Mtg purchase apps, Gas prices, Greek debt, Euro area trade and inflation, Oil prices

Another setback for those grasping for straws looking for housing to lead a recovery:

MBA Mortgage Applications
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Gas prices up enough to hurt consumers, but not enough boost oil capex.

You might say it’s in the ‘sour spot’:
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Again, for all practical purposes this IS full debt forgiveness, and something Greece has yet to recognize as such:

IMF Proposal on Greece Sets Up Battle With Germany

May 17 (WSJ) — A new IMF proposal goes far beyond what Greece’s eurozone creditors have said they are willing to do. Germany is leading the pressure on the IMF to dilute its demands and rejoin the Greek bailout program as a lender. The IMF wants eurozone countries to accept long delays in the repayment of Greece’s bailout loans, which would fall due in the period from 2040 to 2080 under the proposal. The IMF is also pressing for Greece’s interest rate on its eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due.

Trade continues to provide serious fundamental support for the euro, much like it did for the yen for two decades, which continued to strengthen even with 0 rates, QE, and perhaps the highest debt/GDP ratios in the world:
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This also provides fundamental support for the euro:
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And the recently rising oil prices work to increase the US trade deficit with prices and imports rising, as the price increase isn’t enough to slow the decline in US output. Again, you could call it the ‘sour spot’ for as long as it lasts:
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Unemployment claims, NYC apts, Japan spending, interview in Truth-Out

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Claims readings could be distorted because a smaller share of those potentially eligible for benefits are applying. The share of recently unemployed workers seeking benefits has fallen this year to just above 50%, according to the National Employment Law Project, a group that advocates for the unemployed.

The rate is down from record high of almost 80% just after the recession ended.

The application rate typically declines as expansions age, but the current pace is the lowest in 15 years. NELP Policy Analyst Claire McKenna said the low rate reflects a vastly different labor market for those who recently lost their jobs versus the long-term unemployed.

The unemployment rate for those out of work for five weeks or less fell below prerecession levels this year. The rate for those out of work for six months or more is well down from 2009, but it remains about double the rate recorded in mid-2007.

“This late into a very slow recovery you have a sizable population of unemployed people that are less likely to establish eligibility for benefits,” Ms. McKenna said. In past cycles, even those workers who didn’t find long-term jobs would have landed shorter-term work that subsequently allowed them to again seek for benefits.

Must be a consequence of income reductions for people getting oil related revenues…

;)

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Spending is the measure of ‘policy success’ for the households:

Japan : Household Spending
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December 1 chart. Can you spot the hike in the consumption tax?
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Economist Warren Mosler: If the EU Doesn’t Loosen Its Deficit Limits, Greece Should Leave the Euro

Six years into Greece’s economic crisis and following successive “bailouts,” there still seems to be no light at the end of the tunnel. Greece’s economy continues to shrink and unemployment remains at record high levels while the Syriza-led government coalition has reneged on its promises of radical change and ending austerity. The troika, in turn, continues to insist that strict austerity measures, including budget cuts and mass privatizations, be enforced in Greece.

In this interview, economist Warren Mosler, a leading figure in the field of modern monetary theory and the cofounder of the Center for Full Employment and Price Stability at the University of Missouri-Kansas City, discusses money, debt and the role of the European Union’s deficit limits in perpetuating the crisis, and shares the proposals he believes could help lead Greece out of its crisis.

quick macro update

It all started when the FICA tax cuts and a few of the Bush tax reductions were allowed to expire at the end of 2012, followed by the sequesters a few months later 2013. That resulted in 2013 GDP growth of a bit less than 2% or so that might have been closer to 4% without the tax hikes and spending cuts.

Going into 2014 GDP I suggested growth might be closer to 0 than to the 3.5% being forecast. It again printed about in the middle averaging a bit over 2% (with some ups and downs…), and then towards the end of 2014 the price of oil collapsed and it was discovered there had been $hundreds of billions of planned capital expenditures that would be cut, domestically and globally, after which I again suggested GDP growth for the year- this time 2015- would now be near 0, and in fact could well be negative. Additionally, it was revealed the extent to which it was the large and growing oil capex expenditures up to that time that had been supporting at least 1% GDP growth up to that point. And so far GDP growth for 2015 has been less than 2014, even after 2014’s recent downward revisions, and along with slowing GDP has come slowing corporate revenues and earnings growth. All subject to further revisions, of course, which lately have been downward revisions.
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Meanwhile, in the first half of 2014 the euro began falling against the $ as well as other currencies. The fall coincided with the ECB threatening and then following through with negative rates and QE, much to the consternation of global portfolio managers, including Central Bankers, pension funds and hedge funds, who collectively proceeded to lighten up on their euro allocations. And along the way, issues surrounding Greece further frightened the portfolio managers into further selling of euro assets. This relentless selling pressure drove the euro down, particularly vs the US dollar. Specifically, a euro based portfolio manager might, for example, sell his euro securities, and then sell the euros to buy dollars, and then use the dollars to buy US stocks. Or a CB might manage its reserves such that the % of euro assets declined vs dollar assets. And a hedge fund might simply buy the $US index, which is about half dollar/euro and a way to sell euro and other currencies vs the dollar. All of this, along with several other ways to skin the same cat, constituted euro selling that drove the dollar up and the euro down, and at the same time produced buyers of US stocks.

