Aug 132015
 
 August 13, 2015  Posted by at 9:28 pm Finance Tagged with: , , , , , , ,  28 Responses »


Gustave Doré The Ninth Circle of Hell (Treachery) 1857

Eventful days in the middle of summer. Just as the Greek Pandora’s box appears to be closing for the holidays (but we know what happens once it’s open), and Europe’s ultra-slim remnants of democracy erode into the sunset, China moves in with a one-off but then super-cubed renminbi devaluation. And 100,000 divergent opinions get published, by experts, pundits and just about everyone else under the illusion they still know what is going on.

We’ve been watching from the sidelines for a few days, letting the first storm subside. But here’s what we think is happening. It helps to understand, and repeat, a few things:

• There have been no functioning financial markets in the richer parts of the world for 7 years (at the very least). Various stimulus measures, in particular QE, have made sure of that.

A market cannot be said to function if and when central banks buy up stocks and bonds with impunity. One main reason is that this makes price discovery impossible, and without price discovery there is, per definition, no market. There may be something that looks like it, but that’s not the same. If you want to go full-frontal philosophical, you may even ponder whether a country like the US still has a functioning economy, for that matter.

• There are therefore no investors anymore either (they would need functioning markets). There are people who insist on calling themselves investors, but that’s not the same either. Definitions matter, lest we confuse them.

Today’s so-called ‘investors’ put to shame both the definition and the profession; I’ve called them grifters before, and we could go with gamblers, but that’s not really it: they’re sucking central bank’s udders. WHatever we would settle on, investors they’re not.

• The stimulus measures, QE, were never designed to induce economic recovery. They were meant to transfer private losses to public purses. In that, they have been wildly successful.

• China is the end of the line. It was the only economy left that until recently could boast actual growth on a scale that mattered to the global economy. Growth stopped when China, too, introduced stimulus measures. To the tune of some $25 trillion or more, no less.

The perhaps most pivotal importance of China is that it was the world’s latest financial hope. The yuan devaluation shatters that hope once and for all. The global economy looks a lot more bleak for it, even if many people already didn’t believe official growth numbers anymore.

Because we’ve reached the end of the line, the game changes. Of course there will be additional attempts at stimulus, but China’s central bank has de facto conceded that its measures have failed. The yuan devaluations, three days in a row now, mean the central People’s Bank of China has, openly though reluctantly, acknowledged its QE has failed, and quite dramatically at that. They just hope you won’t notice, and try to bring it on with a positive spin.

Central banks are not “beginning” to lose control, they lost control a long time ago. The age of central bank omnipotence has “left and gone away” like Joltin’ Joe. Omnipotence has been replaced by impotence.

This admission will reverberate across the globe. China is simply that big. It may take a while longer for other central bankers to admit to their own failures (though ‘failures’, in view of the wealth transfer, is a relative term here), but it won’t really matter much. One is enough.

What will happen from here on in will be decided by how, where and in what amounts deleveraging will take place. This will of necessity be a chaotic process.

Debt deleveraging leads to, or can even be seen as equal to, debt deflation. This is a process that has already started in various places and parts of economies (real estate), but was kept at bay by QE programs. It will now accelerate to wash over our societies like a biblical plague.

The Automatic Earth started warning about this upcoming deflation wave many years ago. I am wondering if I should rerun some of the articles we posted over the past 8 years or so. I might just do that soon.

It is fine for people to say that since it hasn’t happened yet, we were wrong about this, but for us it was never, and is not now, about timing. If you think like an investor -or at least you think you do- timing may seem to be the most important thing in the world. But that’s just another narrow point of view.

When deflation takes its inevitable place center stage, it will wipe away so much wealth, be it real or virtual or plain zombie, that the timing issue will be irrelevant even retroactively. Whether the total sum of global QE measures is $22 trillion or $42 trillion, its deflation-driven demise will wipe out individuals, companies and nations alike at such a pace, people will wonder why they ever bothered with trying to get the timing right.

This may be hard to understand in today’s world where so many eyes are still focused on central banks and asset- and equity markets, on commodities and precious metals, on housing markets. In that regard, again, it is important to note that there have been no functioning markets for many years. Those eyes are focused on something that merely poses as a market.

For us this was clear years ago. It was never about the timing, it was always about the inevitability. Back in the day there were still lots of voices clamoring for – near-term or imminent – hyperinflation. Not so much now. We always left open the hyperinflation option, but far into the future, only after deflation was done wreaking its havoc. A havoc that will be so devastating you’ll feel silly for ever even thinking about hyperinflation.

Deflation will obliterate our economies as we know them. Imagine an economy for instance where next to no-one sells cars, or houses, or college educations, simply because next to no-one can afford any of it.

Where everything that today is bought on credit will no longer be bought, because the credit will be gone. Where homes are not worth more than the cardboard they’re made of, and still don’t sell.

Where ships won’t sail because letters of credit won’t be issued, where stores won’t open in the morning because they can’t afford their inventory even if it arrives in a nearby port.

As for today’s reality, the Chinese leadership has been eclipsed by its own ignorance about economic systems, the limits of their control over them, and the overall hubris they live in on a daily basis. These people were educated in the 1960s and 70s China of Mao and Deng Xiaoping. In the same air of omnipotence that today betrays all central bankers. Why try to understand the world if you’re the one who shapes it?!

It was obvious this moment would arrive in Beijing as soon as the one millionth empty apartment was counted. There are some 60 million ’empties’ now, a number equal to half the total US housing contingent.

Beijing then heavily promoted the stock market for its citizens, as a way to hide the real estate slump. All the while, it kept the dollar peg going. And now all this is gone. And all that’s left is devaluation. As Bill Pesek put it: “China Adds a Chainsaw to Its Juggling Act”.

Ostensibly to improve the country’s trade position, for lack of a better word. Whether that will work is a huge question. For one thing, the potential increase in capital flight may turn out to be a bigger problem than the devaluation is a solution.

Moreover, one of the main reasons to devalue one’s currency is the idea that then people will start buying your stuff again. But in today’s deflationary predicament, one of the main failures of mainstream economics pops up its ugly head: the refusal to see that many people have little or nothing left to spend.

This as opposed to economists’ theories that people must be sitting on huge savings whenever they don’t spend “what they should”. Ignoring the importance of personal debt levels plays a major part in this. Any which way you define it, the result is a drag on the velocity of money in either a particular economy, or, as we are increasingly witnessing, a major spending slowdown in the entire global economy.

Seen in that light, what good could a 1.9% devaluation (or even a, what is it, super-cubed 5% one, now?!) possibly do when China producer prices fell for the 40th straight month, exports were down 8.3% in July, and cars sell at 30% discounts? Those numbers indicate a fast and furious reduction in spending.

Which in turn lowers the velocity of money in an economy. If money doesn’t move, an economy can’t keep going. If money velocity slows down considerably, so does the entire economy, its GDP, job creation, everything.

This of course is the moment to, once again, point out that we at the Automatic Earth define deflation differently from most. Inflation/deflation is not rising/falling prices, but money and credit supply relative to available good and services, and that, multiplied by the velocity of money.

When this whole debate took off, even before Lehman, there were only a few people I can remember who emphasized the role of deflation the way we did: Steve Keen, Mike Mish Shedlock and Bob Prechter.

And Mish doesn’t even seem think the velocity of money is a big factor, if only because it is hard to quantify. We do though. Steve is a good friend, he’s the very future of economics, and a much smarter man than I am, but still, last time I looked, stumbling over the inflation equals rising prices issue (note to self: bring that up next time we meet). Prechter gets it, but believes in abiotic oil, as Nicole just pointed out from across the other room.

So yeah, we’re sticking out our necks on this one, but after 8+ years of thinking about it, we’re more sure than ever that we must insist. Rising prices are not the same as inflation, and falling prices are but a lagging effect of deflation.

Spending stops when people are maxed out and dead broke. And then prices drop, because no-one can afford anything anymore.

We’ve had a great deal of inflation in the past decade or two, like in US housing. We still have some, for instance in global stock markets and Canada and Australia housing. But these things are nothing but small pockets, where spending persists for a while longer.

Problem is, those pockets pale in comparison to diving -consumer- spending in the US, China, Europe, Japan. Spending that wouldn’t even exist anymore if not for QE, ZIRP and cheap credit.

The yuan devaluation tells us the era of cheap credit is now over. The first major central bank in the world has conceded defeat and acknowledged the limits to its alleged omnipotence.

It always only took one. And then nothing would stand in the way of the biblical plague. It was never a question. Only the timing was. And the timing was always irrelevant.

Jul 102015
 
 July 10, 2015  Posted by at 7:58 am Finance Tagged with: , , , , ,  21 Responses »


Unknown Petersburg, Virginia. Group of Company B, U.S. Engineer Battalion 1864

I was going to write up on the uselessness of Angela Merkel, given that she said on this week that “giving in to Greece could ‘blow apart’ the euro”, and it’s the 180º other way around; it’s the consistent refusal to allow any leniency towards the Greeks that is blowing the currency union to smithereens.

Merkel’s been such an abject failure, the fullblown lack of leadership, the addiction to her right wing backbenchers, no opinion that seems to be remotely her own. But I don’t think the topic by itself makes much sense anymore for an article. It’s high time to take a step back and oversee the entire failing euro and EU system.

Greece is stuck in Germany’s own internal squabbles, and that more than anything illustrates how broken the system is. It was never supposed to be like that. No European leader in their right mind would ever have signed up for that.

Reading up on daily events, and perhaps on the verge of an actual Greece deal, increasingly I’m thinking this has got to stop, guys, there is no basis for this. It makes no sense and it is no use. The mold is broken. The EU as a concept, as a model, has failed and is already a thing of the past.

It’s over. And anything that’s done from here on in will only serve to make things worse. We should learn to recognize such transitions, and act on them. Instead of clinging on to what we think might have been long after it no longer is.

Whatever anyone does now, it’ll all come back again. That’s guaranteed. So just don’t do it. Or rather, do the one thing that still makes any sense: Call a halt to the whole charade.

As for Greece: Just stop playing the game. It’s the only way for you not to lose it.

There’s no reason why European countries couldn’t live together, work together, but the EU structure makes it impossible for them to do just that, to do the very thing it was supposed to be designed for.

Germany runs insane surpluses with the rest of the EU, and it sees that as a sign of how great a country it is. But in the present structure, if one country runs such surpluses, others will need to run equally insane deficits.

Cue Greece. And Italy, Spain et al. William Hague for once was right about something when he said this week that the euro could only possibly have ended up as a burning building with no exits. This is going to lead to war.

Simple as that. It may take a while, and the present ‘leadership’ may be gone by then, but it will. Unless more people wake up than just the OXI voters here in Greece.

And the only reason for it to happen is if the present flock of petty little minds in Berlin, Paris, London and Brussels try to make it last as long as they can, and call for even more integration and centralization and all that stuff. The leaders are useless, the structure is painfully faulty, and the outcome is fully predictable.

Europe has no leadership, it has a varied but eerily similar bunch of people who crave the power they’ve been given, but lack the moral sturctures to deal with that power. Sociopaths. That’s what Brussels selects for.

And Brussels is by no means the only place in Europe that does that. What about people like Schäuble and Dijsselbloem, who see the misery in Greece and loudly bang the drum for more misery? What does that say about a man? And what does it say about the structure that allows them to do it? At times I feel like the Grapes of Wrath is being replayed here.

It’s nice and all to claim you’re right about something, but if your being right produces utter misery for millions of others, you’re still wrong.

Greece is not an abstract exercise in some textbook, and it’s not a computer game either. Greece is about real people getting hurt. And if you refuse to act to alleviate that hurt, that defines you as a sociopath.

Germany now, and it took ‘only’ 5 months, says Greece needs debt relief but it also says, through Schäuble: “There cannot be a haircut because it would infringe the system of the European Union.” That’s exactly my point. That’s silly. And looking around me here in Athens for the past few weeks, it’s criminally silly. You acknowledge what needs to be done, and at the same time you acknowledge the system doesn’t allow for what needs to be done. Time to change that system then. Or blow it up.

I don’t care what people like Merkel and Schäuble think or say, once people in a union go hungry and have no healthcare, you have to change the system, not hammer it down their throats even more. If you refuse to stand together, you can be sure you’ll fall apart.

Get a life. Greece should just default on the whole thing, and let Merkel and Hollande figure out the alleged Greek debt with their own domestic banking sectors. They’re the ones who received all the money that Greece is now trying to figure out a payback schedule for.

Problem with that is of course that very banking sector. They call the shots. The vested interests have far too much power on all levels. That’s the crux. But that’s also the purpose for which a shoddy construct like the EU exists in the first place. The more centralized politics are, the easier the whole thing is to manipulate and control. The more loopholes and cracks in the system, the more power there is for vested interests.

Steve Keen just sent a link to an article at Australia’s MacroBusiness, that goes through the entire list of new proposals from the Syriza government, and ends like this:

Tsipras Has Just Destroyed Greece

This is basically the same proposal as that was just rejected by the Greek people in the referendum. There are some headlines floating around about proposed debt restructuring as well but I can’t find them. This makes absolutely no sense. The Tsipras Government has just:
• renegotiated itself into the same position it was in two months ago;
• set massively false expectations with the Greek public;
• destroyed the Greek banking system, and
• destroyed what was left of Greek political capital in EU.

If this deal gets through the Greek Parliament, and it could given everyone other than the ruling party and Golden Dawn are in favour of austerity, then Greece has just destroyed itself to no purpose. Markets are drawing comfort from the roll over but how Tsipras can return home without being lynched by a mob is beyond me. And that raises the prospect of any deal being held immediately hostage to violence.

Yes, it’s still entirely possible that Tsipras submitted this last set of proposals knowing full well they won’t be accepted. But he’s already gone way too far in his concessions. This is an exercise in futility.

It’s time to acknowledge this is a road to nowhere. From where I’m sitting, Yanis Varoufakis has been the sole sane voice in this whole 5 month long B-movie. I think Yanis also conceded that it was no use trying to negotiate anything with the troika, and that that’s to a large extent why he left.

Yanis will be badly, badly needed for Greece going forward. They need someone to figure out where to go from here.

Just like Europe needs someone to figure out how to deconstruct Brussels without the use of heavy explosives. Because there are just two options here: either the EU will -more or less- peacefully fall apart, or it will violently blow apart.

Jun 282015
 
 June 28, 2015  Posted by at 11:42 am Finance Tagged with: , , , , , , , ,  6 Responses »


Harris&Ewing Goat team, Washington, DC 1917

A Perfect Storm Of Crises Blows Apart European Unity (Guardian)
The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)
The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)
Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)
Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)
Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)
Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)
Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)
Europe’s Moment of Truth (Paul Krugman)
Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)
Greece Referendum: Why Tsipras Made the Right Move (Fotaki)
IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)
Austrians Launch Petition To Quit EU (RT)
The Government Must Run Deficits, Even In Good Times (Ari)
Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)

Because it has no morals.

