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The Economist points out that China's total debt of government, corporate and households has grown by about 100% of GDP since 2008. The 2009 crisis led to rapid increase in debt. It is now about 250% of GDP, according to the Economist. Slower growth of below 7% risks reducing China's ability to service this debt. About half of this debt is owed by state owned companies and property developers. China can use its sovereign reserves to continue supporting bank and state owned companies. Investor's are pricing bank shares to reflect about 10% of this debt as bad debt even though government estimates are much lower. The reserves provided China time to fix the banking system since 2008, yet the debt keeps growing and China has failed to take strong action in the last 6 years. Complacency is a problem, and the incentives for local governments to continue prior practices that increase debt continue. As Krugman and other experts have pointed out at some point the rules of finance will apply to China as they have for other countries that faced a debt crisis- Japan in the late 1980's, South Korea and other Aisan countries in 1997, and the U.S. in 2008. Even without a crisis through deft managemen and use of reserves China risks zombifying the economy as old loans are backed up by new loans, with the further risk of misallocation of capital or poor use of capital. This lowers productivity of capital and hurts development. With poor statistics such as the figure of 1% of debt being bad debt cited here, the problems of complacency can be magnified, as there is less reason for a strong response....

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Krugman says France is getting a lot of attention, but it is Germany where attention needs to be focussed. German long term bonds are yielding 0.7%, a yield level associated with Japanese deflation. He says Greece's problem was a fiscal mess limited to a small country, and Italy has a problem of low productivity that is unique to Italy over several decades. Loss of French competitiveness is overstated, as France has only a small trade deficit, and some of that lack of competitiveness comes not from excessive growth in cost and prices but from policies pursued in Germany. He points to France's GDP deflator (the average price of French goods and services) since 1999 when the euro started, as rising 1.7% a year, and labor costs rising 1.9% annually. By comparison German price growth was 1% and labor cost growth was 0.5%. France is close to the ECB target of 2% inflation. Germany falls way short of the 2% inflation target.

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Mark Gilbert, a visiting associate professsor of European History at the John Hopkins School for Advanced International Studies in Bologna, describes the crisis of the political culture in Italy that goes deeper than the economic crisis and has lasted for most of the post war period. Gilbert says the political parties have avoided implementing financial discipline and opening up the economy for most of the last two decades, except for brief periods, and did not take the opportunity of joining the eurozone to make serious changes. Italy has many parties with the Democratic Party having 25-30% support in the polls and Berluconi's People of Liberty (PdL) having the support of 20-25% of voters. There is also the Northern League, the Third Pole of centrist Catholic parties, the Italy of Values party, and the Ecology Freedom party. Italy lacks a national consensus on making the changes. The risk is that Monti will not have enough time to make the changes, as new elections may be held by April 2013. His government was formed as a government of technocrats led by former EU commissioner Mario Monti, after President Napolitano forced the PdL, the PD, and the Third Pole to work together to support the new government. Changes are needed in the legal system, local government, the health sector, and in the university system. One factor favoring Monti is that 90% of Italians voters are dissatisfied with the political parties, according to Italian think tank ISPI. For Italy the EU crisis has in this sense a positive aspect as it has forced Italy to come to grips with economic and cultural changes under a leadership from outside the political system....

