The Man from Snowy River

By Banjo Paterson

So Clancy rode to wheel them — he was racing on the wing
Where the best and boldest riders take their place,
And he raced his stock-horse past them, and he made the ranges ring
With the stockwhip, as he met them face to face.
Then they halted for a moment, while he swung the dreaded lash,
But they saw their well-loved mountain full in view,
And they charged beneath the stockwhip with a sharp and sudden dash,
And off into the mountain scrub they flew.

Unemployment is everywhere and always a monetary phenomenon, and necessarily a government imposed crime against humanity. The currency is a simple public monopoly.

The dollars to pay taxes, ultimately come from government spending or lending (or counterfeiting…)

Unemployment can only happen when a govt fails to spend enough to cover the tax liabilities it imposed, and any residual desire to save financial assets that are created by the tax and by other govt policy.

Said another way, for any given size government, unemployment is the evidence of over taxation.

Motivation not withstanding, David Stockman has long been aggressively promoting policy that creates and sustains unemployment.

Comments below:

State-Wrecked: The Corruption of Capitalism in America

By David Stockman

March 30 (NYT) — The Dow Jones and Standard & Poors 500 indexes reached record highs on Thursday, having completely erased the losses since the stock markets last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later within a few years, I predict this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Phony money? What else are $US other than credit balances at the Fed or actual cash in circulation? Of course he fails to realize US treasury securities, also known as ‘securities accounts’ by Fed insiders, are likewise nothing more than dollar balances at the Fed, and that QE merely shifts dollar balances at the Fed from securities accounts to reserve accounts. It’s ‘money printing’ only under a narrow enough definition of ‘money’ to not include treasury securities as ‘money’. Additionally, of course, QE removes interest income from the economy, but that’s another story…

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion).

And also debited/reduced/removed an equal amount of $US from Fed securities accounts. The net ‘dollar printing’ is 0.

Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the bottom 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

Yes, and anyone who understood monetary operations knows exactly why QE did not add to sales/output/employment, as explained above.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants,

‘Paying off the debt’ is simply a matter of debiting securities accounts at the Fed and crediting reserve accounts at the Fed. There are no grandchildren or taxpayers involved, except maybe a few to program the computers and polish the floors and do the accounting, etc.

unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nations bills.

The nations bills are paid via the Fed crediting member bank accounts on its books. Today’s excess capacity and unemployment means that for the size govt we have we are grossly over taxed, not under taxed.

By default, the Fed has resorted to a radical, uncharted spree of money printing.

As above, ‘money printing’ only under a narrow definition of ‘money’.

But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

With floating exchange rates, bank liquidity, for all practical purposes, is always unlimited. Banks are constrained by capital and asset regulation, not liquidity.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008.

There is nothing to ‘burst’ as for all practical purposes liquidity is never a constraint.

Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even todays feeble remnants of economic growth.

This dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, weve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

The currency itself is a simply public monopoly, and the restriction of supply by a monopolist as previously described, is, in this case the cause of unemployment and excess capacity in general.

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (clean energy, biotechnology) and, above all, bailing out Wall Street they have now succumbed to overload, overreach and outside capture by powerful interests.

He may have something there!

The modern Keynesian state is broke,

Not applicable. Congress spends simply by having its agent, the tsy, instruct the Fed to credit a member bank’s reserve account.

paralyzed and mired in empty ritual incantations about stimulating demand, even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

Some truth there as well!

The culprits are bipartisan, though youd never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry.

Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed.

Actually it was the Texas railroad commission pretty much fixing the price of oil at about $3 that did the trick, until the early 1970′s when domestic capacity fell short, and pricing power shifted to the saudis who had other ideas about ‘public purpose’ as they jacked the price up to $40 by 1980.

Then came Lyndon B. Johnsons guns and butter excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nations debt obligations by finally ending the convertibility of gold to the dollar. That one act arguably a sin graver than Watergate meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today.

It also happens to equal the ‘savings’ of financial assets of the global economy, with the approximately $16 trillion of treasury securities- $US in ‘savings accounts’ at the Fed- constituting the net savings of $US financial assets of the global economy. And the current low levels of output and high unemployment tell us the ‘debt’ is far below our actual desire to save these financial assets. In other words, for the size government we have, we are grossly over taxed. The deficit needs to be larger, not smaller. We need to either increase spending and/or cut taxes, depending on one’s politics.

