Friday, October 30, 2015

Reauthorizing the "Bank of Boeing"

Many of us have either heard very little about or are unaware of an Executive Branch agency that exists with the "mission of supporting American jobs by facilitating the export of U.S. goods and services".  In this era of declining manufacturing in America, this agency sounds like a great thing, unless it costs taxpayers more than it provides.

EXIM also known as the Export-Import Bank of the United States, was formed in 1934 by the Roosevelt Administration with the initial goal of providing funding to the Soviet Union and Cuba.  In fact, the first loan issued by EXIM was to the nation of Cuba so that it could purchase $3.8 million worth of silver ingots from the United States.  It became an independent agency on July 31, 1945 and became a self-funding federal government agency in 2007 although all loans are still backed by the federal government, otherwise known as the American taxpayer.  One of the requirements of EXIM is that it be reauthorized by Congress every four or five years and, on September 19, 2014, under House Joint Resolution 124, the operating authority of the Export-Import Bank was extended until June 30th, 2015.  Since July 1, 2015, this is what has been displayed on the EXIM website:

Since July 1, 2015,  EXIM has lost its authority to issue new loan guarantees to foreign purchasers of American goods.

While EXIM's primary goal is to basically create jobs in the United States through the manufacturing and exportation of American-made goods by guaranteeing loans for foreign purchasers of said goods (and services), its operation has been questioned by many analysts.   This is particularly the case for Boeing, a major player in the world's aircraft manufacturing industry.  EXIM, sometimes referred to as "The Bank of Boeing" is a major backer of Seattle, Washington-based Boeing as you can see on this diagram from the Mercatus Center:

On top of that, according to a recent article by Veronique de Rugy, EXIM reached out to Boeing for assistance in drafting new bank rules that were to be put in place to ensure that its loans take into consideration the negative impact that they have on non-subsidized American companies.  To see how distorted EXIM's disbursements have become, here is a table showing the state rankings for EXIM's disbursements between 2007 and 2014:

Not surprisingly, the state of Washington is by far the biggest beneficiary with total EXIM disbursements of $50.63 billion which means that 22.67 percent of the state's total export value being supported by EXIM.  As well, you can see that small businesses really get the short end of things; only $57.06 billion worth of small business exports are supported by EXIM out of the total of $235.62 billion worth of exports which were supported by EXIM between 2007 and 2014.  In the case of Washington, a tiny 1.03 percent of EXIM disbursements went to small businesses.

Now that we have a bit of background, let's look at the present.  On October 27, 2015, Roll Call 576 took place, voting on House Resolution 597.  This vote received relatively little coverage by the mainstream media.  For your information, here is the text of H.R. 597, otherwise known as the Export-Import Bank Reform and Reauthorization Act of 2015:

Here is a listing of who voted for and against H.R. 597 by party:

Here are the yeas:

Here are the nays:

Given that the continued existence of EXIM is critical to Boeing, let's look at how much money Boeing has spent trying to convince Washington of its viewpoint on many issues since 1998:

So far in 2015, Boeing has spent $16.755 million on lobbying in Washington, compared to $15.23 million in 2014 which put it at number 10 out of 3514 lobbyists, and could well set a "personal best" this year.   When it comes to all lobbying on trade, in 2015, Boeing has spent the fourth highest amount, following Wal-Mart, Big Pharma and the United Parcel Service.  On top of that, Boeing spent $3.253 million on campaign contributions in the 2014 cycle, benefitting these individuals and many more:

Current Democratic presidential candidate Hillary Clinton has even offered her opinion on EXIM at a recent speech in New Hampshire.  She called for "speedy reauthorization of the Export-Import Bank".  As well, back in November 2014, she stated the following:

Thank you for mentioning the EXIM Bank, because I’m a very strong supporter of the EXIM Bank, because it is a tool for us to be competitive in order to support our businesses exporting.  But there are those who wish to end the role of the Export-Import Bank, and it’s not based on evidence, it’s based on ideology.

In contrast, her main competitor, Senator Bernie Sanders, issued the following statement after the Senate voted on an amendment that would see EXIM reauthorized for five years back in June:

"At a time when almost every major corporation in this country has shut down plants and outsourced millions of American jobs, we should not be providing corporate welfare to multi-national corporations through the Export-Import Bank.

Instead of providing low-interest loans to multi-national companies that are shipping jobs to China and other low-wage countries, we should be investing in small businesses and worker-owned enterprises that want to create jobs in the United States of America.  If the Export-Import Bank cannot be reformed to become a vehicle for real job creation in the United States, it should be eliminated. 