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Ann Lee a former investment banker and now adjunct Professor at New York University, gives us facts that show the smaller banks that lend to small and medium sized businesses in the country are being closed by the FDIC. According to ADP small business that employs between 1 to 49 people, accounts for 48 million jobs, those between 50 and 499 employees account for 42 million jobs, and large business for only 17 million jobs. Without access to capital these small and medium sized businesses will continue to layoff employees, creating a vicious cycle of falling credit and demand. According to Automatic Data Processing's August employment report large business shed 60,000 jobs, medium sized business 116,000 jobs and small businesses shed 122,000 jobs. These smaller banks says Lee have done most of the lending to small and medium sized businesses. And overall lending has dropped from pre-crisis levels. Treasury's Capital Purchase Monthly Lending Report shows that banks that received government money actually reduced loan balance by $54 billion. According to reports issued by major credit rating agencies $700 billion of asset backed securities were underwitten in 2007. In 2009 only $10 billion was issued. This has a significant impact in every area. Banks have no incentive to lend with all the bad nonperforming loans on their books. They only hope that over time renegotiated loan terms would enable to recover these loans. But this might take a decade says Lee, if this is similiar to other crises like the one in Japan. She says what the banks do to make money is to borrow virtually unlimited amounts from the Fed at near zero rates and earn money from the spread when they lend to the Treasury. Does our current banking system make sense she asks. Banks are not investing in economic activity, in real products and services,but engaged in agovernment backed shell game that enriches bankers at the expense of everyone else. She says that the banking lobby may prevail in preventing the nationalization of the banking system, but this will not prevent questions about the status quo and its assumptions from arising if the recovery and regulatory reforms fail. ...

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The benchmark price of U.S. crude oil dropped to $31.41 a barrel on January 11, 2016, as oil prices continued to drop sharply following a slowdown in China, appreciation in the U.S. dollar and no cuts in production from Saudi Arabia. Analysts expect a crisis for energy producers that is deeper than ones in 1986, and five plunges in oil price all the way back to 1970. With the oil prices at $30 and expected to drop below $30, the companies that took on a lot of debt have no choice but to keep up production. In the process many may find themselves in bankruptcy. Private equity with capital of $100 billion is likely to come in at this point to buy cheap assets without the debt, say analysts. U.S. banks energy portfolios are small, with Wells Fargo energy exposure only 2% for oil and gas loans in the third quarter of 2015, or about $17 billion. Loans that are rated "sub-standard. doubtful or loss," are projected at 15% of loans to energy producers, about $34.2 billion, in a biannaual review by banking regulators. The unusual aspect of this energy price slump is that production is not declining with falling prices- oil production in the U.S. was estimated by the government at 9.2 million barrels a day in Jan 2016- 1% higher than at the beginning of 2015 when prices were over $40 a barrel....

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As its economy slows and facing high debt levels, China benefits by an estimated $18 billion a month from lower oil prices in 2015. The estimate is from Starfort Holdings, investment and private equity group. The estimates as China benefits from lower prices of all commodities, including oil, are of about $250 billion annually as China replenishes its stocks of commodities. With $12 million barrels imported daily China is a major emerging market beneficiary, along with India, of the drop in oil prices. Continuing pressure on prices from the expected resilience in shale oil production in the U.S. with learning and the development of new production methods means the benefits are likely to continue. China has also not renegotiated price points in deals made earlier at higher prices with China and Venezuela, as it pursues its foreign interests. Stockpiling of grains and edible oils are being increased by 33% in 2015 by $24.7 billion.

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Two thirds of Americans are becoming pessimistic about the economy. This is one of the results of a Wall Street Journal/NBC poll. This is up from 53% in January. Voters are losing confidence in the idea that the Democrats can come up with better solutions than the Republicans. Only 24% of those polled have positive feelings for the Republican party, with Democrats doing only slightly better. Democratic pollster, Peter Hart- who along with Republican pollster Bill McInturff conducted the survey- calls it the JetBlue election. This description is from the JetBlue flight attendent who ran from the plane after exiting through an emergency chute. There is a sense of severe discomfort and looking for the exit, he says. With 6 in 10 of those polled expressing a loss of confidence in the policies of the Obama administration to improve the economy, including 83% of independents, and a quarter of Democrats. The situation has deteriorated on the confidence level with the war in Afghanistan as well. 68% of those polled say they are less confident now that the war in Afghanistan can be brought to a successful conclusion....