This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply.

And the never ending expansion of $US global savings desires, including trillions of accumulations in pension funds, IRA’s, etc. Where there are tax advantages to save, as well as trillions in corporate reserves, foreign central bank reserves, etc. etc.

As everyone at the CBO knows, the US govt deficit = global $US net savings of financial assets, to the penny.

The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

It was the Saudis hiking price, not the Fed. Note that similar ‘inflation’ hit every nation in the world, regardless of ‘monetary policy’. And it ended a few years after president Carter deregulated natural gas in 1978, which resulted in electric utilities switching out of oil to natural gas, and even OPEC’s cutting of 15 million barrels per day of production failing to stop the collapse of oil prices.

Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedmans penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the Greenspan put the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash was reinforced by the Feds unforgivable 1998 bailout of the hedge fund Long-Term Capital Management.

The Fed didn’t bail out LTCM. They hosted a meeting of creditors who took over the positions at prices that generated 25% types of annual returns for themselves.

That Mr. Greenspans loose monetary policies didnt set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia.

No, because oil prices didn’t go up due to the glut from the deregulation of natural gas .

By offshoring Americas tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspans pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust.

No, it wasn’t about Greenspan, it was about the private sector and banking necessarily being pro cyclical. And the severity of the bust was a consequence of the Clinton budget surpluses ‘draining’ net financial assets from the economy, thereby removing the equity that supports the macro credit structure.

Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They China and Japan above all accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. Weve been living on borrowed time and spending Asians borrowed dimes.

Yes, the trade deficit is a benefit that allows us to consume more than we produce for as long as the rest of the world continues to desire to net export to us.

This dynamic reinforced the Reaganite shibboleth that deficits dont matter and the fact that nearly $5 trillion of the nations $12 trillion in publicly held debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan one reason I resigned as his budget chief in 1985

I wonder if he’ll ever discover how wrong he’s been, and for a very long time.

was the greatest of his many dramatic acts. It created a template for the Republicans utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation

Hadn’t heard about an US bankruptcy filing? Am I missing something?

through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism for the wealthy.

He’s almost convinced me deep down he’s a populist…

The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable hot money soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

Can’t argue with that!

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Streets gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.

The shameful part was not making a fiscal adjustment when it all started falling apart. I was calling for a full ‘payroll tax holiday’ back then, for example.

There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding.

While the actual policies implemented were far from my first choice, they did keep it from getting a lot worse. Yes, it would have ‘burned out’ as it always has, but via the automatic fiscal stabilizers working to get the deficit high enough to catch the fall. I would argue it would have gotten a lot worse by doing nothing. And, of course, a full payroll tax holiday early on would likely have sustained sales/output/employment as the near ‘normal’ levels of the year before. In other words, Wall Street didn’t have to spill over to Main Street. Wall Street Investors could have taken their lumps without causing main street unemployment to rise.

Instead, the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but ruinous. The auto bailouts, for example, simply shifted jobs around particularly to the aging, electorally vital Rust Belt rather than saving them. The green energy component of Mr. Obamas stimulus was mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent.

Some good points there. But misses the point that capitalism is about business competing for consumer dollars, with consumer choice deciding who wins and who loses. ‘Creative destruction’ is not about a collapse in aggregate demand that causes sales in general to collapse, with survival going to those with enough capital to survive, as happened in 2008 when even Toyota, who had the most desired cars, losing billions when 8 million people lost their jobs all at once and sales in general collapsed.

Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster.

Ok, apart from the ‘borrowed money’ part. Congressional spending is via the Fed crediting a member bank reserve account. They call it borrowing when they shift those funds from reserve accounts at the Fed to security accounts at the Fed. The word ‘borrowed’ is highly misleading, at best.

But even Mr. Obamas hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour.

And ‘unprinted’ securities accounts/treasury securities at exactly the same pace, to the penny.

Fast-money speculators have been purchasing giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets.

Probably true, though quite a few ‘headline’ fund managers and speculators have apparently been going short…

If and when the Fed which now promises to get unemployment below 6.5 percent as long as inflation doesnt exceed 2.5 percent even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs profits. Notwithstanding Mr. Bernankes assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.

It’s about setting a policy rate. The notion of prison isn’t applicable.

