Mish's Global Economic Trend Analysis

China’s Xi Vanishes; Where is the Man Rumored to Lead China Next Month? China Having Second Thoughts? What's the Worst That Could Happen?
University of Phoenix Tops Debt Slave Racket with 35,049 Student Loan Defaults (Top Public School has 786); Debt Slave Collection Business is Booming; Housing and Economic Implications
Actual Constitutional Case Against OMT and ESM; Why Bond Buying Undermines Democracy; Is Draghi Above The Law?
German Constitutional Court Approval of ESM Not a Done Deal; Draghi's Fatal Mistake?

China’s Xi Vanishes; Where is the Man Rumored to Lead China Next Month? China Having Second Thoughts? What's the Worst That Could Happen?

Posted: 10 Sep 2012 09:09 PM PDT

A regime change in China is slated for next month. Yet Xi Jinping, the man rumored to be the next leader is missing in action.

It is not uncommon for Chinese leaders to disappear from public life for extended periods, but it is uncommon for them to disappear smack in front of a regime change.

It is also uncommon for them to skip planned and announced meetings with foreign leaders. Xi Jinping has cancelled at least four scheduled meetings with visiting dignitaries including a Russian delegation, Singapore's prime minister and US secretary of state Hillary Clinton last Wednesday and the prime minister of Denmark on Monday.

So where is he?

The Financial Times reports Rumours swirl as China's Xi vanishes.

Where is Xi Jinping? The man anointed to run the world's most populous nation and second-largest economy has disappeared from public view just weeks before his expected elevation to lead the Chinese Communist Party.

An official account did not list him among the attendees at an unscheduled meeting held last Friday by the party's powerful central military commission, of which Mr Xi is vice-chairman.

Late last week the foreign ministry invited overseas media to cover a meeting between Mr Xi and Danish prime minister Helle Thorning-Schmidt scheduled for Monday afternoon. But on Monday the ministry denied that the meeting was ever supposed to take place.

Mr Xi's mysterious disappearance has sparked speculation about his whereabouts and renewed political infighting just months after the purge of senior Chinese leader Bo Xilai shook the ruling party. It also underscores the opacity and lack of a strong institutionalised mechanism for transferring power in China's authoritarian one-party political system.

"We know Xi Jinping is supposed to be the next leader [of China] but we have very little idea how he was chosen, which is quite amazing for such a significant position in world politics," said David Zweig, a professor specialising in Chinese politics at Hong Kong University of Science and Technology. "Perhaps he's got some health problems, but they don't want to let the public know about it because they feel it's important to present the image of a strong healthy leader taking China into the future."

Speculation Intensifies
The Business Standard reports China President-to-be Xi Jinping goes missing

Speculation intensified on Monday over the whereabouts of China's presumptive new president, Xi Jinping, who has been missing from public view in recent days as the country prepares for a crucial leadership change.

"There's every sort of crazy rumor about Xi's health," said a senior Chinese journalist, who asked not to be identified because of sensitivity surrounding the case. "But no one is saying anything."

The speculation adds another wrinkle to the less-than-smooth transition from the departing president, Hu Jintao, to Xi. Earlier this year, a senior Communist leader, Bo Xilai, vanished from view after his wife was charged with murdering a British businessman. Then, earlier this month, another senior official was unexpectedly demoted after a scandal surrounding his son.

And no date has been set for the 18th Party Congress, when the transition is supposed to take place. The consensus is that it will happen next month, but no announcement has been made. The last congress was also held in October, but its dates had been made public in August.

"These are not signs that everything is going well," said Bo Zhiyue, a political-science professor at the National University of Singapore.

China's political system has long been a black box, but its secrecy has begun to seem more anachronistic as the country has become one of the world's biggest economic, political and military powers.

Some of the rumors have it that Xi hurt his back swimming or playing soccer; these were given credence by reports from foreign diplomats who say they were told that his bad back had caused him to cancel the meetings with Clinton and Lee.

