Global economic news goes from bad to worse

I’m sure this is totally unrelated to what is going on in China and the EU . . . this allegedly was not a “cyber attack,” but just a “technical issue.” New York Stock Exchange Ends Hours-Long Shutdown:

Trading on the New York Stock Exchange was shut down for hours on Wednesday as the exchange tried to cope with what appeared to be a technical glitch, rather than an attack.

It was the longest such suspension of trading at the exchange in recent years, although trading in the stocks listed on the N.Y.S.E. was able to continue on other stock exchanges, like Nasdaq.

Trading resumed late Wednesday afternoon, almost four hours after the shutdown began, less than an hour before the 4 p.m. closing bell.

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The shutdown was especially troubling because it came only hours after United Airlines temporarily grounded all of its flights following a technical issue. Other businesses had problems with their websites.

But both United and the New York Stock Exchange were adamant that the problems were a result of internal technical problems, rather than malicious hackers.

I’ll bet China’s government is wondering, “Why didn’t we think of this?” as the government’s direct intervention in its stock market has failed to stop the mass sell-off. Beijing’s Moves Fail to Stem Sharp Slide in China’s Stocks:

Stock prices in mainland China fell sharply again on Wednesday, despite another series of government measures meant to restore confidence and stabilize a market that has grown increasingly turbulent in the last month.

The sell-off is putting pressure on the government to take swift action, as losses pile up for the millions of ordinary investors that piled into the market. Just days after Beijing introduced a number of bold measures to prop up share prices, regulators announced new initiatives Wednesday, including allowing insurers to invest more money in stocks and creating a fund to buy up shares in small and midsize companies.

But the slump, which is defying the efforts by Beijing to prop up stocks, presents a serious challenge for the leadership. If stocks continue to fall, it could erode consumer confidence, further weighing on the economy.

The social and political repercussions could also be significant for the government. Many ordinary investors have poured their savings into the stocks, making them especially vulnerable to the market volatility.

The losses have been brutal. And the full extent of the pain may be even steeper, since nearly half of the stocks have stopped trading.

Even after the big sell-offs, though, stock prices in China are still considerably higher than they were a year ago. The Shanghai composite is still up 74 percent from mid-2014, and the Shenzhen composite is up 84 percent since then.

On Wednesday, the main Shanghai index plunged 5.9 percent, and the Shenzhen index fell 2.5 percent. Over all, the Shanghai index is down 32 percent and the Shenzhen is off 40 percent from the highs reached in mid-June.

In Hong Kong, which had escaped much of the mainland market’s rout, the Hang Seng index fell 5.8 percent.

The sell-off has also spread to other parts of the Asia-Pacific region. In Japan, the Nikkei 225-stock average dropped 3.1 percent, Australian stocks were down 2 percent and South Korean shares fell 1.2 percent.

Fear is gripping the markets after a phenomenal bull run in which mainland China’s major stock indexes doubled, tripled and even quintupled over the last few years. Sentiment has turned down too sharply and investors have lost confidence, analysts said, and because buying shares with borrowed money was a critical part of the increase in prices, there is now pressure to sell.

“China’s stock market remains under stress, as investor confidence will take some time to recover,” Li Wei, the China economist at the Commonwealth Bank of Australia, wrote in a report to investors.

Panic selling may also be extending the downturn because each day trading is suspended for hundreds of stocks after they drop by 10 percent, under exchange rules. Some companies are even asking that their shares be temporarily suspended, hoping to ride out the downturn.

Since late June, on almost every trading day, there have been more than 900 stock trading suspensions, according to Xinhua, China’s official news agency. On Tuesday and Wednesday, 900 to 1,700 stocks were suspended from trading. That means that among the approximately 3,000 listed companies on the two major exchanges, up to half may have been suspended during the first two days of the week.

The Chinese authorities have been moving swiftly, apparently worried about the potential impact the sell-off could have on the financial markets and on a broader economy that is relatively weak. In one of the biggest moves, some of the country’s largest brokerage houses created a $19.4 billion stabilization fund.

