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Reflecting the volatile nature of the global economy with systemic risks remaining, impact of sharp cuts in spending, and the danger of oil prices exceeding $150 with a mideast crisis, the IMF provided a wide range of possibilities around its basic forecast. The IMF says it expects the global economy to grow 3.5% in 2012, up 0.2% from a Jan. forecast, and a forecast of 4.1% for 2013. But the IMF says this depends on the eurozone crisis, which could take off 2% from global output and 3.5% from output in the eurozone if things went wrong in Europe. Higher oil prices above $165 with supply disruptions after Iranian sanctions are another danger. Its forecast for Europe is 0.3% contraction in 2012 and 0.9% growth in 2013. Because of the risks in the outlook the IMF cautions countries from cutting spending too quickly, and says the best approach is to reduce deficits gradually over the long term and not to move too fast in the short term. This word of caution applies to Spain, the UK, France and Germany. To maintain enough funding in a crisis the IMF plans to increase its lending capacity from $380 billion by an additional $280 billion, with pledges of $60 billion from Japan, $26 billion from the Nordic countries, and $200 from other eurozone countries. ...

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Jim Tankersley of the Washington Post looks at the myths and realities of trade following incorrect statements made by Donald Trump about international trade. For example Trump suggests that Japanese automobiles imports are a big problem, though the imports have been cut by over 50% since the 1980's with Japanese companies Toyota and Honda making cars in the U.S. in Kentucky and Ohio. Detroit faces competition from foreign manufacturers based in southern states, including Alabama for Mercedes Benz and Tennessee for Nissan. Mismanagement including lagging in fuel efficiency and quality, and higher health costs for older workers were problems facing Detroit in the past decade. The Obama administration provided support to the auto companies to make the recovery following two bankruptcies in the U.S. auto industry, showing the U.S. has intervened as needed and the auto companies have made transformational changes. A big problem says Trump is the trade agreement with China which he promises to renegotiate. Tankersley points out that no such treaty exists. The U.S. agreed to China's entry into the WTO. This is not something the U.S. can renegotiate as the WTO sets rules for trade for all countries. The likely result of a shift away from Chinese imports would be more imports from countries such as India and Vietnam which are lower cost producers than China. Trump says some of the 2 million jobs lost in the past 2 decades will come back, yet the shift may be towards lower cost countries from China, with fewer jobs coming back to the U.S. High tariffs would not lead to the growth Trump predicts. A study made by Moody's Analytics at the request of the WP shows a Trump move for high tariffs would lead to a recession and lead to mass layoffs as other countries imposed their own tariffs, leading to large loss in U.S. exports. Trump has made claims such as telling the Post that $19 trillion in federal debt could be paid off in 8 years without raising taxes by fixing trade. No grounding on facts is provided by Trump. One of the failures of the media in the 2016 election campaign is the failure of the media to provide scrutiny for candidates claims and wild exaggerations, which have gone uncontested or unquestioned, or without the persistence till satisfactory answers are given by the candidates making them. Especially when the stakes are so high, for the U.S. and for the global economy. ...

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In an effort to address global uncertainty, Australia's Treasurer, Wayne Swan, presented a budget designed to move to a surplus of A$1.5 billion from a deficit of A$44.4 billion for fiscal year ending June 30, with large cuts in defense spending. Savings and cuts amount to A$33.6 billion. The trade deficit is widening, and Australia faces uncertainty about the prospects of the mining boom continuing to sustain economic growth with the slowdown in China. The budget plan is based on assumptions of 3.25% growth in the next fiscal year, unemployment at 5.5% slightly above the 5.2% today. The growth in GDP for the last quarter of the prior fiscal year slowed to 2.3%. Australia's widening trade deficit for the first quarter 2012, was A$3.2 billion. New taxes on mining profits will generate A$6.5 billion in 2 years, and taxes on carbon pollution A$7.4 billion. With elections set for 2013, the government plans to continue payments supporting low and middle income families.

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Economists predict sluggish economic growth in 2013.