Less reliable was a rumor that he was hurt in an auto accident when a military official associated with Bo tried to injure or kill Xi as part of a revenge plot; the report was later retracted.

One well-connected political analyst in Beijing said he was told by party officials that the rumors of skulduggery were wrong. But he said he was told that Xi, 59, had suffered a mild heart attack.

On Monday, the situation grew odder. China's Ministry of Foreign Affairs denied that the meeting between Xi and the Danish prime minister, Helle Thorning-Schmidt, had been scheduled. Last week, however, the ministry had invited the foreign press for a photo opportunity with the two leaders.

Adding to the conspiracy theories, on Monday a popular microblogging site, Sina Weibo, banned searches for the term "back injury."

Almost as if to assuage worries about Xi's health, a newspaper on Monday ran a picture of Xi addressing students at opening of the fall semester of the Central Party School. The photo and speech, however, were from September 1.

China Having Second Thoughts?

It is damn strange to deny a meeting was supposed to take place especially after you invite the foreign press to take pictures. Unfortunately, I cannot shed any more light on the situation. However, I can postulate more speculative theories.

Is there any chance China is having second thoughts about who the new leader will be? More likely, is there a growing concern about the alleged shift away from infrastructure and export-led growth to a consumer-driven model?

I do not have the answers to either question but I can offer a statement "Let's hope not". China (and the world) desperately needs China to rebalance its economy, no matter what short-term pain rebalancing causes.

And there will be pain. Chinese exporters will suffer, as will the commodity producing countries that export to China. GDP will decline and so will growth in jobs.

However, postponement of rebalancing will only make matters worse.

What's the Worst That Could Happen?

The worst possible outcome would be for China to give up on a rebalancing shift coupled with a Mitt Romney victory who then does as he says he would, label China a currency manipulator, thereby starting a devastating trade war with China.

Regardless of what the reasons are for the disappearing act, here is the key question: Will cooler heads prevail in China and the US? Let's hope so.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

University of Phoenix Tops Debt Slave Racket with 35,049 Student Loan Defaults (Top Public School has 786); Debt Slave Collection Business is Booming; Housing and Economic Implications

Posted: 10 Sep 2012 01:48 PM PDT

Congratulations to the University of Phoenix, a private for-profit school, which has the dubious distinction of having 4,359 percent more student loan defaults than Columbus State, the top public school.

A student loan is considered in default when it is 360 days delinquent.

Number of Loans in Default

The above chart from the New York Times article Bad Student Debt Stubbornly High as Collection Efforts Surge.

There is now over $1 trillion in student debt and $76 billion of that is in default reports the NY Times in Debt Collectors Cashing In on Student Loans

As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years.

In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.

In an attempt to recover money on the defaulted loans, the Education Department paid more than $1.4 billion last fiscal year to collection agencies and other groups to hunt down defaulters.

Unlike private lenders, the federal government has extraordinary tools for collection that it has extended to the collection firms. Ms. Cordeiro has already had two tax refunds seized, and other debtors have had their paychecks or Social Security payments garnisheed. Over all, the government recoups about 80 cents for every dollar that goes into default — an astounding rate, considering most lenders are lucky to recover 20 cents on the dollar on defaulted credit cards.

There is no statute of limitations on collecting federally guaranteed student loans, unlike credit cards and mortgages, and Congress has made it difficult for borrowers to wipe out the debt through bankruptcy. Only a small fraction of defaulters even tries.

"You are going to pay it, or you are going to die with it," said John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring service.

Debt Slave Collection Business is Booming

Last year the government paid $1.4 billion to collect defaulted loans of which $355 million went to 23 private debt collectors. Student debt collection is now the most sought-after contract within the industry.

No wonder.

Student loan collectors have the ability to garnish wages, seize tax refunds, and seize other government payments.

Those in the debt slave racket are of course willing to do anything to keep the business alive. Obama wants to expand the program. Of course, so do all the universities and anyone associated with the slave trade.

The schools and slave trade collection agencies are big contributors to politicians willing to accept campaign bribes to keep the student "aid" programs intact.

