Michael Spence writes:  Uncertainty about China’s economic prospects is roiling global markets – not least because so many questions are so difficult to answer. IIn the real economy, the export-driven tradable sector is contracting, owing to weak foreign demand. Faced with slow growth in Europe and Japan, moderate growth in the United States, and serious challenges in developing countries (with the exception of India), the Chinese trade engine has lost much of its steam.

At the same time, however, rising domestic demand has kept China’s growth rate relatively high – a feat that has been achieved without a substantial increase in household indebtedness. As private consumption has expanded, services have proliferated, generating employment for many. This is clear evidence of a healthy economic rebalancing.

The situation in the corporate sector is mixed. On one hand, highly innovative and dynamic private firms are driving growth. On the other hand, the corporate sector remains subject to serious vulnerabilities. The rapid expansion of credit in 2009 led to huge over-investment and excess capacity in commodity sectors, basic industries like steel, and especially real estate.

Despite these challenges, the reality is that China’s transition to a more innovative, consumer-driven economy is well underway. This suggests that the economy is experiencing a bumpy deceleration, not a meltdown.

As it stands, non-performing loans are on the rise, owing largely to the weaknesses in heavy industry and real estate.

China may need to rely on the large state balance sheet for loan consolidation, debt write-offs, and bank recapitalization.

Net private capital outflows remain substantial, and show no signs of slowing. As a result, the reserves held by the People’s Bank of China (PBOC) have declined by roughly $500 billion over the last year, with particularly large declines of some $100 billion in each of the last two months.

President Xi Jinping’s intensive anti-corruption campaign and, more generally, declining official tolerance for heterodox views also impact the economy.  Those who feel directly threatened by the anti-graft campaign might be inclined to take their money out of China.

Given China’s systemic importance in the global economy, uncertainty about its plans and prospects is bound to send tremors through global capital markets. That is why it is so important that the Chinese government increase the transparency of its decision-making, including by communicating its policy decisions more effectively.

The principal unaddressed problem affecting China’s financial system is the pervasiveness of state control and ownership, and the implicit guarantees that pervade asset markets. This leads to misallocation of capital (with small and medium-size private enterprises struggling the most) and the mispricing of risk, while contributing to a lax credit culture. The absence of credit discipline is particularly problematic when combined with highly accommodative monetary policy, because it can artificially keep zombie companies afloat.

To resolve this problem, China’s leaders must segregate the state balance sheet from the credit allocation system.

China’s current bout of economic volatility is likely to persist, though increased transparency could do much to blunt it. Add to that the smart use of state resources, together with sure-footed reforms, and China should be able to achieve moderate yet sustainable long-term growth.

No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays zero nominal interest.”– Ben Bernanke, 2009

“I think negative rates are something the Fed will and probably should consider if the situation arises.”-– Ben Bernanke, December 2015

“In theory there is no difference between theory and practice. In practice there is.”– Yogi Berra

John Mauldin writes: Economists used to think below-zero interest rates were impossible. Necessity (as central banks see it) is the mother of invention, though; and multiple central banks now think negative rates are a necessary step to restore growth.

Are they right? Will negative rates pull the global economy out of its funk? Probably not; but for better or worse, several central banks are already below zero. The Federal Reserve just sent its clearest signal yet that it is headed that way, too. The Fed has warned banks to get ready. We had all better do the same.

This week’s letter has two parts. The first deals with some of the practical aspects of negative rates and what the Fed is really signaling. The second part, which is somewhat philosophical, deals with why the Fed will institute negative rates during the next recession. This letter is longer than usual, but I think it’s important to understand why we will see negative rates in the world’s reserve currency (and the currency in which most global trade is conducted). This policy trend is truly a foray into unexplored territory.

The idea of negative rates isn’t new; what’s new is the willingness to try them out. The Ben Bernanke quote above comes from a November 2, 2009, Foreign Policy article in which the Fed chairman wrestled with how to keep inflation at the “right” level in a weak economy.

Set aside the question of whether there is any “right” level of inflation. As of six years ago, the head of the world’s most important central bank thought no one would ever lend at a negative interest rate. We now know he was wrong, at least with regard to Japan and most of Europe. Central banks there have instituted negative rate policies, and people are still borrowing and lending.