A Perfect Storm Of Crises Blows Apart European Unity (Guardian)

The time was shortly after 3am when David Cameron descended from level 80 of the vast Justus Lipsius building in Brussels on Friday. The birds were singing as he was whisked away for a much-curtailed sleep at the British ambassador’s residence, five minutes up the road. The prime minister is no novice when it comes to long and tedious discussions at European summits. But what he had just witnessed over a seemingly never-ending dinner with the other 27 EU leaders was something different altogether. The immediate crisis under discussion was migration and what the EU should do to handle the many thousands who have crossed the Mediterranean from Africa and the Middle East and arrived via Italy and the western Balkans over recent months.

Increasingly, Europe is a magnet for those seeking a better life. But the EU does not know how to react and the problems are spreading. Last week a strike by French workers at Calais caused huge tailbacks on motorways leading to both the ferry port and Channel tunnel as hundreds of migrants – mainly from east Africa, the Middle East and Afghanistan – tried to take advantage of queueing traffic by breaking into lorries bound for the UK. Against this background, a supposedly cordial working dinner, held high in the Council of Ministers building, rapidly descended into personal insults and finger-jabbing – which an exhausted-looking Cameron later summed up as “lengthy and, at times, heated discussions”.

Matteo Renzi, the Italian prime minister, was incensed by the refusal of several countries, including Hungary, which has taken in 60,000 refugees since the beginning of the year, and the Czech Republic, to agree to take part in a compulsory refugee-sharing scheme to help ease Italy’s burden. Cameron kept fairly quiet. The UK has opted out of EU asylum policy and Renzi, who was in an emotional state, did not need to be reminded of its non-participation. But others took up the cudgels as the row intensified across the table. Dalia Grybauskaite, the Lithuanian president, told Renzi in no uncertain terms that her country would not take part either. Bulgaria, one of the EU’s poorest countries, took a similar line. Disputes flared. European commission president Jean-Claude Juncker, prime mover behind the idea of compulsory burden sharing, and council president Donald Tusk tore strips off each other over what should be done, as inter-institutional solidarity broke down.

Read more …

They don’t seem to realize that though.

The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)

Greece is on the brink. Even if a last-minute deal is found it is clear that the solutions proposed are little more than a way to delay the crisis. A more comprehensive resolution of the Greek tragedy needs to address the medium-term (non-)sustainability of the Greek debt position. Economists know that negotiations usually break down when there is uncertainty in bargaining. When the two sides are uncertain as to what gains and losses the other side can make through any deal or by walking away. In this case, part of the uncertainty is political, because the Greek and other EU governments don’t fully know what might be acceptable to their electorates. But a good part of the uncertainty at this bargaining table is economic. Because we are in totally uncharted waters.

Monetary unions can be, and have been, dissolved before in history but, except in the aftermath of wars, not usually in anger. There are several sources of uncertainty for both sides in the dispute. First, if Greece leaves the Eurozone, at one level it will have greater freedom to walk away from at least some its debt, or to restructure it in a way which suits its short-term economic need. It could plan a moderate primary surplus. The problem for the Greek government is that it will inherit a broken banking system and there will be great uncertainty on whether a devaluing new Drachma could benefit its net trade position, with an impaired financial system, and shut out from world capital markets. Greece is not Iceland, and there is less social consensus on how to share the short-run burden of economic adjustment in a Grexit scenario.

Second, the losses for the EU lenders are truly eye-watering. The two bail-out packages for Greece amount to €215.8 billion. Of these €183.8 billion came from other EU countries and the rest from the IMF. The biggest shares of the support through the European Financial Stability Facility came from Germany and France. None of this includes the cost of support given to the Greek banking system via the ECB. The IMF would suffer considerable losses too (the UK’s main exposure is through this channel). The impact of Grexit and a partial or full debt repudiation on the rest of the EU would be considerable. Paradoxically by triggering a Grexit rather than an orderly debt restructure, the EU lenders may lose more of their current bail-out. So why are they not more accommodating? Because if it stays in, Greece will need a further bail-out, as no-one believes the current plan is sustainable. It’s that uncertainty again.

Read more …

Dead on. 1- 2 = -1.

The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)

Many times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen. Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize. When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:

Make the math workable. In the US the 4 principle “solutions” to make the math workable were to:
1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.
2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.
3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.
4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.

ZIRP’s true purpose is actually much more sinister: To make global debt serviceable. To make the math work without a default. Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default. Which brings us to Greece the butterfly, the truth and indeed the future: Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work. It never has and it never will until there is a default on at least some of the debt. And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.

Read more …

“The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt.”

Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)

Colleagues, In our last meeting (25th June) the institutions tabled their final offer to the Greek authorities, in response to our proposal for a Staff Level Agreement (SLA) as tabled on 22nd June (and signed by Prime Minister Tsipras). After long, careful examination, our government decided that, unfortunately, the institutions’ proposal could not be accepted. In view of how close we have come to the 30th June deadline, the date when the current loan agreement expires, this impasse of grave concern to us all and its causes must be thoroughly examined.

We rejected the institutions’ 25th June proposals because of a variety of powerful reasons. The first reason is the combination of austerity and social injustice they would impose upon a population devastated already by… austerity and social injustice. Even our own SLA proposal (22nd June) is austerian, in a bid to placate the institutions and thus come closer to an agreement. Only our SLA attempted to shift the burden of this renewed austerian onslaught to those more able to afford it – e.g. by concentrating on increasing employer contributions to pension funds rather than on reducing the lowest of pensions. Nonetheless, even our SLA contains many parts that Greek society rejects.

So, having pushed us hard to accept substantial new austerity, in the form of absurdly large primary surpluses (3.5% of GDP over the medium term, albeit somewhat lower than the unfathomable number agreed to by previous Greek governments – i.e. 4.5%), we ended up having to make recessionary trade-offs between, on the one hand, higher taxes/charges in an economy where those who pay their dues pay through the nose and, on the other, reductions in pensions/benefits in a society already devastated by massive cuts in basic income support for the multiplying needy.

Let me say colleagues what we had already conveyed to the institutions on 22nd June, as we were tabling our own proposals: Even this SLA, the one we were proposing, would be extremely onerous to pass through Parliament, given the level of recessionary measures and austerity it entailed. Unfortunately, the institutions’ response was to insist on even more recessionary (aka parametric) measures (e.g. increasing VAT on hotels from 6% to 23%!) and, worse still, on shifting the burden massively from business to the weakest members of society (e.g. to reduce the lowest of pensions, to remove support for farmers, to postpone ad infinitum legislation that offers some protection to badly exploited workers).

Read more …

There’s more than one candidate.

Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)

In the end, they kicked the can a little further down the road. After keeping the markets on a cliff-hanger for the last week, wondering whether the Greeks might end up getting kicked out of the eurozone, a deal of some sort looks likely. It won’t fix Greece, and it won’t fix the euro either. But it will patch the whole system up until Christmas — and that will buy everyone some time to concentrate on something else. And yet, in reality, the real crisis may not be in the east of the eurozone, but right over in the west. Portugal is the ticking time-bomb waiting to explode. Why? Because the country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well.

The elections later this year may well trigger the second Portuguese crisis — and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the world’s attention. All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable. Back in 2011 and 2012, when the euro crisis first flared up, three countries went bust. Of those, Greece is still in intensive care, and looks likely to remain so for the foreseeable future — the Greeks look willing to do just enough to stay in the eurozone, while the rest of Europe is willing to offer it just enough money to stay afloat while making it impossible to grow (it is a reverse Goldilocks — probably the worst of all possible solutions).

Ireland, which was always the strongest of the three bankrupt nations, is now growing again at a reasonable rate, helped along by the robust recovery in the U.K., which is still its main export market. And then there is Portugal — which is not in Greek-style permanent crisis, and yet does not seem capable of a sustainable recovery. On the surface, Portugal looks in much better shape than it did three years ago. It has exited the bailout scheme, leaving the program in May last year, after hitting European Central Bank and International Monetary Fund targets. The economy is starting to expand again. GDPt rose by 0.4% in the latest quarter, extending the run to a whole year of expansion, taking the annual growth rate up to 1.5%. It is forecast to expand by another 1.6% this year.

If Portugal can indeed recover, that would be a big win for the EU and IMF. Their catastrophic mix of internal devaluation and austerity looks to have been a complete failure in Greece, but if they can make it work in both Ireland and Portugal, the reputation of both institutions could be salvaged.

Read more …

Don’t think the ECB is smart enough to oversee the fall-out.

Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)

[..] if this is correct, Goldman essentially says that it is in the ECB’s, and Europe’s, best interest to have a Greek default – and with limited contagion at that – one which finally does impact the EUR lower, and resumes the “benign” glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14. Needless to say, that is a “conspiracy theory” that could make even the biggest “tin foil” blogs blush. A different way of saying what Goldman just hinted at: “Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE).” Or, in the parlance of Rahm Emanuel’s times, “Let no Greek default crisis go to QE wastel.” Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30% across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2).

In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten% (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking – it tells the truth! “As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled.” Bingo – because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts..

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It’s stunning to see that when confronted with basic democracy, the press has no idea what to say or do.

Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)

Economists with PhDs and hedge-fund traders can barely stay on top of the vagaries of Greece’s spiraling debt crisis. Now, try getting grandma to vote on it. That’s what Prime Minister Alexis Tsipras is doing by calling a snap referendum for July 5 on the latest bailout package from creditors. The 68-word ballot question namechecks four international institutions and asks voters for their opinion on two highly technical documents that weren’t made public before the referendum call and were only translated into Greek on Saturday.
Worse, they may no longer be on the table. International Monetary Fund chief Christine Lagarde told the BBC late on Saturday that “legally speaking, the referendum will relate to proposals and arrangements which are no longer valid.”

Tsipras’s decision means everyone from fishermen to taxi-drivers and factory workers will have to form an opinion on the package, with their country’s economic future hanging in the balance. A rejection of the bailout terms could lead to an exit from the euro area and economic calamity; accepting them would probably keep Greece in the euro, but with more austerity. “Usually in democracies, it’s the technocrats and the politicians who take care of the details, while voters are asked about broader issues and principles,” said Philip Shaw, the chief economist in London at asset manager Investec. “This is a transfer of responsibility from parliament to the voters.”

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The numbers stopped making sense long ago. Quit looking at the numbers.

Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)

All the heated negotiations and analysis around a bailout for Greece seem oblivious to the key problems of any settlement. Since February’s “deal,” the parties have inched close to an agreement in a prolonged battle of alternative drafts (some incorrect; other misdirected). It remains highly uncertain whether agreement can be reached. The creditors insist this is their “last and best” offer. The Greeks bluster about democracy and blackmail. Now, the Greek government has called a snap referendum on the new proposals. In its current form, the terms will represent a few concessions by the creditors, but almost total capitulation by the Greek government. Consider:

First, the agreement is likely to cover five months, necessitating a more comprehensive further program, which will inevitably require creditors to provide new financing to Greece (in effect a third bailout) if default is to be avoided. Second, the focus originally has been on the release of €7.2 billion from the existing second bailout program. If the amounts that Greece has run down from reserves, pensions and also its account at the IMF are replaced, then there is little additional new funding to Greece. It seems the European have found a little more money, by shuffling funds, whereby the amount would be a more “generous” 17 or so billion euro. But it is far from clear what Greece needs in any case.

Third, the issue of debt repayments or relief is not addressed, other than in vague terms. Greece has commitments of around 5-10 billion euro each year plus the continuing need to roll over around €15 billion in short-term Treasury bills. Greece may not have the ability to meet these obligations on an ongoing basis. This does not take into account additional funding needs of the State that may arise from budget shortfalls or the need of Greek banks.

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Oh, c’mon, I feel so awkward agreeing with Krugman….

Europe’s Moment of Truth (Paul Krugman)

Until now, every warning about an imminent breakup of the euro has proved wrong. Governments, whatever they said during the election, give in to the demands of the troika; meanwhile, the ECB steps in to calm the markets. This process has held the currency together, but it has also perpetuated deeply destructive austerity — don’t let a few quarters of modest growth in some debtors obscure the immense cost of five years of mass unemployment. As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.

It seems to me that the troika — I think it’s time to stop the pretense that anything changed, and go back to the old name — expected, or at least hoped, that Greece would be a repeat of this story. Either Tsipras would do the usual thing, abandoning much of his coalition and probably being forced into alliance with the center-right, or the Syriza government would fall. And it might yet happen. But at least as of right now Tsipras seems unwilling to fall on his sword. Instead, faced with a troika ultimatum, he has scheduled a referendum on whether to accept. This is leading to much hand-wringing and declarations that he’s being irresponsible, but he is, in fact, doing the right thing, for two reasons.

First, if it wins the referendum, the Greek government will be empowered by democratic legitimacy, which still, I think, matters in Europe. (And if it doesn’t, we need to know that, too.) Second, until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way. If you ask me, it has been an act of monstrous folly on the part of the creditor governments and institutions to push it to this point. But they have, and I can’t at all blame Tsipras for turning to the voters, instead of turning on them.

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Getting ugly.

Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)

Evidence pointing to international espionage, a plot to murder former Greek Prime Minister Costas Karamanlis and a 2012 plan for Greece’s exit from the euro code-named the “Silver Drachma” are just some of the sensational findings unveiled in a report by Greek Anti-Corruption Investigator Dimitris Foukas, released on Friday and sent to the Justices’ Council for consideration. The report outlines the findings of three converging judicial investigations spanning several years, initiated after the notorious phone-tapping scandal in 2005 and revelations that the mobile phones of then Prime Minister Karamanlis and dozens of other prominent Greeks were under surveillance.

This investigation later merged with that of the “Pythias Plan’” – for the neutralization and even murder of Karamanlis – and allegations that Greek National Intelligence Service officers and former Minister Michalis Karchimakis had leaked classified state secrets and documents. Foukas cited evidence – including Wikileaks reports – supporting the existence of the Pythias Plan, which he said was designed to exert pressure on the Greek government to change its policy in crucial sectors, such as energy, arms procurements and public sector procurements. According to the report, the rapprochement between Greece and Russia provoked action by the United States to avert agreements for Russian pipelines, leading to the gradual abandonment of the plans by Athens and its commitment to the Trans-Adriatic Pipeline (TAP), as well as the cancellation of plans to acquire Russian military equipment.

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Word: “With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.”

Greece Referendum: Why Tsipras Made the Right Move (Fotaki)

Greece will hold a referendum on July 5 on whether the country should accept the bailout offer of international creditors. The government’s decision to reject what was on offer and call the referendum is ultimately an attempt to take charge of its domestic policy and reaffirm its credibility with voters. Although Greece is hard strapped for cash this is clearly a political decision with profound consequences for the future of the European Union. It is also the right one. This is not merely useful as a negotiating tactic for obtaining a better deal with its creditors, as many commentators might suggest. The coalition of the left, Syriza, had no choice but to oppose further measures that would lock its economy into a deflationary spiral, the trappings of which are destroying Greek society.

Elected with the mandate to end the savage austerity policies already imposed, Syriza could hardly accept the further cuts demanded. These include cuts in income support for pensioners below the poverty line and a VAT hike of up to 23% on food staples. Even more onerous was the demand that Greece should deliver a sustained primary budget surplus of 1% for 2016, gradually increasing to 3.5% in the following years when its economy has already been contracting for six years. By most counts the austerity policies imposed by Greece’s creditors in 2010 in exchange for the bailout money have been an abject economic and moral failure. The IMF itself has acknowledged “a notable failure” in managing the terms of the first Greek bailout, in setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed.

