California Free Press

The Greek Tragedy: A Labyrinth of Debt

by John Lawrence from the San Diego Free Press

Wall Street's Stranglehold on Greece

How to figure out the ongoing crisis that is Greece? What exactly is going on there? As per usual it's another chapter in the strange saga that involves Wall Street's stranglehold over the world economy. What happened to Greece is similar to what happened to American mortgage holders after they were encouraged to go in over their collective heads borrowing more money than they could reasonably expect to be in a position to pay back. Greece did the same.

Will Greece default soon? Will they stay in the Eurozone or be ejected out of it. These questions have been hanging in the air for what seems like an interminably long time. Is Greece having a liquidity crisis or an insolvency crisis? That is the question. If the former, a short term loan should be able to get them over the hump. If the latter no loans or bailouts of any kind will ever solve their problem.

It all started when Goldman Sachs assisted Greece in lying their way into the Eurozone in the first place. They really didn't qualify for admission but Goldman hid that small detail under a heap of trompe l'oeil, sleight of hand and financial shananigans that got past the critical eyes of the European ministers. They manufactured a highly questionable derivative scheme involving a currency swap that used artificially high exchange rates to conceal Greek debt. Goldman then turned around and hedged its bets by shorting Greek debt just as they had done with the mortgage crisis in the US. Predictably, these derivative bets went very wrong for the less sophisticated of the two players, namely, Greece. A 2.8 billion loan to Greece in 2001 became a 5.1 billion debt by 2005. In the US mortgage fiasco they packaged subprime loans in portfolios, after having loaned money to people with questionable ability to pay back the loans, and then bet that they would default. Goldman made tons of money that way.

Now this operation on the part of Goldman should come as no surprise to those familiar with Goldman's shenanigans leading up to the debt crisis of 2008 in which they packaged a bunch of mortgages that were designed to fail into collateralized debt obligations, sold them off to unsuspecting investors and then turned around and placed bets against them. Such a deal was the Abacus fund designed by John Paulson who made billions on it. The American government then bailed out the too big to fail Wall Street banks while leaving the underwater mortgagees to dangle from a fiscal rope.

They did the same thing with Greece. They loaned Greece big bucks for its 2004 Olympic Games. Greece also borrowed a lot of money for its military. In retrospect it was foolish of Greece to borrow all this money. It never got a return on its investment from the Olympic games which it thought would encourage tourism. The Olympic site essentially became a heap of trash and rubble.

While Greeks Suffer, Big Banks Are Made Whole

With Greece owing tons of money to Wall Street, the European Central Bank (ECB) stepped in with loans ostensibly to the suffering Greek people but not really. Instead the borrowed money went straight to Wall Street to pay off Greek debts to them. The debt never really went away. Instead it was converted to debt owed to the ECB. Private debt was converted to public debt with the Greek people left hanging just as American mortgagees were.

Mario Draghi, President of the ECB, is a former employee of Goldman Sachs. So he represents Wall Street interests. It's in Wall Street's interests that austerity be imposed on Greece and that Greece be forced to sell off public assets to private investors at fire sale prices. Draghi was vice chairman and managing director of Goldman Sachs International from 2002 to 2005 so he is a natural to protect Wall Street interests, not the interests of the Greek people.

Just as a poor person who cannot pay his debts is forced to sell off his assets at fire sale prices, Greece has been forced into what is called a debt deflation spiral. Greek assets and bank collateral get deflated meaning they decrease in value making it even more onerous to make debt payments or borrow new money. Interest rates for Greece go up because the deflation of assets makes their situation even more precarious. Finally, the poor person having sold off all his assets hits the road and becomes homeless. This is also the prospect for Greece.

There is one ray of hope for Greece, however. It's primary balance - meaning its financial situation before debt and interest payments are taken into account - has become positive in the last couple of years. The Greek government is actually taking in more in revenues than it's paying out in expenses which means it is no longer in recession. There is positive GDP growth. That means that if Greece repudiated or defaulted on all its debts, it would actually be in the black. When debt payments are taken into account, however, the situation is hopeless: Greece is insolvent.

Since the ECB is not designed to do fiscal policy ala John Maynard Keynes, who believed in deficit financing to prime the pump of a down and out economy as ostensibly happened during the Great Depression when the US government borrowed money and spent it into the economy in order to get it moving again, Greece is left in the position that a) it can't borrow any more money at reasonable interest rates and b) it can't print money and spend its way out of debt. It is in the position of the average household which must balance its budget and pay its bills. If it can't pay its bills, its creditors will demand that its assets be sold.

The question is, if Greek debt were nullified by default, would Greece be in a position to have a functioning economy in which government revenues would be sufficient for it to pay its bills? Evidently, the answer is yes because Greece has a positive primary balance. In that case Greece would not be insolvent. But when Greek debt is taken into account without it being written down by the ECB which is highly unlikely, Greece cannot pay its bills and is, therefore, insolvent.

Greek taxpayers have been notorious for not paying taxes. The ECB will not and should not let Greece become a money pit for the rest of the Eurozone countries. Having no central bank of its own and the inability to just print money like the US does, Greece is stuck between a rock and a hard place. For sure it needs to start collecting taxes especially from the rich who should be prevented from taking their money out of the country and putting it in secret Swiss bank accounts like rich Americans do.

The anti-austerity Syriza Party, that took control of Greece recently, has not been able to convince the ECB to cut Greece a break by writing down its debt to a level that the Greek government could manage. The ECB is holding most of the cards. Therefore, Syriza will not get any further than its predecessors did with the ECB. The EU, however, must consider the implications of a Greek default either within the Eurozone or one in which they leave the Eurozone completely and perhaps become aligned with Russia, something that the US would not be too happy about either.

The ECB has been reluctant to print money as the US Fed does except to bail out Wall Street. Controlled basically by Germany which underwent hyperinflation in the 1920s, the ECB is reluctant to risk that happening again. So they are on the horns of a dilemma. From Greece's point of view, it might make more sense to default on its loans, exit the Eurozone and start over with structural reforms it imposes on itself. It could obtain liquidity financing elsewhere like Russia or China. But it wouldn't have the heavy foot of the ECB standing over it and almost guaranteeing that Greece will become a perpetual debtor.

Hit The Road Jack

The noose around Greece's neck is this: the ECB will not accept Greek bonds as collateral for the central bank liquidity all banks need until the new Syriza government accepts the very stringent austerity program imposed by the troika (the EU Commission, ECB and IMF). That means selling off public assets (including ports, airports, electric and petroleum companies), slashing salaries and pensions, drastically increasing taxes and dismantling social services, while creating special funds to save the banking system. Just as the person who loses his job and cannot make his mortgage payment must hit the road, the Greek people through no fault of their own are being told to hit the road. Many young Greeks are doing just that and emigrating.

This could all have been avoided if Greece had a public central bank not beholden to Wall Street or the ECB for money. A public bank can create its own money and spend it into the economy thereby avoiding paying interest to Wall Street or the ECB. This gets people back to work and gets around the predicament of having to borrow money to get the economy running again as Keynesian economics would necessitate.

Greece doesn't have the luxury of Keynesian pump priming.

Germany’s Bild newspaper claims that Athens is planning a special tax on the country’s 500 richest families. Bild says the measure is included on the Greek finance ministry’s list of reforms, which also includes a luxury tax on items such as expensive cars and trips to Greek islands, and higher taxes on workers earning over €30,000 per year.