The Fed staff has also speculated on the possibility. Earlier this month my good friend David Kotok sent around links to several academic and central bank negative-rate studies. One was a 2012 article by Kenneth Garbade and Jamie McAndrews of the Federal Reserve Bank of New York. Their title tells you what they thought at the time:

Former Minneapolis Fed President Narayana Kocherlakota, who was for years the FOMC uber-dove, says going negative would be “daring but appropriate.” He has a number of reasons for this stance. In a note last week, he said the federal government is missing a chance to borrow gobs of money at super-attractive interest rates.

Kocherlakota would like to see the Treasury issue as much paper as it takes to drive real rates back above zero. He would use the borrowed money to repair our rickety infrastructure and to stimulate the economy.

It is an appealing idea – in theory. In reality, I have no faith that our political class would spend the cash wisely. More likely, Washington politicians would collude to distribute the money to their cronies, who would build useless highways and bridges to nowhere. The taxpayers would end up stuck with more debt, and our infrastructure would be little better than it is now.

The fact that this is a “monumentally” bad idea doesn’t mean it will never happen. There’s an excellent chance it will happen. Yellen and the Fed are clearly looking in that direction.

Yellen might face one small problem on the road to NIRP: no one is completely sure if the Fed has legal authority to enact such a policy. An Aug. 5, 2010, staff memo says that the law authorizing the Fed to pay interest on excess reserves may not give it authority to charge interest.

Despite the impression that the smartwatch hype has died down a bit since reaching its apex in Apple’s introduction of the Apple Watch in early 2015, the industry just passed a notable milestone.

According to a new report by Strategy Analytics, global smartwatch shipments surpassed Swiss watch shipments for the first time. Worldwide smartphone shipments amounted to 8.1 million, just beating the  Swiss watch industry total of 7.9 million.

While most of the world’s watches may come from China these days, Swiss watches are still the gold standard in terms of quality and consumer appeal. The Swiss watch industry has been hesitant to jump on the smartwatch bandwagon, accounting for just 1 percent of smartwatch shipments worldwide.

This chart compares worldwide smartwatch shipments to Swiss watch shipments in Q4 2015.

Many species of bees, butterflies and other creatures that are vital to agricultural pollination are threatened with extinction, posing risks to major world crops and global biodiversity..

“Many wild bees and butterflies have been declining in abundance, occurrence and diversity at local and regional scales in Northwest Europe and North America,” said an assessment by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES).

It said declines in pollinators – which also include a vast range of other insects, bats, birds and other animals – had also been detected elsewhere in the world.

The problem facing policymakers is that scientists remain unsure exactly which factors are the biggest drivers.

The world’s first assessment of its kind said possible causes include habitat loss, pesticides, pollution, invasive species, pathogens, climate change and the spread of vast farms dedicated to a single product, which suppresses biodiversity.

The IPBES was established under UN auspices in 2012 to assess the state of global biodiversity.

It said healthy populations of the creatures are critical to ensuring stable fruit and vegetable output, as concerns rise over the challenge of feeding the world’s people in coming decades.

Among its findings, IPBES said animal pollination is directly responsible for between 5 and 8 per cent of global agricultural production by volume, amounting to between $235 billion (Dh863 billion) and $577 billion worth of annual output. Pollination is the transfer of pollen between the male and female parts of flowers to enable reproduction.

But more than three-quarters of the “leading types of global food crops” also rely to some extent on animal pollination for yield and quality.

“Pollinator-dependent species encompass many fruit, vegetable, seed, nut and oil crops, which supply major proportions of micronutrients, vitamins, and minerals in the human diet,” the IPBES said.

The assessment is the work of nearly 80 scientists from around the world and was released at an IPBES meeting in Kuala Lumpur.

In Europe, 9 per cent of bee and butterfly species are threatened with extinction and populations are declining for 37 per cent of bee species and 31 per cent of butterfly species for which sufficient data is available, the IPBES said.

In some places in Europe more than 40 per cent of bee species may be threatened.

Some of the most important world food staples such as rice, wheat and other grains do not rely on animal pollination.

But vulnerable crops could include everything from apples and mangoes, to chocolate and almonds, and many other commonly consumed foods, said Simon Potts, co-chair of the assessment.

Policy options could be as simple as planting more flowers, the group said.

But it also mentioned overall better protection of natural environments and ecosystems, limiting the scope of intensive agriculture, encouraging sustainable farming, and finding alternatives to pesticides.

Are women CEOs less talented than men, or do they only get the very touch jobs now.  Two of three CEOs at the top of a list of “must-gos” are women.