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How ACA a company that provided bond insurance for Collaterized Debt Obligation or CDO's basically did not provide good insurance to the CDO issuers becase it did not have the financial resources necessary to do this but instead let banks and investment houses to benefit from the accounting rules in the insurance industry which allow another set of accounting rules different from GAAP (Geerally Accepted Accounting Principles). Under these rules banks and investment houses did not have to follow the mark to market rules of GAAP and could book the difference between interest payments and the insurance premium across the life of the bond (5-10 years), in the quarter they bough the insurance, what were essentially illusory profits. Merill Lynch issued a lot of these CDO's. In November 2007 ACA was forced to take $1 billion in losses for the third quarter. Standard and Poors downgraded ACA from A to CCC a month later. The downgrade forced ACA to come up with more collateral to show that it had the funds to back up its insurance. When it came short of funds Merrill Lynch, UBS, CIBC had to take big losses on these policies. This began the first big shocks on the Street at te end of 2007. Note that $43 billion in securities backed by risky corporate loans and bonds like the ones used for a lot of the buyouts have insurance from ACA. These could be the next to sour and lead to more writedowns as the economy weakens. ...

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When experts say corporate earnings and balance sheets are healthy this is because they are speaking of the situation in aggregate. Companies that benefitted from the commodities boom like the oil companies and companies like Microsoft and Apple have hundreds of billions of dollars, but this is very deceptive and misleading. About two thirds of nonfinancial companies, 1600 companies, carry a junk rating according to S&P. How does this compare with earlier periods? Its up 50% from the beginning of the last bust in 2000 and 40% higher than in 1990. Also Wall Street hugely expanded the market for speculative floating rate loans with $1.2 trillion raised like this in the last 4 years to 2007, according to Thomson Reuters. And the junk bonds are much junkier. Between 2003 and 2007 lenders financed $194 billion worth of bonds in the bottom tier of non investment grades with B- or below. And that was twice the amount of the previous 4 years. Histoically it should be noted 23% of bonds in this group default within 3 yearsafter they are issued vs just 3% in the top 3% of junk. Which companies are likely to default? Amusement park operator Six Flags, construction products maker Georgia Gulf, trucking company Swift Transportation, and sports equipment maker Easton-Bell Sports. Private Equity owners who have loaded the companies they own with debt also could default. This includes real estate brokerage operator Realogy, newspaper company Tribune and pizza chain Uno Holdings. S&P's estimate that the default rate among US junk rated borrowers will jump from 1% last year to 4% this year but other experts estimate it at around 8%. And if history is any guide it will probably be in double digits. After the 2 lending booms the one in late 1980's for LBO's and commercial real estate and for telcom and tech in the late 1990's default rates reached double digits. And with a recession one expert Fridson of research service FridsonVision estimates default rates of upto 16% for two consecutive years considering the huge amount of debt that has built up....

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Under the Volcker Rule setup during the global financial crisis of 2008-2009, banks total investments in private equity, hedge funds and similar higher risk funds cannot exceed 3% of high quality capital. During the financial crisis investment banks were highly leveraged leading to the collapse of Bear Stearns and Lehman Brothers, and the precarious financial condition of other banks. Goldman has pared down about 60% of such investments. Remaining are $4.8 billion in private equity investments, $1.2 billion in real estate, and about $1.1 billion in both credit and hedge funds. Regulators have given the bank till July 2017 to comply. As banks recovered from the impact of the crisis, the tearing of the social fabric that happened with high unemployment in some groups especially older white men, has remained six years after the crisis- as evident in the U.S. election campaigns this year. As a result the mood has shifted for tighter regulation and both party platforms, Republican and Democratic, now call for reinstatement of the Glass Steagall Act, which separated commercial banking from investment banking as part of the lessons learned from the Great Depression. Volcker, was chairman of the U.S. Federal Reserve during the Carter administration, known for taking a tough line against inflation. He was the principal driver of the move to restrict banks from risky activity, and faced considerable opposition from banks during the 2009-2013 period when the rule was being formulated.  ...

