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China's shadow banking system of trust companies and insurance companies with trust company units and other informal lenders are the fastest growing part of its banking system. Between 2010 and 2012 trust companies and other shadow banks doubled outstanding loans to 36 trillon yuan ($5.8 trillion) or about 69% of China's GDP, according to J.P. Morgan Chase & Co. Hidden debt that is likely to default in this poorly regulated sector is seen as a large risk in the banking system by the central bank and China's government planners. Tightening of credit by the central bank, the People's Bank of China, sent interbank lending rates from 3% to as high as 25% in late June 2013, finally settling on June 24 at 6.64%. China's state owned banks lend to trust companies in this market. Trust companies get additional financing by selling wealth management products promising investors returns of 8-10%. Even with China's high savings rate and large government reserves, the hidden debt and large unknowns about the loans in default, are seen by the central bank as posing risks to the target rate of economic growth of 7.5% if the government has to bailout a significant number of troubled banks. Much of the money funnelled through the trust companies since 2008 has been poorly invested. The trust companies such as Citic and Ping An Trust channel lending to borrowers for projects ranging from steel mills to infrastructure projects, such as highways and property developments that cannot obtain the financing through the large state owned banks. Fitch Ratings estimate is that since the financial crisis of 2009 these loans generated only one third of the economic growth per yuan as they did before 2009. ...

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Krugman points to some striking facts about China in 2011. Consumer spending in China is only 35% of GDP and has declined over the years. There are no signs of rebalancing the economy away from exports by increasing consumer spending. China's dependence on exports for trade surpluses is greater than ever. Beyond this there is another disturbing fact. With weak consumer spending and heavy investment spending at about half of GDP, Kugman raises the question where is all that increase in spending going? Real estate investment takes up about half of the increase in investment spending, as the share of GDP of real estate investment almost doubles compared to figures for 2000. Much of the rest of the increase Krugman attributes to firms selling to the construction industry. The speculative fever, the corruption at the local level, the shadow banking system which is not protected and unsupervised, the poor quality of statistics, suggest a bubble phenomena that may not be under control of policy makers, and risks damaging China economy and the world economy in 2012-2013. After all China's economic and financial planners and banks are no better than America's or Japan's, where asset bubbles burst causing serious damage....

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Elvira Nabiullina, head of Russia's central bank, is a think tank economist who was Economy minister before becoming chief economic advisor to Russian president Putin in 2012. She is one of the liberal economists in Russia who see the years of economic growth following ruble devaluation in 1998 as an example of how devaluation can actually help the economy. The devaluation lowers costs for manufacturing and agriculture, and is seen by some economists as having done more than oil price increases to help the Russian economy grow during president Putin's first term from 1999 to 2004. Nabiullina's position to support a free float after the sharp decline in the value of the ruble following the plunge in oil prices, is based on the need she sees to use the crisis to reduce Russian overdependence on imports. This policy had other advantages by reducing the need to tap Russia's foreign currency reserves to defend the ruble. Russia's gold and foreign currency reserves are at $385 billion. In Jan 2015 the central bank cut interest rates. A policy of increasing rates would trigger a sharper recesssion. Russia faces a unique situation in that the oil price decline and the decline in the value of the ruble occurred at about the same time of about 50%, so that the budget continues to be balanced. The number of rubles coming in from oil exports remains the same after the crisis. Nabiullina told Russia 24 television- "We have to live in a different zone, Russians should orient ourselves more toward our own sources of financing projects, and to give a chance to import substitution."...

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China's domestic debt has surged to levels that precede a crisis, to 216% of GDP and heading for 271% by 2017 according to Fitch Ratings. As a result president Jinping has taken over control of economic policy and controlling debt, especially local government debt, is now a top priority for 2014. Jinping will head the "leading group" for overall top down reforms, reflecting the new urgency. Local government debt went up 67% from 10.7 trillion yuan to 17.9 trillion yuan ($2.95 trillion) in just 3 years from 2010 to 2013, according to the National Audit Office. About half of this debt is due by the end of 2014, according to Standard Chartered Bank economist Stephen Green. Another risk is that shadow banking with interest rates of 10% are now about 11% of new lending. The option adopted by the government to use central government funds and regulation to restrict lending could make local governments turn increasingly to the shadow bank lenders (trust companies, and informal lenders) making things worse. The other option of tackling it aggressively by letting some companies default has the risk of other lenders raising rates on loans and bonds. This makes solutions tricky and prone to problems of increasing severity. ...