IBM (NYSE: IBM)
CEO: Virginia Rometty
Year started: 2012
One year stock price change: -18.9%
Annual compensation: $19.3 million

105-year old IBM is one of the greatest conglomerates in U.S. history. The company created some of the most important tech products of all time, including the mainframe computer and PC. The company has been battered by falling demand for large computers, a poor showing in the enterprise software and consulting business, and a weak move into the cloud computing market. IBM reported $103.6 billion in revenue in 2008. Revenue last year was $92.2 billion, and has continued to decline in 2015. Ginni Rometty has been CEO for four years. Rometty has repeatedly told shareholders the company will soon become dominant in cloud computing, mobile, and social media. Instead, it appears the company is having more trouble dealing with the changing tech landscape than Rometty is willing to admit.

Carl Icahn has finally managed to achieve what many Xerox investors were hoping would happen for a long time. Following pressure from the billionaire shareholder, the company announced it is breaking in two. This breakup is essentially undoing CEO Ursula Burns’ 2010 purchase of Affiliated Computer Systems for $6.4 billion. At the time, the plan was to transform Xerox from a hardware and copier company to an IT consulting company. Xerox’s performance has been downhill since. The company is in such deep trouble that the Icahn plan did not lift the company’s stock price. It trades near its 52-week low, which puts it down 32% for the period. Revenue of the company Burns created hit $22.6 billion in 2011. Last year, revenue was $18.0 billion, and it continues to drop rapidly. Burns may not have a role in either of the two new companies.

ChristineLagarde, Managing Director of the IMF,  says indirect taxation in the form of VAT in low single digits is the most viable option for GCC states: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.

Growing anxiety over the UK’s EU referendum has driven sterling down to a new seven year low. The pound fell as low as $1.3879, as cabinet ministers clashed over the legal strength of Britain’s new deal with Europe.

Investors are also scrambling to protect themselves against fresh volatility ahead of the June referendum. The cost of insuring against sterling volatility has hit its highest level since 2011.

IMF chief Christine Lagarde has warned that Britain, and Europe, would bother suffer if the UK quits the EU. She fears that the uncertainty will hurt growth, at a time when the world economy is already fragile.

The Fund also cited June’s referendum as a potential threat to the UK’s recovery.

Several other City bosses have warned against Brexit. Ryanair, the budget airline, has even pledged to campaign actively to keep Britain inside the EU.

HSBC has predicted that the pound would slump by 20% in the event of a Brexit vote. It also warned that growth would fall sharply, with the housing market and the banking sector also vulnerable.

A poll of City economists has also predicted that the pound will tumble further if the Out campaign wins.

Black money saved India

There is no question that India has the most positive economic story on the planet.

Buoyed by increased manufacturing output, India’s economy grew by 7.4% in the third quarter of 2015, the fastest growth of any major country in the world.

But there is a dark side to India’s success, says one of the country’s most eminent economists.

Kaushik Basu, the chief economist of the World Bank and former chief economic adviser to the Indian government, says the nation’s tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years.

His argument is that the pervasive use of “black money” – illegal cash, hidden from the tax authorities – created a bulwark against a crisis in the banking sector.

India’s economy was looking just as frothy as the rest of the world, growing at an astounding 9% a year for the three years to 2008.

What’s more, India’s growth had been fuelled, at least in part, by a dramatic housing boom.

Between 2002 and 2006 average property prices increased by 16% a year, way ahead of average incomes, and faster even than in the US.

The difference in India is that all this “irrational exuberance” did not end in disaster.

There was no subprime loans crisis to precipitate a wider crisis throughout the banking sector.

So the big question is why not.

There were some shrewd precautionary moves by India’s central bank, but he one important answer is all that dirty money.

In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent. Not in India.

Here a significant part of almost all house purchases are made in cash.

And because the highest denomination note in India is 1,000 rupees, ($15; £10) it isn’t unusual for a buyer to turn up with – literally – a suitcase full of used notes.

Let’s say you like the look of a house that is for sale. You judge it is worth – for argument’s sake – 100 rupees.

The chances are the seller will tell you he will only take, say, 50 rupees as a formal payment and demand the rest in cash.

That cash payment is what Indians refer to as “black money”.

It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too because the lower the declared value of the property, the lower the property tax they will be obliged to pay.

What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.

At the peak of the property boom in the US and the UK it was common for lenders to offer mortgages worth 100% of the value of the property.

Some would even offer 110% mortgages, allowing buyers to roll in the cost of finance and furnishing their new home..

In India, by contrast, mortgage loans can only be raised on the formal house price. So when prices fell in India – and they did fall in 2008 and 2009 – most bank loans were still comfortably within the value of the property.