Now that H.R. 597 has passed the House, it will be interesting to see whether Boeing has spent sufficient lobbying money to ensure that the "Bank of Boeing" receives the final stamp of approval, ensuring its continued existence for the near future.  With the Republicans and Democrats being split over EXIM, its future is certainly uncertain.

Thursday, October 29, 2015

Why are the Federal Reserve's Hands Tied?

Now that the Federal Reserve has once again left investors baffled about their interest rate intentions, I wanted to take another look at an issue that may tie the Fed's "hands" for the foreseeable future.  Stuffed away in the Bank for International Settlements Quarterly Review dated September 2015 is some interesting information regarding the global debt situation.  As many of my long-term readers are aware, debt is a regular subject on this blog and this data from BIS shows us all how the global debt situation has reached the danger point.  

Let's start this posting by looking at a couple of definitions:

1.) Market value of debt is the amount for which a creditor (in this case, a nation) could exchange assets or settle a liability at any moment in time.  Market values tend to fluctuate significantly.

2.) Nominal value of debt is the amount that at any moment in time the debtor (in this case, a nation), owes to a creditor plus the amount of interest owing.   This amount is stable from the time of debt issuance until it is fully repaid, unless accrued interest has not be paid.

Now let's look at how the nominal (in blue) and market (in red) values of the core debt as a percentage of GDP of key advanced economies have changed since 2007:

For your information, the green bars represent the valuation effect (right-hand scale) which are estimates of the difference between the reported market and nominal values of the debt.  For given changes in market interest rates, the valuation effect increases with the duration of the debt instrument.

As we can see from the graphs above, the debt levels for all nations have risen substantially since the beginning of the Great Recession.  In fact, here is what has happened to the nominal debt levels of European nations, Canada, the United States and Australia as a percentage of GDP between the end of 2007 and the end of 2014:

On average, the debt-to-GDP ratio for these 12 advanced economies rose from 63.2 percent in 2007 to 108.3 percent in 2014, an increase of 45.1 percentage points.  Even the European debt transgressors of Italy, Portugal, Spain, Greece and Ireland have seen substantial increases in their debt levels despite their attempts to rein in their budgetary deficits.  The only thing that is saving these nations (and others) from total fiscal ruin are today's ultra-low interest rates on their debt instruments as shown on this graph which shows the yield on ten year bonds:

Let's close this section with a graph showing how the debt-to-GDP ratio for sovereign debt has changed since 2000 for both emerging economies (in yellow using left-hand scale) and advanced economies (in red using right-hand scale) with the shaded area representing the 25th and 75th percentile across all of the nations in the sample and the vertical line representing September 15, 2008:

Now that we've looked at a bit of detail on government debt, let's look at what has happened to the debt of households in both emerging and advanced economies with the same colour scheme as above:

Here is a graph showing what has happened to non-financial corporate debt as a percentage of GDP since 2000, again, with the same colour scheme as the earlier graphs:

Lastly, here is a graph showing what has happened to total non-financial debt (including government, household and non-financial corporate debt) since 2000 with the same colour scheme as used above:

Here is a table showing the core debt of the non-financial sectors, including government, households and corporations (non-financial) and how much that debt has changed as a percentage of GDP between the end of 2007 and the end of 2014 for both advanced and emerging economies:

Between 2007 and 2014, on average, among advanced economies, total non-financial sector debt as a percentage of GDP rose by 36 percentage points to 265 percent compared to 50 percentage points and 167 percent for emerging economies.  Looking in more detail we find that among advanced economies, the largest growth in non-financial sector debt as a percentage of GDP was found in Japan (77 percentage points), followed by France (72 percentage points) and Italy (53 percentage points).  As well,  Japan has the highest total non-financial sector debt as a percentage of GDP at 393 percent, followed by Sweden at 295 percent and Spain at 293 percent.  Among emerging economies, the largest growth in non-financial sector debt as a percentage of GDP was found in Hong Kong (103 percentage points), followed by China at 82 percentage points and Singapore at 59 percentage points.  As well, Hong Kong has the highest total non-financial sector debt as a percentage of GDP at 287 percent, followed by Singapore at 242 percent and China at 235 percent.