The former IMF negotiator, Reza Moghadam, has acknowledged the fund’s erroneous projections about Greek growth, inflation, fiscal effort and social cohesion. The debt is now almost 180% of Greece’s GDP, up from 120% when the bailout program began. And this is mainly due to the fact that GDP has contracted by 25%, rather than the significantly lower projections by the IMF. The shrinking of the economy and rising unemployment levels have exceeded those that hit the US in the financial crisis of the 1930s. The human and social costs have been even more staggering in Greece. Incomes have fallen by an average of 40%, and the unemployment rate reached 26% in 2014 (and higher than 50% for youth). With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.

Yet in the terms presented to Greece by their creditors there is no commitment to reducing Greece’s crippling debt (which all commentators acknowledge is unrepayable). Nor is there any tangible proposal for rebuilding the Greek economy. Germany, France, and the EU, aided by the IMF and ECB, continue to insist on implementing policies that have so manifestly failed Greece. They do so to avoid having to justify the massive bailouts of their own financial systems – shifting the burden from banks to taxpayers – if Greece fails to make the repayments. The leading EU partners must not be seen to act leniently towards Greece as this might encourage anti-austerity parties Spain and elsewhere.

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No, the IMF should be dismantled.

IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)

Whatever the eventual outcome of the Greek debt talks, there are a number of judgments can already be made; one is that a large part of the blame for this ever deepening debacle lies at the doors of the International Monetary Fund, which from the very beginning has had both its priorities and its analysis of the situation hopelessly wrong. The IMF is meant to fix these things; instead, it has conspired to turn what should have been a containable crisis into a total disaster. With its reputation in tatters and its credibility shot to bits, it is small wonder that China and others are seeking alternative, rival models of governance for the global financial system. If this were any normal organisation, the IMF’s managing director, Christine Lagarde, would be forced to resign and someone with less of a vested interest in propping up the folie de grandeur of EMU installed in her place.

Tharman Shanmugaratnam, deputy prime minister of Singapore – measured, clever, internationally respected and impressively free- market orientated in his approach to global affairs – would make an excellent choice, though even he, as a long-standing chairman of the IMF’s policy committee, is somewhat tainted. It may require a complete outsider. Crisis management is of course what the IMF is there for; and if in the thick of a crisis, you are almost bound to get flak. Has there ever been a crisis in the IMF’s 70-year history that was not said to have done irreparable damage to the organisation’s reputation? It’s hard to think of one. Whatever it does, the IMF always gets it in the neck. Take the Russian financial crisis of 1998. The $5bn the IMF lent to help the country over its difficulties was immediately stolen and spirited away into Swiss bank accounts.

Or the pre-millennial Asian crises, where the IMF was accused of imposing a degree of austerity on afflicted nations it would never dare advocate for any G7 economy. I could go on, but it would fill the rest of the newspaper. In any case, criticism comes with the territory, which is possibly why the IMF has always been so impervious to it, and also why it repeatedly fails to learn from its mistakes. By any standards, however, the IMF’s entanglement with the eurozone crisis is a whopper of a screw-up. Nor is it something in which the IMF should have got involved in the first place. Europe, one of the richest regions in the world, should have been left to sort out its own affairs. This is more particularly the case as the Greek debt crisis is almost entirely one of the eurozone’s own making.

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Shut off the light on your way out.

Austrians Launch Petition To Quit EU (RT)

Austrians have launched a petition to quit the EU, arguing that the nation will be better off economically if it leaves the union. To force the national parliament to consider the initiative activists need to have gathered 100,000 signatures by July 1. The petition was started by a retired 66-year-old translator, Inge Rauscher, who has collected enough signatures to launch an official campaign. The plea seeks to request that the national parliament debate the idea of a referendum on quitting the EU. However, to get that issue even discussed, the petition must gather 100,000 signatures. “We want to go back to a neutral and peace-loving Austria,” Rauscher said at the start of the campaign this week. Austrians have until July 1 to sign the petition which they can do in municipal or district offices.

Rauscher and her non-partisan Heimat & Umwelt committee (Homeland and Environment) argue that Austria will benefit from leaving the EU both economically and environmentally. She also criticized Austria’s forceful endorsement of EU sanctions against Russia, generally blaming Brussels for the economic downturn. “We are not any longer a sovereign state in the European Union. Over 80% of all essential legislation is being imposed by Brussels, not by elected commissioners. In our view, Europe is not a democracy. The European Parliament does not even have legislative powers,” Rauscher told Sputnik Radio.

An independent Austria, the committee believes, would gain an extra €9,800 per household per year, because the country will be freed from the burdens of EU bureaucracy. Recent polls show that only about one third of Austrians would be in favor of leaving the EU, according to the Local. The idea is championed by both the right-wing Freedom Party and the Euro-skeptic Team Stronach party. “This initiative is open for all political parties and we expect a broad support,” Rauscher said. “This is proved by our numerous conversations with the citizens over the past months.”

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Ari, interesting, but you kill your own argument by defining inflation as rising prices.

The Government Must Run Deficits, Even In Good Times (Ari)

It is my view that it is very important to keep things simple and this is what I will aim to do here. I will get down to the simplest identity and build from there using empirical data. I will draw conclusions which logically follow from the data and base assumptions. But despite the elementary nature of the idea, I still think that what it will show is very informative and the conclusion it leads to is one that the current government in the UK would be appalled to consider. Although the conclusion will be surprising to some people, I believe that every step of the logic shown here is undeniably true. I would be very interested if someone can show me a faulty link in the chain. The starting point is the basic identity here:

If GDP in one year is given by £A, then the total amount of money spent on domestic goods and services is £A.
If nominal GDP the next year grows by proportion n, then GDP in year two is given by £A*(1+n) and the total amount of money spent in year two is also £A*(1+n).
What it means is that, if, for example, growth is 2% and inflation is 2%, then a total of 4% more money MUST be spent in year two than was spent in year one.

The question I will mainly be answering in the rest of this post is ‘where does this money come from?’. I will not just try to answer this question in the abstract but to quantify the effect of different sources of money. When money is spent in an economy then it contributes to nominal GDP. Nominal GDP growth is the increase in A above. The economy can be simplified to how much money was spent and how much of that leads to real growth and how much to inflation. I will try to show, using empirical data, the source of funding for our economic growth and how this leads to the conclusion that we have a big problem now. I am trying to keep things simple so I will avoid using any long equations, but to see this idea broken down into greater detail, it can be seen in the model I develop here and give an example of here (where I explain that the next crash we will have could well be a painful one).

I am not too concerned with the supply side during this discussion; it is a different issue. For example, better infrastructure and training will increase future real growth by improving productivity. There are two sides to an economy and both are important. However all of this is irrelevant for this analysis because it is just looking at the importance of demand. Deficiencies in supply will be shown in inflation figures. The supply side can expand supply to fill a certain amount of the demand as demand grows. This is dependent upon the spare capacity in the economy. If many people are out of work, then it would be easier to fulfill an increase in demand than if there is full employment. This will show in the numbers. The higher the level of GDP, the higher proportion of the extra spending that will lead to inflation.

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Not sure about this…

Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)

She is one of the world’s most high-profile social activists and a ferocious critic of 21st-century capitalism. He is one of the pope’s most senior aides and a professor of climate change economics. But this week the secular radical will join forces with the Catholic cardinal in the latest move by Pope Francis to shift the debate on global warming. Naomi Klein and Cardinal Peter Turkson are to lead a high-level conference on the environment, bringing together churchmen, scientists and activists to debate climate change action. Klein, who campaigns for an overhaul of the global financial system to tackle climate change, told the Observer she was surprised but delighted to receive the invitation from Turkson’s office.

“The fact that they invited me indicates they’re not backing down from the fight. A lot of people have patted the pope on the head, but said he’s wrong on the economics. I think he’s right on the economics,” she said, referring to Pope Francis’s recent publication of an encyclical on the environment. Release of the document earlier this month thrust the pontiff to the centre of the global debate on climate change, as he berated politicians for creating a system that serves wealthy countries at the expense of the poorest. Activists and religious leaders will gather in Rome on Sunday, marching through the Eternal City before the Vatican welcomes campaigners to the conference, which will focus on the UN’s impending climate change summit.

Protesters have chosen the French embassy as their starting point – a Renaissance palace famed for its beautiful frescoes, but more significantly a symbol of the United Nations climate change conference, which will be hosted by Paris this December. Nearly 500 years since Galileo was found guilty of heresy, the Holy See is leading the rallying cry for the world to wake up and listen to scientists on climate change. Multi-faith leaders will walk alongside scientists and campaigners, hailing from organisations including Greenpeace and Oxfam Italy, marching to the Vatican to celebrate the pope’s tough stance on environmental issues. The imminent arrival of Klein within the Vatican walls has raised some eyebrows, but the involvement of lay people in church discussions is not without precedent.

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May 312015
 
 May 31, 2015  Posted by at 5:00 pm Finance Tagged with: , , ,  11 Responses »


Jack Delano Brockton, Mass., Enterprise newspaper office on Christmas Eve 1940

This is a letter From Greek PM Alexis Tsipras in today’s Le Monde. I have little to add, his eloquence needs few comments at this moment. One thing is certain: the negotiations will never be the same. And neither will Europe.

Straight from the Prime Minister’s offical website: :

Alexis Tsipras: On 25th of last January, the Greek people made a courageous decision. They dared to challenge the one-way street of the Memorandum’s tough austerity, and to seek a new agreement. A new agreement that will keep the country in the Euro, with a viable economic program, without the mistakes of the past. The Greek people paid a high price for these mistakes; over the past five years the unemployment rate climbed to 28% (60% for young people), average income decreased by 40%, while according to Eurostat’s data, Greece became the EU country with the highest index of social inequality.

And the worst result: Despite badly damaging the social fabric, this Program failed to invigorate the competitiveness of the Greek economy. Public debt soared from 124% to 180% of GDP, and despite the heavy sacrifices of the people, the Greek economy remains trapped in continuous uncertainty caused by unattainable fiscal balance targets that further the vicious cycle of austerity and recession. The new Greek government’s main goal during these last four months has been to put an end to this vicious cycle, an end to this uncertainty. Doing so requires a mutually beneficial agreement that will set realistic goals regarding surpluses, while also reinstating an agenda of growth and investment. A final solution to the Greek problem is now more mature and more necessary than ever.

Such an agreement will also spell the end of the European economic crisis that began 7 years ago, by putting an end to the cycle of uncertainty in the Eurozone. Today, Europe has the opportunity to make decisions that will trigger a rapid recovery of the Greek and European economy by ending Grexit scenarios, scenarios that prevent the long-term stabilization of the European economy and may, at any given time, weaken the confidence of both citizens and investors in our common currency. Many, however, claim that the Greek side is not cooperating to reach an agreement because it comes to the negotiations intransigent and without proposals. Is this really the case?

Because these times are critical, perhaps historic–not only for the future of Greece but also for the future of Europe–I would like to take this opportunity to present the truth, and to responsibly inform the world’s public opinion about the real intentions and positions of Greece. The Greek government, on the basis of the Eurogroup’s decision on February 20th, has submitted a broad package of reform proposals, with the intent to reach an agreement that will combine respect for the mandate of the Greek people with respect for the rules and decisions governing the Eurozone.

One of the key aspects of our proposals is the commitment to lower – and hence make feasible – primary surpluses for 2015 and 2016, and to allow for higher primary surpluses for the following years, as we expect a proportional increase in the growth rates of the Greek economy. Another equally fundamental aspect of our proposals is the commitment to increase public revenues through a redistribution of the burden from lower and middle classes to the higher ones that have effectively avoided paying their fair share to help tackle the crisis, since they were for all accounts protected by both the political elite and the Troika who turned “a blind eye”.

From the very start, our government has clearly demonstrated its intention and determination to address these matters by legislating a specific bill to deal with fraud caused by triangular transactions, and by intensifying customs and tax controls to reduce smuggling and tax evasion.= While, for the first time in years, we charged media owners for their outstanding debts owed to the Greek public sector. These actions are changing things in Greece, as evidenced the speeding up of work in the courts to administer justice in cases of substantial tax evasion. In other words, the oligarchs who were used to being protected by the political system now have many reasons to lose sleep.

In addition to these overarching goals that define our proposals, we have also offered highly detailed and specific plans during the course of our discussions with the institutions that have bridged the distance between our respective positions that separated us a few months ago. Specifically, the Greek side has accepted to implement a series of institutional reforms, such as strengthening the independence of the General Secretariat for Public Revenues and of the Hellenic Statistical Authority (ELSTAT), interventions to accelerate the administration of justice, as well as interventions in the product markets to eliminate distortions and privileges.

Also, despite our clear opposition to the privatization model promoted by the institutions that neither creates growth perspectives nor transfers funds to the real economy and the unsustainable debt, we accepted to move forward, with some minor modifications, on privatizations to prove our intention of taking steps towards approaching the other side. We also agreed to implement a major VAT reform by simplifying the system and reinforcing the redistributive dimension of the tax in order to achieve an increase in both collection and revenues.

We have submitted specific proposals concerning measures that will result in a further increase in revenues. These include a special contribution tax on very high profits, a tax on e-betting, the intensification of checks of bank account holders with large sums – tax evaders, measures for the collection of public sector arrears, a special luxury tax, and a tendering process for broadcasting and other licenses, which the Troika coincidentally forgot about for the past five years. These measures will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata.

Furthermore, we agreed to implement a major reform of the social security system that entails integrating pension funds and repealing provisions that wrongly allow for early retirement, which increases the real retirement age. These reforms will be put into place despite the fact that the losses endured by the pension funds, which have created the medium-term problem of their sustainability, are mainly due to political choices of both the previous Greek governments and especially the Troika, who share the responsibility for these losses: the pension funds’ reserves have been reduced by €25 billion through the PSI and from very high unemployment, which is almost exclusively due to the extreme austerity program that has been implemented in Greece since 2010.

Finally–and despite our commitment to the workforce to immediately restore European legitimacy to the labor market that has been fully dismantled during the last five years under the pretext of competitiveness–we have accepted to implement labor reforms after our consultation with the ILO, which has already expressed a positive opinion about the Greek government’s proposals. Given the above, it is only reasonable to wonder why there is such insistence by Institutional officials that Greece is not submitting proposals.

What end is served by this prolonged liquidity moratorium towards the Greek economy? Especially in light of the fact that Greece has shown that it wants to meet its external obligations, having paid more than 17 billion in interest and amortizations (about 10% of its GDP) since August 2014 without any external funding. And finally, what is the purpose of the coordinated leaks that claim that we are not close to an agreement that will put an end to the European and global economic and political uncertainty fueled by the Greek issue? The informal response that some are making is that we are not close to an agreement because the Greek side insists on its positions to restore collective bargaining and refuses to implement a further reduction of pensions.

Here, too, I must make some clarifications: Regarding the issue of collective bargaining, the position of the Greek side is that it is impossible for the legislation protecting employees in Greece to not meet European standards or, even worse, to flagrantly violate European labor legislation. What we are asking for is nothing more than what is common practice in all Eurozone countries. This is the reason why I recently made a joint declaration on the issue with President Juncker.