This is a step in the right direction no doubt. It's a conundrum facing the US as well: how to tax the wealthy in order to help out the poor and middle class. Syriza probably would not mind forcing austerity on the rich. It just doesn't want to balance its budget on the backs of the poor by cutting their pensions and the minimum wage any more than they've been cut already.

The Financial Times  reported on May 6 that Greece will rehire 13,000 civil servants whose jobs were cut in an overhaul of the public administration agreed with bailout lenders. Clearly, Syriza will not be bullied by the Troika. Hopefully, Greece will get its house in order by balancing its budget on the backs of the rich not on those of the poor.

There is additional possible cooperation between Russia and Greece and even the possibility of Russia providing financial assistance. And where there's financial assistance, military association would not be far behind. Military cooperation would not only be a thorn in the side of the EU but one also in the side of the US which has only one military base in the Greek island of Crete. Financial and military cooperation go hand in hand as we have recently seen with the Obama championed free trade deal know as the TPP. It's as much about reducing China's influence in the Asian sphere as it is about economic cooperation.

This is from Business Insider:

Additionally, Russia and Greece's new government have taken initiatives to explore their military and economic relationship (for example, here, here, and here).

In fact, the new Greek Prime Minister Alexis Tsipras even said in early February: "Greece and Cyprus can become a bridge of peace and cooperation between the EU and Russia."

So this part of the world could soon become very interesting — and a huge pain for Europe.

The EU has to consider the implications to a Greek default which might not only be a harbinger of future defaults for other weak EU states such as Spain and Portugal, but might increase Russia's influence in countries surrounding the Eurozone which are becoming increasingly friendly with Russia. Could China be far behind as well in offering financial help?

Can Greece Master Its Debt, Deflation, Insolvency Trap?

By Frank Thomas from the San Diego Free Press

Greece’s Solvency Problem

The Western world is moving out of a public debt-deflation crisis of the worst sort … and Greece is still in the middle of it as the worst example of a dire fiscal crisis in a weaker member country that can destabilize the entire euro zone.

Greece is simply de facto insolvent …as was Lehman Brothers in the recent Great Recession and the U.S. at the start of the Great Depression. The Troika (ECB [European Central Bank], IMF [International Monetary Fund], EU Commission) has been mistakenly treating the Greek bailout debt problem as a liquidity issue – optimistically hoping this in combination with tough reform measures would enable Greece to achieve debt sustainability and economically grow out of its debt problem. That’s failed … so far.

It’s not a liquidity issue. It’s an immediate and long term solvency crisis – an inability to generate adequate tax revenues and asset values (whether pledged or sold) to repay debts, especially those due in short term. Having just met a euro 750 million debt payment, Greece’s cash chest is empty. By June, two debt payments are due of euro 1.6 billion and euro 7.0 billion. Debt default is on the horizon.

Most of the euro 240 billion ‘bailout’ funds went to foreign creditor banks, not to fund Greek government operations. Even if Greece had ongoing access to ECB’s Emergency Liquidity Funds temporary funds, this wouldn’t solve underlying problem of excessive debt obligations and overall deficits after debt service, intensified by austerity measures aimed at improving the country’s competitiveness. During 2009-2014, wage, pension, and spending cuts shrunk GDP 26% . This and higher debt skyrocketed the debt/GDP ratio from 130% of GDP in 2009 to 175% in 2014. Greece’s tendency to be in budget deficit and debt troubles started long before the 2008-2013 great recession. This history and the great recession have pushed Greece into a disastrous “over-indebtedness, deflation and insolvency trap.”

Over-indebtedness and deflation are the two dominant drivers in recessions and depressions. Disturbances in debt and purchasing power trigger disturbances in most other economic variables. The spiral process develops along following lines: over-indebtedness leads to liquidation and stress selling of assets, leads to contraction of deposits and velocity of money circulation, leads to price deflation, leads to decline in net worth of businesses, leads to bankruptcies and lower business profits or losses, leads to a reduction in output and employment to cut losses.

When over-indebtedness does not reduce prices or deflation rises from other than debt causes, then the resulting cycle will be much softer or much less destructive. But, when the debt and deflation diseases occur together, as is happening in Greece, they act and react on each other. Then over-indebtedness leads to deflation and deflation leads to more debt owed – the more debtors pay, the more they owe. (See: “Debt-DeflationTheory of Great Depressions,” by Irving Fisher; “Falling Into a Liquidity Trap?” ECO-Societe Generale, Dec. 2013).

The more Greece cuts fiscal spending and hikes taxes, the more growth gets hit and deflation expands, the harder it becomes to meet ECB deficit and debt targets … leading to more debt required. The combination of extreme over-indebtedness and a policy of internal devaluation of assets, wages, pensions and other costs leads to deflation. Unchecked so far, this has brought Greece to insolvency where debts cannot be met by assets, even if sold.

When over time an economy with a rising high debt level has been depressed 26% by an internal devaluation, then the debt/GDP ratio will go UP, not DOWN … as is Greece’s story. It’s not just recession and deflation that push up debt. The existing huge public debt overhang acts as a drag on the economy. This is the circular debt and deflation economic stagnation Greece is stuck in. An economy caught in such a trap doesn’t easily return to a growth path and healthy debt/GDP ratio as Japan has demonstrated.

What Is Historical Origin of Greece’s Fiscal Troubles?

Greece has had a long history of fiscal trouble – an economy constantly burdened with excessive debt, budget deficits, bureaucracy, restrictive regulations, poor transparency, flaky statistics, and rampant corruption. Carmen Reinhart and Kenneth Rigoff in their book, “This Time is Different,” a history of financial crises, conclude Greece has spent half of the past two centuries in default.

Since WWII through 1998, Greece had hardly a balanced year without relying on heavy subsidies from abroad. Greece entered the euro zone in 2001 – using falsified debt and deficit numbers ignored by the banking establishment. During 2001-2007, the door opened for long term funds at low interest rates and under-pricing of default risk (supported by Germany’s credit worthiness). Thus, a sharp reduction in debt service costs gave Greece some fiscal space to reduce its debt burden. Instead, Greece went on a spending and debt splurge that placed its debt burden on an unsustainable path – where the primary budget deficit soared to over 10% of GDP in 2009 and the debt/GDP ratio jumped from 100% in 2001 to 130% in 2009.

Adding fuel to the fire, in 2002 investment banks like Goldman Sachs were offering complex, secret derivative products including cross currency swaps used to guarantee government revenues from bond issues in foreign denominations. These specially designed swaps provided a hedge against exchange rate oscillations using a fictional exchange rate, allowing a country to exchange its dollar (or Yen) loans into a greater number of euros. In Greece’s case, this hedge transaction created a credit (covert loan) of nearly $1 billion to the Greek government. Reporting of the credit in the balance sheet was not required by European accounting rules.

Since these swaps weren’t registered as debt, the Greek government and other EU governments were enticed to spend beyond their means. Greece exploited cross currency swaps presumably to help avoid the huge fines levied under the Maastricht Treaty for violating the 60% debt/GDP ratio limit and the 3% overall budget deficit limit.