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Central Huijin, part of China's sovereign wealth fund, China Investment Corporation, bought shares of China's four major banks in October 2011 to prevent steep price declines. China's bank stocks have lost about a third of their value in 2011. The four major banks- China Construction Bank, Agricultural Bank of China, Bank of China, and the Industrial and Commercial Bank of China- control two-thirds of the banking industry in China. In China's interlocking system of relationships between the state, the banks and the state controlled industrial companies, Central Huijin owns 35.4% of Industrial and Commercial Bank, 67.6% of Bank of China, and similiar stakes in the other 2 banks. It was created in 2003 to bail out China's banks after bad loan losses, and was transferred to China Investment Corporation in 2007. As part of the 2007 move bonds were issued by CIC to compensate the central bank. This means the banks pay dividends to CIC so that it can make payments on the bonds. Today the 4 major banks pay half of their earnings in dividends to CIC. CIC chief Lou Jiwei, says Central Huijin needs 300 million renminbi a day, or $47 million to pay interest on the bonds to the central bank. The 4 major banks are also under pressure from China's regulators to increase their capital reserves, because of large bad loans to local governments after the global financial crisis of 2008....

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In a shift from statements at earlier summits which focussed on fiscal restraint, the Camp David summit continued the "firm committment to fiscal consolidation," yet emphasized jobs and economic growth as "imperative." There is new flexibility to address needs for economic growth and no specific timetables for fiscal balance as in previous summits. Obama had many one to one encounters with the other leaders. He discussed the euro crisis with Cameron while working out on a treadmill, and watched the Champions League soccer final between Chelsea and Bayern Munich with Merkel and Cameron. Each leader of the G-8, Harper of Canada, Monti of Italy, Hollande of France, Medvedev of Russia, Cameron of Britain, Noda of Japan, Merkel of Germany, was assigned a cabin in the rustic wooded setting of Camp David's mountains. A special effort was made to see that Germany's Merkel did not feel isolated in the setting because of the growing sentiment that austerity policies pushed by Germany are not working. On Iran, Obama stated that he was "hopeful that we can resolve this issue in a peaceful fashion that recognizes their sovereignty, but also recognizes their responsibilities."...

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Oil prices drop below $38 by mid-December 2015, as the Saudis continue to push prices down further by continuing production increases. No change is planned for 2016 and analysts expect low oil prices into 2016. At $38 a barrel it becomes uneconomical for most shale oil producers to operate in the U.S. About 50,000 jobs are lost in Texas and 250,000 jobs worldwide. This is a boost for large oil importers such as India, Japan, and Europe. China also stands to benefit from low oil prices. Nigeria, Venezuela, Iran and Russia have the most to lose from an extended period of low oil prices. Politics in the Middle East also may play a part in decisions as the Saudis oppose intervention in Syria and Iraq by Russia and Iran. Rising shale oil production in the U.S. could also be one of the additional targets of Saudi policy. One consequence is that OPEC is divided with the Saudis going their own way.

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Daniel Yergin of consultancy firm IHS describes the geopolitical disputes in the Middle East between Russia, Saudi Arabia, and Iran that are leading to likely continued oversupply of oil in 2016, keeping prices in the $30-$40 range. Saudi Arabia is not likely to change its policy of going after market share, Venezuela is affected but lacks a voice in OPEC decisions, Russia continues its policies in Syria and Iraq under the Putin government affecting other Sunni states, and Iran following the lifting of sanctions is likely to ramp up supply to make up for its lost market share- all leading to an extended period of low prices. This situation benefits China, the European Union countries, India, Turkey and the U.S. in a period of slow economic growth in 2015-2016. Russia looks to use this period of low oil prices to shift to domestic industry after a period of rising imports when oil prices were high. The Saudis seeing their interests in the region threatened by Iran and Russia, and dissatisfied with the foreign policy of president Obama, see a policy of pushing for market share as appropriate in the current geopolitics of the region....

