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Portugal in 2012-2013 stands as a good case study of what is good and what is bad about austerity measures, about what makes sense and is needed and what does not make sense and is bad both in a fiscal sense and for growth. Patricia Knowsmann does a good job of bringing this out, from the hundreds of stories written about austerity vs growth in the media. During 2011-2012, the elected government of Passos Coelho has supported an EU-IMF-ECB program that reduced wages, raised taxes, privatized state owned companies and changed labor laws that reduced hiring by businesses. During this time the Portuguese have patiently accepted the program compared to other countries and the budget deficit is shrinking from 9.8% in 2010 to an expected 5% in 2012. The unemployment rate has gone up to 15%. Now a new plan by prime minister Coelho in September has created an uproar and sparked popular opposition to the austerity measures threatening what has been achieved in deficit reduction, including the credibility of the austerity program. The plan is to reduce the portion of salaries that employers contribute to the social security system from 23.5% to 18%, in the hope that employers would increase hiring. At the same time it increases the portion of salaries employees pay from 11% to 18%. Coelho was looking at Germany and Slovenia where employees pay more than 20% of salaries to Social Security. What he failed to look at was the situation in Portugal where workers and pensioners have lost about 24% of their income through wage cuts and tax increases. The new plan would reduce incomes even further. Portugal's small business owners expressed strong disapproval for the plan because it would mean a drastic drop in consumer spending. The president of a Portuguese shoe maker, Kyaia, with 600 employees, says it makes no sense to reduce companies contribution if the company can't sell enough shoes to keep its workers. Kyaia has already experienced a 25% decline in demand and its CEO Fortunato Frederico, says he cannot understand how a company can hire workers if demand declines. This impact on consumer demand and sentiment is a fact that policymakers cannot ignore throughout the eurozone as austerity measures are implemented, especially when demand has already declined to an unacceptable point. The move by Coelho ignored a study by Portugal's finance ministry and central bank that showed export businesses may be induced to hire from the savings in contributions, but the businesses serving the domestic market would simply take in the savings. The EU-IMF-ECB recognized this and suggested increasing taxes to pay for the reduction in employer contributions, which would also depress demand by reducing incomes further. Portugal's economy and business is not focussed on exports, small business makes up 97% of Portugal's companies and most of them do not export. The introduction of such a plan gives credibility to the idea that there is a transfer of wealth from workers to business under the austerity programs, which affects the credibility of the entire deficit reduction and competitiveness improvement programs. For Coelho it also means the strong opposition of a minority party in his coalition government and from members of his Social Democratic Party. Large demonstrations were held on Sept 15 in 40 cities in Portugal in the first large scale opposition to further austerity measures and the Coelho social security contribution plan. Capital markets in Europe also see a problem with such plans because it removes the essential element of popular acceptance of deficit reduction plans jeopardizing the entire program. After the failure to win popular acceptance in Greece capital markets see additional risks and failures as one too many for the eurozone. ...

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The memo to U.S. president Reagan written by his economic advisors in November 1980 before his first inauguration. Inflation was running at 13% and the economic problems looked as intractable as they do today. Advisors included Milton Friedman and George Shultz. The memo called for setting steady policies for the long run to encourage investment and growth, and at the same time steady monetary policy. This is different from the repeated quantitative easing efforts by the Federal Reserve responding to financial markets, and the Obama administration's stimulus efforts that have not led to long term growth. On the long term perspective the memo said: "The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success." The memo was released by George Shultz.

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The bleak situation for Americans facing retirement as most people age 65 are likely to outlive their savings. The median financial net worth of an American household is $10,890, according to work done by Edward Wolff, an economics professor at New York University. This estimate is based on 2010 Federal Reserve data updated for the movement in market indexes. Even the ten percent of Americans who have saved $1 million will have difficulty as a 2% withdrawal rate would provide only $20,000 to supplement Social Security income. Earlier generations of Americans could depend on income from bonds. In today's low interest rate environment, the benchmark 10 year Treasury note is at 2.2% in 2013, bonds will provide only a fraction of the income generated in earlier periods. Stock markets are volatile and pose additional risks for seniors in retirement.

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The commodities boom allowed Brazil under president Lula to commit to heavy state spending, subisidies, protection of favored sectors with large tariffs, that led to inefficiency and high debt. The policies continued under president Rousseff. Corruption scandals in the latter part of the Lula administration led to more populist policies for the Workers Party to stay in power, says Porter. Compared to Mexico and Chile, Brazil and Argentina under presidents Lula and Kirchner moved in the direction to closing up their economies to trade and foreign investment that would make corporate sectors more competitive and less dependent on the state for subsidies and favors. Mexico's economy other than the automobile sector is struggling, as mismanagement also plays a part as with the handling of Pemex and huge capital injections needed. Mindfulness and thoughtfulness is needed in setting policy direction, aware of the risks free of illusions about rosy scenarios, knowing that ideology plays less of a part than exercizing good judgement....