The Greek people were neither aware of nor a party to the financial risks their government officials were exposing them to. Yet they, as taxpayers, are responsible for paying the price of a euro 240 billion European bailout debt. Social costs stemming from the government’s fiscal mismanagement have been excruciating – a 26% joblessness, massive homelessness, an educational system in shambles, a serious brain drain, a generational dead-end future for many.

Why Wasn’t Keynesian Pump-Priming Utilized?

One reasonable answer to this question comes from a Eurobank Research report: (See: Eurobank Research, “Is Deflation a Risk For Greece?”)

“Avoiding monetary and/or fiscal contraction during the recession and allowing automatic stabilizers to work, as suggested by Keynesian thinking, was not an option. Greece has purposefully implemented internal devaluation in order to reclaim price competitiveness losses against trade partners. Even if this was not the case, participation in a Monetary Union (i.e., loss of autonomy in the exercise of monetary policy) implies that the country would be unable to combat inflation via monetary means. In addition, given the huge size of public deficits and the explosive path public debt had embarked on, a fiscal expansion would only enlarge the fiscal crisis and the ensuing collapse of output. Loss of access in international capital markets meant a fiscal expansion was not feasible anyway. Instead, the country had to implement a draconian fiscal consolidation program which led to a contraction of the primary budget balance from a deficit of -10.5% in 2009 to a primary surplus of 2.1% in 2013.”   (Editor’s note: 2.1% excludes huge 10.1% one-time recapitalization cost; primary budget surplus was 1.7%% in 2014 and a 2.9% primary surplus is expected in 2015).

 An important point to stress here is that for the first time in more than a decade Greece is on a path of reporting a primary budget surplus (before debt payment) for the years 2013, 2014, and an expected surplus in 2015. After 6 years of a deep recession and 26% GDP decline, Greece appears to be emerging slowly out of the recession. Its economy grew 0.8% in 2014 and is forecast to grow more than 2.5% in 2015.

TABLE 1 shows Greece’s impressive fiscal adjustment ^i.e. significant improvement in its primary budget balance since 2009:

 

SOURCE: (“Should Other Eurozone Programme Countries Worry About A Reduced Greek Primary Surplus Target?” - Feb. 2015 Forecast of the European Commission)

The structural primary balance excludes both one-off measures (e.g., bank recapitalization costs) and impacts of the economic cycle. Greece’s 2009-2014 primary balance improvement of 11.9 percentage points from a -10.2% primary deficit in 2009 to a 1.7% primary surplus in 2014 is astonishing enough. A 2.9% primary surplus is expected in 2015. The structural primary balance improvement of 16.1 percentage points – is even more astonishing. It’s TWICE that of Ireland, Portugal and Spain. To stabilize Greece’s debt situation, the ECB and IMF believe the country must achieve a debt-stabilizing primary surplus target of 4.5% of GDP. This, however, does not negate fact Greece is insolvent and will still need constructive debt relief to reverse its debt-deflation spiral and spur economic growth.

Greece has two ills propelling insolvency: the Exceptional Scale of its Debt and the Weak Quality of its Assets supporting that debt. A state of insolvency occurs when an entity’s debts (liabilities) exceed its assets making it almost impossible to raise funds to meet financial obligations or to pay debts as they come due – regardless whether assets are sold or mortgaged. Greece’s Finance Minister himself has said, “Greece is bankrupt.” Mention of the ‘insolvency’ word makes creditors nervous and complicates ECB’s task as it’s apparently illegal to extend Emergency Liquidity Assistance (ELA) to an insolvent country. Greece is cash-strapped and can’t meet upcoming heavy debt repayments in July/August. So desperate is the situation, consideration is being given to tapping into the euro 1.5 billion reserve funds of local municipalities to stay afloat until end of May. Even temporary use of pension and social security funds is being reviewed.   

And funding crunch pressures could get much worse. For example, a staggering outflow of over euro 20 billion of bank deposits has occurred since last November. Where will the funds come from to match this outflow? Another potential money pressure is that four big banks hold a huge euro 18 billion of capital in the form of Deferred Tax Assets and Deferred Tax Credits owed by the Greek state.  If the banks request this money, it must be provided in cash, not government bonds. So over 50% of the Greek banking system – which is owned largely by the Greek state – is in the form of a cash IOU from the Greek state. This tight interconnectedness between the Greek state and its banks, operating under a “patronage” culture rather than a meritocratic system, has long magnified Greece’s gross mismanagement of its finances.(See: “ECB Asks: Are Greek Banks Solvent,” by Raoul Ruparel, Feb. 20, 2015)

Continuing an all-out austerity program to return Greece to a sustainable fiscal path needs to be rethought. Persistent deflationary pressure could hurt the country’s fragile debt sustainability now at 175% of GDP (vs. 130% in 2009). I believe internal deflation and enormous size of Greek debt make it impossible to grow out of that debt. Accepting more loans to meet debt service obligations worsens matters by further squeezing income and increasing debt. Still, despite 5 years of severe austerity, Greece’s broad economic picture is getting better, but life is much worse for most Greeks.

An excessive public debt curse constrains government actions by the need to service debt – which seriously compromises or crowds out critically vital investments in infrastructure, education, health care, child welfare, etc. The negative financial and social impact would have been much more disastrous without the bailout funds.

If a government is running primary budget deficits, it needs to borrow money to continue running. That has been the Greek government’s argument to its citizenry, namely, austerity is necessary to keep bailout funds coming to fund basic services like infrastructure, education, health care.

However, if a government is running primary budget surpluses as Greece now is, it’s much easier to get by without access to foreign debt markets. This depends on the timing and amounts of debt that must be paid to official creditors who are not about to accept a ‘haircut’ on the Greek debt owed them.

If Greece can raise recent trend of primary surpluses to 4.5% target of GDP, it will be able to finance its current level of consumption and investment, including government and private spending, without depending much on foreign capital inflows. That surplus will cover an interest cost of 4% of GDP, leave some fiscal space for economic growth incentives, for unforeseeable adverse cost events but not for high one-time costs which occur often in Greece. And it leaves little fiscal  space to reduce debt principle and no space to meet large debt payments.

Where Are We Now?

Greece’s problem is insolvency, not a temporary liquidity shortfall. Funds are being lent to Greece to meet current debt service obligations on assumption this will bring Greece to renewed growth and income adequate to meet long-term debt obligations. Despite Greece’s weak economy and giant debt burden, 5 years of draconian austerity did produce a 1.7% primary budget surplus in 2014. BUT, the debt level still expanded to 175% of GDP from 130% in 2009.

This dramatizes how serious Greece’s insolvency problem is. Tough austerity measures and a huge euro 240 billion bailout injection of ‘liquidity’ funds – of which +85% went to creditor banks, not to fund Greek operations (except freeing up funds for basic social services) – can’t solve the over-indebtedness and deflation and insolvency trap. A crisis of distrust prevails, pitting debtor and creditor against each other. Many feel official lending by ECB and IMF is only worsening crisis and insuring a certain default and “haircut” for creditors.

ECB President Mario Draghi has laid down the financial ‘Maginot Line’ to Greece regarding bailout funds. In essence, his message to Greece is move fast on concessions and key reforms (e.g., inflated pensions, huge tax evasion, accounting irregularities) or you are on your own. In latter event, an ‘orderly default’ and ‘friendly exit’ from the euro currency zone, but not necessarily the EU, is the only recourse.

