a negative relationship between the Gini coefficient and intergenerational earnings elasticity.

The Gini coefficient is a standard way of measuring inequality. It is an index between 0 and 1, based on the Lorenz curve, which is the proportion of the total income earned by each percent of the population. The larger the number, the less equal the society.

Intergenerational earnings elasticity is the relationship between parents’ earnings and those of their children. In a way, it shows if children can escape their parents’ poverty. According to the 1921 song by Van & Schenck, immortalized in F. Scott Fitzgerald’s "The Great Gatsby", they can’t: “The rich get richer and the poor get children.” 

Therefore the title of the graph!

Cover of  F. Scott Fitzgerald’s "The Great Gatsby"
Inequality in America

European and American Elites united

The interesting Republican primary continues to produce pearls of speech:


"American elites are guided by their desire to emulate the European elites," says presidential hopeful Newt Gingrich. "As a result, anti-religious values and principles are coming to dominate the academic, news media and judicial class in America."


Praise the GOP's troglodytes, for acknowledging the continental elites some merit!

I hate Europe - Newt Gingrich cartoon

Der Spiegel summarizes de GOP posture well: "Europe is socialist, bloated and a threat to the global economy. That appears to be the message from the ongoing presidential campaign in the US. Republicans in particular have discovered Europe as a convenient punching bag -- and have even begun accusing each other of being too 'European.'"

Invasion of Goa - 50 years

December 18th 1961, the armed forces of the self described "pacifist" Nehru, attack Portuguese India, the first and last bastion of European civilization in the subcontinent.

Portuguese India - Coat of Arms

Map of Portuguese territories in India

A few lines by the poet M.Daedalus (www.mdaedalus.com), to honour the day:

Goa 1961

A taciturn rain envelops the morning,
Tears drop from the cross of a white basilica,
India wears a Mediterranean nostalgia.

Man-made thunders agitate the palm-trees
The birds ebb in the ungrateful firmament
Afonso de Albuquerque is invoked in Konkani
"Nehru is coming" a soldier shouts
"Bandit, not pundit!" somebody retorts.

Pathetically the radio plays patriotic songs
Gagged by jet aircraft gutting the clouds
Shiva avenges the kingdom of Cambay
Kalashnikovs echo the screams of Bijapur
Salazar flies away in yesterday's newspaper
The Queen of the Orient drowns in the Mandovi.

Elephants loose their composure
Austins and Peugeots lie abandoned on the harbour road
Oranges and panic are spread over the pier
A man in white suit wraps a fist full of earth
Panjim dies for the sake of a life to be invented.

The empire sheds European and Asian blood
Dadra and Nagar Aveli, were the first perfidious blows
Goa, Daman and Diu completed the five wounds.

M.Daedalus

Dec 9, 2011: the first day of Europe's new life

Merkel and Sarkozy point the way... or poking fun at Cameron?

Today, 20 years after the Maastricht Treaty, the temptation may be to start a long rant on Britain's often successful attempts to block European integration, in general acting on behalf of its former colonies across the Atlantic. Thirty eight years of British Euro-skepticism and hostility have now been repaid with simple indifference. Britain was always the spanner in the European works, or as Der Spiegel puts it "the fly in the European soup"!

Anyway, let bygones be bygones and let us celebrate the first day of a new era: a two-speed Europe.

We are done with the hypocrisy, no more lowest common denominator agreements. The continent will march on forwards, and the island north of La Manche can continue swimming towards America... except that maybe Scotland may decide to join us later on.

History proved the Charles de Gaulle was right all the time: Britain should never have entered, having instead some kind of association agreement at the same level of Turkey. The unprepared US-led enlargement towards the East was also an error: although these nations are an absolutely essential part of Europe, the calendar was all wrong, i.e. deepening of the Union should have came before a formal enlargement. This has led us to a moment when only creative destruction will solve the problem, and Merkel and Sarkozy have earned their place in history. The debt crisis is Europe's blessing in disguise.

So we have a draft intergovernmental treaty, but that is only a first step. Europe now needs the instruments of representative democracy. Of course integrated economic policies, foriegn policy and defense are essential, but none are totally legitimate without the creation of European-wide political parties. Without truly European parties setting the agenda, we will always face the risk of crippling balkanization.

Having solved the problem of a Union eternaly blocked by the British, of course the intergovernmental agreement (the "compact") itself still has to run the gauntlet of approval in each signatory country. Furthermore, a 'fiscal union' may come in many forms, and the devil is in the detail. 'Fiscal union' at most will be an euphemism for common rules for budgetary discipline across the Eurozone, there will be no merger of tax structures and authorities.

Naturally the less naïve among us are also raising fundamental doubts on the sufficiency of the intergovernmental agreement as a tool to return public debt markets to normality, strong tools such as Eurobonds or the ability of the ECB to make large scale bond purchases or increase money supply remain off the agenda. Even simple budgetary discipline rules imposed from outside will only be effective if non-compliance will lead to powerful sanctions. Writing budget prudence into the constitution of each member country per se is not enough, if politicians have a talent is is fudging the rules. In case it was forgotten: rules for budgetary discipline across the EU are already in place. The Euro convergence criteria (aka Maastricht criteria) require that member states keep deficits below 3 per cent of GDP and ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.

Charles de Gaulle vindicated at last - Gallic revenge on the Brits

Muammar Gaddafi: he died fighting, as per his promise

Muammar Gaddafi killed - rebels drag the body

May he rest in peace, Muammar Gaddafi 1942-2011.
The man fought against all the odds and died fighting after air and ground attacks.
Gaddafi stayed true to his words, that he would stay in Libya till the bitter end.
Rarely does a politician keeps his promises in such a dramatic way.