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Russia raises interest rates by 6.5% to 17% on Dec. 15, 2014, as Brent crude prices fall below $60 and pressure on the ruble increases. Anticipation of the U.S. Federal Reserve raising interest rates in 2015 puts pressure on emerging market currencies, adding to pressure on the ruble. All emerging market currencies, the Brazilian Real, South African Rand, Indian Rupee, Indonesian Rupiah, Turkish Lira, also come under pressure as money flows out of emerging markets in a repeat of the situation in January 2014.

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About 63% of respondents in a Washington Post/ABC poll conducted in July 2011 say they would look for new faces in Congress in the 2012 elections. There is serious public discontent with the lack of compromise by Republicans and Democrats in the debt ceiling and deficit reduction talks.

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Krauthammer quotes Congressional Budget Office Director, Elmendorf, who said "we don't estimate speeches," when Elmendorf was asked about President Obama's April 13 debt plan speech. President Obama has failed to come up with specific ideas for debt reduction and not taken up any position on debt reduction, including removing tax expenditures as recommended by the President's Bowles-Simpson Commission report. Krauthammer says the President is using the discussion on debt reduction and the debt talks as a way to move forward with his reelection campaign. This President Obama has done by not putting forward any new ideas of his own or backing the ideas of the Bowles -Simpson Commission, and by putting Republicans on the defensive for coming up with any new ideas which may be unpopular. He calls the President's February 2011 efforts on debt issues a farce, and the April 2011 efforts empty, lacking any substantial specifics.

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The civilian labor force participation rate for people over 60 years of age reached 29.4% in the U.S. in 2012, up from a little over 22% in 2002, according to the Labor Department. This reflects the slow growth in retirement savings with low interest rates and the economic shocks from the global financial crisis of 2008 to savings. A Conference Board report shows about two thirds of people between 45 and 60 years age are planning to delay retirement, up from 42% two years earlier.

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The May 6 episode of the stock market plunge of 900 points in the U.S. and then recovering had the effect of rattling investors nerves especially retirees. The impact of this episode is recorded in the experience of one Charles Schwab broker office in Englewood, Colorado. By the end of that day this broker had 50 calls on his answering machine from a fifth of his clients, all seeking to know what happened. Charles Schwab, who helped launch a period of individual investing in the U.S. after 1982 by cutting fees and going after the average investor, (along with others like Jack Bogle of Vanguard Funds), is also on edge. He says he has not seen anything like this since his early days. Schwab confirms Yale Prof. Shiller who says (see link) that his index for markets shows a lot of nervousness. Saying that 98% of people are still very concerned, coming after the May 6 incident, and the Greece and eurozone crisis that impacted US stock markets. One other factor he points out is the constant flow of headlines that suggest certain business people engaged in fradulent practices, something that fuels a lack of trust. Charles Schwab ponders from his office across the San Francisco Bay Bridge, whether words like safety and soundness mean anything anymore. Another factor of concern, Bogle points out, is that institutional investors now own 70% of American corporations, up from 35% in 1975. And the advantage has veered sharply in their direction as institutions, hedge funds, and investment banks trade on their own account, with wealth moving in that direction. This leaves the individual investor and especially the retiree or those about to retire in a severe predicament....

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The ECB stands ready to act with the unanimous support of its 25 member governing policy, says Mario Draghi, president of the ECB. Draghi said that "if oil feeds into other prices, that could generate exactly what we want to avoid, namely a spiralling downward phenomenon" for wages and prices. Mark Carney of the Bank of England, says he will see "how things evolve." The U.S. Federal Reserve might slow planned rate increases in 2016, if inflation remains well below the target of 2%, and conditions indicate adverse effect on the economy.

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Portugal's parliament gave preliminary approval to a new budget bill with 4.3 billion euros in tax increases on income, captal gains, property and car ownership, and 1 billion euros in spending cuts compared to the 2012 budget. Banco Espirito Santo was able to sell 750 million euros in 3 year bonds with an interest rate of 5.875%. Over 200 investors from France, UK, Germany made buying offers of more than 2.7 billion euros. The rate is lower than expected and reflects ECB policy support for bond markets of countries requesting aid.