While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul D. Ryan, the chairman of the House Budget Committee, are terrified of telling the truth: that the 10-year deficit is actually $15 trillion to $20 trillion, far larger than the Congressional Budget Offices estimate of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs in the next decade, compared with only 2.5 million in the last 10 years, is only one of the more extreme examples of Washingtons delusions.

And with no long term inflation problem forecast by anyone, the savings desires over that time period are at least that high.

Even a supposedly bold measure linking the cost-of-living adjustment for Social Security payments to a different kind of inflation index would save just $200 billion over a decade, amounting to hardly 1 percent of the problem.

Thank goodness, as the problem is the deficit is too low, as evidenced by unemployment.

Mr. Ryans latest budget shamelessly gives Social Security and Medicare a 10-year pass, notwithstanding that a fair portion of their nearly $19 trillion cost over that decade would go to the affluent elderly. At the same time, his proposal for draconian 30 percent cuts over a decade on the $7 trillion safety net Medicaid, food stamps and the earned-income tax credit is another front in the G.O.P.s war against the 99 percent.

Never seen him play the class warfare card like this?

Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today.

Not that it will, but if it does and inflation remains low it just means savings desires are that high.

Since our constitutional stasis rules out any prospect of a grand bargain, the nations fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.

No description of what ‘fiscal collapse’ might look like. Because there is no such thing.

The future is bleak. The greatest construction boom in recorded history Chinas money dump on infrastructure over the last 15 years is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand.

Agreed.

The American machinery of monetary and fiscal stimulus has reached its limits.

Do not agree. In fact, there are no numerical limits.

Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too.

The state-wreck ahead is a far cry from the Great Moderation proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown seems likely to be contained. Instead of moderation, whats at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices a form of inflation that the Fed fecklessly disregards in calculating inflation.

It’s not at all disregarded. And the Fed has only done ‘pretend money printing’ since they ‘unprint’ treasury securities as they ‘print’ reserve balances.

These policies have brought America to an end-stage metastasis. The way out would be so radical it cant happen.

How about a full payroll tax holiday? Too radical to happen???

It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

These are the conclusions of his way out of paradigm conceptualizing.

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

Whatever…

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

I happen to fully agree with narrow banking, as per my proposals.

It would require, finally, benching the Feds central planners, and restoring the central banks original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.

Rhetoric that shows his total lack of understanding of monetary operations.

That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market recovery, artificially propped up by the Feds interest-rate repression.

No govt policy necessarily supports rates. Without the issuance of treasury securities, paying interest on reserves, and other ‘interest rate support’ policy rates fall to 0%. He’s got the repression thing backwards.

The United States is broke fiscally, morally, intellectually and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse.

How about a full payroll tax holiday???

If this sounds like advice to get out of the markets and hide out in cash, it is.

I tend to agree but for the opposite reason.

The deficit may have gotten too small with the latest tax hikes and spending cuts.

(feel free to distribute)

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_27/09/2012_463278

Greece’s biggest employers group on Thursday said that rising costs, poor infrastructure, higher borrowing costs and red tape were among the main reasons that the cost of goods in the country has not dropped despite the ongoing crisis.
In a memo sent to the Development Ministry on Thursday, the Hellenic Federation of Enterprises (SEV) set out six reasons for the stubborn prices. These were:

1. Soaring energy costs as a result of higher energy rates, including a special tax tagged on electricity and gas bills.

2. The escalating cost of mostly-imported raw materials.

3. Poor infrastructure services. The report cited the substandard cargo loading and unloading facilities at the port of Volos, in central Greece, as an example.

4. The high transport costs which undermine competition.

5. The extra financial strain caused by the doubling of borrowing costs over the past year, the deterioration of payment terms for imported materials (e.g. packaging materials), the significant increase in taxes, and the long delay in VAT reimbursement.

6. Red tape and a complex administrative structure.

“Compressing labor costs is not fundamental in reducing prices,” SEV said in the memo. “A good example is energy intensive industries where energy costs make up for 40-50 percent of production costs. To offset the recently-imposed 20 percent rise in energy bills you would have to reduce labor costs by 80percent,» it said.

The federation said that the key steps for reducing the prices of manufactured products were lowering taxes, removing regulatory and administrative barriers, and improving the efficiency of the notoriously dysfunctional state apparatus.

Greece’s international lenders, the International Monetary Fund and the European Union, have demanded a reduction in labor costs to make the country more competitive.