Fundamentally, however, the opposite was happening. The euro area had a (small) trade surplus, which was removing euro from global markets, but not as fast as the sellers were selling, and the euro went ever lower. But as it did this it made the euro area that much more ‘competitive’ (euro area goods and services were that much less expensive in dollar terms) which resulted in an ever larger trade surplus, with the latest release showing a record trade surplus of about 24 billion euro per month. And at the same time, the increased euro exports helped support the economy and generated forecasts for improved future growth, all of which supported euro stocks.

It now appears the curves (finally) crossed, with the euro area trade surplus now exceeding the euro portfolio selling which seems to have run its course, which caused the euro to bottom and start to appreciate. This started generating adverse marks to market for those short euro and long US stocks, for example, who subsequently began reversing their positions by buying euro and selling US stocks. And the strong euro also threatens euro area exports and therefore output, employment, and GDP forecasts, causing euro stocks to sell off as well.

So far I’ve left out what turned out to be the catalyst for this reversal- China. When China moved to allow the yuan to trade lower against the dollar, it was deemed a credible threat to both euro and US exports, and world demand in general, which set off the latest wave of selling.
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So what’s next?

More selling of US stocks and buying euro to reverse those positions. Hedge funds might move quickly, but, for example, pension funds often do their reallocating at quarterly and annual meetings, so it could all take quite a bit of time.

Additionally, buying of euro will drive the euro up, as there is no ‘excess supply’ being generated. Quite the reverse, in fact, as the trade surplus works to make euro that much harder to get. That means the euro will appreciate until the trade surplus reverses (whether there is any causation or not…), which should prove highly problematic for the euro economy and euro stocks. The other side of this coin is the weaker dollar that should lend some support to the US stock market, though a collapsing euro area economy with it’s associate debt issues and political conflicts might do more harm than the weak dollar does good, not to mention the weakening domestic demand in the post oil capex world with no relief in sight from other sectors.

Lastly, the stock market has been maybe the best leading indicator, and probably because of it’s direct effect on perceptions of wealth and its influence on spending and investing decisions. And the Fed doesn’t target stocks,
but it doesn’t ignore them either, as it too recognizes the influence it can have on output and employment, especially on the downside.

Of course all of this can be reversed for the better with a simple fiscal expansion, as the underlying problem remains- the Federal deficit is too small in the absence of sufficient private sector deficit spending needed to offset desires to not spend income. (Yes, it’s always an unspent income story…)

But politics, at least for now, renders that sure fire remedy entirely out of the question.

Krugman on debt

Debt Is Good

By Paul Krugman

Aug 21 (NYT) — Rand Paul said something funny the other day. No, really — although of course it wasn’t intentional. On his Twitter account he decried the irresponsibility of American fiscal policy, declaring, “The last time the United States was debt free was 1835.”


Which consequently was followed by the worst depression in US history.

Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.

But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?

Believe it or not, many economists argue that the economy needs a sufficient amount of debt out there to function well.


Yes, to offset desires to not spend income (save) when private sector borrowing to spend isn’t sufficient, as evidenced by unemployment.

And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.


Yes, it’s called unemployment, which is the evidence that deficit spending is insufficient to offset desires to not spend income. Something economists have known by identity for at least 300 years.

I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

Why?


This is the right answer- because the US public debt, for example, is nothing more than the dollars spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’. And a growing economy that generates increasing quantities of unspent income likewise needs an increasing quantity of spending that exceeds income- private or public- for a growing output to get sold.

One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right.


Wrong answer. It’s never about ‘when the price is right’. It is always a political question regarding resource allocation between the public sector and private sector.

The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates.


Wrong answer. Yes, there is a serious infrastructure deficiency. The right question, however, is whether the US has the available resources and whether it wants to allocate them for that purpose.

So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.


I agree it’s a good time to fund infrastructure investment, due to said deficiencies.