Although experts say they doubt there could be systemic damage, banks and brokerage firms could be threatened because of the huge amount of margin trading, or borrowing to purchase stocks.

By some estimates, margin trading may have amounted to as much as 3.4 trillion renminbi, or nearly $550 billion. And because some of the borrowing probably took place in the shadow banking sector, no one is quite clear how big it was.

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Most analysts believe the bulk of the selling pressure is coming from investors who borrowed to finance their stock-buying binges.

Neil Irwin at the New York Times’ “The Upshot” makes a point that I frequently make about media coverage of economic news in the U.S.: “Repeat after me: The stock market is not the economy. And the economy is not the stock market.” The Upshot: The Problem With China’s Efforts to Prop Up Its Stock Market:

That’s the central, crucial idea to sound economic policy that seems to be missing from China’s increasingly frantic efforts to prop up its plummeting stock market. It dropped another 6 percent in Wednesday’s trading session and is now down 32 percent in the last month.

No doubt these are scary times in China. It is understandable that government and industry leaders fear what the collapse will do to the savings of the country’s growing middle class, who have taken to stock investing in mass numbers in recent years.

It is easy to understand why the headlines out of China would make the rest of the world fret. China is an important global economic player. Continuing uncertainty about what will happen to Greece and the eurozone, another major driver of the world economy, has further fueled the sense of global markets in peril.

These are valid fears, and help explain why the People’s Bank of China has cut interest rates and loosened bank lending restrictions, hoping to keep Chinese economic growth on an even keel despite the market drop.

But others in the long list of actions China has taken to try to shore up the market seem focused less on containing the consequences of the market sell-off, and more on directly propping up the market itself. There was the June 29 decision for local government pensions to invest in stocks for the first time, a July 1 relaxation of securities trading fees, a July 2 relaxation of rules on margin trading to make it easier for people to make risky bets on stocks, and a July 5 decision by a state-owned investment fund to buy more stocks.

The Chinese government is going to these lengths to prop up the market despite evidence that Chinese stocks really were overvalued at their mid-June levels, having experienced a 150 percent run-up in the preceding year without much fundamental improvement in earnings or growth in the Chinese economy to justify it.

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When a government intervenes to try to prevent markets from adjusting to sensible levels, it can mean pouring money down a sinkhole and merely delaying an inevitable correction.

Finally, there is the “Greek Tragedy” playing out in the European Union this week. The shorter version: Greece has made an offer that is not acceptable to the EU, and Greece has until Sunday to agree to creditors’ terms, or a “Grexit” from the EU is likely to occur. Greece Sends Loan Request, but Is Vague on Fiscal Plan:

Greece requested a three-year loan on Wednesday from the eurozone’s bailout fund as the country and its creditors began what could be a last effort to avert a historic rupture.

But in making a formal request for new aid that it needs to avoid further defaults on its debts, Greece did not provide any details of what it would do in return to show that it is serious about strengthening the government’s finances, other than alluding generally to a willingness to make quick changes to its tax and pension systems. The government said it would provide those specifics on Thursday.

Nor did it publicly describe the size of the loan it was seeking. Some economists have estimated that Greece will need 50 billion euros (about $55 billion), or possibly more.

Until Athens submits that proposal on Thursday, the final deadline the eurozone creditors have set, it remains to be seen whether Greece can finally come close enough to meeting demands for pension cuts, tax increases and other changes to secure a new bailout deal.

Without a deal, which European leaders said they would decide on by Sunday night, Greece seems destined to stumble out of the euro currency union and face an uncertain future as a bankrupt stand-alone economy.

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The basic disagreements between Greece and its creditors have been well established through months of negotiations. Before providing additional bailout money, the creditors want Greece to show that it can strengthen its finances and handle more debt. The main points of contention involve Greece’s overburdened pension system, which has been a big drain on the government’s finances, and proposed increases to elements of the country’s value-added tax, some of which are opposed by regional and other interest groups.