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Hingh unemployment in important states including Florida, Pennsylvania, Colorado (8%). Unemployment has improved in Ohio (7%), Virginia and Iowa (6%).

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Porter cites a report by Kai Daniel Schmid and Ulrike Stein of the Macroeconomic Policy Institute in Dusseldorf. The report shows the top 10% of Germans having 26% of the country's income before taxes and transfers in 1991. This increased to 31% by 2010. For the same period of about 20 years the bottom half of the population took in 17% in 2010 dropping by 5% from 22%. The growing income inequality in Germany is comparable to what has happened in the U.S. over this period.

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Fitch Ratings analyst Charlene Chu tracks unreported debt in China's shadow banking system. She is doing this after moving to China in 2004, following work at the New York Fed. She was first alerted to the increase in unreported private debt when a banker disclosed to her at a meeting that he was pushing loans off the bank's books by repackaging it as securities and calling it wealth management products. She sees shadow lending in the banking system as a way to extend credit beyond the bank's government quota and not disclose questionable loans. The growth in private debt is alarming, much of it unreported. China undercounted private debt by 28% or 1.3 trillion yuan ($212 billon ) in the first half of 2010. In July 2011, the People's Bank of China added many of this type of off-balance sheet type of lending to its figures, following Chu's example. Her figures are still higher and she says conservative estimates. Fitch Ratings puts China's private sector debt at 214% of China's GDP as of June 2013, from 129% in 2008.The central bank's estimate is about 20% lower. Shadow lending soared after China increased lending in 2009 as part of the Stimulus policies. ...

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Germany benefits from the lower value of the euro in relation to other currencies. Germany's exports to the eurozone as a percentage of all exports increased from 38.4% in 2009 to 41.7% in 2011, according to the Germany Federal Statistical Office and the German Chambers of Industry and Commerce. Exports to China increased from 4.64% to 6.11%, and to Asia from 11.8% to 13.73%, and to the U.S. from 6.77% to 6.95%. This increases the gap between Germany and other eurozone countries with smaller exports. Ireland with its large export base and foreign investment is likely to benefit from the lower euro. German companies VW, BMW, Mercedes, Heidelberg Cement and EADS also benefit from the weaker euro. France's Peugeot with sales concentrated in Europe does not benefit from the weaker euro compared to German auto companies with higher sales overseas, especially in China.

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Samuelson says the bill in the U.S. Senate is symbolic because it allows companies to cite the undervalued renminbi as an illegal subsidy and have the Commerce Department impose duties on Chinese products. This would have to be done on a case by case basis, making it largely ineffective in dealing with the large trade deficit with China. He also cites the differences among economists that show a range between 1 million and 2.8 million jobs lost. The 2.8 million jobs estimate is from the Economic Policy Institute for the period 2001-2010. The 1 million is an estimate for 1990-2007, which estimates a loss of quarter of all manufacturing jobs. By WTO rules subsidies that are not targeted at specific industries or firms are allowed, according to lawyers. Which means China could appeal to the WTO, and impose retaliatory duties. In the meantime the trade deficit with China, with imports of $364 billion in 2010, and $86 billion in exports, would remain largely unaffected. This is the reason some Senators, including Republican Orrin Hatch (Utah), see this move as political posturing by President Obama and the Democrats, because the administration has no new proposals to address the trade deficit and the gradual erosion of America's manufacturing base. Samuelson cites Arvind Subramanium of the Peterson Institute, and his book "Eclipse: Living in the Shadow of China's Economic Dominance." Subramanium says what is at stake is not a temporary imbalance in world trade a happened with Japan in the 1980's, but a gradual shift to a system of trade in which China has preferential access to raw materials (oil, grain, minerals), subsidizes exports in new industries as it moves upscale from shoes and textiles to automobiles, aircraft and alternative energy, and changes the very nature of the global trading system as it becomes the dominant trading nation in the world. By Subramanium's estimate China's share of global trade increased from 1.6% to 9.8% in the 2 decades from 1990 to 2010. In two more decades he estimates China could increase this to 15% of global trade, significantly larger than the U.S. In a response to Congressmen, businessmen and policymakers wary of starting a trade war, Samuelson says there already is a trade war as a "fixed" system of trade undermines America's manufacturing and industrial base. The only difference being that today only one side is fighting that war, and America is slow to grasp the implications or its policymakers are clueless how to respond....