This data quite clearly shows us how the world, both advanced and emerging nations, has levered up during the period since the beginning of the Great Recession.  Rather than using the period of economic growth to reduce debt levels, governments, corporations and households have been lured into taking on additional debt, debt that will haunt all of us when the next recession arrives.  Thanks to the world's central banks, most particularly the Federal Reserve, we are now hooked on what has the appearance of cheap credit.   With the global economy slowing, these high levels of debt will prove to be a drag on future economic growth, showing us that the long-term economic impact of ZIRP, QE and other imaginative tools used by the world's most influential central banks since 2008 are effectively zero and may net out to be far worse than nothing and that the Federal Reserve has successfully tied its own hands when it comes to its future interest rate policies.

Tuesday, October 27, 2015

Ayatollah Khamenei, Trust and the P5+1 Nuclear Deal

A recent letter from Iran's Ayatollah Ali Khamenei to Iran's President Hasan Rouhani sheds light on his verdict about the recent Iran/P5+1 nuclear deal.  Before we look at the letter, I'd like to provide you with a bit of background on Iran's political landscape which will show you how important any pronouncement from the Ayatollah is to the people of Iran.

For those of you who aren't aware of the division of power in Iran, Ayatollah Khamenei is the Supreme Leader of the nation and is appointed and supervised by the publicly-elected Assembly of Experts.  In post-revolutionary Iran, there have been only two Ayatollahs, the infamous Ayatollah Ruhollah Khomeini and his successor, the current Ayatollah Ali Khamenei.  The Supreme Leader is considered to be the head of state and is in charge of Defense, Religious Affairs and the Guardian Council of the Constitution, an appointed 12 member council that is charged with interpreting the Constitution of Iran including the supervision of elections and the appointment of candidates.  One of the key jobs of the Supreme Leader is his right to appoint the commanders of the armed forces, the heads of the nation's major religious foundations, the members of the national security councils that deal with defence and foreign affairs, the nations chief judge and prosecutor and the director of the national media (think propaganda outlets).

Next in line, the second-most powerful person in Iran is the President.  This person is elected by free vote for a four year term.  Any candidate running for president must be approved by the aforementioned Guardian Council of the Constitution which is led by the Ayatollah.  The President is responsible for the duties that fall outside of the responsibilities of the Ayatollah including the implementation of Iran's constitution and the exercising of executive powers including the appointment of government ministers within the Islamic Consultative Assembly, commonly referred to as Iran's parliament.  It is important to note that while the President may appoint the Minister of Defense, the appointment must be approved by the Supreme Leader.  The current president, Hasan Rouhani, is widely viewed as a moderate compared to his predecessor, Mahmoud Ahmadinejad who was very hawkish on his views of Israel and the United States.

Here is a diagram that shows the complex  relationship between Iran's Supreme Leader and the remainder of Iran's elected bodies:

You can quite clearly see that the Supreme Leader has very significant control over Iran's government through the mechanism of appointments.  On the other had, the government as elected by the voters generally has control through the approval of appointments.  In any case, Ayatollah Khamenei has significant control over the internal and external affairs of Iran, particularly the Joint Comprehensive Plan of Action (JCPOA), the agreement that assures that Iran's nuclear program will be used for peaceful purposes only.

With that background information in mind, here is the text of a rather lengthy letter that Ayatollah Khamenei.  I have highlighted portions of the letter that are key to understanding where Iran stands on the current iteration of the JCPOA. 

"In the Name of Allah, the Most Compassionate, the Most Merciful 

Your Excellency,  Mr Rouhani,
President of the Islamic Republic of Iran and Head of the Supreme National Security Council
May God bestow success upon you.
Greetings to You 

The agreement known as the Joint Comprehensive Plan of Action (JCPOA) has already been cleared through legal channels following precise and responsible examinations in the Islamic Consultative Assembly, [parliamentary] ad hoc committees and other committees as well as the Supreme National Security Council. Since the agreement is waiting for my view, I deem it necessary to remind several points so that Your Excellency and other officials directly or indirectly involved in the issue would have enough time to comply with and safeguard national interests and the country’s best interests.

1.         Before anything else, I deem it necessary to extend my gratitude to all those involved in this challenging procedure throughout all its periods, including the recent nuclear negotiating team whose members tried their best in explaining the positive points and incorporating all those points [into the agreement], critics who reminded all of us of weak points through their appreciable meticulousness, and particularly the chairman and members of the Majlis ad hoc committee [set up to review the JCPOA] as well as the senior members of the SNSC who covered some voids by including their important considerations, and finally the Speaker of Majlis and Members of Parliament who adopted a cautious bill to show the right way of implementation [of the agreement] to the administration, and also national media and the country’s journalists who despite all their differences of view presented a complete image of this agreement to public opinion. This voluminous collection of activity and endeavors and thoughts [spent] on an issue which is thought to be among the unforgettable and instructive issues of the Islamic Republic, deserves appreciation and is a source of satisfaction. Therefore, one can say with certainty that the divine reward for these responsible contributions will, God willing, include assistance and mercy and guidance by Almighty God because the divine promises of assistance in exchange for assisting His religion are unbreakable. 