But many Greeks, who have seen their disposable income plummet over the last few years, are frustrated that the cost of living has not fallen as well.

Tens of thousands of demonstrators took to the streets of Athens on Wednesday in protest at the anticipated cuts.

Falls under ‘will do whatever it takes’
;)

Greece is in the process of trying to secure funding from Greek local banks to payoff 2.6 bb in Greek Government bonds maturing this month (4.10% 8/20/12) that are owned by the ECB and EIB. The Eurozone turned down a request from Greece for a bridge loan to pay off the maturing bonds. For their part, the ECB rejected a proposal from Greece to delay the payoff until September when Greece hopes to receive its next tranche of funding. However, the local banks have apparently been given approval to lend Greece the funds it needs to pay off the bonds and avoid a default. The Greek banks will then be allowed to use the loans as collateral at the Bank of Greece’s ELA program to secure the funds for the loan to Greece.

 
Again, here is a non-standard measure being considered to fund sovereigns that involves central bank funding, even if it is not directly the ECB’s direct lending.
This is just another example of access to unlimited funding via central banks.

Looking like it was another ‘buy the rumor sell the news’ near term.

After you do the maths it still doesn’t add up.

It can’t add up.

Ever.

Given today’s institutional structures- pension funds, insurance reserves, etc.- that include massive, tax advantaged, demand leakages where private sector credit expansion is bound to periodically fall short full employment levels. And with the private sector necessarily pro cyclical, counter cyclical fiscal adjustments are, for all practical purposes, entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations.

In other words, as previously discussed, the maths can’t add up without the ECB, directly or indirectly, writing the check.

And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency.

The last few weeks have demonstrated that the ECB does ‘write the check’ for bank liquidity even though it’s not legally required to do that,(and even though some think it’s not acting within legal limits) but it won’t just come out and say it.

And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call ‘voluntary’, no government has missed a payment, also with indirect ECB support either through bond buying or via the banking system, but, again, it won’t just come out and say it’s an ongoing policy.

So while the ECB can and has ‘written the check’ as needed, there has been no formal proclamation of any sort that it will continue to do so. Nor does it look like there will be any such over policy announcement for a considerable period of time.

This means any manager of ‘other people’s money’ with any fiduciary responsibility will continue to remain on the sidelines.

And even as markets fluctuate, and then some, underneath it all payments are met on a timely basis and the banking system continues to function to service deposits and loans.

And budget deficits will continue to be deemed too large, (at least until private sector credit expansion exceeds the ‘savings desires’/demand leakages) ensuring the maths don’t ever add up without the assumption of the ECB writing the check.

One last thing.

Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road.

A good economy with rising debt and ECB support to keep it all going isn’t even a consideration.

They’ve painted themselves into an ideological corner.

And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance.

This economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart.

The founders of the euro believed a single currency would work to prevent a third great war. So they did what it took politically to get the consensus needed to create the euro. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.

Yes, a banking license means unlimited ECB support.
The ‘talk’ continues to move in the right direction.

*HOLLANDE SAYS BANKING LICENSE WOULD GIVE ESM `GREATER POWER’
*HOLLANDE SAYS MANY IDEAS ON TABLE TO COMBAT CRISIS
*HOLLANDE SAYS EUROPE CAN IMPROVE ITS CRISIS RESPONSE
*HOLLANDE SAYS EUROPE HAS THE MEANS TO CONTROL ITS FUTURE
*HOLLANDE SAYS EUROPE MUST SO ITS DUTY ON GROWTH FOR GREECE
*HOLLANDE SAYS GREECE HAS MADE ENORMOUS EFFORTS
*HOLLANDE SAYS ITALY UNJUSTLY ATTACKED BY FINANCIAL MARKETS
*HOLLANDE SAYS HE’S IN AGREEMENT WITH MONTI ON GROWTH MEASURES
*HOLLANDE SAYS EUROPE NEEDS MECHANISMS AGAINST SPECULATION
*HOLLANDE SAYS GROWTH IS NECESSARY FOR DEBT REDUCTION
*HOLLANDE SAYS HAS `GREAT CONSIDERATION’ FOR MONTI’S LEADERSHIP

Hollande Says Europe Needs Mechanisms Against Speculation

By Gregory Viscusi

June 14 (Bloomberg) — French President Francois Hollande said that Italy has been unjustly attacked by financial markets and that Europe needs mechanisms to counter speculation.

