In a statement that is affecting markets in just the opposite way as intended, Japanese PM Shinzo Abe yesterday announced an update to his “third arrow” economic reform policies. For markets, his statements were disappointingly short on details, but he focused on the fact that Japan would cut its corporate tax rate, reform the agricultural center, and change its massive state run pension management program into a more risk-taking, equity-driven, investment house. Various political statements indicate that Japan will likely cut the corporate tax rate from its current 35% to somewhere around 20-30%, but no specifics have been offered. Abe also announced the closing of a discriminatory tax against two-income families, and will now require companies to declare what percentage of executives are female, all in an effort to boost women’s participation in the labour force. Finally, Abe will introduce legislation which will allow employers to negotiate contracts directly with workers rather than following national guidelines.
FINSUM: For the most part these changes seem modest but attainable. However, they are not the earth-moving kind of reforms one hoped would accompany such a revolutionary course of monetary stimulus. It is ironic that Abe’s plans have been watered down by the very type of culture he is trying to change.
In a sign of the growing size of the shale oil boom, newly released figures show that the United States’ petroleum production has hit a new 44-year high. The recent boom in output has reversed four decades of decline in just five years and is helping support a renaissance in American manufacturing. In terms of petroleum production, which includes products beyond crude oil, the US is currently putting out 11.27m barrels per day, nearly matching the average of 11.3m b/d in 1970. The US is now the top combined producer of oil and gas globally, and third overall in crude production behind Russia and Saudi Arabia. America’s performance is in direct contrast to the rest of the world, where production has dropped. New “fracking” techniques have allowed the US to exploit its unique geology and produce the boom, though analysts say production will peak once more in 2020 and then begin to decline.
FINSUM: This is a tangible statistic which shows just how prolific the US boom has been. It is one of the major factors that is driving the resurgence of American manufacturing.
This article, run in the NY Times, compares the current problems in the student loan debt market to problems that existed in the mortgage market before and after the crisis. The piece shows how the student loan market is experiencing the same kind of lender and servicer foot-dragging over helping borrowers with unmanageable debt loads as occurred with mortgage borrowers before and after the crisis. Servicers, in particular, have little incentive to assist borrowers in repayment because they have comparatively little to lose if the loan defaults. The US government, which provides student loans has pressed its contracted servicers to help restructure repayment plans, but the costs and time of doing so have meant that little has been done to help recent graduates repay. Complicating the issue further, inertia has gripped the whole market as there have been massive transfers of loan portfolio ownership over the last few years, meaning no one is quite sure who has the legal right to alter the loans’ terms, again similar to the mortgage crisis. Young borrowers are having their credit records ruined and are facing much higher living costs as a result.
FINSUM: The rapid rise in tuition fees has led to startling buildup in student debt and young people are suffering under its burden. While the ABS market likes to repackage such loans, the government should act directly to clean up the mess.
Despite a series of “toothless” sanctions and a seeming inability to deliver any economic pain to Moscow, Brussels has finally found a way to make its presence felt—the suspension of the South Stream pipeline. The South Stream pipeline is a major oil pipeline project that was aimed at delivering Russian gas to Europe, but under pressure from other EU members, EU member Bulgaria has announced that it has halted preparation for construction of its portion of the pipeline. The pipeline is planned to deliver 63 bn cubic metres of gas each year, but now the project’s future is in doubt. Russian Foreign Minister Sergei Lavrov has said that Brussels is merely being vindictive, saying “sometimes Brussels is guided by a desire to punish, a desire to take revenge”. The EU is also seeking to tie up the pipeline in court, challenging Russia’s Gazprom and Bulgaria over the regulatory details of the project. Bulgaria, the EU’s poorest state is desperate to build the pipeline as it sorely needs to diversify its sources of gas. It currently receives all of its gas through Ukraine, which has caused several supply disruptions over the past year.
FINSUM: Finally, the EU has found some leverage in its negotiations with Russia over Ukraine. This pipeline appears doomed as the EU has little incentive to allow it to go through—Europe does not want another source of Russian gas.
Recent economic data showed that Chinese inflation surged between April and May, rising from 1.8% to 2.5% in one month. The numbers come as relief to those worried about deflation gripping the economy, but it raises some very difficult issues for policymakers trying to stoke growth in the country’s debt-ridden economy. Inflation is politically unpalatable in China, which means that policymakers’ hands are seemingly tied on how to stimulate the economy as they cannot risk inflation rising. The country’s economy is shrinking in many sectors, including in construction, which has the government worried about overall growth slowing and the country’s enormous mass of credit collapsing. The PBOC has quietly been stimulating the economy, both through cash injections in the interbank market as well as in cutting the deposit requirements of smaller banks, meaning they are more free to lend. Premier Li Keqiang has said the government needs to keep meeting growth targets in mind, despite the fact that officials need not wholly be measured by the growth rate, a comment markets have taken to mean that more easing is to come.
FINSUM: China is in quandary—if it wants to avert a major credit meltdown then it needs to stimulate the heavily-indebted construction sector, which props up the shadow banking system. However, if it undertakes large-scale stimulus then it risks stoking inflation and effectually worsening its credit problems.
A new report by left-leaning research group, the Institute for Public Policy Research, has concluded that the UK is producing too many university graduates for its economic needs, and that more young people should go through vocational training. The report is obviously economically important, but it also undermines recent government proposals to increase university attendance by removing barriers. The report showed that supply of “highly skilled” university graduates was already grossly outstripping employers’ demand for them. It also concluded that more jobs over the next decade would be created in trade industries and the care sector. The report also has large implications for students themselves, as it indicates that hundreds of thousands of students may be unable to repay their large student debt burdens after graduation because of a dearth of employment prospects.
FINSUM: While this report fails to consider the perspective that education can be meaningful for its own sake, it raises an excellent point that not everyone needs a university education to run a successful economy.