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New information shows a crisis is developing in higher education as student debt passes $1 trillion with the unrelenting rise in the cost of college. Higher debt levels is leading to higher droput rates. According to think tank Education Sector, 30 percent of college students taking out loans dropped out of school, compared to 25% ten years ago. And work can be a large factor as students take parttime jobs to lower the loan burden- half of college dropouts attributed dropping out to work, according to a 2009 study by Public Agenda. It also adds another burden to the productive potential of the U.S. economy. The director of the Center on Education and the Workforce at Georgetown University, Anthony Carnevale, estimates the cost to the U.S. economy at half a trillion dollars in terms of skills not available for increasing economic output and income lost for dropouts.

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House Majority Leader Eric Cantor talks with Joseph Rago of the Wall Street Journal. There is a fundamentally different world view between Obama and Cantor. Cantor does not hesitate to present his view and says President Obama did not like to be challenged on policy grounds in debt negotiations, leading to the famous "I'll call your bluff Eric" remark by Obama. Cantor sees no chance of reaching an agreement with Obama that would go towards solving the fiscal crisis and feels it would be best to focus on incremental wins. He says of the Obama-Boehner deal that it did not address the problems with Social Security and Medicare. Without the transformational changes that are needed in those programs he did not think it was worth the cost. Cantor is mainly responsible for the Republicans not agreeing to include revenue increases in the negotiations or the final deal. Cantor says the super-committee part of the deal which has to come up with savings, will only lead to incremental progress- considering the huge divide that separates their world view and that of President Obama. The real fight says Cantor is to prevent President Obama from getting re-elected....

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Bank of Spain Gov. Miguel Angel Fernandez Ordonez said Spain finds itself in an "exceptional situation," as it goes "back into recession," and only exports acting to contribute to gains in GDP.

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Economists are calling this a "wage-less" recovery in the U.S. With unemployment at 8.8%, wage pressures are weak. Average hourly earnings were flat in March 2011. The annualized growth of average hourly earnings for the last 5 months is 1%, according to Gluskin Sheff chief economist Rosenberg. After accounting for higher inflation, real wages are actually falling.

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This Journal editorial points to a Philadelphia Fed study showing that students in the middle class with higher student debt are reluctant to start small business. The Fed study shows new firms with five employees declined by 17% on average for 2000-2010 in counties where relative student debt was up by 2.7%. The average student loan customer owes $28,000. Student debt has doubled from $547 billion in 2007 to over $1 trillion in 2015. As small business makes up about half of the private economy and generates 6 of 10 new jobs, the effects on small business show the damage being done rising student loan debt.

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U.S. Federal Reserve chairman Ben Bernanke tells the House Financial Services Committee hearings that the Fed will give importance to underemployment, not just the unemployment rate, in making decisions about bond purchases. The unemployment rate could be a false indicator of the labor market if the rate falls below the Fed's goal of 6.5% before raising interest rates, and yet labor markets are still weak because of underemployment. Bernanke said: "There are a number of problems with the labor market. Unemployment is one problem, but long term unemployment and underemployment- and by 'underemployment,' I mean people either who are working fewer hours than they would like or possibly working at jobs well below their skill level- is also indicative of a weak labor market." In this situation of high underemployment combined with low inflation the Fed may hold off on raising interest rates when the unemployment rate reach 6.5%. In Bernanke's words: Reaching 6.5% unemployment "would not automatically result in an increase in the federal funds rate target." Since 2010 financial markets in the U.S., and to a lesser extent worldwide, have looked to U.S. Fed policy for raising interest rates, as guidance on the degree of support for the economy and by extension for markets....

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A local government vehicle in China, Sixth Division of XPCC fails to make a bond payment in August 2018. This is the first such instance of failure to make a bond payment for a local government vehicle in 2018. Economists estimate China's total debt at 242% of GDP in 2017, and government efforts to tighten liquidity and reduce support for overextended local government investment vehicles.

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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.    ...