Concerning the issue on pensions, the position of the Greek government is completely substantiated and reasonable. In Greece, pensions have cumulatively declined from 20% to 48% during the Memorandum years; currently 44.5% of pensioners receive a pension under the fixed threshold of relative poverty while approximately 23.1% of pensioners, according to data from Eurostat, live in danger of poverty and social exclusion. It is therefore obvious that these numbers, which are the result of Memorandum policy, cannot be tolerated–not simply in Greece but in any civilized country.

So, let’s be clear: The lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance. It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people, despite the public admission of the three Institutions that necessary flexibility will be provided in order to respect the popular verdict.

What is driving this insistence? An initial thought would be that this insistence is due to the desire of some to not admit their mistakes and instead, to reaffirm their choices by ignoring their failures. Moreover, we must not forget the public admission made a few years ago by the IMF that they erred in calculating the depth of the recession that would be caused by the Memorandum. I consider this, however, to be a shallow approach. I simply cannot believe that the future of Europe depends on the stubbornness or the insistence of some individuals.

My conclusion, therefore, is that the issue of Greece does not only concern Greece; rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.

The first strategy aims to deepen European unification in the context of equality and solidarity between its people and citizens.
The proponents of this strategy begin with the assumption that it is not possible to demand that the new Greek government follows the course of the previous one – which, we must not forget, failed miserably. This assumption is the starting point, because otherwise, elections would need to be abolished in those countries that are in a Program. Namely, we would have to accept that the institutions should appoint the Ministers and Prime Ministers, and that citizens should be deprived of the right to vote until the completion of the Program.

In other words, this means the complete abolition of democracy in Europe, the end of every pretext of democracy, and the beginning of disintegration and of an unacceptable division of United Europe. This means the beginning of the creation of a technocratic monstrosity that will lead to a Europe entirely alien to its founding principles.

The second strategy seeks precisely this: The split and the division of the Eurozone, and consequently of the EU.
The first step to accomplishing this is to create a two-speed Eurozone where the “core” will set tough rules regarding austerity and adaptation and will appoint a “super” Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism. For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency.

Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim.
To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline. What is not being taken into account is the high amount of risk and the enormous dangers involved in this second strategy. This strategy not only risks the beginning of the end for the European unification project by shifting the Eurozone from a monetary union to an exchange rate zone, but it also triggers economic and political uncertainty, which is likely to entirely transform the economic and political balances throughout the West.

Europe, therefore, is at a crossroads. Following the serious concessions made by the Greek government, the decision is now not in the hands of the institutions, which in any case – with the exception of the European Commission- are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders. Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division?

If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.

Apr 262015
 
 April 26, 2015  Posted by at 2:43 am Finance Tagged with: , , , , , , , , ,  18 Responses »


DPC Clam seller in Mulberry Bend, NYC 1904

After the high-level EU summit on the migrant issue, hastily convened after close to a thousand people drowned last weekend off the Lybian coast, Dutch PM Mark Rutte was quoted by ‘his’ domestic press as saying ‘Our first priority is saving human lives’. That sounds commendable, and it also sounds just like what everybody knows everybody else wants to hear. One can be forgiven, therefore, for thinking that it’s somewhat unfortunate that the one person tasked by Brussels with executing the noble ‘saving lives’ strategy, doesn’t seem to entirely agree with Rutte:

EU Borders Chief Says Saving Migrants’ Lives ‘Shouldn’t Be Priority’ For Patrols

The head of the EU border agency has said that saving migrants’ lives in the Mediterranean should not be the priority for the maritime patrols he is in charge of, despite the clamour for a more humane response from Europe following the deaths of an estimated 800 people at sea at the weekend. On the eve of an emergency EU summit on the immigration crisis, Fabrice Leggeri, the head of Frontex, flatly dismissed turning the Triton border patrol mission off the coast of Italy into a search and rescue operation.

He also voiced strong doubts about new EU pledges to tackle human traffickers and their vessels in Libya. “Triton cannot be a search-and-rescue operation. I mean, in our operational plan, we cannot have provisions for proactive search-and-rescue action. This is not in Frontex’s mandate, and this is in my understanding not in the mandate of the European Union,” Leggeri told the Guardian.

To refresh your memory, the Triton border patrol mission took the place late last year of Italy’s Mare Nostrum mission, which ended in October 2014. For good measure, the budget was slashed from the €9.5 million per month Italy had been putting in, to €2.9 million per month. Saving lives can be simply too expensive when you think about it in your high rise office in that brand new €1 billion+ EU building. These are hard economic times, and we all need to make sacrifices and to cut costs wherever we can.

But of course after that summit, Europe announced it was going to triple the budget for the Triton mission. That will of course only simply bring back the budget to where it already was before it was cut by two-thirds, but it’s a nice headline anyway.

The difference in focus between Rutte and Frontex head Leggeri can be found all around Europe. It would be nonsense to claim Europe agrees on much of anything regarding the refugee issue. Well, they agree it’s a nuisance that all these people die and Europe is supposed to do something. The national government leaders would like it much better if such things didn’t happen, it’s bad publicity. But at the same time, it’s nothing that can’t be spun and turned to their advantage. Or so they like to think.

Reactions to the statements released after the summit were not all positive, to say the least. Amnesty said that the only thing Europe tries to save is its face. Former Belgian PM Guy Verhofstadt, at present a member of the European Parliament, indicated that the equipment Frontex has at its disposal (one helicopter, two ships and seven planes) wouldn’t even be enough to survey the Belgian coast (of which there’s not a lot).

Just to make sure his peers wouldn’t think he’d gone all soft, Rutte came with another catchy oneliner: “Last time I checked, Lybia was in Africa, not Europe.” In other words, ‘saving lives’ is a great press quote, but don’t blame him for lives lost. And that’s the crux behind the shift from Italy’s mission to the EU’s. The former was patrolling off the coast of Lybia, while the latter occupies itself only with the European coastline, and it just so happens that’s not where refugees’ lives are under threat (let’s stop saying migrants, that’s a grossly misleading term).

In its infinite wisdom, the EU has decided in its summit that there will be 5000 ‘resettlement’ places available for the hundreds of thousands of refugees (migrants) that want to go to Europe. The EU in a post-summit statement said it expects 150,000 refugees this year, but it might as well add up to 500,000 in 2015 alone. How Brussels thinks it’s going to send back almost half a million people is a big question mark. So much so we’d put our money on no-one having properly thought it over.

According to the United Nations High Commissioner for Refugees, millions of refugees are making their way to the Mediterranean from trouble spots across Africa. To put it in somewhat cynical economic terms, think of this as pent-up demand. And also don’t forget how Patrick Boyle framed it: “We fear the arrival of immigrants that we have drawn here with the wealth we stole from them.”

The typical story of the refugees is one in which it takes years to get from their mostly sub-Saharan homes to the Lybian coast, working odd jobs on the way. Once they get to Lybia, which has been shot to bits by western forces, they’re dependent on all sorts of militia, who often arrest them, take their money etc. Perhaps the most insulting thing to come out of Brussels is the comparison with Somali pirates, and the argument that the refugee stream should be dealt with in the same way.

Indeed, much of the European ‘leadership’ have emphasized one approach more than any other: send in the military, start shooting. The idea being that if the boats of the traffickers are destroyed, everything will return to ‘normal’. But the issue here is not the traffickers, it’s the refugees. Want to send in the military against them too?

If there’s anything good that can come from the deeply deplorable death of far too many poor sods in the Meditteranean, it’s that it shows us all once more, as if we needed further confirmation, what a dysfunctional entity – morally as well as practically – the European Union is. More than anything, the EU makes itself entirely irrelevant. There is no decision structure in Brussels, since there is no ultimate responsibility that has been assigned. And they all sort of like it that way for now, because it means everyone can deflect that responsibility if and when necessary.

From the first example above that should be very clear: Rutte says the first priority should be saving lives, but the man who leads the organization that is tasked with executing it, flatly denies that.

Greek news organization Kathimerini ran a piece this week that serves to add yet another level of cold cynicism. Lest we forget, it’s Europe’s poorest countries that are forced to deal with the brunt of the refugee problem. In that summit we mentioned before, half of all European nations refused to take up even one single refugee. Yet another example of the absolute lack of coherence and solidarity that so-called union exhibits.

The idea seems to be: Let ’em all stay in Greece, while we suffocate the nation financially. But Greece cannot solve the issue all by itself, it can’t handle the expected 100,000 refugees on its own. It will be forced to open its borders and tell the refugees to try and reach Germany or France. See also: Open Letter From Greece on the Mediterranean Migrants Issue.

The present EU policy is that a refugee must stay in the country where (s)he has been registered. Hence, all Greece and Italy need to do is not register them. Kathimerini:

The Dubious Politics Of Fortress Europe

In “Border Merchants: Europe’s New Architecture of Surveillance” (published by Potamos), Apostolis Fotiadis, an Athens-based freelance investigative journalist, seeks to document a paradigm shift in Europe’s immigration policy away from search and rescue operations to all-out deterrence. The switch, the 36-year-old author argues, plays into the hands of the continent’s defense industry and is being facilitated by the not-so-transparent Brussels officialdom. “Their solution to the immigration problem is that of constant management because this increases their ability to exploit it as a market. The defense industry would much rather see the protracted management of the problem than a final solution,” Fotiadis said in a recent interview with Kathimerini English Edition.

“Without a crisis there would be no need for emergency measures, no need for states to upgrade their surveillance and security systems,” he said. Fotiadis claims the trend is facilitated by the revolving door between defense industry executives and the Brussels institutions, which means that conflict of interests is built right into EU policy. “There is a certain habitat in which many people represent the institutions and at the same time express a philosophy about the common good,” he said. [..]

Fotiadis believes there is no reason Greece should not be able to set up some basic infrastructure to deal with the influx. He says that the number of immigrants and refugees received by the EU is in fact small compared to the more than 1.5 million refugees who have found shelter in Turkey due to civil war in Syria. Jordan is estimated to be home to over 1 million Syrian refugees, while one in every four people in Lebanon is a refugee. Meanwhile, the EU, one of the wealthiest regions of the world, with a combined population of over 500 million, last year took in less than 280,000 people. “All that hysteria is a knee-jerk overreaction to an illusory version of reality,” he said.

Why Greece or any other country would wish, be eager even, to be part of the EU is becoming ever harder to comprehend. The moral values prevalent in Brussels, whether it comes to EU policies regarding Ukraine, Greece or the refugees’ dilemma, don’t seem to be shared in any individual European nation (if anything, they’re reminiscent of what various extreme right wing parties espouse).

And as the Greek negotiations with the eurogroup and the ‘institutions’ show us with intense and increasing clarity, the notion of the euro being a boat to lift all tides turns out to be full-on bogus. Southern Europe’s nations will be either thrown out or allowed to stay only as debt servants. For now, Germany and Holland prefer to keep everyone on board, but that may still change. It would therefore seem like a good idea for Greece and Italy to make their moves while they can.

In order to achieve that, however, they must convince their people that staying in the EU, and in the eurozone, is a bad choice. And since their old-time political establishments will continue to deny this (because the EU allowed them to sit fat and pretty), that will not be an easy task. Perhaps the refugee issue can help.

In all likelihood, the victims of the sunken boat near the Lybian coast this weekend will never be identified, except for perhaps a handful. Nobody knows who they are, and those who do stayed behind a thousand miles or more away. These deceased people, most of whom will never even be buried ashore, define, in one fell swoop, the ‘new’ price of a human life. Theirs, yours, and everyone else’s.

Sinking nameless to the bottom of the sea, with no-one either ever knowing who you are or aware of how you are doing. That is our new valuation of a human being. It’s price discovery in its most cynical sense, it’s how assets get re-priced in markets.

What Tsipras and Varoufakis must accomplish is to make people understand that what Europe does to the refugees, it will do to its own citizens too.

Mar 082015
 
 March 8, 2015  Posted by at 2:32 am Finance Tagged with: , , , , , , , ,  22 Responses »


Christopher Helin Kissel military Highway Scout Kar at Multnomah Falls, Oregon 1918

The European Union is busy accomplishing something truly extraordinary: it is fast becoming such a spectacular failure that people don’t even recognize it as one. People have no idea, they just think: this can’t possibly be true, and they continue with their day. They should think again. Because the Grand European Failure is bound to lead to real life consequences soon, and they’ll be devastating. The union that was supposed to put an end to all fighting across the continent, is about to be the fuse that sets off a range of battles.

To its east, the EU is involved in a braindead attempt at further expansion – it has only one idea when it comes to size: bigger is always better -, an attempt that is proving to be such a disaster that heads will roll in the Brussels corridors no matter what. Europe has joined the US and NATO very enthusiastically in creating not just a failed state, but a veritable imitation of Hiroshima, in Ukraine, right on its own borders. The consequences of this will haunt the EU (or if it doesn’t last, which is highly plausible, its former members) not just for weeks or months or years, but for many decades.

The carefully re-crafted relationship with Russia, which took 25 years to build, was destroyed again in hardly over a year, something for which Angela Merkel deserves so much blame it may well end up being her main political legacy. Vladimir Putin, and Russia as a nation, will not easily forget the humiliation the west has thrown at them, the accusations, the innuendo, the attempts to draw them into a war they never wanted and in which they see no advantage for any party involved.

That US warmongers would try and set this up, is something Moscow has long known and expected; that Merkel would stand side by side with the likes of John McCain and Victoria Nuland is seen as a deep if not ultimate betrayal between neighbors and friends. Russia will present Germany with the bill when it feels the time is right. Obviously, all other EU countries that have behaved in the insane ways they have over the past year will receive that same bill, or worse.

To be sure, this week we’ve seen the first protest voices from Germany regarding NATO’s vacuous attempts to draw Russia into the battlefields of Ukraine. But those voices are years too late. They can’t undo the damage already done. They may keep American weapons from reaching Kiev – and even that’s a big maybe -, but they can’t bring back either the lives of the victims, the Ukrainian economy or the trust lost between east and west.

To its south, the EU faces perhaps its most shameful -or should that be ‘shameless’? – problem, because it doesn’t do anything about it: the thousands of migrants who try to cross the Mediterranean to get to Europe but far too often perish in the process.

The Italians spend themselves poor, trying to save as many migrants as they can (170,000 last year!), and there are private citizens – Americans even – pouring in millions of dollars, but the EU itself has zero comprehensive policy as people keep dying on its doorstep all the time. The official line out of Brussels is that the EU polices only the European coastline, but the drownings mostly take place off the Lybian coast. At least Italy and others do sail there to alleviate the human misery.

And now the problem threatens to expand into a whole new and additional dimension, with Muslim extremists like ISIS set to travel alongside the migrants to gain entry into Europe with the aim of launching terror attacks. Having turned a blind eye to the issue for years, Europe will now find itself woefully unprepared for this new development. Still, expect more bluster and brute force where there was never any reason or need for it. That the EU’s MO today.

It’s not just in the south either that migrant problems are rampant: the Ukraine is a hotbed migrant route that Europe has lost control over for obvious reasons, and there have for example been thousands of African refugees camping out in the French port of Calais for what feels like forever, desperate to make it to Britain (I know, God knows why..).

To its west, the EU has Britain, which by the time it gets to vote on Europe may well have its belly so full of Brussels that no scare campaign helps anymore. Then Britain will make a sharp turn right, as many other countries will. Which is exclusively due to the EU, and to all the domestic politicians across the entire spectrum who are so blind to the failings of the Union that the only option voters have if they want out is to choose right extremism.