The Greek government, elected early this year on a platform of ending years of austerity imposed by Germany and other lenders, is pushing back against further pension cuts and higher taxes, saying they would further weaken an already crippled economy. It is also seeking a quick infusion of aid to help cover its bills and loan repayments in the short run, as well as a reduction in its debt payments for the long run.

“We have ideological differences,” Mr. Tsipras told the Parliament. “We are divided on issues.”

The differences are not huge in absolute terms, but they are complicated by an almost total breakdown in trust between the two sides. In its letter seeking new bailout money on Wednesday, Greece said, without offering any details, that it was ready “to immediately implement a set of measures as early as the beginning of next week” to address creditors’ demands for pension cuts and tax increases.

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Chancellor Angela Merkel of Germany has already indicated that she opposes lending additional money to Greece through the European Stability Mechanism or granting it any debt relief until the Tsipras government presents an economic overhaul plan acceptable to the creditors.

In the meantime, the banks in Greece remain closed and close to insolvency. The Governing Council of the European Central Bank decided Wednesday to keep Greek banks on life support.

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The European Central Bank will have to stop providing emergency lending to Greek banks unless there is an accord with creditors by Sunday, Mr. Noyer said on Europe 1 radio.

Without central bank support, Greek banks will go bankrupt, and the economy will plunge into an abyss.

The New York Times‘ Paul Krugman writes, “However things play out from here — I find it hard to see a path other than Grexit — the troika’s program for Greece represents one of history’s epic policy failures.” Debt Deflation in Greece:

Even if you ignore the economic and human toll, it was an utter failure in terms of restoring solvency. In 2009, before the program, Greek debt was 126 percent of GDP. After five years, debt was … 177 percent of GDP.

How did that happen? Did the Greeks continue massive borrowing? As the chart shows, the answer is a definite no. Greek debt at the end of 2014 was only 6 percent higher than it was at the end of 2009. Admittedly, that number reflects a significant haircut on private debt along the way, but it was still nothing like the continued borrowing binge some imagine.

What happened instead was, of course, the collapse of GDP — itself largely the result of the austerity program.

What this suggests is that the troika program was simply infeasible, and would have been infeasible no matter how willing the Greeks had been to make sacrifices. The more they cut, the worse things got, because of Fisherian debt deflation.

I suppose you can argue that structural reforms might have delivered a boost in competitiveness, but the truth is that there’s very little evidence supporting the conventional faith in such reforms.

Krugman adds, Policy Lessons From The Eurodebacle:

It’s now clear, or should be clear, that the Greek program was doomed to failure without major debt relief; no matter how hard the Greeks tried, austerity would shrink GDP faster than it reduced debt relative to the baseline, so that the debt situation was bound to worsen even as the attempt to balance the budget imposed vast suffering.

And there was no good, or even non-terrible, answer given Greece’s membership in the euro.

But there’s a broader lesson from Greece that is relevant to all of us — and it’s not the usual one about mending our free-spending ways lest we become Greece, Greece I tell you. What we learn, instead, is that fiscal austerity plus hard money is a deeply toxic mix. The fiscal austerity depresses the economy, and pushes it toward deflation; if it’s accompanied by hard money (in Greece’s case the euro, but a fixed exchange rate, a gold standard, or any kind of obsessive fear of inflation would do the trick), the result is not just a depression and deflation, but quite likely a failure even to reduce the debt ratio.

For comparison, look at everyone’s favorite example of successful austerity, Canada in the 1990s . . . What was Canada’s secret?

The answer was, easy money and a large currency depreciation. These offset the drag from austerity, allowing growth to continue.

So, how does this play into U.S. policy debates? Well, Republicans love to warn that America might turn into Greece any day now. But look at the policy mix that is now de facto GOP orthodoxy: sharp cuts in government spending (maybe offset by tax cuts for the rich, but these won’t provide much stimulus), combined with a monetary policy obsessed with fears of dollar “debasement.” That is, the conservative side of the US political spectrum, while holding up Greece as a cautionary tale, is actually demanding that we emulate the policy mix that turned Greek debt into a complete disaster.

Bumper sticker version: “Austerity Economics Kills Economies.”