However, whether or not it’s a good time to increase deficit spending is a function of how much slack is in the economy, as evidenced by the unemployment rates, participation rates, etc. And not by infrastructure needs.

And my read based on that criteria is that it’s a good time for proactive fiscal expansion.

Nor in any case is deciding whether or not to increase deficit spending rightly about whether or not to increase borrowing per se for a government that, under close examination, from inception necessarily spends or lends first, and then borrows. As Fed insiders say, ‘you can’t do a reserve drain without first doing a reserve add.’

Beyond that, those very low interest rates are telling us something about what markets want.


Wrong, they are telling is something about what level market participants think the fed will target the Fed funds rate over time.

I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so?


Right answer- deficit spending adds income and net financial assets to the economy to support sufficient spending to get the output sold.

The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.


Wrong answer. Net govt spending provides in the first instance provides dollars (tax credits) in the form of dollar deposits in reserve accounts at the Federal Reserve Bank. Treasury securities are nothing more than alternative deposits in securities accounts at the Federal Reserve Bank for those dollars. Both are equally ‘safe’.

Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.

But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.


Rates went down in anticipation of future rate setting by the fed.

What investors did was reprice financial assets. Investors can’t change total financial assets. The total only changes with new issues and redemptions/maturities.

And those low interest rates, Mr. Kocherlakota declares, are a problem. When interest rates on government debt are very low even when the economy is strong, there’s not much room to cut them when the economy is weak, making it much harder to fight recessions.


True, but cutting rates doesn’t fight recessions. In fact low rates reduce interest income paid by govt to the economy, thereby weakening it.

There may also be consequences for financial stability: Very low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus.


That would be evidenced by an increase in the issuance of higher risk securities, but there has been no evidence of that. In fact, it was $100 oil that at the margin drove the credit expansion that supported GDP growth, as evidenced by the collapse when prices fell.

What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery.


It would more likely very modestly strengthen it from the increase in the govt deficit due to the increased interest income paid by govt to the economy. However, I’d prefer a tax cut and/or spending increase to support GDP, rather than an interest rate increase. But that’s just me…

What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.


Mr. K isn’t wrong, but again I’d rather just have a larger tax cut to get to the same point, but, again, that’s just me…

In other words, the great debt panic that warped the U.S. political scene from 2010 to 2012, and still dominates economic discussion in Britain and the eurozone, was even more wrongheaded than those of us in the anti-austerity camp realized.


True, and this author…

Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.


True but for differing reasons. It’s never about investors pleading. It’s always about the public purpose behind the policies.

And the ironic thing is that these foolish policies, and all the human suffering they created, were sold with appeals to prudence and fiscal responsibility.


The larger problem with this editorial is that the wrong reasons it gives for what’s largely the right policy are out of paradigm reasons that the opposition routinely shoots down and shouts down, easily convincing the electorate that they are correct and the ‘headline left’ is wrong.

Feel free to distribute

Redbook Retail Sales, Case-Shiller House Prices, PMI Services, Consumer Confidence, Richmond Fed, Oil Capex, Truck Tonnage

Still bad:

source: Econoday.com
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Softening:

source: Econoday.com
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I don’t put much weight on Markit surveys, but the optimism comment is interesting:


source: Econoday.com
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Highlights

Service sector growth is strengthening slightly this month based on Markit’s July flash index which is up 4 tenths to a very solid 55.2. New orders are at a 3-month high and are getting a boost from both consumer spending and from business customers, the latter a welcome signal of strength for business investment. Backlogs are up and so is hiring. But optimism in the 12-month outlook, perhaps shaken by the outlook for the global economy, is the softest it’s been in three years. Input prices continue to rise but final prices are flat. This report is mostly upbeat and, despite the easing in the outlook, points to solid contribution from the service sector.

This kind of drop is concerning, and I’ve been watching for employment, a lagging indicator, to take a dive:

source: Econoday.com
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Highlights

Consumer confidence has weakened substantially this month, to 90.9 which is more than 6 points below Econoday’s low estimate. Weakness is centered in the expectations component which is down nearly 13 points to 79.9 and reflects sudden pessimism in the jobs outlook where an unusually large percentage, at 20 percent even, see fewer jobs opening up six months from now.

Less severe is weakness in the present situation component which is down nearly 3 points to 107.4. Here, slightly more, at 26.7 percent, say jobs are hard to get but this is still low for this reading.

A striking negative in the report is a drop in buying plans for autos which confirms weakness elsewhere in the report. Inflation expectations are steady at 5.1 percent which is soft for this reading.