2.         Enjoying decades-long background of presence in the very details of the affairs of the Islamic Republic of Iran, you must have naturally realized that the government of the United States of America, neither in the nuclear issue nor in any other issue, had been pursuing no other approach but hostility and disturbance, and is unlikely to do otherwise in the future either. The remarks by the US President [Barack Obama] in two letters addressed to me on the point that [Washington] has no intention of subverting the Islamic Republic of Iran turned out to be unreal and his open threats of military and even nuclear strike, which can result in a lengthy indictment against him in international courts, laid bare the real intentions of US leaders. Political pundits and public opinion of many nations clearly understand that the case of his never-ending hostility is the nature and identity of the Islamic Republic of Iran, which is born out of the Islamic Revolution. Insistence on rightful Islamic stances and opposition to the hegemonic and arrogant system, perseverance against excessive demands and encroachment upon oppressed nations, revelations on the US support for medieval dictators and suppression of independent nations, incessant defense for the Palestinian nation and patriotic resistance groups, rational and globally popular yelling at the usurping Zionist regime constitute the main items which make the US regime’s enmity against the Islamic Republic inevitable, and this enmity will continue as long as the Islamic Republic [continues to] disappoint them with its internal and sustainable strength.   The behavior and words of the US government in the nuclear issue and its prolonged and boring negotiations showed that this (nuclear issue) was also another link in their chain of hostile enmity with the Islamic Republic. Their deception through flip-flopping between their initial remarks that came after Iran accepted to hold direct talks with them and their constant non-compliance with their pledges throughout two-year-long negotiations and their alignment with the demands of the Zionist regime and their bullying diplomacy regarding relations with European governments and bodies involved in the negotiations are all indicative of the fact that the US’s deceitful involvement in the nuclear negotiations has been done not with the intention of a fair settlement [of the case], but with the ill intention of pushing ahead with its hostile objectives about the Islamic Republic.  Doubtlessly, vigilance vis-à-vis the hostile intentions of the US government and instances of resistance on the part of the officials of the Islamic Republic of Iran throughout the negotiations managed, in numerous cases, to prevent heavy damage from being inflicted [upon Iran].   However, the outcome of the negotiations, which is enshrined in the JCPOA, has numerous ambiguities and structural weaknesses that could inflict big damage on the present and the future of the country in the absence of meticulous and constant monitoring. 

3.         The nine-point provisions entailed in the recent bill adopted by the Majlis and the 10-point instructions outlined in the resolution of the Supreme National Security Council carry helpful and effective points which must be taken into consideration. Meantime, there are some other necessary points which are announced here while some of the points mentioned in the two documents are highlighted.  

First, since Iran has accepted to negotiate basically for the objective of removal of unjust economic and financial sanctions and its enforcement (the lifting of sanctions) is tied to Iran’s future actions under the JCPOA, it is necessary that solid and sufficient guarantees be arranged to avoid any infraction by the opposite parties. Written declaration by the US president and the European Union for the lifting of the sanctions is among them. In the statements of the EU and the US president, it must be reiterated that these sanctions will be fully lifted. Any declaration that the structure of the sanctions will remain in force shall imply non-compliance with the JCPOA.   

Second, throughout the eight-year period, any imposition of sanctions at any level and under any pretext (including repetitive and fabricated pretexts of terrorism and human rights) on the part of any of the countries involved in the negotiations will constitute a violation of the JCPOA and the [Iranian] government would be obligated to take the necessary action as per Clause 3 of the Majlis bill and stop its activities committed under the JCPOA .

Third, the measures related to what is mentioned in the next two clauses will start only after the International Atomic Energy Agency (IAEA) announces [the conclusion of] the past and future issues (including the so-called Possible Military Dimensions or PMD of Iran’s nuclear program).

Fourth, measures to renovate the Arak plant by preserving its heavy [water] nature will start only after a firm and secure agreement has been signed on an alternative plan, along with sufficient guarantees for its implementation.  