"There is a conspiracy to control Libyan oil and to control Libyan land, to colonise Libya once again. This is impossible, impossible. We will fight until the last man and last woman to defend Libya from east to west, north to south." 


and in his last will:

"Let the free people of the world know that we could have bargained over and sold out our cause in return for a personal secure and stable life. We received many offers to this effect but we chose to be at the vanguard of the confrontation as a badge of duty and honour.

Even if we do not win immediately, we will give a lesson to future generations that choosing to protect the nation is an honour and selling it out is the greatest betrayal that history will remember forever despite the attempts of the others to tell you otherwise."

Ha-Makom yenahem etkhem b'tokh sha ar aveilei Tzion vYerushalayim

After Iraq, Egypt and Tunisia, another Arab nation is ready for "Democracy".
We already have seen what "democracy" has brought to Iraq, and Egypt, and it seems that less blood flowed and more tolerance existed under Saddam and Mubarak. The only positive secondary effects will be some degree of freedom for Kurds and Berbers, but even those will be lost in a return to medieval Islamic intolerance.

Intelligence and real-politik are gone from our Washington lead foreign policy. As if the self defeating wars in Iraq and Afghanistan were not enough, the West will live to regret supporting these revolutions.

For how long will beautiful Damascus keep a Christian quarter?
Good luck Bashar!

Colonel Gadhafi in his glory days (1969)

Col. Muammar Gaddafi, the Jewish-descendent leader of Libya is greeted by President Hussein Obama, the Muslim Raïs of America - Hypocrisy in motion, an operetta like prelude to a backstabbing

Evolving World Power Balance: China's first aircraft carrier starts sea trials

Chinese aircraft carrier Shi-Lang - artist's impression - pennant number 83

She was known as Riga when her keel was laid down in Nikolayev (Ukraine SSR) in 1985, to be the second ship in the Admiral Kuznetsov class. She was launched in 1988, and renamed Varyag in 1990, as Riga was in the process of becoming a foreign city. Construction stopped by 1992, with the ship structurally complete but without equipment or weapons.

With the dissolution of the USSR, the Ukraine became the owner, but lacked the money and expertise to proceed. The Varyag rusted for several years and then was stripped. In early 1998, she lacked engines, a rudder, and much of her operating systems.

It was purchased from the Ukraine at auction for US$20 million by Chong Lot Travel Agency, believed to be acting as a proxy for the People's Liberation Army Navy (PLAN). At the time Chong Lot stated that the ship would become a floating entertainment center and casino in Macau.

As expected, Macau wasn't to be the final destination, though it would be interesting if the old Portuguese naval center would become an important base for the PLAN. In 2005, the Varyag ended up at a dry dock in Dalian, home to the PLA Dalian Naval Academy. There, China's first batch of carrier aviators began training in 2008, undergoing a four-year course.

The Chinese have been in touch with Russian naval construction firms, and may have purchased plans and technology for equipment installed in the Kuznetsov. Until last year, progress was slow. On June 8, 2011 the chief of China's General Staff of the People's Liberation Army (PLA) confirmed that China's first aircraft carrier was under construction. On the morning of August 10 the ship began her first sea trials.

Under the PLAN the carrier will bear the highly symbolic name of Shi Lang (施琅). Shī Láng; 1621-1696) was a Ming-Qing admiral. He was commander-in-chief of the Manchu fleets which destroyed the power of the Zheng family and conquered Formosa (Taiwan) in 1681.

Observers predict that she will call Sanya Naval Base on China's southern Hainan Island her mother port. If that proves true, the carrier will be assigned to the PLA Navy's South China Sea Fleet, likely sailing back and forth from the Persian Gulf to help secure Beijing's crude oil shipping line.

But besides a defensive role in protecting the vital routes for raw materials, a new offensive capability is created, projecting Chinese power. Taiwanese, Indian, Vietnamese, Thai and Australians will have to re-think their regional positions.

But of course it is the US that face the main challenge. In the short term the Chinese carrier is more a symbol for the Chinese than a menace to the US. This does not mean that real menaces do no come in other forms: the Americas should worry about their own carriers vulnerability as more of the Chinese  Dong Feng 21D carrier killer missiles (anti-ship ballistic missile / ASBM) are deployed and as rumors of a tactical naval nuclear missile start to be whispered.

Anyway, it's been some time now since history did not end: the Pacific is no longer an American lake and more is in the pipeline, e.g. in the form of a Chinese designed nuclear powered aircraft carrier. Furthermore Beijing's naval ambitions are now global, no ocean should be considered off-limits and the prospect of Chinese naval bases abroad should be faced seriously.

The years of a single super power are going away fast!

Naval Ensign of the People's Republic of China - the PLAN flag will become an ever more common sight in the world's oceans and ports - 中国人民解放军海军军旗

Dong Feng DF-21 anti-ship ballistic missiles (ASBM) on parade in Peking - 东风-21中程弹道导弹

UPDATE:

She has been seen at sea: DigitalGlobe, a commercial US satellite company, says the Shi-Lang has been photographed on December 8th off the Chinese coast by one of the company's satellites, image below:

Satellite image of the Chinese aircraft carrier Shi-Lang off the PRC's coast (c) DigitalGlobe

Update, Sept 25, 2012: it's official, the Riga is now in service as the Liaoning (辽宁号航空母舰 - hull number: 16), after the province of the same name. Only the Shenyang J-15 Flying Shark fighters are missing now. The J-15 carrier-based combat plane was adapted from the Sukhoi Su-33.

Shenyang J-15 Flying Shark fighter (歼-15) - prototype in flight - notice the hook for carrier landings