Student "Aid" or Economic Prison Sentence?

You know the answer to the question if you have any common sense. Student "Aid" is not for the kids. Virtually nothing of importance in the education industry is "for the kids".

From public unions, to aid programs, and even grants, the entire system is geared to sending as many kids as possible to school, hoping to make debt slaves out of them for life.

The only rational thing to do is kill every one of these ridiculous programs cold turkey. Those in the slave trade will fight tooth-and-nail against cutbacks, led no doubt by the University of Phoenix.

For more on Student "Aid" please see

A Remarkable Comparison: Affordable Student Loans vs. Affordable Housing an email from Eugene Holloway, a Maryland Attorney, on the rising cost of college education.

Debt for Diploma Schemes: Debt for Diploma Schemes and the Cookie Monster Principle

Off-Balance-Sheet Budget Fraud: Budget Deficit Accounting Fraud and the Off-Balance-Sheet Student Loan Scam; Time to Scrap Entire Student Loan Program

Pell Grants Turn Students into Debt Zombies: For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program

Subprime College Loans, Who is to Blame?: Subprime Goes to College; Students Buried in Debt; Who is to Blame?

Expect More Student Riots: University of California Campus Erupts In Riots; Student Loan Scam Drives Up Cost Of Education; Expect More Riots

Major Economic Headwinds

The effect on housing and the economy of these disastrous policies are enormous, yet Bernanke is not even bright enough to figure it out.

Please consider a few snips from Central Bankers Fail to Understand Forces Holding Back the Economy; Ten Major Economic Headwinds

Ten Major Headwinds

Boomers heading into retirement have insufficient savings
Student debt holds back home-buying, marriage, and family formation
Ability and willingness of individuals and businesses to take on more debt has shrunk dramatically. Attitudes towards lending, borrowing, and home ownership have changed.
Bank bailouts at taxpayer expense left banks intact but did nothing for households deep in debt
Tax policy encourages flight of jobs and capital
Technology now serves to destroy more jobs than it creates. Please see Robots to Rule the World? Taking All Jobs? Replace Women? for a discussion.
Untenable pension problems at the city, state, and federal level can no longer be put off.
Public unions and collective bargaining are structural problems at the heart of the pension mess as well as the heart of numerous city bankruptcies.
Artificially low interest rates weakens those on fixed income
Commercial real estate bust on top of housing bust limits further job expansion. How many more Walmart, Pizza Huts, McDonalds, nail salons, Kohl's stores, Office Depots, Home Depots do we need? Where?

Housing and Recoveries

Housing has led nearly every economic recovery for decades. So look at point number two above: Student debt holds back home-buying, marriage, and family formation.

I expect housing to be weak for a decade because of those points. Prices will be stagnant for years as banks work off REOs.

The structural overhangs of inept policies, bank bailouts, mortgage fraud, public unions, and boomer retirements guarantees Bernanke will not be able to stimulate lending to the degree he wants.

Worse yet, Bernanke's policies only serve to increase the economic distortions and the tension between the 1% and everyone else.

Addendum:

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Actual Constitutional Case Against OMT and ESM; Why Bond Buying Undermines Democracy; Is Draghi Above The Law?

Posted: 10 Sep 2012 11:02 AM PDT

A post on the the Fibs and Waves blog by "Blankfeind" outlines the actual legal case against the OMT. I believe the case is rock solid. How the German constitutional court rules in two days is another matter.

Please consider The ECB Thumbs Its Nose At The Law.

On September 6th, the ECB announced its Outright Monetary Transactions program, known as OMT. Justified as a means for the ECB to repair monetary policy transmission and to recreate the singleness of monetary policy for the euro area, the OMT offers an unlimited commitment by the ECB to purchase short-term (one to three year) sovereign debt in the secondary markets for sovereigns who agree to certain conditions.

The bond purchases themselves will not be conducted by the ECB, but rather by the national central banks in proportion to their capital key with the European Central Bank. Hence, should Spain eventually fall under the OMT program, it will be the German Bundesbank that will be responsible for purchasing the largest single share of Spanish bonds.