Speaking in Rome today at a joint press conference with Italian Prime Minister Mario Monti, Hollande said that both leadders agreed on measures to spur economic growth. Growth is necessary for debt reduction, he said.

Europe must do its duty in helping to deliver growth for Greece, which has made enormous efforts during its bailout program, Hollande said.

Europe can improve its crisis response, and has the means to control its fuuture, he said. Many ideas are on the table to combat the crisis, he said, citing a banking license for the permanent rescue fund, which would give it “greater power.”

Except it’s just about an ‘allowable entry’, not a ‘fund’.

The BOG, functionally a ‘branch’ of the ECB, just ‘accounts for’ negative member bank balances as loans.

Presumably on a ‘legally’ collateralized basis.

That’s what CB’s do in the normal course of business.

CB’s don’t ‘have funds’ in their currency of issue any more than the scorekeeper in a card game has any points.

Europe Shares Seen Higher; Secret Greek Fund Revealed

By Matthew West

May 22 (CNBC) — European shares were set to open higher on Tuesday as investors came to the conclusion that the markets were most likely over-sold and news emerged overnight of around 100 billion euros ($127 billion) of liquidity provided by the European Central Bank to the Greek central bank to prop up Greece’s financial system.

US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

They have certainly had their ups and downs:

Click here for larger version

As previously discussed, for all practical purposes there is no political support for leaving the euro. The various populations simply do not trust their own governments with their currency:

Greece’s Tsipras: We Want Euro, but Not Austerity

By Michelle Caruso-Cabrera and Jennifer Leigh Parker

May 10 (CNBC) — The head of Greece’s Radical Left Coalition, Alexis Tsipras, told CNBC Thursday that he will “go as far as I can” to keep Greece in the euro zone, despite declaring earlier this week that the Greek bailout agreement is “null and void” and should be abandoned.

Tsipras (pronounced SEE-Pras), who was unable to form a coalition government this week after his party came second in Sunday’s election, said a Greek exit from the euro zone would be “disastrous.”

Tsipras said he is willing to negotiate with the so-called troika — the International Monetary Fund , the European Union, and theEuropean Central Bank — to keep Greece in the euro zone.

One of Marshall’s regular TV appearances.
Darn, he’s getting good at this!

CTV National Affairs

>   
>   (email exchange)
>   
>   On Tue, May 8, 2012 at 10:21 AM, John wrote:
>   
>   Norway’s oil sovereign wealth fund has sold all its holdings of Irish and Portuguese
>   government debt and reduced its ownership of Spanish and Italian bonds as part of a
>   continuing protest over its forced participation in Greece’s debt restructuring. The
>   fund also reduced its Italian sovereign debt position from about EUR 8bn in the middle
>   of 2011 to about EUR 3.5bn at the end of March this year.
>   

Greece did it, and sanctioned by the EU. They cut their deficit by 100 billion euro by decree, by what was called ‘private sector involvement’ which was, functionally, a bond tax.

Instead of another 100 billion of public sector service cuts and tax hikes on the population, they just taxed the holders of Greek bonds. And ostensibly nothing ‘bad’ happened, apart from a few banks changing a few numbers down on their books. Nor did the euro go down or inflation go up or anything else ‘monetary’ go wrong.

Pretty tempting for a new socialist govt in any euro member nation?
No more austerity, just a bond tax instead?
If Greece doesn’t have to pay, why do we?

But, so far, not a word from any of them.
The silence is deafening.
The risk very real.

Spotted by Sean Keane

It was also interesting to note an easily overlooked article in Greek online newspaper Kathimerini saying that the European Commission is pressuring the European Investment Bank to withdraw a clause that it recently inserted into its new loan contracts that were signed with a number of Greek companies. The new clauses allow for the repayment of debt in Greek Drachma instead of Euro, should the Greeks decide to leave the EU at some point in the future. Clearly the EC is displeased at one of the foremost European lending institutions legally embedding the possibility of something happening which the Commissioners all insist is impossible. Commissioner Olli Rehn reportedly called the clauses “unfortunate and incomprehensible2”. A cynic might note that the EIB has taken an appropriately commercial and realistic approach to the loans, free of the politics that surround the EC.