To its north, the EU doesn’t seem to have much to worry about right now, but don’t you worry: they’ll think of something. Count for instance on Brussels to join Denmark in its Arctic land claims, and offend Moscow some more while they’re at it.

But the biggest failure is not even in politics outside of its own territory. The union rots from within. Which starts with its moral bankruptcy, obviously. If you allow yourself to be an active accomplice in the death of over 6000 East Ukrainians, and you simply look away as thousands of migrants die in the seas off your shores, it should not be surprising that you just as easily allow for a humanitarian crisis, like the one in Greece, to develop within your own borders. It comes with the territory, so to speak.

And make no mistake: this absence of moral values is something Europe in its present form will never be able to claim back. Never. The EU has shown itself to be a gross moral failure, and that’s it: the experiment is over. They can’t come back in 10 or 20 years and say: now we want it back, we’re different now. You’d need to have a whole new union, new rules and principles, and new leadership.

It’s like the US, which once (post WW) had an enormous moral high ground in the world to walk on, and it’s completely gone. Nobody trusts anything America says anymore. America has lost its place in the world as guardian of freedom and democracy, and so has Europe. All they can do now to exert influence is to engage in political scheming and military sabre rattling. Everything else is gone.

What will undo Europe from within is its economic policies. Which are strongly linked to the same moral values issue: inside a union, you cannot let thousands of people go without food and health care while others, a few hundred miles away, drive new Mercs and Beamers over a brand new Autobahn. That’s not a union. That’s a feudal society. And those don’t hold.

In practical terms: Mario Draghi will launch ECB Q€ this month, and it will be as dismal a failure as the entire eurozone project. Because the ECB will need to drop interest rates into very negative territory to keep the ship afloat a little longer, and because Draghi won’t find the sovereign bonds he wants to buy, available in the market.

If Draghi acted in the interest of the entire eurozone and all its citizens, he’d be busy restructuring bank debt in Germany, France, Italy, Belgium, all over the eurozone, instead of playing these monopoly money games. But Draghi’s only pumping more ‘wealth’ into the broke banking system, €1.1 trillion more, to be specific.

Eventually, this refusal to restructure a a bankrupt system will bring bail-ins like the one playing out in Austria right now, closer, across the currency zone (though mostly not before 2016). And by the time that process spreads to ever more banks, which is inevitable, it will have consequences Draghi cannot oversee. And they’ll be of his own making. If he just did his work today, and forced banks to get healthy or close down, it wouldn’t end nearly as messy and chaotic.

Europe’s leaders across all of its institutions are completely lost, whether it comes to intelligence, morals or simple decency. They’re all too willing to trample upon their own people in order to have access to power. And that can only lead to more misery.

Stick a fork in their ass and turn them over. They’re done.

Nov 132014
 
 November 13, 2014  Posted by at 9:26 pm Finance Tagged with: , , , , , , ,  14 Responses »


Dorothea Lange Negro woman who has never been out of Mississippi July 1936

Looks I have to return to the deflation topic. I’m a bit hesitant about it, because the discussion always gets distorted by varying definitions and a whole bunch of semi-religious issues. The Automatic Earth has for many years said that an immense bout of deflation is inevitable because of global debt levels, and it’s all only gotten a lot worse since we first said that. Our governments and central banks have ‘fought’ deflation with more debt, and that was always the stupidest idea in human history. Or at least, most of us were stupid for believing it would work, or was even intended to.

Just so we don’t get into yet more confusion, i probably need to explain that the debt deflation we’re talking about here is not some subdivision like consumer inflation or price inflation or cookie inflation, those are just hollow and meaningless terms. Debt deflation is deflation caused by too much debt, and the deleveraging it must and will lead to. Deflation does not equal falling prices, those are merely an effect of it.

The reason this matters is that when you equate inflation and deflation with rising or falling prices, you’re not going to be able to know when you actually have deflation. Because prices can rise for all sorts of reasons. Inflation/deflation is the money/credit supply in an economy multiplied by the speed at which money is spent in that economy, the velocity of money.

It should be obvious that prices for some items can still rise, certainly initially, when deflation sets in. Producers that see less sales can try to raise prices for their remaining buyers. Basic necessities will always be needed. Governments can raise taxes. Rising/falling prices tell us only part of the story, and with a considerable time delay.

Ergo: rising/falling prices are a lagging factor, and if you look at them only, you will have missed the point where deflation has set in. What follows, obviously, is that you can’t measure deflation by looking at consumer prices (CPI) or production prices (PPI) numbers. You’d be way behind the curve. CPI and PPI tell you something, but they don’t tell what causes falling or rising prices. And that is a valuable thing to know.

I see even John Mauldin in this week’s The Last Argument of Central Banks talk about ‘good deflation’, but that doesn’t exist any more than cookie inflation, sorry, John. Prices for some items may fall due to innovation etc. while an economy booms, but if you call that deflation, you’ll miss what’s really deflation when it arrives.

Deflation is always bad. It either occurs when money/credit is so short that people can not get their hands on it no matter how hard and productive they work, and how much demand there is for their products, or it occurs when people are too poor, too much in debt or too reluctant to part with what they have.

In a deflation, people spend only what they absolutely must, provided even that they can afford to, which leads to large swaths of an economy being liquidated. Falling prices lead to falling wages lead to ever further falling prices lead to factory closings lead to more people who can’t afford to spend which leads to closings which leads to less spending which leads to faling prices etc. This continues until the debt has been deleveraged. Governments will lose tax revenue and raise taxes, but soon enough they will in quick succession disband and be replaced, rinse and repeat until even essential services can no longer be provided.

Until recently, a shrinking money/credit supply was very clearly not in the cards. Central banks have gone absolutely nuts in their stimulus plans, and this has artificially kept price levels up somewhat, though far less than they, and scores of ‘experts’ had hoped and expected. Now that game, too, is up. Japan went crazier than ever the other day out of fear that falling oil prices would sink consumer spending even more, but the US Fed has cut QE. That is an admission it has failed to do what it officially was supposed to, not the sign of triumph it’s made out to be, as in ‘the economy is doing so well, it doesn’t need our support anymore’.

Central banks have spent like maniacs, and consumer spending only keeps falling. Just ask Japan. And while you’re at it, ask them how entrenched deflation can become even in an economy that still has the benefit of growing world market to sell its products in. We won’t have any such benefit. The world has stopped growing, and there’s no massaging of numbers left strong enough to hide it. Not that it won’t be tried. As I said earlier this week, we now live in a world built on debt and propaganda.

Since QE and other ‘plans’ never reached the real economy, most nations’ money supplies have also either fallen or at best remained stagnant. We have the perfect set-up for deflation, and we therefore have deflation. It hasn’t reached the US yet, though we should be careful with that because the numbers being reported are notoriously flaky. But it has reached Europe and Asia. Which means the US is only a matter of time. And people, reluctantly, start taking notice. Steve Hochberg and Pete Kendall penned the following for Bob Prechter’s Elliott Wave:

Deflation Rearing its Ugly Head in Subtle and Not-So-Subtle Ways Around the Globe

According to the latest figures, deflation is now perched on China’s doorstep. In September, China’s consumer price index was up 1.6%, but its producer price index fell 1.8%. The CPI increase was its lowest since 2010. [..] in September, demand for electric power, a “bellwether for China economic activity,” fell 8.4% from the prior month, the second straight monthly decline.

“Deflation is the real risk in China,” stated the chief economist at a Hong Kong bank. In Europe, deflation is no longer a possible risk; it’s reality. In September, eleven of fifteen European Union members experienced lower goods prices, and the latest quarter-over-quarter Eurozone growth in real GDP is zero.

With Alice-in-Wonderland naiveté, U.S. financial media place the United States outside the risk of global deflation. Headlines talk of “Mild Inflation” and insist that the U.S. will gain “From Good Deflation.” On October 14, Bloomberg reported that consumer spending is strong enough “to steer the U.S. economy safely through the shoals of deteriorating global growth and the turbulent financial markets.” In early September, we stated that it was only a matter of time before economic weakness and deflation (which will be anything but good) jump the Atlantic and Pacific oceans and arrive in the U.S.

According to the U.S. Labor Department, real wages for full-time employees averaged $790 a week in the third quarter, about $1 less than in the third quarter of 2007. “There’s been no net gain for workers since 1999.” In recent months, spending has been uneven. Retail sales fell 0.3% in September. Most economists are baffled: “one of the great mysteries is why the U.S. has lacked inflation despite all the money being pumped into the economy.” A study by the St. Louis Fed finds that the answer is “a dramatic increase in the private sector’s willingness to hoard money instead of spend it.”

Note: the ‘hoarding meme’ is habitually used by economists, re: Bernanke and his Chinese savings glut, to point out situations which are more often than not characterized by people being too poor to spend, not sitting on anything at all. For economists, if people don’t spend, it must be because they save, never because they’re poor. I kid you not.

For years now, the Fed along with most economists have anticipated the imminent return of inflation, but it continues stubbornly subdued. This long-term chart above of the CPI shows a succession of lower highs since the early 1980s, as inflation turned into disinflation, which is on the cusp of leading to outright deflation. Some argue that the CPI is rigged to show milder levels of inflation, but the bottom graph shows the same steady move toward the zero line in the Personal Consumption Expenditures Index, an alternate inflation measure favored by the U.S. Fed.

When outright deflation hits, recognition of it will play an important role. Once its presence becomes widely observed, investors and the debt markets will belatedly take defensive action. Eventually, notes Conquer the Crash, “default and fear of default exacerbate the trend as it causes creditors to reduce lending. A downward ‘spiral’ begins feeding on pessimism just as the previous boom fed on optimism.”

Moving from theory to practice, we end up with our old friend Ambrose. Though he confuses inflation and consumer prices, and thinks they’re one and the same thing, he does have useful numbers:

Spreading Deflation Across East Asia Threatens Fresh Debt Crisis

Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order. Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82% of the items in the producer price basket are deflating in China. The figures is 90% in Thailand, and 97% in Singapore.

These include machinery, telecommunications, and electrical equipment, as well as commodities. Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147% to 207% of GDP in six years.

These countries face a Sisyphean Task. They are trying to deleverage, but the slowdown in nominal GDP caused by falling inflation is always one step ahead of them. “Debt to GDP has risen despite these efforts,” he said. If this sounds familiar, it should be. It is exactly what is happening in Italy, France, the Netherlands, and much of the eurozone. Data from Nomura show that the composite PPI index for the whole of emerging Asia – including India – turned negative in September.

China itself is now one shock away from a deflation trap. Chinese PPI has been negative for 32 months as the economy grapples with overcapacity in everything from steel, cement, glass, chemicals, and shipbuilding, to solar panels. It dropped to minus 2.2% in October. The sheer scale of over-investment is epic.

The country funnelled $5 trillion into new plant and fixed capital last year – as much as Europe and the US combined – even after the Communist Party vowed to clear away excess capacity in its Third Plenum reforms. Old habits die hard. Consumer prices are starting to track factory prices with a long delay. Headline inflation dropped to 1.6% in October. This is so far below the 3.5% target of the People’s Bank of China that it looks increasingly like a policy mistake. Core inflation is down to 1.4%.

China has flirted with deflation before: during its banking crisis in the late 1990s, and again during the West’s dotcom recession from 2001-2002. Both episodes proved manageable. This time the level of debt is greater by orders of magnitude, with a large chunk in trusts, wealth products, and other parts of the shadow banking nexus, and a further $1.2 trillion in “carry trade” loans from Hong Kong.

Standard Chartered thinks total debt has reached 250% of GDP. This is roughly $26 trillion, the same size as the US and Japanese commercial banking systems put together, and therefore a headache for us all. Larry Brainard from Trusted Sources says China is sliding towards a European debt-compound trap. “It’s arithmetic.Deflation will kill you if you’re leveraged. It is just a question of how quickly. We don’t know how big the problem is because China is playing a game of three-card Monte and moving the debt to different buckets,” he said.

Asia is not yet in a full-blown currency war, but no country can stand idly by as neighbours dump toxic deflationary waste on their front lawn. Korea has threatened to force down the won, pari passu with the yen. The central bank of Taiwan has been intervening. These skirmishes are happening in a region of festering grievances and territorial disputes, with no Nato-style security structure – or for that matter EU-style soft governance – to damp down fires.

[Chinese] purchases of foreign bonds have dropped to zero, down from $35bn a month at the start of the year. The yuan has appreciated 22% against the yen since June, and 50% since mid-2012. It is up 12% against the euro since the early summer. China is in effect strapped to the rocketing dollar through its quasi-peg, increasingly a torture machine.

George Magnus from UBS says this cannot continue. “What is happening in the property market is the tip of the iceberg for the whole economy. China will have to resort to monetary reflation over the winter, and I think this will include a lower yuan. We are heading into a currency war,” he said.

We have the debt. And we recognize it. Still, the line politics and media feed us is that more debt can be a good thing, that we need more debt in order to attain what they like to call ‘escape velocity’ from the financial crisis caused by that same debt. Oil on fire.

We have the propaganda. We don’t always recognize it for what it is, but the, that’s the idea, isn’t it? It’s to make people think that things are not really what they really are. That we need to spend more public funds on saving banks, not saving people, or else armageddon. There’s hardly a news story left today that is not to an extent phrased by propaganda.

And now we have deflation. Which is not the falling prices, though they are a – delayed – symptom. Still, other symptoms are as valid, as nobody is spending. Mass unemployment in southern Europe is a symptom. West Texas oil at $74 dollars today is one. The Chinese economy, allegedly still growing at $7.5%, but at 250% debt-to-GDP, is another. Throw in 207% debt-to-GDP debt levels across southeast Asia.

With deflation becoming a daily topic in our propagandistic media, despite the fact that governments and central banks are vehemently allergic to it (for good reasons), rest assured that we are entering a next phase of the crisis. Just not one that they would like you to think we are. When debt starts being deleveraged for real, deflation cannot be avoided. And debt must be deleveraged, we can’t sit on it till Kingdom Come and keep adding more while we’re at it. That was never in the cards. And we’ve accumulated too much of it to ever outgrow it. We simply can’t sell or make enough iPhones to accomplish that. Or eat enough burgers, hard as we try.

Our world, our life, has been built on debt and propaganda for many years. They have kept us from noticing how poorly we are doing. But now a third element has entered the foundation of our societies, and it’s set to eat away at everything that has – barely – kept the entire edifice from crumbling apart. Deflation.

It’s time to check where your basic needs will come from when it becomes first harder and them impossible to obtain them from the sources you have been used to. And please, get out of debt. Debt during deflation is a cruel and unforgiving mistress. Think of deflation as a biblical plague.

Oct 242014
 
 October 24, 2014  Posted by at 7:42 pm Finance Tagged with: , , , , , , ,  2 Responses »


Russell Lee Sharecropper mother teaching children in home, Transylvania, LA. Jan 1939

Europe is fast turning into a freak comedy show. Very fast. Or maybe we should say it’s always been one, and it’s just that the Larry, Curly and Moe moves are only now coming out in droves. Or maybe, what do I know, we’re just starting to understand how much talent for farce and slapstick the boys from Brussels have always had.