But, is OMT legal under the treaties that govern the ECB?

The letter of the law:

Treaty on the Functioning of the European Union (TFEU)

Article 123 (ex Article 101 TEC)

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as 'national central banks') in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

With the OMT program, the ECB has essentially said that any European Monetary Union sovereigns unable to obtain favorably priced credit from the market may apply to the ECB in order to obtain that credit in unlimited quantities, albeit via debt purchases in the secondary market.

This clearly means that the ECB will have established a credit facility in favor of the sovereign participating in the OMT program, and that is an explicit violation of the letter of the law.

Primary vs. Secondary Markets and Intent of the Treaty

Former ECB president Jean-Claude Trichet (and one of the original architects of the treaties that created the eurozone), opened up this can of worms by allowing the ECB to buy bonds in the secondary market.

Since the ECB could act as the end party immediately buying bonds from the original buyer, there is in practice virtually no difference between buying bonds in the primary and secondary markets.

Here is the loophole Trichet exploited:

Article 123 (ex Article 101 TEC)

1. ... Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

Clearly, that could not possibly be what the treaty intended. When discussing the intent of the treaty, the ECB is already in violation. Now Draghi has gone a step further.

"Blankfeind" continues ...

Germany demanded the inclusion of Articles 123 and 125 of the Treaty on the Functioning of the European Union with the clear intent of protecting itself and its citizens from responsibility for the fiscal failings of other member states. Hence, OMT violates the intent of the applicable laws.

Conclusion:

The OMT program is in violation of both the letter and the intent of Article 21 of Statute of the European System of Central Banks and of the European Central Bank and of Article 123 of the Treaty on the Functioning of the European Union (TFEU).

"Blankfeind" is certainly correct. And I point out the obvious creep in unconstitutional acts. Trichet capitalized on one misplaced word and debate over the intent of "directly" giving Draghi a bit of cover to even more blatantly break the law.

Why Bond Buying Undermines Democracy

In a direct criticism of "Draghi Almighty" Der Spiegel explains Why ECB Bond-Buying Plans Undermine Democracy

Anyone who breaks a law can hardly excuse his actions by claiming that he is acting within the scope of the law. In any case, it won't help him much -- unless his name is Mario Draghi and he is the president of the European Central Bank (ECB).

Draghi wants more, though; he wants to save the European common currency at all costs. The euro, he says, is "irreversible."

So far, the ECB has already spent over €200 billion ($256 billion) buying sovereign bonds from crisis-stricken euro-zone countries. If the exception now becomes the rule, additional bonds worth hundreds of billions could quickly follow. German taxpayers are also ultimately liable for this amount -- without the German parliament, the Bundestag, having a say.

This Wednesday, Germany's Federal Constitutional Court is expected to decide whether the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, is compatible with the German constitution. It is seen as likely that the judges will put a ceiling on Germany's liability. But in view of the latest ECB decision, such limits are already useless before they have even been enacted. The ECB apparently stands above the Bundestag and above the Federal Constitutional Court.

Double Game

And what is the German government doing? It's playing a double game. It supports both the ECB president as well as his main critic, Weidmann. Merkel is secretly pleased with Draghi's initiative because the chancellor would probably not be able to gain majority support in the Bundestag for additional euro rescue programs. That's why she is among those saying that the ECB is acting within the scope of its mandate.

If she said anything else, she would have to take action. She could, for example, file a suit with the European Court of Justice in Luxembourg in a bid to have the ECB decision nullified. The Bundestag could also pass a resolution calling for such a lawsuit -- and thus force Merkel to put her cards on the table.

But if there are no plaintiffs, no judges will intervene. In such a situation, Mario Draghi is the most powerful man in Europe, undeterred by courts or parliaments.

The euro may be irreversible, but apparently democracy is not.

That is exceptionally harsh criticism of both the OMT and of chancellor Merkel from a magazine that is generally quite pro-euro.