The ECB has cut off Greek access to the normal lending process where loan risk is divided among the 19 euro zone countries. For years, Greece has failed to meet a very important lending provision, namely, that the supporting collateral must be sound. In the ECB’s opinion, Greek bank collateral is not worth much. Accordingly, the ECB has stopped accepting Greek bonds as collateral. In essence, access to capital markets by the Greek government and Greek banks has been closed down.

In prior bailouts, the ECB waived the collateral provision. But, upon hearing of Premier Tsipras’ refusal to continue with key reforms, the ECB has withdrawn its waiver. Greece now only qualifies for Emergency Liquidity Assistance which the ECB is tightly limiting. ELA comes at a higher interest rate, and the Greek Central Bank assumes formal risk liability, not the euro zone countries. But, if something goes wrong, the euro zone is the ultimate backup.

According to Draghi, ELA support will be given providing Greek banks have adequate collateral and are solvent – two conditions that are not being met. A slowly developing bank run has brought the financial backup level of Greek banks below the peak-crisis level in 2012 – driving the interest rate on 3-year Greek securities to 30% range. In Draghi’s words, “Collateral is being destroyed.”

Greece’s interest payments are relatively low thanks to a low 2.2% average interest rate on its outstanding debt. If Greece had to borrow at the 8% market rate for its 10-year government bonds, its overall budget deficit would explode to over 15%. Despite the low 2.2% interest rate on public debt, total interest payments are still a substantial 4.0% of GDP due to Greece’s extravagant debt build-up.

Generally, a country’s national debt grows by the size of its overall budget deficit or surplus and strength of its economy. If Greece can consistently achieve a positive 2-4% primary budget surplus, its debt burden as a % of GDP will eventually decline so long as the GDP growth rate exceeds the average interest rate (now 2.2%) on government debt. (See: Martin Feldstein, Harvard Prof. of Economics – “The Greek Budget Myth,” Nov. 2013)

But, the Greek economy remains weak, not helped by severe austerity measures. Unless Greece can increase its rate of annual growth +2% and stabilize deflation, its overall budget deficit after debt payment will be high and the current 175% debt/GDP ratio will hardly change.

Where To Go From Here?

Greece’s acute insolvency is not being solved by spending and amassing debt far beyond its means and ability to grow itself out of the interest and principal debt payments. Result? Since the 2009 crisis, Greece has been forced to borrow more and more from the EU in an ‘ad hoc manner’ in emergency situations.

Daniel Gros and Thomas Mayer deftly address the problem of balancing of moral hazard by sharing EU support and risks vs. relying purely on financial markets to resolve an “excess debt-insolvency” crisis like Greece is experiencing.(See: “How To Deal With The Threat of A Sovereign Default in Europe,” March/April 2010; “Debt Reduction Without Default?” Feb. 2011). In Gros and Mayer’s opinion:

This ‘ad hoc manner’ (piecemeal liquidity) approach is unsatisfactory. The European Monetary system should be made robust enough to minimize the disruption caused by the failure of one member. The drafters of the Maastricht Treaty failed to appreciate that, in a context of fragile financial markets, the perceived (and real) danger of a financial meltdown makes a ‘pure’ no-bailout response unrealistic … The EU needs to design a scheme capable of dealing with the threat of sovereign default and capable of organizing an orderly default as a last resort … The strongest negotiating asset of a debtor is always that default cannot be contemplated because it would bring down the entire financial system.

For a Greek type of insolvency crisis, Daniel Gros and Thomas Mayer propose an innovative, fair market-based debt reduction option without a formal default. The concept shows promise for vastly mitigating disruption in financial markets caused by a foreign sovereign default. An orderly debt workout framework would help prevent a taxpayer bailout of a sovereign. Also, contagion effects would become very limited since market participants could estimate ex ante their maximum risk exposure by lending to another country. Some variation of the Gros-Mayer market-based debt reduction concept deserves reexamination by ECB authorities, if that has not already been done.

Greece is locked into a debt, internal deflationary economic stagnation that has all the ingredients of lasting as long as Japan’s 20 year economic stagnation! The ad hoc manner of accepting more loans to pay current debt service obligations only makes matters worse … as does an ongoing crushing austerity on the Greek people.

As to what to do now, I would give first priority to quickly and decisively restructuring Greece’s debt, including upcoming euro 1.6 billion and euro 7 billion payments.

The restructuring should provide real debt relief that allows Greece fiscal space to resume productive investment while also executing reforms selectively aimed at systemically poor tax collection, restrictive and regulatory labor practices raising the cost of doing business, inflated pension funds, absence of financial transparency and discipline, lack of confidence in statistical data, a governance and banking system functioning under an egregiously dishonest culture of ‘patronage’ rather than ‘meritocracy.’

The task is finding right balance between debt relief and limited austerity while not losing momentum with reforms, not increasing moral hazard or disrupting Greece’s real economy. The overall aim should be to improve Greece’s ‘economic model’ for responsible growth and access to capital markets.

Restructuring can take many forms, combinations: implementing a variation of the Gros-Mayer market-based debt reduction concept, swapping a portion of existing debt for bonds, linking interest payments to future economic growth as proposed by Greek Finance Minister Yanis Varoufakis, replacing Greek debt owned by the ECB with “perpetual bonds,” adopting a new Greek currency but keeping Greece in euro zone, rolling debt over, extending debt maturities or deferring debt payments.

If at the end of the negotiating process, parties cannot agree to an acceptable civil, humane, debt restructuring, debt relief and reforms in everyone’s best interest, then an orderly, friendly well-managed EXIT of Greece from the euro is the only option … leaving responsibility to Premier Tsipras’s government to resurrect an economy sunk in a sea of bureaucracy and debt.    

An exit will hurt. Greece will eventually gain a more competitive currency, but this will not come cheaply without contagion impacts and some concrete costs. The current ECB euro 240 billion bailout averages euro +-600 per person for euro zone countries. How much this rises depends on the debt restructuring actions and reforms undertaken and how sound the exit process is risk-controlled. In this regard, the ECB has made a commitment to do “whatever is necessary to protect the euro.”

But, If Greece’s exit is judged a ‘least-worse’ scenario, what to do if the Portuguese, Spaniards, and Italians want a similar divorce? Greece out of the euro zone – given its geostrategic position at the crossroads between East and West – brings some indefinable risks.

Besides the economic issue, there’s a fundamental political issue … HOW IMPORTANT IS GREECE STRATEGICALLY TO EUROPE?

Frank Thomas May 18, 2015 The Netherlands

Going Homeless to Pay For College

by John Lawrence

My daughter was entering the freshman class at UCSD in 1992 and the plan was for me to move out of our condo where we had lived for 18 years and in with my girlfriend. Renting out the condo would bring in $1000. a month and let me pay for a good share of my daughter's college expenses. After about a year when the relationship didn't work out, I decided that rather than rent an apartment which would cost me what I needed to pay my daughter's expenses, I would go homeless instead. It wasn't that I was desperate; I could have rented an apartment. I just decided I'd rather collect rent than pay it, and not only would I be saving $1000. a month in rent, I wouldn't have a cable bill, an internet bill or an SDG&E bill either. Such a prospect appealed to the Scotsman in me.