• Austerity everywhere keeps domestic demand in check and export channels muted
• Non govt credit expansion pretty much stone cold dead in the US and Europe
• Rising oil energy prices subduing global aggregate demand
• US federal deficit just about enough to muddle through with modest GDP growth
• Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
• Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
• All good for stocks and shareholders, not good for most people trying to work for a living
• Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.

‘Must’ is a good choice of words because if they fail the consequences are financially catastrophic.

*BINI SMAGHI: EU MUST RECOGNIZE PORTUGAL MAY NEED MORE AID

*BINI SMAGHI SAYS EU MUST ACT TO SHOW GREEK PSI AN EXCEPTION


*FORMER ECB OFFICIAL BINI SMAGHI COMMENTS IN FT OPINION ARTICLE

*BINI SMAGHI SAYS PORTUGAL MAY NEED EU100 BILLION *BINI SMAGHI SAYS IRELAND MAY NEED ADDITIONAL EU80 BILLION

Yes, assured that taxing bond holders works to lower deficits. That is, their public debt is sustainable after the PSI bond tax.

If anything, seems to me this kind of talk serves to keep investors away from any euro zone member debt.

Market Should Be Assured by Debt Deal: Greek Minister

By Reported by Silvia Wadhwa, Written by Catherine Boyle

March 12 (CNBC) — Greece has been tossed on the turbulent sea of global markets for almost two years now – but the bond swap deal secured on Friday should reassure markets about the country’s future, Greek Finance Minister and possible future prime minister Evangelos Venizelos told CNBC.

“Now we have a sustainable debt for a sustainable country,” he said. “And now we can persuade the market because we have a new, very important and very concrete argument: the sustainability of the public debt after the PSI (the private sector investor deal).”

“We have a very clear political declaration and position from the part of our institutional partners. We have a very clear statement from the part of the Eurogroup, but also of the Euro Summit. We have the support of the so-called “Official Sector” until the return of Greece in the market,” he added.

In regard to the euro zone officials insisting there will be no further haircuts:

‘The lady doth protest too much, me thinks.’

Mr. Dallara and the rest of the euro mob have as yet not come up with any reason any one nation wouldn’t be better off, as evidenced by Greece, with a whopping big tax on bond holders vs the usual tax hikes and spending cuts otherwise demanded.

Rest of Europe Shouldn’t Follow Greek Bailout: Dallara

By Margo D. Beller

Mar 9 (CNBC) — Charles Dallara, who represented bond holders in the Greek debt talks, told CNBC Friday he doesn’t expect other troubled EU countries such as Italy, Portugal and Ireland to need a similar bond swap.

“I would strongly discourage other governments, other peoples of Europe from going this route,” he said, adding the Greek situation “cast a cloud over the entire euro zone.”

None of these other countries “have the same extraordinary high levels of debt and deficits and none of them have quite the same distortions in the economic system. They are on the right path and should maintain the path of reform.”

Greece’s problems were unique, he said, and the resulting financial crisis was “extremely painful for the citizens of Greece” and “prevented the building of confidence” throughout the euro zone.

Dallara, managing director of the U.S.-based Institute of International Finance, was the chief negotiator representing private-sector holders of Greek debt in the largest bond restructuring in history.

He said he was “quite pleased” that 83.5 percent of the bond holders voluntarily accepted losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece’s crippling public debt.

“To see so many bondholders voluntarily deliver their bonds into this exchange is remarkable” and speaks to the desire for Europe and investors to “turn the page” on the whole European sovereign debt problem, he added.

Athens had said it would enforce the deal on all its bondholders, activating collective action clauses on the 177 billion euros worth of bonds regulated under Greek law.

That would potentially trigger payouts on the credit default swaps that some investors held on the bonds, an event which would have unknown consequences for the market.

Dallara said activating the collective action clauses was “one of the unfortunate dimensions” of the debt swap, but stressed it shouldn’t stop foreign investment in European sovereign debt.

“The issue is not just one of legal risk in investing in sovereign debt, it’s better credit analysis,” he said. “You have to understand the underlying credit risks.”

Will Greece Resolution Spark a Bigger Crisis?

By John Carney

Mar 8 (CNBC) — Markets around the world were buoyed on hopes that Greece’s long and winding journey to debt restructuring may at last be its final port of call.

But some are warning that this may actually be the beginning of a new and more dangerous crisis.