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Krugman says voters in France, Greece, the UK and other countries are protesting against austerity measures imposed in the EU countries. The policies were based on the assumption made by the Chrisitian Democrats in Germany that the German model if applied in other countries would generate the kind of recovery Germany made in the last decade from the high unemployment under chancellor Gerhard Schroeder. German wage restraint agreement between unions, industry and government made this possible under the Hartz reforms, and France is already embarking on wage restraint, with the two major parties, unions and industry backing the plan. But for this to work France and other countries such as Spain and Italy have to be able to export to Germany or other countries. German workers are suffering from stagnant wages for many years, stemming from concessions made to reduce unemployment. Allowing wages to rise in Germany when there is a shortage of workers in industry, would benefit workers in Germany and help France and other EU countries increase exports. German industry is failing to make this normal adjustment in markets by insisting on smaller concessions, even though there is support within the government for higher wages. German growth was possible because of demand outside for its exporters. The "austerity measures" Germany supports would depress demand inside the domestic economies of France, Spain, Italy and other EU countries, and without the wage and inflation adjustments with Germany leave demand weak outside. Without needed demand output falls, unemployment rises and tax revenues decline, leaving deficits worse than before, and a dangerous downward spiral. Better management of finances as Germany has insisted has ceased to become the issue, as both Hollande in France and Rajoy in Spain, and Monti in Italy, are keen on getting control of finances, especially regional spending in Spain....

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During 2012 and 2013 the U.S. put pressure on China and India to cut oil imports from Iran to increase the effectiveness of sanctions. As negotiations eased the sanctions, China increased oil imports in 2014 by 30% in 2014 over the prior year. China's Foreign Ministry sees a "win-win spirit" in the nuclear deal that opens up economic relations with Iran. Analysts say China has setup three new storage facilities on its eastern coast with about 45 million barrels of new capacity, which could be filled with new supplies as its growth slows and demand decreases. China's imports were about 7 million barrels a day in June 2015.

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Polls by Renato Mannheimer show popular support for the People of Freedom party of Mr. Berlusconi, which won 37% of the vote in 2008, is now down to 17% This comes after a series of corruption scandals. The most recent involves embezzlement of 1.7 million dollars by a politician from the Rome-Lazio regional government. New parties are being formed which are drawing increasing support. The Five Star Movement of Beppe Grillo, a former comedian, which opposes being in the eurozone and calls it a "noose" for Italy shows 18% support, according to a poll by the SWG agency. In that poll the Italy of Values party had 6% support, and the Left Ecology party 6%. Mannheimer says only one third of Italian voters are now in favor of the large established parties, indicating a big change is underway in Italian politics. The new parties are also critical of prime minister Monti's policies. This happens just as political and business leaders in Italy are calling for Monti to run for office to continue policy changes he has made to improve Italy's competitiveness and lead to economic recovery. Monti, a former EU Commissioner, was appointed as prime minister after pressure from German chancellor Merkel and the EU led to a loss of parliamentary support for Mr Berlusconi with key members of his own party defecting. After passing legislation for changes to Italian labor laws and making other shanges to improve Italy's competitiveness since taking office in November 2011, Monti is now seen in Italy, and outside Italy in EU circles, as the only person who can lead Italy out of the economic crisis; even though his reforms and austerity measures have not proved popular....

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Prof. Gorton and Prof. Metrick of the Yale School of Management review 16 scholarly studies and papers on the causes of the 2008-2009 global financial crisis in the current isue of the Journal of Economic Literature. Another article in the same journal reviews 21 books on the subject. Samuelson says the most cited causes- lax regulation and passive regulators, and the policy of home ownership that encourage the packaging and of securitization of mortgages to government sponsored agencies Fannie Mae and Freddie Mac- are only the surface causes. If we are to explain how a whole society seemed to believe in the idea that somehow there was a way to maintain a rising tide continuously, with only small corrections over several decades, by the clever manipulation of monetary and fiscal policies; then one has to look to the hubris of economists who acted as if this was possible and the gullibility of business and a public that desperately wanted to believe as some have put it "that this time it was different," or that shrewd management of economic policy could actually bring about such a panacea. The abiding lesson is economic policies based on a better understanding of how modern industrial economies work are merely useful tools, no more no less, and there is no substitute for a good ethic, wise management and careful thinking on the part of the public, business and government, particularly for the people in leadership positions. ...