I had a Ford E-150 work van which was set up sort of like a camper. The rear window popped out for adequate ventilation with the front windows open a crack. I had 4 inches of foam on the floor covered with indoor-outdoor carpet. It was quite comfy with my double sleeping bag and two pillows. All the comforts of home as far as I was concerned. I got a tension rod and some curtains to seal off the back compartment and added double layers of tinting for the side and rear windows for privacy.

I called my vehicle a WSUV - Work, Sleep, Utility Vehicle. It functioned well for me for all those purposes. I chose my night time sleeping spots very carefully. I scouted them out. First of all the road had to be level; second it had to be in a place that would not attract attention. I chose to be among other parked vehicles in good neighborhoods. There was nothing about my vehicle that would identify it as anything other than a work vehicle with ladders on top. I had preselected spots and wouldn't pull in till 10:30 PM when the neighbors were hopefully asleep. Then I was up and out of there by 6 AM. In a year of doing this I only got rousted out by the cops twice, and once was my own fault for getting cocky and disobeying my own rules. I parked on a cul-de-sac with no other vehicles around me and attracted the attention of a neighborhood watchman. After making me stand on the street by the hour, the cops finally let me go. I went a couple miles to a more secure parking place.

I googled homelessness and found a blog by a guy who called being homeless "distributed living." The concept was simple. Instead of doing everything under one roof, you did different things in different places under different roofs. That was exactly what I was doing. It's also called urban camping. When I pulled out of my parking place at 6 AM before my fellow citizens had gotten up (except for a few dog walkers which I always had to keep an eye out for), I headed for the YMCA where I did my morning ablutions - shaved, brushed my teeth etc. Then I swam my laps, showered and started my day with a juice from the case of Kern's juices I carried with me and some vitamins. Then I headed over to Starbucks for my morning coffee. A few years later, after I had stopped using that particular Starbucks, I went back and one of the girls remembered my name. Amazing.

After my juice, vitamins and coffee I headed over to 7-11 and picked up a bag of ice for my cooler. In it I had cold water, Pepsi and other stuff that needed refrigeration like stuff for sandwiches. I had Tiger's Milk bars for lunch and fresh fruit that didn't require refrigeration.

Then I went to my my first window cleaning job. Most of the time I did two jobs in a day or, if it was a really big job, I only did one. I was able to keep in contact with customers and schedule jobs thanks to the miracle of the cell phone which allowed me to dispense with a landline as well as a fixed residence and expedited my "distributed living." After work, if I was really sweaty I headed back to the Y for a shower. Then I settled into my evening "home" where I did what I usually did if I had a real house to live in. I read, listened to music and blogged on the internet. Sometimes I did research on my project on Social Choice. I found the best place that suited all these multifarious activities was the San Diego State library, mainly because it didn't close till 10 o'clock at night and had free Wi-Fi. The city library closed too early to accommodate my schedule. I took my back pack with my books, laptop and CD player which I listened to with ear phones and spread out on a table hopefully where it was quiet and there were not a lot of students kibitzing over their homework assignments or other less dutiful activities.

When the library closed, I headed out to one of my preselected parking spots, and, if everything was kosher pulled in unnoticed by the local denizens. I did make some special arrangements for my situation. If I couldn't make it to the Y in the morning before peeing, I had a bottle for that purpose. Before leaving the library at night, I always made sure I went to the bathroom and brushed my teeth. My sleeping accommodations were comfortable providing the neighborhood was quiet. Occasionally, I was awakened by a motorcycle blasting through the neighborhood at 3 o'clock in the morning. I had spent years sleeping in a sleeping bag when I was in a domiciled situation but that's another story. Sleeping in a regular bed is not all it's cracked up to be despite Jerome's commercials.

During this period I took my daughter out to eat once a week to keep up with how she was doing in college. I got together with friends. I even dated. In fact there was nothing I couldn't do that I would have done if I had been living in an apartment. I was a contradiction in terms - a homeless landlord, a worker who was also a capitalist - and I was happy about all the revenue that was coming in both from my work and from the return on my investment (ROI). I had paid my mortgage off years earlier so the rent I was collecting was almost pure profit minus taxes, insurance, maintenance and HOA fees. Some friends said that I should have rented an apartment. I guess that was what you were supposed to do, but I was used to not doing what you were supposed to do. My unconventional life suited me.

I had distributed my living situation among my WSUV which I used for sleeping and work, the YMCA which I used for showering and swimming, and the San Diego State library which I used for relaxing and edification. I was living off "the fat of the land" as was George and Lennies's dream in Steinbeck's "Of Mice and Men." I was using public roads not only for commerce (getting me to and from jobs) but also for sleeping, public or semi-public facilities like the YMCA and the library at San Diego State which was open to the public. I also used these same techniques when I traveled having researched libararies and YMCAs in San Francisco, Portland and Seattle where I spent a fair amount of time. In San Francisco I parked my WSUV near the Stonestown mall and bought a transit pass using public transportation for getting around. My Y card was good at the Stonestown YMCA and any other YMCAs when I was away from my home base.

Living off the fat of the land, or in other words public amenities, was something I endeavored to be good at. In Scandinavia they have a law called allemandsretten which means that you can camp out anywhere you choose even on private property so long as it's not right in someone's garden. This represents the fat of the land, public rather than private amenities. It's all good. No need for a motel. In my case allemandsretten was finding a parking place on a public street for my WSUV. It had to be level of course.

Eventually, I found a good deal on an office for $150. a month in the heart of downtown Encinitas right above Roxy's Ice Cream. It was an office which also afforded me living accommodations. I even teamed up with Joe on satellite TV. All the comforts of home. I took my dates downstairs to Vigilucci's for Italian food. With what I was saving on rent, I could well afford to.

Nike, Obama, and the Fiasco of the Trans Pacific Partnership

by Robert Reich

Friday, May 8, 2015                

On Friday, President Obama chose Nike headquarters in Oregon to deliver a defense of his proposed Trans-Pacific Partnership.

It was an odd choice of venue.

Nike isn’t the solution to the problem of stagnant wages in America. Nike is the problem.

It’s true that over the past two years Nike has added 2,000 good-paying professional jobs at its Oregon headquarters, fulfilling the requirements of a controversial tax break it wrangled from the state legislature. That’s good for Nike’s new design, research and marketing employees.

Just before the President spoke, Nike announced that if the Trans Pacific Partnership is enacted, Nike would “accelerate development of new advanced manufacturing methods and a domestic supply chain to support U.S. based manufacturing,” thereby creating as many as 10,000 more American jobs.

But that would still be only a tiny fraction of Nike’s global workforce. While Nike makes some shoe components in the United States, it hasn’t assembled shoes here since 1984.

Americans made only 1 percent of the value of Nike products that generated Nike’s $27.8 billion revenue last year. And Nike is moving ever more of its production abroad. Last year, a third of Nike’s remaining 13,922 American production workers were laid off.

Most of Nike’s products are made by 990,000 workers in low-wage countries whose abysmal working conditions have made Nike a symbol of global sweatshop labor.

As wages have risen in China, Nike has switched most of its production to Vietnam where wages are less than 60 cents are hour. Almost 340,000 workers cut and assemble Nike products there.

In other words, Nike is a global corporation with no particular loyalty or connection to the United States. Its loyalty is to its global shareholders.