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The European Union Commission says Ireland must recover 13 billion euros in back taxes for giving tax preferences to Apple that are against EU rules. The EU Commission says Ireland allowed Apple to pay a corporate tax rate of 1% on its European profits in 2003, and .005% in 2014. The EU Commissioner says the use of Ireland as the place where Apple pays taxes on operations in Europe has no base in reality, as most profits are earned in other countries outside Ireland. Taxable profits of Apple "did not correspond to economic reality," according to Ms. Vestager, the EU Commissioner.  In the current environment where political upheaval is unsettling the democratic process in the U.S., Britain, Spain, France and Italy, as well as in Brazil and other countries in the developing world- because of deep recessions, and efforts to cut the deficits with deep cuts in state spending including in education and healthcare, basic services- the moves by companies to reduce taxes to these absurdly low levels such as .005% when other companies in the EU are paying 12.5%, is becoming increasingly unpopular. As pointed out in this BBC News article this sounds like the way Carnegie, Rockefeller and Vanderbilt operated during the late 19th century, and were seen as operating in a manner that was above the law. Janet Yellen pointed out at a Boston Fed Conference on inequality in Oct 2014 that the bottom half of the distribution or 62 million households in the U.S. in 2013, had a net worth of about $10,000, One quarter of these households had a net worth of zero dollars. The working class and blue collar workers in the U.S. provide much of the support at Trump rallies. Younger college educated people support Sanders, because of the situation of the working and middle class in the U.S., and a similar situation exists in Europe. It is for the sake of the democratic process and delivering services in education, healthcare, and other basic areas to all, that companies small and large need to pay their fair share of taxes, regardless of size, influence, or technological advantages. Today this is is seen by most leaders who draw public support as the right way forward for the U.S., Latin America, Europe and Asian countries, including proper allocation of resources to best serve the needs of working people. For example the 13 billion euros is equal to all of Ireland's healthcare budget, and 66% of its social welfare budget.    ...

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The unemployment rate drops to 6.3% in April 2014, as a significant number of Americans stop looking for jobs they cannot find. 288,000 new jobs were created in April 2014, according to the Labor Department. Yet the participation rate has declined to 62.8%, the lowest in three decades, and wages are up only about 1.9% from the prior year month. The unemployment rate which counts involuntary part-time workers and workers discouraged and not looking for a job was 12.3% for April 2014.

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"China's Superbank," by Henry Sanderson and Michael Forsythe looks at the rise of China Development Bank to provide insights into the two decade real estate boom in China, and the trillions of dollars in loans made by state owned banks to finance China's state owned industries and infrastructure development. The authors say these loans based on land owned by the state, improved with roads and other infrastructure and then sold to industry, have helped finance China's urbanization and industrial development. But it has also created problems including eviction of farmers from the land by local government authorites increasing inequality, led to misallocation of capital on bad projects, and an unsustainable model of development focussed on state owned companies. A major side effect of this is not covered in the book. This is the impact of crowding out of credit for private industry in China, with privately owned business having to pay higher rates in the underground loan market or lacking financing. A major focus of the report "China: 2030" by the World Bank and China's official think tank Development Research Center is on reversing this development to come up with a sustainable development model. The report was supported by World Bank chief Zoellick and China's new prime minister Li Keqiang. "The Great Rebalancing," by Pettis, a finance professor at Beijing University, looks at the other side of the financing of China's boom- the low interest rates on savings for China's consumer. This reduces household incomes and reduces purchasing power as the interest rates are lower than the rate of inflation. Lower value of China's currency also reduces the purchasing power for China's consumers. Estimates show the low interest rates cost China's workers and consumers somewhere in the range of 3 to 8% of GDP annually in bank deposit income. This money is funnelled through the banking system to make more loans for infrastructure and growth at the state owned companies, concentrating exraordinary level of financing in one direction. As a result the consumption share of GDP in China has actually fallen in the two decades of hyper development. This is about 34% compared to 50-55% for other Asian economies....

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Bernanke's defense of the action of the Fed's monetary policy making committee, on November 3, 2010, (with a vote of 10-1) to buy an additional $600 billion of Treasury securities over the next 8 months. His defense focusses on the prospects of deflation- how low inflation can morph into deflation (falling prices and wages), that can create a long period of economic stagnation. In addition, with low and falling inflation, Bernanke sees spare capacity in the US that can be utilized to reduce the number of jobless people. He points to the rise in stock prices and fall in long term interest rates in anticipation of the Fed's action, as evidence that this Fed move would improve financial conditions. Lower mortgage rates would make housing more affordable, higher stock prices would increase consumer wealth, confidence and spending. Spending would lead to higher incomes and profits for economic expansion, from this viewpoint. The situation in November 2010, was a deepening housing slump anticipated for 2011, gridlock after the 2010 midterm elections and no agreement on additional stimulus for 2011, the need to rebalance the global economy lacking cooperation from China (with China increasing imports and reducing exports and the US increasing exports and reducing imports). Fed's Bernanke does not mention these factors, and only hints at the gridlock towards the end of the statement. This Fed action will push the dollar lower, just as efforts to improve exports and the trade balance are underway. The Fed's committee sees the risks of commodities inflation as an acceptable risk in the current situation, and the use of a cautious approach assessing the purchase program regularly as sufficient measure of safety. As to difficulties of the unwinding of these policies, the Fed sees present danger outweighing the risks of no action. For emerging markets such as Turkey, India, Australia and other countries seeing even more inflows of capital, the risks are left to these countries to manage. The central banks of India and Australia moved to increase interest rates at the same time that the Fed made its move....