Just Wednesday, I wrote in 40% of Eurozone Banks Are In Bad Shape about a Reuters report based on Spanish source Efe, that claimed 12 banks would fail the ongoing stress tests, results of which are due this Sunday at 12pm CET (their daylight savings time will be over by then). I noted how the indignation expressed over the leaked data by Brussels seemed odd, since in 2014 everything leaks.

Then, I cited Pimco’s global banking specialist, Philippe Bodereau, saying he thought 18 banks would fail, and moreover, almost a third would narrowly pass. Something that according to several sources was important than who actually failed. Because all banks have had many many months to shore up their capital positions, and if they’re now still below or just above the dividing line today, that’s suspect at best.

130 banks were supposed to have been tested, and ‘almost a third’ of that is some number north of 40. Add the 12 to 18 sure failures, and you’re north of 40%.

But today Bloomberg reports on a new draft they have obtained, which raises the numbers even further.

ECB Set to Fail 25 Banks in Review, Draft Document Shows

25 lenders in the European Central Bank’s euro-area bank health check are set to fail the regulator’s Comprehensive Assessment, according to a draft communique of the final results, seen by Bloomberg News. 105 banks are shown passing the review, according to the draft statement. Of the lenders that failed, about 10 will still face capital shortfalls they need to plug, according to a person with knowledge of the matter, who asked not to be identified…

If 25 fail, and ‘almost a third’, i.e. at least 40, narrowly make it, 50% or more of Europe’s banks are in trouble. And that’s after they’ve been given ample time to borrow, sell assets, do whatever it takes to pass. More than half of all banks. And sure, Europe has scores of ‘systemic’ or Too Big To Fail banks, and they’ll never be put in the corner with the dunce hat on. But that’s not as great as it may seem, it just means we’re not allowed to know what shape they’re really in, and if they threaten to topple over, taxpayers will need to pay up.

And that’s still not all. Catherine Boyle explains a few things at CNBC about the stress tests:

What’s Missing From The EU Bank Stress Tests

The EBA stress tests involve running banks’ books through shocks like a 14% drop in house prices from current predictions. However, they do not involve deflation, or a sustained period with higher or lower prices for commodities such as oil – both of which the euro zone is potentially facing.

If ‘shocks’ like these are the worst case scenario of the tests, and half of the banks fail that, you might want to speak of a systemic problem. Many housing markets are still very expensive, let’s see interest rates go up to any historic average of your choosing and then see what happens to home prices. No review of what havoc deflationary pressures or oil and gas prices might do to banks sounds hardly serious either.

There is also disagreement over how certain assets may be classed. In weaker economies like Portugal, Greece, Spain and Italy, the governments have passed laws allowing banks to convert deferred tax assets (DTAs), which are tax payment deferrals generally awarded during times of weaker profitability, into more capital-enhancing deferred tax credits (DTCs).

Translation: local accounting tricks are still alive and well. Deferred tax credits are just one example, obviously.

Oliver Burrows, senior analyst at Rabobank, told CNBC: “European banks have actually done quite a lot in terms of balance sheet repair and capital raising. To give it additional credibility, you need to have some victims, and those are going to be quite predictable. Another fear is that if there is a rush of these weaker “victims” to raise more capital, there may not be much demand for it – and that could weaken the sector further. “Who would want to support or buy new equity in these banks?” Burrows asked.

That’s it right there: they’ve done a lot, and still fail. So where are they going to get the rest of the investments they need?

And then the EU comes this morning with a new stunt worthy of Larry, Curly and Moe. They’ve sent new calculations about members’ economic data, and the contributions they need to send to Brussels based on those data, around, and it’s a shame all the news is about how Britain is told to pay a billion and a half or so extra. Holland must fork over much more per capita, for one thing.

But what makes it even better is that Greece has been told to pay more, and that can go straight to Germany, which is set to receive a billion. Explain that. Italy has to pay extra, France receives.

The problem is of course, Brussels feels it doesn’t have to explain anything it does. They put the data on some webpage before even informing the member nations, as per the Dutch finance minister. Who, like Cameron, had no idea where the numbers came from. Brussels thinks: you don’t have the guts to break up the EU, anyway. So what are you going to do about it? Well, Cameron feels Nigel Farage breathing down his neck, that’s what.

The best part is that everyone’s falling over one another to assure us that the new accounting methods, which include drugs and prostitution, have nothing to do with this madness. But isn’t it just great to ponder that Britain has to fork over an additional billion only because the French have cheaper hookers?

Someone finish off that inane union before it starts to do real serious harm. Because it will.

Oct 072014
 
 October 7, 2014  Posted by at 12:29 pm Finance Tagged with: , , , , ,  3 Responses »


Charlotte Brooks Marilyn Monroe and Navy Pilot 1952

Global Banks Face 25% Loss-Absorbency Rule in FSB Plan (Bloomberg)
‘Nuanced’ Q4 Dollar Gains As Monetary Policy Diverges (CNBC)
Why The Oil Price Decline Is Failing To Boost Europe (CNBC)
German Industrial Output Drops Most Since 2009 (AN)
France Cautions Germany Not To Push Europe Too Far On Austerity (AEP)
France’s Stagnation Is Tragic To Watch (Telegraph)
Europe Cash Pile Signals Savings Glut Sequel for Markets (Bloomberg)
French PM To Bring In Sunday Shopping As Part Of Reform Program (Guardian)
The Reserve Currency’s Exorbitant Burden (Pettis)
Retirement Age To Rise By As Much As Six Months Per Year (Telegraph)
China Private Sector Demand Continues To Decline (Zero Hedge)
Chinese Investors Surged Into EU At Height Of Debt Crisis (FT)
Beware a Chinese Slowdown (Rogoff)
Zero Interest Loan Lets Low-income Borrowers Build Equity Fast (?!) (LA Times)
Ukraine Insists Transit Of Russian Gas To Europe Should Be Revised (RT)
$1,200 3-D Printer For Untraceable Guns Sells Out in 36 Hours (Wired)
Nurse In Spain First Ebola Case Contracted Outside Africa (CNBC)
CDC Clears US Ebola Victim’s Stepdaughter To Return To Work After 7 Days (DM)
Senior Banker In UK Pleads Guilty In Libor Probe (Reuters)
Must Be the Season of the Witch (Jim Kunstler)

Fool me once.

Global Banks Face 25% Loss-Absorbency Rule in FSB Plan (Bloomberg)

The largest global banks will have to hold more capital and liabilities than previously reported that can automatically be written off in a crisis — as much as a quarter of risk-weighted assets — as regulators take on lenders deemed too big to fail. The Financial Stability Board is developing minimum standards that will limit the double-counting of capital banks use to meet existing international rules, according to an FSB working document sent for comment to Group of 20 governments and obtained by Bloomberg News. The restriction means that, while the basic requirement will be set at 16% to 20% of risk-weighted assets, the final number will be higher because the banks must separately meet “other regulatory capital buffers,” according to the document, dated Sept. 21. The FSB in Basel, Switzerland, declined to comment on the non-public document.

“These standards are an important step in developing a strategy which will limit taxpayers’ exposure to failing banks, but of course a lot of work still has to be done to determine how much flexibility national regulators will have or even need when applying the rules,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland. The FSB, which consists of regulators and central bankers from around the world, plans to present the draft rules to a G-20 summit in Brisbane, Australia, next month. The plans, which will be published for comment and completed next year, are part of a package of measures designed to make sure taxpayers are no longer on the hook when banks fail. The FSB maintains a list of globally systemic banks that it updates each November. The latest list included 29 banks and identified HSBC and JPMorgan as the banks whose failure would do the most damage to the global economy.

The FSB plan would force the world’s most systemically important banks to issue junior debt and other securities that could be written down in a straightforward manner and cover costs associated with winding down or restructuring. The rule would fully apply in 2019 at the earliest. Bank of England Governor Mark Carney, the FSB’s chairman, has said that the measure is needed to prevent taxpayer-funded bailouts of banks. “It is essential that systemically important institutions can be resolved in the event of failure without the need for taxpayer support, while at the same time avoiding disruption to the wider financial system,” Carney wrote in a letter to the G-20 last month.

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Beware the analysts and experts.

‘Nuanced’ Q4 Dollar Gains As Monetary Policy Diverges (CNBC)

The divergence in global monetary policy – as the Federal Reserve prepares for its first rate hike in mid-2015 while counterparts in Japan and Europe consider adding stimulus – will drive the U.S. dollar higher this quarter, a CNBC survey of currency strategists and traders shows. The rise of the dollar index – a gauge of the greenback’s value against a basket of six major currencies – has been virtually unassailable, racking up gains for a record 12 straight weeks – its longest winning streak since its 1971 free float under President Nixon. “We expect a strategically strong dollar over an extended period measured in months and years,” said David Kotok, chief investment officer at U.S. money manager Cumberland Advisors with $2.3 billion in assets under management. “Our central bank is at neutral and unlikely to revert to QE (quantitative easing) again. The rest of the world has not reached that stage.”

Kotok is not alone. Eighty one% of respondents expect the greenback to set new highs, while just under a fifth believes the rally will fade. In a research report on September 30, Deutsche Bank flagged the dollar’s ascent as a major headwind for the commodities complex and predicted that the move has further to go. “A new long-term uptrend in the U.S. dollar is now firmly entrenched and will continue to pose risks to large parts of the commodities complex,” Deutsche Bank strategists said in their Commodities Quarterly. “On our reckoning we are only half way through the current U.S. dollar cycle in duration and magnitude terms.” Fed policymakers last month indicated that they expect faster rate hikes next year and the year after. The central bank in its mid-September meeting pushed up its expected path of interest rate increases – the so-called Fed ‘dots’ forecast. That’s likely to set the tone for further dollar gains, though yields on U.S. treasuries – on short and medium-dated notes – suggest the bond market remains unconvinced.

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Obvious.

Why The Oil Price Decline Is Failing To Boost Europe (CNBC)

Forget quantitative easing by the European Central Bank. Surely the precipitous oil price decline in the last couple of weeks will finally be the catalyst to give the down-trodden European economy the big boost it needs. I mean, after three years of prices north of $100 a barrel surely a big cut in the European energy bill will provide the stimulus effect that ECB President Mario Draghi could only dream of? Well, I’m afraid it appears there will be no energy-induced bonanza as, like many other peculiar aspects of the European economy, consumers will hardly see the benefits of market falls in commodities. To recap, the likes of OPEC are only getting circa $90 per barrel for their oil nowadays compared with around $107 per barrel as recently as June this year. So you could be forgiven for thinking that if the producers are getting less bang per barrel then the consuming nations of Europe would be a major beneficiary. Well that’s not quite the case it seems.

Yes, the big red top headlines talk of the ‘a couple of pence per liter’ off pump prices but the major benefits will never come our way in Europe. Why? Simple. Europe is overwhelmed by taxation, subsidy, over-capacity and green incentivization plans that have conspired make hydrocarbons a dirty and expensive source of energy. Europe’s biggest economy, Germany, is at the heart of the issue in its noble pursuit to reduce greenhouse gases. Great ambition but stunningly expensive. By 2050 the Germans want to have 60% of their energy coming from renewables. This will be an impressive feat but may well seriously dent European competitiveness further.

Daniel Lacalle, Senior Portfolio Manager at Ecofin is worried. “Since the beginning of the crisis in 2008, average European power prices are up 38% whereas wholesale prices have actually fallen. The problem is that we don’t see any of the benefits in Europe of the lower oil prices as we subsidize too many energy industries, we have oversupply and subsidies. In addition, there are so many green taxes that gasoline prices have been going up instead of down.”

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Factory orders down 5.7%, capital goods down 8.8%. Europe lost its engine. Get ready for the freefall.

German Industrial Output Drops Most Since 2009 (AN)

German industrial production declined at the fastest pace since January 2009 underlining that the largest euro area economy is moving further down after contracting in the second quarter. Industrial production fell 4% month-on-month in August following the revised 1.6% rise in July. This was the biggest annual decline since January 2009 and was much larger than the expected fall of 1.5%. Last month, Bundesbank had warned against a decline in August industrial production after the timing of school holidays boosted July output. The drop is too strong to explain it by one-offs, Carsten Brzeski, an economist at ING Bank NV, said. This means that increased uncertainty but also real slowing of the Eurozone economy, Eastern European economies and emerging markets are all currently taking their toll on the German economy, he said. Looking beyond the third quarter, the German industry is looking into a more difficult future, Brzeski said.

Jonathan Loynes, an economist at Capital Economics said the big drop in industrial production underlined the need for both the ECB and the German government to give the economy much more policy support. The European Central Bank kept its key rates unchanged at a record low early this month as economic momentum in the euro area remains subdued. ECB President Mario Draghi unveiled details of its Asset Backed Securities and covered bond buying programs. The Organization for Economic Cooperation and Development, in its interim economic assessment published on September 15, recommended more monetary support to boost demand as slow growth in the euro area was the most worrying feature of the projections. The think-tank projected that the German economy would grow by 1.5% in both 2014 and 2015. Data today showed that production of capital goods declined the most, by 8.8%. Production of intermediate goods and consumer goods slid 1.9% and 0.4%, respectively.

Construction output decreased 2%, while energy production rose 0.3% in August. Industrial production, excluding energy and construction, fell 4.8%. Year-on-year, industrial production fell 2.8% in August in contrast to a 2.7% rise in July. The ministry said the sector is going through a period of weakness. The third quarter is likely to see soft production. Data released on Monday showed that factory orders declined the most since 2009 in August. Orders fell 5.7% after rising 4.9% in July.

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Full panic mode soon to come.

France Cautions Germany Not To Push Europe Too Far On Austerity (AEP)

France has denounced the eurozone’s austerity regime as deeply misguided and issued a blunt warning to Germany and the EU institutions that demands for further belt-tightening may set off a political backlash, endangering European stability. “Be careful how you talk to the countries in the South, and be careful how you to talk to France,” said the French premier, Manuel Valls. “The adjustment has been brutal and it has turned millions of people against Europe. It is putting the European project itself at risk.” Mr Valls said Europe’s fiscal rules have been overtaken by deflationary forces and a protracted slump. “You cannot enforce the Treaty rigidly in these circumstances. The austerity policies are becoming absurd, and we have to examine the situation,” he told journalists in London.

The reformist French premier said the eurozone’s failure to recover risked leaving the region on the margins of the world economy, stuck in a Japanese-style trap. France had pushed through €30bn of fiscal cuts from 2010 to 2012, and another €30bn since then in an effort to comply with EU deficit rules, only to see the gains overwhelmed by the economic downturn. The deficit will remain stuck at 4.3pc of GDP in 2015. A further €50bn of cuts are coming over the next three years. “If they make us reach a 3pc deficit, the country will be totally on its knees. It’s not possible,” he said. The warnings came amid reports the European Commission may strike down France’s draft budget for 2015, refusing to give Paris two extra years until 2017 to meet the 3pc limit. Brussels is also threatening “infringement proceedings”, a process that could ultimately lead to fines. This would put the new Juncker Commission on a dangerous collision course with both France and Italy, two of the eurozone’s big three, now closely aligned in a joint push for EMU-wide reflation and New Deal policies.