Fifth, the deal with a foreign government for swapping enriched uranium with yellow cake will start only after a secure agreement has been clinched to that effect, along with sufficient guarantees [for its implementation]. The aforesaid deal and exchange must be done on a gradual basis and on numerous occasions.  

Sixth, by virtue of the Majlis bill, the plan and the necessary preparations for mid-term development of the atomic energy industry, which includes the method of advancement in different periods of time for 15 years for the final objective of 190,000 SWU, must be drawn up and carefully reviewed by the Supreme National Security Council. This plan must allay any concern stemming from some points entailed in the JCPOA appendices.
Seventh, the Atomic Energy Organization of Iran must organize research and development in different aspects such that after the end of the eight-year period, there would be no shortage of technology for the level of [uranium] enrichment entailed in the JCPOA.

Eighth, it must be noted that on the ambiguous points in the JCPOA document, the interpretation provided by the opposite party is not acceptable and the reference would be the text of the negotiations.
Ninth, the existence of complications and ambiguities in the text of the JCPOA and the suspicion of breach of promise, infractions and deception by the opposite party, particularly the US, require that a well-informed and smart panel be established to monitor the progress of affairs and [gauge] the opposite party’s commitment and realization of what was mentioned above. The composition and the tasks of this would-be panel should be determined and approved by the Supreme National Security Council. 

In witness whereof, Resolution 634, dated August 10, 2015, of the Supreme National Security Council, is endorsed pending the observation of the aforementioned points. 

In conclusion, as it has been notified in numerous meetings to you and other government officials and also to our dear people in public gatherings, although the lifting of sanctions is a necessary job in order to remove injustice [imposed on people] and regain the rights of the Iranian nation, economic overture and better livelihood and surmounting the current challenges will not be easy unless the Economy of Resistance is taken seriously and followed up on entirely. It is hoped that this objective will be pursued with full seriousness and special attention would be paid to enhancing national production. "You should also watch out so that unbridled imports would not follow the lifting of sanctions, and particularly importing any consumer materials from the US must be seriously avoided. 

I pray to Almighty God for your and other contributors’ success." (my bold) 

Ayatollah Khamenei's greatest concern appears to be the lifting of the sanctions against Iran by both the United States and Europe.  He notes that the sanctions must be fully listen and not just suspended and that any declaration by the P5+1 that allows the structure of the sanctions to remain in place will be viewed by Iran as a breach of the conditions of the agreement.  Interestingly, if we look at the actual text of the JCPOA, we find this in section 23:

"Eight years after Adoption Day or when the IAEA has reached the Broader Conclusion that all nuclear material in Iran remains in peaceful activities, whichever is earlier, the United States will seek such legislative action as may be appropriate to terminate, or modify to effectuate the termination of, the sanctions specified in Annex II on the acquisition of nuclear-related commodities and services for nuclear activities contemplated in this JCPOA, to be consistent with the U.S. approach to other non-nuclear-weapon states under the NPT.

The United States and its partners will not terminate the sanctions on Iran's acquisition of nuclear commodities and services until either October 18, 2023 or when the IAEA has determined that Iran's nuclear program can only be used for peaceful purposes.  Until then, these sanctions are merely suspended.

As well, since, for the most part, American companies have very little access to Iran's relatively well-off 77 million consumers, this sentence in the Ayatollah's letter is particularly interesting:

 "You should also watch out so that unbridled imports would not follow the lifting of sanctions, and particularly importing any consumer materials from the US must be seriously avoided."

So much for building those MacDonald's, KFC and Starbucks on every street corner in Tehran. 

From the tone of Ayatollah Khamenei's letter, you can gain a sense of how little trust there is between Iran and the other signing parties, particularly when he states that "...the government of the United States of America, neither in the nuclear issue nor in any other issue, had been pursuing no other approach but hostility and disturbance, and is unlikely to do otherwise in the future either."   In a recent speech to the commanders and staff of the Islamic Revolution Guards Corps Navy he stated:

“Negotiations with America would mean paving the way for infiltration [of the United States] into the country’s economic, cultural, political and security domains...In these negotiations (JCPOA), the opposite side sought to seize any opportunity for infiltration and take a step against the country’s national interests. Of course, Iranian negotiators were fully aware, but Americans finally got the chance in some instances...Negotiation with America is banned because such negotiation will not only have no advantage [for Iran], but will also entail numerous disadvantages." 

It certainly appears that this agreement is doomed to failure, right from the start.