This report is citing problems in Greece and China as possible factors for the decline in expectations, but US consumers are typically insulated from international events. The decline in expectations, mirrored earlier this morning by a similar decline in the service-sector outlook, may be sending early hints of second-half slowing, slowing that could push back of course the Fed’s expected rate hike.

A bit better, but another reference to softening employment. And note the volatility of this series, with moves up often followed quickly with moves down:

source: Econoday.com
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Highlights

The Richmond Fed is reporting the best strength of any manufacturing region this month, at 13 which is above the Econoday top-end estimate. New orders are especially strong, up 7 points to 17, with backlog orders also rising, up 7 points to 10. Shipments are strong, capacity utilization is up and inventories, because of the activity, are being drawn down. Hiring, however, is slowing. Price data show slight pressure for inputs but no pressure for finished goods.

This report contrasts with much slower rates of growth in the New York and Philadelphia Fed regions and sharply contrasts with recent data from the Dallas and Kansas City Feds where manufacturing, due to the energy sector, is in deep contraction. But today’s result is a welcome positive, suggesting that manufacturing may yet pick up this year and a reminder of strength in yesterday’s durable goods report.

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This had been estimated at $100 billion:

source: Financial Times
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LA Port Traffic, Greek Banks, Recession Without Financial Crisis

Another weak export report. No mention of the drop in oil prices reduced foreign incomes.

LA area Port Traffic: Weakness in June

by Bill McBride on 7/20/2015 09:57:00 AM

Note: There were some large swings in LA area port traffic earlier this year due to labor issues that were settled on February 21st. Port traffic surged in March as the waiting ships were unloaded (the trade deficit increased in March too), and port traffic declined in April. Perhaps traffic in June is closer to normal.

Container traffic gives us an idea about the volume of goods being exported and imported – and usually some hints about the trade report since LA area ports handle about 40% of the nation’s container port traffic.

The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.

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On a rolling 12 month basis, inbound traffic was down 0.4% compared to the rolling 12 months ending in May. Outbound traffic was down 0.9% compared to 12 months ending in May.

The recent downturn in exports might be due to the strong dollar and weakness in China.

Read more at Calculated Risk Blog

Reads like they still don’t have a clue about how banking works:

The Greek government ordered banks to open on Monday, three weeks after they were shut down to prevent the system collapsing under a flood of withdrawals,

That doesn’t cause collapse. Depositors might have to wait for their Euro. That’s all. No reason for the govt. to close the banks. Reads to me like the govt. thinks that Euro needed to run the economy, pay taxes, etc. would leave the country, or something like that. Makes no sense.

As Prime Minister Alexis Tsipras looked to the start of new bailout talks next week.

The first action of the new cabinet was to sign off on a decree to reopen banks on Monday with slightly more flexible withdrawal limits that allow a maximum of 420 euros a week in place of the strict limit of 60 euros a day currently in place.

But restrictions on transfers abroad and other capital controls remain in place.

It’s up to the banks to set their limits based on how much liquidity they have available.

Also:

Three week shutdown of Greece banks cost the economy an estimated €3B, not counting lost tourism revenue – press – Athens Chamber of Commerce and Industry (EBEA) says some 4,500 containers with raw materials and finished products are blocked at customs.

Additionally, €6B in business transactions were frozen by the bank shutdown.- Retailers lost about €600M in business, with apparel taking the main blow. Exporters lost €240M.

Source: TradeTheNews.com

Yes, negative growth and recession sometimes happens without a domestic financial
crisis, and without any financial crisis globally as well.

Lots of things can cause deficit spending- both non government (private sector) and government together- from being insufficient to offset agents desiring to spend less than their incomes.

Sometimes it’s a sudden obstruction to lending and sometimes it’s not.

Sometimes the agents spending more than their incomes just fade away. For a government allowing the deficit to get too small is a political choice, sometimes well informed but most often misguided.

For the private sector it could be insufficient income, or any reason it simply doesn’t want to borrow to spend or spend from savings.

And the private sector tends to be pro cyclical. That is, should GDP growth decline, private sector borrowing to spend tends to taper as well, as credit worthiness deteriorates, causing the slowdown to get worse. This downward process continues until some agent starts spending more than its income, which historically is government, as tax revenues fall and transfer payments increase with rising unemployment from the downward spiral.

So looks to me like it was the oil capex that was keeping up with the demand leakages, and when that collapsed as prices fell the demand leakages got the upper hand. And so far no sign of anything else stepping up its spending enough to move the GDP needle.

Fed Testimony

Semiannual Monetary Policy Report to the Congress

By Janet Yellen

Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly. Low oil prices

Still seems to leave out the fact that a dollar saved by the buyer of oil is a dollar lost by the seller.