I’m not faulting Nike. Nike is only playing by the rules.

I’m faulting the rules.

In case you hadn’t noticed, America has a huge and growing problem of inequality. Most Americans are earning no more than the typical American earned thirty years ago, adjusted for inflation – even though the U.S. economy is almost twice as large as it was then.

Since then, almost all the economic gains have gone to the top.

The President is angry at Democrats who won’t support this trade deal.

He should be angry at Republicans who haven’t supported American workers. Their obduracy has worsened the potential impact of the deal.  

Congressional Republicans have refused to raise the minimum wage (whose inflation-adjusted value is now almost 25 percent lower than it was in 1968), expand unemployment benefits, invest in job training, enlarge the Earned Income Tax Credit, improve the nation’s infrastructure, or expand access to public higher education.

They’ve embraced budget austerity that has slowed job and wage growth. And they’ve continued to push “trickle-down” economics – keeping tax rates low for America’s richest, protecting their tax loopholes, and fighting off any attempt to raise taxes on wealthy inheritances to their level before 2000.

Now they – and the President – want a huge trade agreement that protects corporate investors but will lead to even more off-shoring of low-skilled American jobs.

The Trans Pacific Trade Partnership’s investor protections will make it safer for firms to relocate abroad – the Cato Institute describes such protections as “lowering the risk premium” on offshoring – thereby reducing corporate incentives to keep jobs in America and upgrade the skills of Americans.

Those same investor protections will allow global corporations to sue the United States or any other country that raises its health, safety, environmental, or labor standards, for any lost profits due to those standards.

But there’s nothing in the deal to protect the incomes of Americans.

We know that when Americans displaced from manufacturing jobs join the glut of Americans competing for jobs that can’t be replaced by lower-wage workers abroad – personal service jobs in retail, restaurant, hotel, hospital, child care, and elder care – all lower-skilled workers face downward pressure on wages.

Jobs being lost to imports pay Americans higher wages than the jobs left behind. Government data show wages in import-competing industries (e.g. manufacturing jobs) beat those in exporting industries overall.

Without a higher minimum wage, an expanded Earned Income Tax Credit, affordable higher education, and a world-class system of job retraining – financed by higher taxes on the wealthy winners in the American economy – most Americans will continue to experience stagnant or declining wages.

Instead, the Trans Pacific Partnership – which includes twelve nations, including Vietnam, but would be open for every nation to join – would lock us into an expanded version of the very policies that have failed most American for the past twenty years.

No doubt Nike is supporting the TPP. It would allow Nike to import its Vietnamese and Malaysian-made goods more cheaply. But don’t expect those savings to translate into lower prices for American consumers. As it is, Nike spends less than $10 for every pair of $100-plus shoes it sells in the U.S.

Needless to say, the TPP wouldn’t require Nike to pay its Vietnamese workers more. Nikes’ workers are not paid enough to buy the shoes they make much less buy U.S. exported goods.

Nike may be the perfect example of life under TPP, but that is not a future many Americans would choose. 

---

 

                                                  
            

•                 
• Friday, May 8, 2015                                

  STEP #2: MAKE WORK FAMILY FRIENDLY

  No one should have to choose between providing for your family and being a good parent. Yet “family-friendly” work is still a pipedream.

  Today most parents are also wage earners, whether in a two-parent or single-parent household. Politicians talk a lot about the importance of family, but must do a better job delivering.

  Specifically:

  – Require that women receive equal pay for equal work.

  – Require employers provide predictable hours so workers can plan to be home when their family needs them.

  – Provide universal childcare – pre-school and after-school – financed by employers and taxpayers.

  – Require that employers offer paid family and medical leave.   

  The richest nation in the world should enable its workers to be good parents. Family-friendly work isn’t a luxury. People who work hard deserve to make more than a decent living. They and their families deserve a decent life.

                                                    
              
•                 
• Thursday, May 7, 2015                                

  MAKING THE ECONONY WORK FOR THE MANY, NOT THE FEW. STEP #1: RAISE THE MINIMUM WAGE

  A basic moral principle that most Americans agree on is no one who works full time should be in poverty, nor should their family.

  Yet over time we’ve seen significant growth in the “working poor” – people working full time, sometimes even 60 or more hours each week, but at such low wages that they remain impoverished.

  What to do?

  One step is to raise the minimum wage to $15 an hour. This is winnable. A powerful movement is fighting for $15 an hour and they’re winning new laws in cities and states, and forcing companies to raise wages.

  If the minimum wage in 1968 had simply kept up with inflation it would be more than $10 today.  If it also kept up with the added productivity of American workers since then, it would be more than $21 an hour.  

  Some opponents say minimum wage workers are teenagers seeking some extra pocket money.

  Wrong. Half are 35 or older, and many are key breadwinners for their families.

  And don’t believe scaremongers who say a $15 minimum will cause employers to cut employment.

  More money in people’s pockets means more demand for goods and services, which means more jobs not fewer jobs.

  Studies also show that when the minimum is raised more people are brought into the pool of potential employees, giving employers more choice of whom to hire. This reduces turnover and helps employers save money.

  Finally, employers who don’t pay enough to lift their employees out of poverty are indirectly subsidized by the rest of us – who are paying billions each year in food stamps, Medicaid, housing assistance, and welfare, to make up the difference.

  The minimum wage should be raised to $15 an hour. It’s the least that a decent society should require.

                  

Extreme Weather Watch: April 2015 - Tornadoes, Floods Devastate the South.

by John Lawrence from the San Diego Free Press

April Showers Turn Violent

As April drew to a close, drenching rain expanded across the Southeast states, bringing the threat of flooding and travel delays. Strong thunderstorms were also a concern for Florida. April has been a particularly wet month across the Southeast due to several slow-moving storms that soaked the region over the past several weeks. Mobile, Alabama, has been one of the wettest cities in the entire country last month from a series of storms - recording over 13 inches of rain. This is nearly three times higher than their normal rainfall for the month. Their ground is saturated leading to the possibility of flooding if any more rain occurs. According to the National Weather Service, there are still dozens of river gauges across the Southeast that are in either minor flood stage or near flood stage.

April started with a bang. Hail as big as baseballs pelted 8 southern states breaking car windshields and causing assorted other damage. There were more than 130 reports of hail. 60 mph winds caused more damage. In April tornadoes were recorded almost every day of the month.

On April 2, the worst rainfall and flooding in Chile's history wiped entire towns off the map and killed 24 with dozens missing. It will cost at least $1.5 billion to rebuild.

April 3 brought a huge flood emergency with millions on high alert for tornadoes in the US. A mother and child in their car were swept away in Kentucky and are still missing. A massive industrial fire in Louisville may have been sparked by lightning. There were more than 160 water rescues. Near Lexington one woman was killed in a campground after a large tree fell on her tent. A tornado touched down in Kansas in a region also pummeled by hail. Wind gusts were up about 60 mph with 2 inch in diameter hail.

April 7: A fast moving storm dumped 3 and a half inches of rain in 40 minutes in the Saint Louis area flooding streets. Hail the size of golf balls saturated some areas. There were mudslides. 5 inches of snow blanketed Michigan. A funnel cloud was seen near Sacramento, CA. Hail near Lodi, CA.