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Friedman calls for a third party candidate to bring a focus on the issues facing the U.S. - winding down the war in Afghanistan, increasing fuel economy and conservation to reduce dependence on foreign oil inclusing a gasoline tax, enacting the proposals of the Simpson-Bowles Commission which eliminates or reduces tax expenditures and reduces spending, and provides any needed fiscal support for the short run. He says the two party duopoly is not working and even if the third party succeeds only in framing the debate and the issues in a constructive and useful way, it will have achieved something significant.

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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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The tense atmosphere in the talks between the Obama White House and Congressional leaders to achieve deficit reduction and raise the U.S. debt ceiling.

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Senate Minority Leader Mitch McConnell offered a way out of the stalemate in talks between the Obama White House and Republican leaders Boehner and Cantor. McConnell's proposal designed to meet the August 2nd 2011 deadlinefor raising the U.S. debt limit is to give the President new authority to raise the federal debt limit. It would place the entire responsibility for raising the debt limit on the President. Under this proposal Republicans would not have to vote to raise the debt limit. Republicans can then shift the effort for large spending cuts to the congressional appropriations process.

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European Central Bank president, Mario Draghi, addressing the European Parliament in Brussels on April 25, 2012, supported both sides in the issues facing the eurozone, calling for continued vigilance on structural reforms to improve competitiveness of countries in the eurozone such as Spain and Italy, and at the same time saying it was imperative to generate economic growth. He told the European parliament: "The uncertainty about the present situation is very, very, high... Any exit strategy is premature given the current economic situation." Saying that the fiscal compact had been negotiated recently to control spending, yet what Europe needed was also a growth compact- "but my most present thought right now is to have a growth compact." He emphasized that it was now upto governments and banks to pick up the ball. The ECB's achievement was buying time with its 3 year loans to banks in Spain and Italy and other EU countries in Dec. 2011-March 2012, which he described as no ordinary achievement. Francois Hollande and Angela Merkel seized on Draghi's comments to show they were doing the right thing. Merkel conceded that growth was needed, saying sustainable initatives would be good for Europe, that what Germany was opposing was simply stimulus spending that would increase debt without the structural reforms to improve competitiveness. Hollande for his part said he would call for eurozone bonds to pay for industrial and infrastructure projects, and a financial transactions tax....

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Defense spending under the new Obama 2012-2013 budget for the fiscal year starting Oct. 1, 2012, is $525 billion, and an additional $88 billion for Afghanistan. This is $6 billon below the $531 billion budget for the 2011-2012 budget of $531 billion approved by Congress, $22 billion less than the Obama administration's proposed budget. An additional $115.1 billion was for Afghanistan. In a move to bring financial discipline to additional appropriations for foreign conflicts, the Obama administration is proposing in the 2012-2013 budget proposal a limit to "overseas contingency operations" appropriations. The total proposed is $450 billion for fiscal 2013 to 2021.

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Laurence Meyer of Macroeconomics Advisors, a former Fed governor, says monetary policy will offset the effects of tighter fiscal policies and budget cuts. This is not stated explicitly he says, but Bernanke will counteract the effects of budget cuts and austerity policies by putting off rate hikes. The expiry in December 2011 of a compromise reached between the GOP and Obama to lower payroll taxes and offering business a tax break on capital investment will lead to a reduction in GDP by 1% in 2012, according to Mark Zandl, of Moody's Analytics. Pressure for budget cuts could add another half percentage point reduction in GDP, according to IHS Consultants. Bernanke will be mindful of these considerations as he considers any rate hikes in 2012.

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In the most recent Global Financial Stability Report out in Sept. 2011, the increase in the ratio of a country's outstanding credit to GDP is highlighted as a key warning light indicator for country economies. An increase in this ratio of over 5% signals a warning light according to the IMF. It tells us that borrowing is expanding at significantly faster rate than the growth of the economy. Using this indicator would have set a warning light up for the U.S. before the 2008 mortgage crisis, and a warning light well before the financial crises in Greece, Portugal and Ireland. The outstanding credit to GDP ratio went up for China by 24 percentage points in 2009, with 4% percentage point increase in 2010. The ratio was up 30 percentage points in Hong Kong for 2010. The warning light is also up for Turkey and Vietnam. Capital inflows into countries that can be suddenly reversed, and overvalued currencies are a danger for emerging market countries and act as supplemental indicator warning lights. Brazil and South Africa have overvalued currencies. Turkey has high capital inflows. Only a small portion of this is foreign direct investment, the rest helps support a high amount of lending and credit provided by the banks. That a significant portion of this is in short term borrowing poses additional risks, as evident in the 1997 Asian financal crisis for S. Korea, Thailand and Malaysia....