India did experience a slowdown, but it was collateral damage from the global recession rather than the result of any national problem.

To preserve this advantage, it’s been suggested that bribery be legalized.

It means people who give bribes no longer have a shared interest in keeping their nefarious activity secret.

Freed from the risk of prosecution, bribe-givers would have a powerful incentive to reveal corruption.

Press release from Whistleblowers United in the US

Four prominent Wall Street whistleblowers – who have identified high-level wrongdoing by the nation’s largest financial institutions and the federal government – will announce on Thursday a challenge to the 2016 presidential candidates to pledge specific, common-sense actions to curb the financial sector’s corrupting influence on political campaigns and government regulators. They have proposed a detailed plan that requires no new legislation or rulemaking to restore the rule of law to Wall Street, end too-big-to-fail and restore the best features of the Glass-Steagall law that used to govern bank activities.

The four – William K. Black, Gary J. Aguirre, Richard Bowen and Michael Winston – have formed a new initiative called Bank Whistleblowers United. They will appear together at a news conference at 10 a.m. Thursday, February 25 hosted by the Campaign for America’s Future at its headquarters, 1825 K Street NW, Suite 400.

Bank Whistleblowers United has as its goal “to create urgent, fundamental changes to break Wall Street’s power over our economy and our democracy,” says Black, an associate professor of Economics and Law at the University of Missouri and a central player in exposing the “Keating Five” savings-and-loan scandal in 1989.

With the political power of the banking sector, and questions concerning over which candidates are likely to be beholden to that power, emerging as central issues in the 2016 presidential campaign, Bank Whistleblowers United will on Thursday unveil a pledge that it will ask each of the presidential candidates to sign. The pledge will include a vow to not accept campaign contributions from those banking institutions and executives engaged in fraudulent behavior during the runup to the 2008 financial crisis. They will also answer questions about why that pledge is important in the context of what has happened in the five years since the Dodd-Frank financial reforms were signed into law.

Gary J. Aguirre is best known as the Securities and Exchange Commission attorney who, while heading an insider trading investigation of Pequot Capital Management, formerly the world’s largest hedge fund, resisted his supervisor’s demands to give preferential treatment to a Wall Street titan involved in the case. Fired for his so-called “insubordination,” Aguirre would prove to the satisfaction of two Senate committees, a federal court and three federal agencies that the SEC had acted unlawfully. In private practice, Aguirre represents whistleblowers and victims of securities fraud and market abuse. He has law degrees from U.C. Berkeley and Georgetown Law Center (LL.M.) and a master in Fine Arts (Film) from UCLA.

William K. Black is an associate professor of economics and law at the University of Missouri – Kansas City (UMKC) and the Distinguished Scholar in Residence for Financial Regulation at the University of Minnesota Law School. He is a white-collar criminologist. He rose to national prominence as a key figure exposing the “Keating Five” savings-and-loan scandal in 1989, in which five U.S. senators were found to have been involved in negotiating favors for Charles H. Keating, Jr., chairman of the Lincoln Savings and Loan Association, in exchange for campaign contributions. His subsequent book, “The Best Way to Rob a Bank is to Own One,” is considered a classic analysis of corrupting influence of Wall Street on the federal government.

Richard Bowen is the Citigroup whistleblower who repeatedly warned Citi executive management, beginning in 2006, about potential losses related to the purchase and sale of mortgage loans. He provided testimony, along with 1,000 pages of documents, to the Securities and Exchange Commission in July 2008, three months before the bank bailouts. He also gave nationally-televised testimony before the Financial Crisis Inquiry Commission in April 2010. A “60 Minutes” story profiling Bowen, “Prosecuting Wall Street,” has been aired multiple times on CBS and CNBC. He is currently a professor of accounting at the University of Texas at Dallas and a popular speaker in the field of business ethics (www.RichardMBowen.com).

Michael Winston was a high-ranking executive at Countrywide Financial who tried to stop the fraud, corruption and deception he observed at the mortgage lender. His warnings were dismissed or ignored by management, and he was eventually fired. He subsequently took Countrywide and Bank of America to court, winning what the trial judge called an “overwhelming” jury verdict. Though the verdict was later thrown out by an appeals court, Winston’s legal fight was favorably chronicled by New York Times columnist Gretchen Morgenson in the article, “How A Whistleblower Conquered Countrywide.” Winston has served as Distinguished Adjunct Professor at Stichting deBaak (The Netherlands) for 16 years.