[..] “When we came to power, we made a strategic error. We didn’t tell the French people what the condition of the country really was: the level of the deficit, the debt and the trade balance,” he said. “The welfare state and everything the Left stands for has been blown up by the shock of globalisation, which was much greater than people realised. When we were beaten, we fell back on our Old Left ideology. We spent 10 years failing to prepare, and now we have to push through our ideological revolution while in government, which is much more difficult,” he said Mr Valls plays down any suggestion that he is pursuing an Anglo-Saxon market agenda. “We will not get rid of the 35-hour working week. We are not a Thatcherite government,” he said. Yet his aim is to slash the size of the French state from 56pc of GDP to average European levels, a drastic overhaul of the French model..

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France’s Stagnation Is Tragic To Watch (Telegraph)

Most countries would welcome with open arms the prospect of hosting a major theme park attracting millions of tourists every year. Not so France – or at least, not in 1992. When Disneyland Paris opened 22 years ago, the fruit of a major foreign direct investment from Walt Disney, it was slammed as a “cultural Chernobyl” by one commentator and faced the wrath of its left-leaning, anti-American establishment. There were endless rows about dress codes, language and just about everything else, even though the American owners employed thousands of staff and millions of ordinary French families readily embraced the experience. I remember the row well as I grew up in France. These days, it is companies like Amazon that are discriminated against in statist France; the people may love US goods and services but the establishment all too often still sees trade as a form of imperialism, for all of prime minister Manuel Valls’ assurances to the contrary on Monday.

But it is not France’s protectionism – at least not directly – that caused Disneyland Paris’s latest woes and the need for a £783m injection of cash from its shareholders. The problem this time is simply the downturn: visitor numbers are declining on the back of economic growth expected by the OECD to come in at just 0.4pc this year. The unfortunate reality is that Disney would have been far better off building its European resort elsewhere – Germany has hardly boomed either in recent years but it would probably have made for a better base. The French economy is stagnating, with a horrifying 3.4m people out of work and millions more in unviable, state-subsidised jobs.

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Maybe a look at debt levels would shine some much-needed light on this claim.

Europe Cash Pile Signals Savings Glut Sequel for Markets (Bloomberg)

Europe is becoming China without the economic growth. What that means is that the euro area is building history’s biggest current-account surplus. The result: mountains of money likely to buoy the world’s stock and bond markets. Deutsche Bank AG’s George Saravelos has coined a phrase for a pile he estimates has reached $400 billion: the euroglut. “It is Europe’s huge savings glut – what we call euroglut – that will drive global trends for the foreseeable future,” the London-based strategist wrote in a report yesterday. “Via large demand for foreign assets, it will play a dominant role in driving global asset-price trends for the remainder of this decade.” The cash is piling up because the world is buying European goods and services – especially Germany’s – and the euro area’s depressed consumers aren’t buying much of anything from home or abroad. The region’s current-account surplus is now 2.2% of gross domestic product having been in a deficit of almost 2% as recently as 2008.

In dollar terms, Deutsche Bank reckons it’s just above China’s peak last decade. As China learned, there’s a political angle too. The surplus provides a stick for international finance chiefs to beat sclerotic Europe with during the International Monetary Fund’s annual meetings in Washington this week. The pressure will fall mainly on Germany to ramp up domestic demand given its own current-account surplus is 7% of GDP. Since accounting rules dictate a current-account surplus is matched by a capital-account deficit, the implications are for investors around the world. For Deutsche Bank, these include the euro falling to 95 cents against the dollar by the end of 2017 and a cap on U.S. 10-year Treasury yields even if the Federal Reserve raises interest rates. Emerging-market assets are also likely to benefit. Think of it as a new version of what then-Fed Chairman Ben S. Bernanke called a “global savings glut” in 2005 when China’s surplus supported global asset prices.

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And people will spend like crazy?

French PM To Bring In Sunday Shopping As Part Of Reform Program (Guardian)

The French prime minister, Manuel Valls, has told a City audience in London that his drastic reform programme will extend to the introduction of Sunday shopping in Paris, and the major towns of France. Valls is fighting on all fronts to lift the French economy out of the doldrums, and may face a confrontation with the new European commission to tolerate a deficit that breaches EU limits. Valls was in London to meet David Cameron and persuade fellow EU leaders that he is trying to take the French economy on the path to structural reform, including an end to the 35-hour working week. Describing it as “bad news to give you here in London”, Valls said shops would open on Sundays in Paris and promised museums will be open seven days week.

He said socialists were pro-business and he would use his time in power to transform the country. He said he had accepted the apology from the John Lewis managing director who described France as sclerotic, hopeless and downbeat. Valls pointed out that the French economy was the fifth largest in the world and second largest in Europe. Insisting his new government was pro-business, he said the top 75% tax rate would be gone by January. Cameron was told by Valls that he wanted Britain to remain a central figure in the EU but he also said the City of London would lose much if it turned its back on Europe. Cameron, who has mocked the socialist policies of the French president, François Hollande, will probably be delighted by Valls’ overall tone and list him as a potentially ally in any future negotiations on the EU.

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The Reserve Currency’s Exorbitant Burden (Pettis)

This may be excessively optimistic on my part, but there seems to be a slow change in the way the world thinks about reserve currencies. For a long time it was widely accepted that reserve currency status granted the provider of the currency substantial economic benefits. For much of my career I pretty much accepted the consensus, but as I started to think more seriously about the components of the balance of payments, I realized that when Keynes at Bretton Woods argued for a hybrid currency (which he called “bancor”) to serve as the global reserve currency, and not the US dollar, he wasn’t only expressing his dismay about the transfer of international status from Britain to the US. Keynes recognized that once the reserve currency was no longer constrained by gold convertibility, the world needed an alternative way to prevent destabilizing imbalances from developing.

This should have become obvious to me much earlier except that, like most people, I never really worked through the fairly basic arithmetic that shows why these imbalances must develop. For most of my career I worked on Wall Street – at different times running fixed income trading, capital markets and liability management teams at various investment banks, usually focusing on Latin America – and taught classes at Columbia’s business school on debt trading and arbitrage, emerging markets finance and financial history. Both my banking work and my academic work converged nicely on the related topics of global capital flows, financial crises and the structure of balance sheets.

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“The number of over-65s in England is expected to increase by 51% over the next 20 years.”

Retirement Age To Rise By As Much As Six Months Per Year (Telegraph)

Older people will be encouraged to work longer under a Government plan to increase the average retirement age by six months every year. Ministers believe that the retirement age needs to increase dramatically to reflect Britain’s ageing population and to avoid a health care crisis. The average age of retirement is 64.7 for men and 63.1 for women. The Department for Work and Pensions said in its business plan that it would like the average to rise by as much as six months every year. The number of over-65s in England is expected to increase by 51% over the next 20 years, and the numbers of those aged 85 and above will double by 2030. Ministers accept that the trend will hugely increase the costs to the NHS, elderly care and state pensions systems.

Steve Webb, the Liberal Democrat pensions minister, admitted that the target was “ambitious” but said the retirement age had already been rising for women. He said: “If someone works an extra year they can add 10 per cent to their pension for life. What we are doing is catching up with decades of longer living. “We are living longer but the labour market and people’s retirement age has not been keeping up. I have fought against a vague target of trying to get people to work longer to have something more specific.” The target is contained in a document released by the Department for Work and Pensions which makes clear that an increase of six months would be a “meaningful change”. “An increase in the average age of withdrawal of more than around 0.5 years would demonstrate an improvement,” the document states.

Mr Webb has said that the growing numbers of people living into their eighties and nineties would leave taxpayers with a rising bill and meant “the sums” would never add up if people continued to retire in their fifties. George Osborne announced earlier this year that increases in life expectancy will automatically trigger a rise in the state pension age, which is likely to rise to 70 within 50 years. The state pension age is currently 65 for men, and is rising from 60 for women to come into line with men at 66 by 2020. It will continue to rise so people in their late twenties are likely to have to work until their 70th birthdays, according to official projections. The Office for Budget Responsibility said that Coalition policies such as raising the state pension age and further cuts will reduce Britain’s debt as a proportion of national income by two thirds.

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Nobody invests?!

China Private Sector Demand Continues To Decline (Zero Hedge)

China is slowing, mostly due to a gradual, steady decline in private sector activity. One example: the decline in fixed asset investment (e.g., business capital spending) at private sector firms relative to firms that are state-controlled. Premier Li Keqiang’s reforms are aimed at making it easier for entrepreneurs to start private sector firms, but in the current climate, private sector investment growth continues to fall.

 

 

The Chinese central bank injected some liquidity into the domestic banking system recently, but it was only for 3 months and not meant to address the more structural issue of declining private sector demand. While export growth and job creation still look pretty good, the overall picture is one of an economy growing at 7%, and that’s with the contribution from government spending. Government spending is set to slow in the second half of the year; the authorities continue to reduce the size of the shadow banking system which extends credit; and the overheated housing market is still in decline as well when looking at national home sales and a 70-city home price average. We expect continued weakness in Chinese data for the rest of 2014 and into next year as well.

Source: JPMorgan

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€27 billion is still not exactly a huge number.

Chinese Investors Surged Into EU At Height Of Debt Crisis (FT)

As investors fled Europe in the worst days of its sovereign debt crisis, China-based companies moved in the other direction and surged in, with cash flowing from China into some of the hardest-hit countries of the eurozone periphery. In 2010, the total stock of Chinese direct investment in the EU was just over €6.1 billion – less than what was held by India, Iceland or Nigeria. By the end of 2012, Chinese investment stock had quadrupled, to nearly €27 billion, according to figures compiled by Deutsche Bank. The buying spree, analysts say, was nothing short of a transformation of the model of Chinese outbound investment. It is expected to increase steadily over the next decade. “We saw a massive spike in Chinese investment in Europe, particularly [mergers and acquisitions] during the height of the debt crisis,” says Thilo Hanemann, an expert in Chinese outbound investment and research director at Rhodium Group, a research consultancy.

“This was partly opportunistic buying because assets were cheap and partly it was a structural secular shift in Chinese outbound investment, from securing natural resources in developing countries to acquiring brands and technology in developed countries.” The Financial Times this week investigates the modern trail of Chinese investment, migration and ambition in Europe. A series of reports from Beijing to Milan to Madrid to Lisbon to Athens reveal the scale of China’s expansion in Europe, the flow of investment and the strategies of Chinese investors and migrants caught up in a national effort – a “going out” policy in place since 1999 – to find new markets and enhance China’s economic strength. The incursion has not been all plain sailing.

When a Chinese state-owned consortium won the bid to build a road from Warsaw to the German border, the government in Beijing presented the deal as a model for Chinese contractors in Europe. But after cost over-runs and repeated breaches of local labour law, the Polish government cancelled the contract with Covec, the Chinese consortium, in 2011 – less than two years into the project. What befuddled the Chinese company most were Polish environmental laws requiring tunnels for wildlife to be built beneath the road and a two-week work stoppage while seven rare species of frogs, toads and newts were moved out of the way.

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All you need to know: “… annual growth in electricity demand has fallen sharply to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis”

Beware a Chinese Slowdown (Rogoff)

While virtually every country in the world is trying to boost growth, China is trying to slow it down to a sustainable level. As the country shifts to a more domestic-demand driven, services-oriented economy, a transition to slower-trend growth is inevitable and desirable. But the challenges are immense, and no one should take a soft landing for granted. As China’s economy grows relative to those of its trading partners, the efficacy of its export-led growth model must inevitably fade. As a corollary, the returns on massive infrastructure investment, much of which is directed toward supporting export growth, must also fade. Consumption and quality of life need to rise, even as China’s air pollution and water shortages become more acute in many areas. But, in an economy where debt has exploded to more than 200% of GDP, it is not easy to rein in growth gradually without triggering widespread failure of ambitious investment projects.

Even in China, where the government has deep pockets to cushion the fall, one Lehman Brothers-size bankruptcy could trigger a major panic. Think of how hard it is to engineer a soft landing in market-based economies. Many a recession has been catalysed or amplified by monetary-tightening cycles; Alan Greenspan, the former US Federal Reserve chairman, was known as the “maestro” in the 1990s because he managed to slow inflation and maintain strong growth simultaneously. The idea that controlled tightening is easier in a more centrally planned economy, where policymakers must rely on noisier market signals, is questionable. If one were to judge by official and market growth forecasts, one would think the risks were modest. China’s official target growth rate is 7.5%. Anyone forecasting 7% is considered a “China bear”, and predicting a downshift to 6.5% makes one a downright fanatic. For most countries, such small differences would be splitting hairs. In the US, quarterly GDP growth has fluctuated between -2.1% and 4.6% in the first half of 2014.

Of course, Chinese growth almost surely fluctuates far more than the official numbers reveal, in part because local officials have incentives to smooth the data that they report to the central authorities. So where is China’s economy now? Most evidence suggests it has slowed significantly. One striking fact is that annual growth in electricity demand has fallen sharply to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis that erupted in 2008. For most of China’s modernisation drive, electricity consumption has grown faster than output, not slower. Weakening electricity demand has tipped China’s coal industry into severe distress, with many mines, in effect, bankrupt. Falling house prices are another classic indicator of a vulnerable economy, though the exact pace of decline is difficult to assess. The main house price indices measure only asking prices and not actual sales prices. Data in many other countries, such as Spain, suffer from the same deficiency.

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The LA Times is part of the scam team? Wow.

Zero Interest Loan Lets Low-income Borrowers Build Equity Fast (?!) LA Times

Two major banks have agreed to originate a new 15-year mortgage under pilot programs aimed at low- and moderate-income borrowers. In addition, the creators of the so-called Wealth Building Home Loan, which allows home buyers to build equity at a much faster clip than they would with a standard 30-year loan, are planning to bring their ideas to 10 other institutions over the next few weeks. Still, Edward Pinto thinks it might take months or even years for the product to become universal, if it becomes a regular offering at all. But Pinto and his co-conspirator, Bruce Marks, generated major buzz when they introduced the Wealth Building Home Loan at a mortgage conference in North Carolina in early September. The loan won the endorsement of several high-profile industry executives, including Lewis Ranieri, generally considered the father of the mortgage-backed security, and Joseph Smith, the former North Carolina bank regulator who was appointed to oversee the National Mortgage Settlement that created new mortgage servicing standards and provided some relief for distressed owners.

So what is everybody so excited about? The Wealth Building Home Loan is a 15-year mortgage with a fixed interest rate that can be bought down to zero. In addition, little or no down payment is required, there are no additional fees, and underwriters will pay far more attention to your residual income than to your credit score. Typically, the monthly payment on a 15-year loan is higher than that on a 30-year loan. But the loan amortizes much more quickly, meaning you build wealth — or equity — faster. To make the payments more affordable, the offering rate will be about three-quarters of a%age point below the 30-year FHA rate. And the rate can be bought down even further. For every 1% of the loan amount the borrower puts up as a down payment, the interest rate will be lowered by half a%age point, which is twice as much as usual. Consequently, a $6,000 down payment on a $100,000 mortgage at 3% would bring the rate down to zero, meaning that every penny spent on the monthly payment would go to principal.

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Shut up.