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IMF Managing Director, Christine Lagarde says Greece should have 2 more years to achieve the deficit targets. Speaking at a news conference during the annual meeting of the IMF in Tokyo in Oct 2012, Lagarde said: "it is sometimes better, given circumstances.. to have a bit more time... This is what we advocated for Portugal, it's what we advocated for Spain, and it's what we are advocating for Greece, where I have said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation program that is considered." A two year extension would add an estimated 20 billion euros to the financing cost for Greece, at the same it improves the chances for growth and means having a program that is more likely to work.

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A plan being put together in eurozone financial circles is for Spain to request aid and the European Stability Mechanism fund to provide far less than 100 billion euros approved for aid to Spain. With the request Spain would agree to conditions set by the EU, ECB and the IMF for improving competitiveness, reducing rigidity in labor markets, and controlling spending by regions in Spain. This would lead to the ECB taking action to buy Spanish bonds and lower borrowing costs.

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Italy's prime minister, Mario Monti put it best when he said in a speech in Brussels in April 2012: "If a country becomes more productive and competitive, but there is no demand for its products domestically or around it, growth will not materialize." There is a new shift in opinion towards a balance of fiscal discipline with growth measures to get Europe back on track. The feeling in different parts of Europe is that the German view of austerity alone will not work for Europe. And the view is coming from the far right to the far left, from Marie Le Pen, far right presidential candidate in France, to the far right leader whose move to withdraw support to the government in Netherlands on the issue of austerity measures led to its collapse. Geert Wilders, leader of the Freedom Party in the Netherlands, said: "we don't want our pensioners to bleed just to meet the dictates from Brussels." The IMF has put out research that questions what is now called "the German hypothesis." The "German hypothesis," is based on the unique experience of Germany with the Hartz reforms under chancellor Schroeder which were based on wage restraint by workers, the German "kurzarbeit" program of government support for retaining workers with lower pay during cyclical downturns, improving competitiveness of German companies, and conservative budget practices. There appear to be two exceptions to this. One is that demand has to be strong outside or domestically for a country to reduce unemployment and improve productive capacity utlilization as it increases competitiveness. This was the case as Germany made the Hartz reforms under Schroeder. Wage restraint acts as a form of devaluing currency for reducing the cost of its products to improve exports. All leading parties and the unions are now in favor of wage restraint and lowering wages to preserve jobs to improve France's competitive position. Germany had the benefit of a decade to implement these reforms to reduce unemployment, because demand was not declining domestically or around it during its reforms. The situation is different in Spain where in all likelihood demand would shrink further with unemployment rising from 25% to higher levels, and higher sales taxes. This is why Francois Heisbourg, special advisor at the Paris based Foundation for Strategic Research, says about the current situation in Europe, that destroyiing Greece with strict austerity alone wasn't something the EU can look back at with the sense of having done the right thing, for Spain it appears misguided and lacking careful thought. The editors of the Wall Street Journal expressed the same sense when they described the March 2012 bailout of Greece as a tragic sideshow, because the main purpose was to buy time and insulate the other larger economies in the EU by giving the French, Spanish and German banks time to improve their financial position. The Journal called it bad for Greece leaving it with debt at 120% of GDP till 2020 and no economic growth, and bad for democracy as it was done against overwhelming Greek public opinion- The Tragic Greek Sideshow, Feb. 22, 2012. Volker Perthes, director of the German Institute for International and Security Affairs, a Berlin think tank, says the Germans have always viewed German leadership in Europe with discomfort, and would prefer a leadership where several states, France, Italy, Spain, and other countries in the EU coalesce around consensus positions. This is historically true for the German position since chancellor Adenauer. With the Free Democrats in decline, and the Social Democrats and the Pirate party doing well in recent German elections and favoring consensus in Europe, Merkel's Christian Democrats need to rethink their policy to give greater weight to economic growth for a consensus position in Europe. ...