And ongoing employment gains should continue to bolster consumer spending, financial conditions generally remain supportive of growth,

Yes, but the growth rate of lending has only been relatively modest and stable

And the highly accommodative monetary policies abroad should work to strengthen global growth.

Low and negative rates and quantitative easing now have a very long history of not resulting in increased aggregate demand.

In addition, some of the headwinds restraining economic growth, including the effects of dollar appreciation on net exports and the effect of lower oil prices on capital spending, should diminish over time.

Yes, but the question is what will replace the lost capital spending? Without that incremental capital expenditure, growth, at best, stagnates and likely goes negative as the ‘demand leakages’ continue to grow.

Also, the weakness in U.S. exports is partially the consequence of lower oil prices as reduced U.S. expense for imported oil = reduced income available to non residents to import U.S. goods and services. And the decline in global oil capital expenditures works against global growth and U.S. exports as well.

As a result, the FOMC expects U.S. GDP growth to strengthen over the remainder of this year and the unemployment rate to decline gradually. As always, however, there are some uncertainties in the economic outlook. Foreign developments, in particular, pose some risks to U.S. growth. Most notably, although the recovery in the Euro area appears to have gained a firmer footing,

That’s due to the weak Euro helping their exports. You can’t have it both ways- if the dollar becomes less of a headwind for the U.S., the Euro will become less of a tailwind for the EU.

The situation in Greece remains difficult. And China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions. But economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for U.S. economic activity.

This again assumes lower rates and quantitative easing are accommodative, particularly in the EU and China

The U.S. economy also might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively.

Again, still assumes lower oil prices are a net positive.

China trade, Greece comment

More reason to suspect US exports will disappoint and US imports will exceed expectations:
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Highlights
China’s June merchandise trade surplus was $46.6 billion against expectations of a $55.3 billion surplus. In Yuan terms, exports were up 2.1 percent on the year while imports tumbled 6.7 percent. The first half of 2015 trade balance was CNY1.61 trillion or $263.9 billion. On a seasonally adjusted basis, exports were up 1.1 percent on the year after sliding 1.4 percent in May. Seasonally adjusted imports dropped 9.9 percent after a 14.1 percent plunge.

According to Chinese Customs, expectations are for export growth to rebound in the second half of the year. It noted that the Greek crisis will have some impact on China’s trade – it is hard to quantify just how big an impact there will be.

China sees exports increase 2% in June, imports decline

By Chen Jia and Zhong Nan

July 13 (ChinaDaily)
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China’s export rose by 2.1 percent year-on-year to 1.17 trillion yuan($188.5 billion) in June, a better-than-expected increase after the 6.4 percent decline in April, according to data from Customs released on Monday.

However, the import figure fell by by 6.7 percent to 890.67 billion yuan last month, leading to an accelerated growth of monthly trade surplus to 45 percent year-on-year.

In the first six months, the country’s total foreign trade value was 11.53 trillion yuan, down by 6.9 percent from a year earlier. Exports increased by 0.9 percent to 6.57 trillion yuan while imports decreased by 15.5 percent to 4.96 trillion yuan.

Trade surplus in the first half rose by 1.5 times from a year earlier to 1.61 trillion yuan, the data revealed.

The structure of trade modes continued to improve when exports of general trade showed marked growth, and strong momentum was spotted in exports to emerging markets and some countries along the “Belt and Road”, said Huang Songping, a spokesman from the Customs department, at a press conference.

China’s bilateral trade with the European Union declined by 6.8 percent during the January-to-June period to 1.67 trillion yuan and trade with Japan fell by 10.6 percent to 832.02 billion yuan, said Hong.

“The Greek debt crisis is likely to influence China’s export, but it is difficult to predict the exact effects,” added Huang.

Varoufakis’ interview in the New Statesman:

Exclusive: Yanis Varoufakis opens up about his five month battle to save Greece

“He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.”

As suspected, he’s was in it over his head.

My response would be to let the banks remain open with circumstances limiting withdrawals to available liquidity. Liquidity might come from earnings on assets, asset sales, and new deposits. The banks would be free, by mutual agreement, to issue IOU’s to depositors who didn’t want to wait for actual euro. The govt might issue IOU’s if it ran out of cash for operating expenses. To ‘seize control of the Bank of Greece from the ECB’ is nonsensical, as there’s nothing there but a computer with a spreadsheet. It would not give Greece the ability to clear funds outside of Greek member banks that are on that spreadsheet. Haircuts to bonds issued to the ECB and reducing Greek debt would also be meaningless in this context.