Is Draghi Above The Law?

The answer to that question is obvious. He thinks and acts like he is. This should not be surprising. It is one of the direct corollaries of the Fed Uncertainty Principle, which I wrote on April, 3, 2008, long before the Fed started its big power grab.

What I said about the Fed applies equally to the ECB and central bankers in general. Here are key excerpts.

Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Addendum:

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German Constitutional Court Approval of ESM Not a Done Deal; Draghi's Fatal Mistake?

Posted: 10 Sep 2012 01:33 AM PDT

One puzzling aspect of ECB president Mario' Draghi's Outright Monetary Transactions (OMT) plan to save the eurozone is his doing so before the German constitutional court had approved the ESM.

In spite of Draghi's emphasis on conditionality, OMT puts Germany directly at risk in an unlimited way. This modification to the ESM makes the constitutional case against it much stronger.

I am not the only one who feels that way. Even the pro-bailout Eurointelligence site sees it that way.

Here are some snips from the Eurointelligence Daily Briefing report A new legal case against ESM – that links Draghi's OMT to the current case

This is the week in the which the German constitutional court will announce the most important ruling in its history. Herbert Prantl reports in Suddeutsche Zeitung on a new anti-euro case this morning that links last week's decision by the ECB to start Outright Monetary Transactions (OMT) to the current ESM case. The case was brought by Peter Gauweiler, a well-known Eurosceptic member of the Bundestag from the Bavarian CSU, and a serial litigator. Gauweiler argues that the OMT had fundamentally altered the ESM, and that the decision on the ESM should therefore be postponed (meaning a delay in the ratification by Germany). He also makes the legal points that the OMT decision did not constitute a breach of competence, but a permanent assumption of competences. When the Bundestag voted on the ESM, it did so under different circumstances. With the OMT, the Bundestag's authority is permanently circumvented.

Spiegel Online reports on the increased nervousness in Berlin ahead of the court's ruling. It says the government really has no Plan B in the event of a No vote, and remarks that the court is likely to take Gauweiler's case very seriously, plus the fact that 37,000 citizens have joined the case (in a kind of class-action constitutional lawsuit). It also quotes views among top coalition MPs who have expressed misgivings about the ECB's decision.

(Gauweiler's motives are transparent, but the legal argument is quite strong in our view. The entire euro rescue effort is legally tenuous, and hard to square with what we already know about the German constitutional court's interpretation of the Treaties, and its views on the scope and limits of financial crisis management. We know out of experience that it is always wrong to second-guess this fiercely independent court. The only thing we do know, in contrast to many financial market participants, is that the court will not take into account the financial market reaction of its decision.)

Draghi's Fatal Mistake?

I certainly do not agree with Draghi, but the man clearly is not a dunce. Was there a strong reason to announce OMT, altering the ESM, before it was approved?

Certainly, yields went into the stratosphere a few weeks ago. Yet, mere talk of rate caps and unlimited bond buying had yields collapsing last week.

Did Draghi feel he could not wait another week? Did he see a need to strike first, fearing the court may otherwise have laid down guidelines against his OMT?

Perhaps Draghi wanted to bring this all to a head right here right now, the sooner the better, even if it meant the court might rule on the need for a referendum.

From that aspect, (and from the point of view of the pro-bailout crowd) the sooner Germany has a referendum, the more likely it would pass.

A year ago I think a referendum would have passed with flying colors. Now 54% of Germans Want the Constitutional Court to Kill the ESM.

With each passing day, more Germans are upset at the economy and the bailouts on top of it (see Germany Trifecta: Steep Drop in Construction New Business, Services New Business, Manufacturing New Business) and an increasingly large group want Germany out of the eurozone completely.

Perhaps we should not overthink this.

Occam's Razor suggests Draghi simply made a mistake in failing to see the bitter response from Germany and the potential implications down the road.

I had been thinking the court would easily approve the ESM, but with reservations. However, the OMT changed the odds quite a bit. Regardless, we are going to find out one way or another in two days.

Addendum:

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