April 8-9: A two-day severe weather episode affected parts of the Great Plains and Midwest. Several EF0 tornadoes occurred on April 8 in the south central part of Kansas, including some to the northwest of Wichita. An EF1 tornado caused moderate damage as it struck the town of Potosi, Missouri that evening as well. Several tornadoes were also reported from Texas to Illinois on April 9. A multiple-vortex EF1 tornado struck the towns of Clinton, Iowa and Fulton, Illinois, and an EF2 tornado near Mount Selman, Texas snapped and uprooted numerous trees, damaged outbuildings, and removed the roof and collapsed a few exterior walls at a frame home.

The most significant event of the outbreak was a violent, long-tracked, very high-end EF4 wedge tornado that moved along a 30.2 mile-long path across several counties in northern Illinois, killing two people and injuring another 22. Hail the size of grapefruits was reported in Kansas and Missouri. 95 million Americans were in the threat zone stretching from the Great Lakes to Texas. Winds up to 70 mph were reported.

April 10: A deadly outbreak of tornadoes. A tornado killed 2 people and left the town of Fairdale, Illinois totally destroyed. There were frantic efforts to save those trapped underground. Buildings were ripped from their foundations and vehicles sailed through the air. The tornado plowed a 50 mile path of destruction a half a mile wide with 200 mph winds. Rochelle, IL also was hit by EF-4 tornado.

April 16: Tornado and severe thunderstorm watch in Texas. Large hail expected. Snow in Denver. Accidents and pile-ups on I-70.

April 17: 10 tornadoes touched down in Texas overnight. I-70 in Denver shut down after 2 semis, a motorhome and 2 busses overturned. At least a dozen people hurt. Another pile-up on I-80 in Wyoming involving more than 40 vehicles including a tanker carrying hazardous material that erupted in flames.

April 18: Several inches of rain in Houston led to flooding. Severe thunderstorms in Wichita and Oklahoma City caused to flash floods.

April 19: Raging wildfire near Los Angeles. Millions in south under threat of severe storms. High winds derailed a freight train in Alabama. Tornado and severe thunderstorm watches throughout the south. Winds up to 60 mph with flash flooding.

April 20: Major east coast cities under tornado watch cross 9 states. Philadelphia, Washington DC and Baltimore among them. 70 mph wind gusts up and down east coast.

April 22: Violent weather threat including tornadoes all the way from Texas to Connecticut. 22 million people at risk.

April 25: A multi-day outbreak of extreme storms blew 18 wheelers on their sides in Louisiana. Tornado warnings and watches were in effect across several southern states. 32 million were at risk for severe storms. Reports of damaging winds, torrential rains, flash flooding and large hail.

April 26: A mile-wide tornado touched down in north-central Texas as a storm system swept through with large hail and damaging winds, the National Weather Service said. The storm knocked out power to more than 60,000 people in Texas, according to online reports compiled from local power companies. Numerous trees were either snapped or uprooted causing downed power lines. Minor damage to barns and outbuildings was recorded. In Johnson County near Dallas at least 50 homes were destroyed. Torrential rain, heavy winds and softball sized hail pummeled the area.

April 27: More than a dozen tornadoes tore through the south over the weekend. Storms pounded the Dallas area tearing apart homes. At least three were killed in a sailboating regatta off the Alabama coast. Three are still missing. 10 boats capsized. 40 people had to be rescued. Thunderstorm winds blew several railroad cars off the Huey P. Long Bridge in Metairie, Louisiana. Major flooding shut down highways and roads. Power was also knocked out at Louis Armstrong New Orleans International Airport. Wind gusts of up to 71 mph were measured at the airport during the storm.

On April 29 severe storms pummeled parts of eastern Texas with softball-sized hail, damaging winds and tornadoes. A tornado struck Rio Vista, Texas, about 40 miles south of Fort Worth. Local emergency management reported overturned trucks and various building damage, including the local high school. After surveying the area on Monday afternoon, the National Weather Service reported the damaged aligned with an EF0 tornado. Earlier that night, additional tornadoes touched down near Stephenville and Glen Rose, Texas.

On April 30 damaging storms swept through southern Louisiana, Alabama and Mississippi. Over 60 million people were under threat as high, near hurricane force winds and heavy rain permeated the Gulf Coast. Storms with drenching rain also reached the western part of the Florida panhandle. Elsewhere, the roofs of several homes were damaged in Thibodaux, Louisiana. A tornado was spotted in the area by law enforcement. More than 150,000 Entergy Louisiana customers were without power during the midday hours.

The Thunder Down Under

In Australia four were killed as severe storms lashed New South Wales. An 86-year-old woman was killed in the Central Hunter region when her car was swept into flood waters, police said. Two men and a woman were found dead in Dungog north of Sydney, one of the worst affected areas, where homes have been washed away by flooding. Dungog was among 12 communities declared a natural disaster area by emergency services. Residents in the capital Sydney have been urged to evacuate after days of heavy rain have put more than 200 homes in the south-west of the city under threat from rising river levels.

200,000 homes in the state were left without power. Parts of the region experienced more than one foot of rainfall, wind gusts of more than 60 mph and waves reaching record heights of 50 ft. Mike Baird, the premier of New South Wales said, "To give you a sense of the size and scope - in Dungog ... there's more rain that has come down in the last 24 hours than they have seen in a 24-hour period for the past century."

It's That Old Devil Global Warming Again

Man-made global warming is responsible for about 75% of all hot-temperature extremes worldwide in the past 100 years, according to a study published Monday in the British journal Nature Climate Change. It is also responsible for about 18% of heavy rainfall, the study said. Even worse, climate change will cause higher percentages of extreme weather in future decades. For example, by the middle of this century, if temperatures continue to increase, about 95% of all heat waves — and about 40% of precipitation extremes — will be due to human influence.

Man-made climate change is caused by the burning of fossil fuels such as gas, coal and oil, which release greenhouse gases like carbon dioxide into the atmosphere, warming the globe to levels that cannot be explained by natural variability. The study's scientists used 25 climate computer models to test their theories. Lead author Erich Fischer, a climate scientist at ETH Zurich, a Swiss university, said the models "agree remarkably well on the change in heavy rainfall and hot extremes at the global scale."

"The idea that almost half of heavy rainfall events would not have occurred were it not for climate change is a sobering thought for policymakers seeking to mitigate and adapt to climate change," wrote Peter Stott of the United Kingdom's Hadley Centre in a commentary that accompanied the study.

Governor Brown Toughens California Greenhouse Gas Emission Targets

In an executive order, Brown called for the most aggressive cuts to carbon emissions in North America. The order establishes that California "must cut the pollutants to 40% below 1990 levels by the year 2030, more than a decade after he leaves office," the Los Angeles Times reported.

“California is taking the most aggressive steps to deal with pollution and the effects of climate change,” he told a roaring crowd at a climate-change conference in California.

As Bloomberg notes, in order to achieve this new target, the state will have to "require utilities to get more electricity from low-pollution sources, compel industries to cut smokestack emissions further and encourage greater numbers of cleaner cars on roads." One likely upshot is that California's efforts are going to impact businesses and utilities in other states, making the Golden State's policy a meaningful factor elsewhere in the country.

With alarming reports about water shortages and the state's warmest-ever winter, Brown has successfully folded the issue of the drought into a broader slate of ambitious environmental reforms. But even as he puts together billion-dollar relief packages and labels climate-change opposition "immoral," he does so without explicitly linking the drought to global warming.