Ukraine Insists Transit Of Russian Gas To Europe Should Be Revised (RT)

Agreements stipulating deliveries of Russian gas to Europe via Ukraine should be revisited, as they don’t comply with EU standards, insists Ukraine’s Energy Minister Yuri Prodan. “The process of revising the transit contract will be conducted surely, as the current contract does not comply with the European standards,” Prodan said in Brussels on Friday. “We are ready to discuss and reach a compromise agreement even tomorrow. But, once again we require compliance in accordance with European legislation. And we are ready to make any decision in this regard if that will be demanded by the European Commission,” the Minister of Energy added. According to him, there are two ways to resolve the gas problem between Kiev and Moscow: whether the decision will be achieved through the courts or an interim solution, “that we can achieve in the next week.” Initially it was reported that a meeting will take place before the end of this week, but the Russian Ministry of Energy and the European Commission announced that it is delayed to next week.

Prodan said that dates are still not confirmed. On September 26, Russia, Ukraine and the the EU conducted three-way gas negotiations in Berlin where they discussed a so-called “winter plan.” According to it Ukraine will pay Gazprom $2 billion as part of its gas debt by the end of October and an additional $1.1 billion in advance payment by year’s end for 5 billion cubic meters of gas, the EU Energy Commissioner Gunther Oettinger said. However, no final documents have been sealed, as price and payment schedule remain the stumbling blocks in the negotiations. Kiev is offering its own repayment schedule for $3.1 billion debt and does not agree with the proposed $100 per thousand cubic meters discount due to customs duty. Russian Minister of Energy Aleksandr Novak rejected Kiev’s conditions saying it calculated the $3.1 billion cost at its own virtual price at $268.5 per thousand cubic meters of gas.

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The land of the free.

$1,200 3-D Printer For Untraceable Guns Sells Out in 36 Hours (Wired)

Americans want guns without serial numbers. And apparently, they want to make them at home. On Wednesday, Cody Wilson’s libertarian non-profit Defense Distributed revealed the Ghost Gunner, a $1,200 computer-controlled (CNC) milling machine designed to let anyone make the aluminum body of an AR-15 rifle at home, with no expertise, no regulation, and no serial numbers. Since then, he’s sold more than 200 of the foot-cubed CNC mills—175 in the first 24 hours. That’s well beyond his expectations; Wilson had planned to sell only 110 of the machines total before cutting off orders. To keep up, Wilson says he’s now raising the price for the next round of Ghost Gunners by $100. He has even hired another employee to add to Defense Distributed’s tiny operation. That makes four staffers on the group’s CNC milling project, an offshoot of its larger mission to foil gun control with digital DIY tools.

“People want this machine,” Wilson tells WIRED. “People want the battle rifle and the comfort of replicability, and the privacy component. They want it, and they’re buying it.” While the Ghost Gunner is a general-purpose CNC mill, capable of automatically carving polymer, wood, and metal in three dimensions, Defense Distributed has marketed its machine specifically as a tool for milling the so-called lower receiver of an AR-15, which is the regulated body of that semi-automatic rifle. The gun community has already made that task far easier by selling so-called “80-percent lowers,” blocks of aluminum that need only a few holes and cavities milled out to become working lower receivers. Wilson says he’s now in talks with San Diego-based Ares Armor, one of the top sellers of those 80-percent lowers, to enter into some sort of sales partnership.

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Scary.

Nurse In Spain First Ebola Case Contracted Outside Africa (CNBC)

A nurse in Spain has become the first person to contract the potentially deadly Ebola virus outside of West Africa in the latest epidemic, the worst on record, authorities said Monday. The nurse had gone into a room in a Madrid hospital that had been used to quarantine an elderly priest, Manuel Garcia Viejo, who contracted Ebola doing missionary work with victims of the same disease in Sierra Leone. The priest died Sept. 25. About 30 other people who had cared for the missionary are also being monitored, officials said. Also, Monday, President Barack Obama said his administration was developing added protocols for screening airline passengers for Ebola. Obama also said he was ordered increased efforts to educated medical providers on how to handed such cases, and that he would also push other large national to provide financial aid to the West African countries were the epidemic is occurring.

Obama spoke to reporters after briefed on the Ebola situation by health advisers. The White House earlier said Monday it is not considering a ban on travel from the West African countries dealing with the Ebola epidemic, which has killed more than 3,400 people since March. “We feel good about the measures that are already in place,” White House spokesman Josh Earnest said. Meanwhile, the father of a freelance NBC News cameraman being treated in Nebraska said his son suspects he may have contracted the Ebola virus from helping clean a car in Liberia after someone else died from the disease in the vehicle. That journalist, Ashoka Mukpo, is “not certain” how he got Ebola, but “he was around the clinic … and he does remember one instance where he was helping spray-wash one vehicle with chlorine,” said Mukpo’s father, Dr. Mitchell Levy.

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What will it take to make Americans wake up? How many bodies?

CDC Clears US Ebola Victim’s Stepdaughter To Return To Work, She Refuses (DM)

The stepdaughter of Texas Ebola victim, Thomas Duncan, who called 911 and rode in the ambulance with the man she calls ‘Daddy’ has been told she can return to work, MailOnline can reveal. Nursing assistant Youngor Jallah, 35, has been in ‘quarantine’ in her small Dallas apartment along with her husband, Aaron Yah, 43, and their four children ages 2 to 11 since Thomas Duncan’s devastating diagnosis last Monday. MailOnline has reported that Mr Yah, also a nursing assistant, had been told he could return to work at the end of last week. Ms Jallah whose contact with Mr Duncan – who remains in a critical condition – was far more intimate and prolonged than that of her husband, told MailOnline on Monday: ‘The CDC came yesterday. They said I can go back to work but I do not know what I will do. I will not go back yet.’

Doctors say that no-one is at risk of catching the virus unless they come into contact with a sufferer who is exhibiting symptoms. But it is unlikely that Youngor will return to work until the family have gone through the 21 days considered the latest time between exposure and manifestation of Ebola. She does not intend to allow her eldest child to return to school before the October 17. She has no child-care provisions either – as her mother, Louise Troh, 54, the woman who Mr Duncan traveled to the States to marry, provided childcare and remains in quarantine in a secret location along with her 13-year-old son, nephew and a friend.

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Reminder: “Libor, a key benchmark against which around $450 trillion of financial contracts are pegged from consumer loans to derivatives”

Senior Banker In UK Pleads Guilty In Libor Probe (Reuters)

A senior banker at a leading British bank has pleaded guilty to conspiracy to defraud in connection with the manipulation of Libor benchmark interest rates, becoming the first person in the UK to plead guilty to such an offence. The banker submitted the plea on Friday and an English High Court judge on Tuesday lifted court reporting restrictions on the case. Two men have already pleaded guilty in the United States to fraud offences linked to the rigging of Libor, a key benchmark against which around $450 trillion of financial contracts are pegged from consumer loans to derivatives, amid a global investigation.

Paul Robson, a British citizen and former senior trader at Dutch Rabobank and his former colleague, Takayuki Yagami, have pleaded guilty to participating in a scheme to rig the London interbank offered rate. Seven banks and brokerages have so far settled U.S. and UK regulatory allegations of interest rate rigging as a result of a global investigation and 17 men have been charged with fraud-related offences.

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“There has never been a crazier moment in history. The weeks before the outbreak of the First World War seem like a garden party compared to the morbid antics of these darkening days. America, you’ve been wishing fervently for the Zombie Apocalypse. What happens when you discover you can’t just change the channel?”

Must Be the Season of the Witch (Jim Kunstler)

As the Governor goblins at the Federal Reserve whistle past the graveyard of dead Quantitative Easing, and the US dollar magically expands like a prickly puffer fish, and Mario Drahgi does what it takes with Euro duct tape to patch all black holes of unpayable debt from Athens to Dublin, and Japan watches its once-wondrous economy congeal in a puddle of Abenomic sludge (with a radioactive cherry on top), and China chokes on its dollar-peg, and Russia waits patiently with its old friend, Winter, covering its back — and notwithstanding the violent chaos, beheadings, and psychopathic struggles across the old Levant, not to mention the doubling of Ebola cases every 20 days, which the World Health Organization did not have the nerve to project beyond 1.2 million in January (does the doubling just stop there?) — there is enough instability around the globe for the gentlemen of Wall Street to make one last fabulous fortune arbitraging the future before the boomerang of consequence circles this suffering planet and finally accomplishes what the Department of Justice under Eric Holder failed to do for six long years.

It’s the season of witch and you should be nervous. Especially if you live in apart of the world where money is used. Pretty soon nobody will know what any currency is really worth — at least for a while — or what anything else is worth, for that matter. Perhaps the fishermen of India will start using their worthless gold for sinkers. Jay-Z and Diddy will gaze down on their bling in despair, thinking, perhaps, they should have invested in Betamax players instead. In the time of anything-goes-and-nothing-matters, it’s dangerous to expect anything.

Here’s what I expect: the surge of the dollar is the crest of an historic Great Wave. A Great Wave is an awesome event, and its crest is a majestic sight, but soon the foam spits and hisses and the wave breaks and crashes down on the beach — say, out at the Hamptons — where hedge funders stroll to catch the last dwindling rays of a beautiful season, and all of a sudden they are being swept out to sea in the rip-tide that retracts all that lovely green liquidity, and no one is even left on the beach to weep for them. Indeed their Robert A. M. Stern shingled manor houses up behind the dunes are swept away, too, and the tennis courts, and the potted hydrangeas, and the Teslas, and all the temporal bric-a-brac of their uber-specialness.

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Oct 042014
 
 October 4, 2014  Posted by at 9:19 pm Finance Tagged with: , , , , ,  16 Responses »


Jack Delano Atchison, Topeka & Santa Fe line at Duoro, NM March 1943

Weekend. Saturday. Beautiful Indian summer imitation where I’m presently located in western Europe. Good time to start out with an empty sheet of text file (for lack of a better term), and stream some consciousness.

Most people must have figured out that things in the economic sphere haven’t gotten any quieter lately. That’s at least something. Stock exchanges in the developed world jumped from a -1%+ loss one day to a 1%+ gain the next. Volatility, nerves, and probably ritalin, have returned. You have to wonder what that means in markets reigned supreme by high-frequency robot traders and central banks, but nevertheless, the public perception remains. And perception is key.

At first glance, US data coming in on Friday look positive, with more jobs and a lower unemployment rate of 5.9%. Bloomberg even had a headline that said the real payrolls increase was 600,000 jobs, instead of the ‘official’ BLS 248,000, because American wage slaves allegedly worked 0.1 hour more per week, 34.6, up from 34.5 in August.

The most since May 2008, the article claims, citing Deutsche’s Joseph LaVorgna. I’m sure if y’all clocked in those 0.1 hours, or 6 minutes, later, you really made them count. I just don’t know whether to laugh or cry when I see things like that reported.

What would seem to me to matter more is the rates in labor participation and Americans not in the labor force.Unfortunately, both are still ugly as warthogs and getting worse. New records all around, as Tyler Durden notes:

While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slid from an already three decade low 62.8% to 62.7% – the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232,000 people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!

But, you know, that’s just the usual nonsense from the usual suspects, and at least today for once we can confidentially state that America is not the horse most likely to be slaughtered tomorrow morning at the glue factory. Drinks all around! Just make sure you finish them within 6 minutes. Or if want to really help out, hand on to your glasses for 10 minutes, and raise job numbers, as calculated by Bloomberg and Deutsche, by a million …

Anyway, the US, the greenback, that’s this week’s story. And it will be for a while to come. The Fed has gone out all guns blazing, cold turkey QE, push up the dollar, (10% or so vs the ‘basket’ of currencies in no time), and the finishing touch waiting in the wings, the rate hike.

The US economy in the months ahead is set to shine. The higher dollar and rates will throw lots of Americans out of their – export-oriented – jobs, but you’re not going to see that reflected in the numbers. Remember how Obama said he was going to double exports in 5 years? That lofty thought is long gone; the basic reality always was.

America is in the process of calling its – dollar – children home. All it needs to do is execute those three steps: QE, dollar, interest rates. That will increase its power, economic and therefore political, over the rest of the world to such an extent that many nations will effectively turn to panhandlers in Lower Manhattan.

Emerging markets, and economies, are the easiest victims. They have risen to what seemed to be great heights, despite the global financial crisis – or is it because of it? – in the past 7-8 years, on the wings of loose monetary policy. From the Fed, from other central banks. Now they need to roll-over the debts that made them shine, and they find themselves having to scramble for the dollar their debts are denominated in.

Every step in the three step program, QE, dollar, interest rates, makes it harder and – much – more expensive for them to service their debts. And the effects haven’t even truly started to sink in yet. For that matter, even the Fed policies haven’t. 2015 is not going to be a nice year for the citizens of Brazil, Thailand, Turkey, you name them, and there will be an enormous amount of unrest and fighting and worse.

Whoever prints the reserve currency rules the world, and the lives of untold millions trying to make a better future for their kids. That last bit: not going to happen.

Japan still plays the role of a rich society, and convincingly, but in reality it’s done. It has been able to keep up appearances more or less so far by selling state debt to its own citizens, but Mrs. Watanabe is not a complete fool. If your 2nd quarter GDP is down -7.1%, that’s not some minor detail.

The final blow to the Japanese economy will be delivered by PM Abe’s insistence that the main pension funds invest in stocks, which will plummet in the upcoming global market plunge – or recalibration if you will -. At which point Abe will be left with two choices: either he leaves in disgrace, not a favorite pastime among the Japanese, or he declares war on China over a bunch of islands. I think Abe’s mind is made up.

As for China, it will have to accept that growth numbers will be way below what it desires, and that ‘massaging’ those numbers is not a solution anymore than it is in Washington, although creative accounting can buy time. The present ‘official’ Beijing growth target is 7.5%, but the real number is nowhere near that.

Which is a huge problem in a society built on the effects and consequences of the higher numbers. Like the by far largest human migration in history, which has seen 100-200 million Chinese peasants into urban centers. And the empty apartment buildings these former peasants have ‘invested’ their hard earned money in. And the unprecedented pollution and other devastation in the areas the peasants came from, to which they can now never return and make a living.

I have no idea how the sequence of Xi’s and Li’s plan to keep that burning cooking cauldron in check, but there’s no way this is going to be pretty and peaceful. Hong Kong is a 5 year old girl’s birthday party compared to what’s coming. And a soaring US dollar will hit the Forbidden City, just as it will most of the world, like a sledgehammer.

And then there’s Europe.. Which needs no help on the way down, it has all the boxes ticked for a descent into mayhem. From what I can see, it will take years for Brussels to admit that Brussels is a really bad idea (and it eats women and children alive), other than as the capital of Belgium, and Europe doesn’t have those years. It needs to decide now that if Germany wants Greece in the eurozone and EU, it will have to pay big bucks for that. No such notion is even considered, but that makes it no less true.

The EU is a dead experiment, a Frankenstein and Mr. Hyde all in one. But no-one wants to see it, and no-one has a clue. Well, wait till interest rates go back up to historically ‘normal’ levels, to 5% or so for the lowest, to 8% or so for you average mortgage loan. That should be interesting to watch.

It’s coming, though, courtesy of Grandma Yellen and the puppeteers that move her limbs and lips up and down. It’s time, wherever you are on the planet, to collect your belongings outside of the reach of the ‘system’, sit down on your porch, and watch the sky for that mushroom cloud on the horizon.