Even though reports from agencies like the National Oceanic and Atmospheric Administration have refrained from laying the historic drought at the foot of global warming, Brown has used the general sense of crisis to move ahead on climate-change issues. Brown's efforts are not only affecting California, but the rest of the country as well.

Fined by China, Qualcomm Losing Chip Business as CEO Departs

by John Lawrence from the San Diego Free Press

Qualcomm Sucks Up To China

Qualcomm has been fined almost a billion dollars by China for violating its antimonopoly law. China has the world's most internet users and the largest smartphone market so Qualcomm has to tread gingerly with the authorities there since it doesn't want to be booted out of the world's most lucrative market. The fine will knock 58 cents a share off Qualcomm’s earnings for the year. Qualcomm CEO Steven M. Mollenkopf thinks paying the fine will make Qualcomm better positioned to cash in in the future.

This could be another front in the brewing economic conflicts between China and the US. To sweeten the pot Qualcomm has offered China deep discounts on licensing its patents for certain systems and agreed to partner with Chinese companies. But all this could be construed as a bribe in order to get access to the Chinese market.

Since half of Qualcomm’s revenue comes from China, there is a need to be China's "friend" as Chinese internet czar, Lu Wei, pointed out. And that doesn't just mean on Facebook. China has considerable leverage over Qualcomm and a host of other American corporations who are all eager to make money in China. China knows this and is flexing its muscles in an apparent show of economic nationalism.

Although regulation is a bad word in the US, not so in China. China's regulator is the National Development and Reform Commission aka the N.D.R.C. It is getting more aggressive in giving out fines. This could correspond to China's push to develop its own chip market so it won't have to import them from companies like Qualcomm. Since Qualcomm makes most of its money from licensing its patents, the future looks ominous for the San Diego chipmaker. China hasn't always shown the greatest respect for foreign patent holders, and will probably have many patent workarounds up its sleeve.

The Qualcomm Drama: Rich People Fighting Other Rich People Over Who Gets a Bigger Slice of the Money Pie

By now it's conventional wisdom that the ratio between CEO pay and the pay of the average worker has reached astronomical proportions. Huffington Post reports:

The ratio of CEO-to-worker pay has increased 1,000 percent since 1950, according to data from Bloomberg. Today Fortune 500 CEOs make 204 times regular workers on average, Bloomberg found. The ratio is up from 120-to-1 in 2000, 42-to-1 in 1980 and 20-to-1 in 1950.

“When CEOs switched from asking the question of ‘how much is enough’ to ‘how much can I get,’ investor capital and executive talent started scrapping like hyenas for every morsel,” Roger Martin, dean of the University of Toronto’s Rotman School of Management, told Bloomberg.

Scrapping like hyenas for every morsel aptly describes the plight of Qualcomm management and Qualcomm shareholders. In an earlier article I wrote about how retiring CEO Paul Jacobs gave his employees a homework assignment last March: go home and tell your wife and family to tell Congress to give Qualcomm a tax break. It seems that Qualcomm has a lot of money parked offshore which should be obvious since they do most of their business in China. Before they can "repatriate" that money, they have to pay taxes to the US government on it so they lobby Congress for a tax break in order to bring it home tax free or almost tax free.

The so-called tax holiday has been tried once before with CEOs promising to use the money to build new plants and create new jobs in the good ole US of A. It never happened. Instead CEOs used the money to buy back their own stock thereby raising its price. The idea is that this benefits shareholders who can then sell their stock at a higher price and cash in.

However, a new wrinkle has emerged in the stock buyback business. Instead of it raising the price so shareholders can cash in, Qualcomm has figured out a way to raise the price so CEOs can cash in and leave shareholders grasping for thin air. The U-T reported "Instead of duly enriching the shareholders who own Qualcomm, its executives have leveraged dominance of the world’s smartphone technology to enrich themselves."

As the price of Qualcomm's stock went up, the hyenas - meaning outgoing CEO Paul Jacobs and incoming CEO Steven Mollenkopf - figured out a way to channel the increased largesse not into shareholder profit but into executive pay for themselves. Investors holding large blocks of Qualcomm stock like Jana Partners were not amused.

The U-T reported:

As overall executive compensation jumped 180 percent last year, Qualcomm gave special stock grants worth $95 million to just two executives. Paul Jacobs, the co-founder’s son who gave up the CEO job way back in March 2014, got $45 million that vests over five years.

The new CEO, Steve Mollenkopf, received a staggering $50 million over five years. President Derek Aberle received grants worth $26.6 million.

Jana Partners, a hedge fund, was founded in 2001 by Barry Rosenstein. Jana, which manages more than $11 billion, is known for buying stakes in companies and then seeking to work with management as it pushes for change. In other words they are a thorn in Qualcomm's side. They've been pushing to break up Qualcomm into two companies - one being the chip making operation and the other being the patent licensing  part.

Qualcomm has a huge target on it from Jana Partners. They want to shake up the company in an effort to make shareholders more money and raise the stock price. Jana has invested about $2 billion in the company so it thinks it has the right to boss it around.

$45 Million for Three Months' Work - Not Bad, Eh?

So Paul Jacobs, failing in his quest for a tax holiday, nevertheless, creatively figured out a way to make $45 million for himself while stiffing Qualcomm shareholders. This was all done by means of stock grants. Qualcomm can grant its executives as many stock shares as it wants to. This means that there are more outstanding shares of stock which dilutes the price per share. So Qualcomm's trick was to buy back some of its stock thereby decreasing the number of outstanding shares and increasing the price per share, and then to turn around and grant stock to those three executives so that the final result was that the exact same number of shares, more or less, were outstanding as there were before this maneuver took place.

The U-T opined "Instead of using buybacks to give owners more of the company over time, Jacobs has effectively recycled shareholder profits into executive pay."

So three hyenas in the form of Jacobs, Mollenkopf and Aberle swiped the money off the table before another hyena in the form of Jana Partners could get to it. Had Jana Partners been successful and gotten to the money first, its rich shareholders could have reaped the profits instead of Qualcomm executives and CEO pay would have decreased. Getting back to the obscene ratio between CEO pay and worker pay, in neither case would workers have benefited even if in this instance CEO pay had diminished. The benefits would have gone to another set of rich hyenas, Jana Partners.

Ironically, workers have no leverage in this scenario whatsoever. Even if executive pay decreases, the only likely beneficiaries are other rich people - shareholders - not workers.

Last week Qualcomm  cut its earnings forecast for the second time this year after reporting that its past quarter’s earnings dropped 45 percent from the prior year. Samsung is not going to use its Snapdragon chip this year, but Qualcomm is optimistic. Samsung has invited them to produce their next chip in Samsung's own factory. Like a moth to a flame, Qualcomm will let Samsung oversee its chip making operation. I wonder what could go wrong with that? As other companies rev up their own chip making operations, Qualcomm will not only lose the chip business, but its patents, from which it gets most of its income, will be rendered worthless as Samsung and others devise workarounds to Snapdragon. 

China is also revving up its chip making operations which will result in less of a need for Qualcomm's Snapdragons. They are afraid Qualcomm has built in a "back door" which would allow the US to spy on Chinese officials. Maybe Paul Jacobs got out just in time.