The private sector is being asked to write off more than 70 percent of the face value of their Greek government bonds in return for new debt. This will help Greece meet its debt obligations and enable it to tap into bailout funds from the EU and IMF.

It seems likely that other nations burdened by heavy debt loads and high interest rates may seek to follow Greece’s path to debt relief. If Greece doesn’t have to pay what it owes, they might argue, why should we? Call it Haircut Contagion.

European officials insist that Greece is a one-time deal, not meant to set a precedent for other nations. But it is easy to see that minority parties in debt-burdened European nations could find a demand for relief an attractive platform. Imposing a “tax” on bondholders rather asking citizens to pay higher taxes while public services are cut might prove popular with voters.

Demands for debt relief could take many forms. Greece has been able to encourage bond holders to participate in the debt swap by enacting laws that incorporated “collective action clauses” into the 86 percent of bonds governed by Greek law. These clauses allow super-majorities of bond holders to force hold-outs to participate in swaps. Other countries in the euro zone could replicate this strategy.

“Effectively, this is a large gift from the Greeks to the parts of the euro zone that face debt crises. By conducting its debt exchange in the way it did, Greece has in effect resurrected the plausibility of purely voluntary debt-reduction operations in Europe,” Moody’s has explained.

Such demands would put new strains on the global financial system. While Europe’s banks and insurance companies can withstand losses on Greek debt, a series of similar haircuts might destabilize the system and render some institutions insolvent.

Warren Mosler, a trader based in the Virgin Islands who is credited with creating the euro-swap futures contract, fears that all it would take to set off a panic would be serious political discussion of widespread haircuts.

“The idea of Greek default transformed from being a Greek punishment to a gift, with the pending question: ‘If Greece doesn’t have to pay, why do I?’ — threatening a far more disruptive outcome that is yet to be fully discounted,” Mosler writes on his website, Mosler Economics. “That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen.”

He has spelled out exactly what he thinks would happen in a Haircut Contagion crisis.

“Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up,” Mosler writes.

A recent paper cited by Reuters took a much more sanguine approach to the likelihood of Haircut Contagion. The ratings agency figures that countries may attempt to receive modest debt relief in exchange for giving up their rights to unilaterally change the terms of their debt. They could do this, for example, by restructuring bonds governed by domestic law into foreign law bonds, mostly likely governed by English law.

“Holders of local-law governed bonds in other euro zone countries that are perceived to be at risk might want to make a trade for English-law governed bonds,” Jeromin Zettelmeyer, deputy chief economist at the European Bank for Reconstruction and Development, and Duke University Professor Mitu Gulati, wrote in the paper. “Depending on how much these bondholders would be willing to pay to make this trade, it could serve the interest of the country as well to make it.”

Of course, countries that agreed to make this swap would be sacrificing a lot of their future flexibility. Some might find it too high a price to pay. In a sense, converting their debt to foreign jurisdiction bonds would be like doubling-down on the structural problems with the euro zone. The countries that did this would sacrifice sovereignty over their debt to achieve lower interest rates, much like they sacrificed monetary sovereignty for the currency union.

And it’s not clear that this would be all that attractive to bondholders, either. After all, a country that cannot or will not pay its debt cannot be forced to, just because the bonds are subject to foreign law.

The hope of European leaders was that preventing a disorderly default in Greece would avoid a domino effect of sovereign debt defaults. The danger, however, is that debt relief for Greece could spark a new and unexpected Haircut Contagion crisis.

Talk of widespread haircuts getting more serious. As previously discussed, this has the potential for catastrophic global financial meltdown.

Analysis: Greek default may be gift to other euro strugglers

By Mike Dolan

Mar 7 (Reuters) — Greece’s tortuous debt restructuring and threat of retroactive laws to compel reluctant creditors heaps regulatory risk onto investors but may make voluntary sovereign debt revamps more attractive and likely for other cash-strapped euro sovereigns and their creditors.

Thursday could mark a climax of the Greek debt workout with private creditors due to respond to an offer that would see them effectively write off more than 70 percent of the face value of their bonds in return for new debt with a series of sweeteners.

With Greek government bonds currently trading at less than 20 cents in the euro and the risk of a total wipeout if Greece decided to unilaterally refuse all payments, a majority will likely go for it. Legally-binding majorities are another matter.

Athens said this week it aims for 90 percent acceptance but if the takeup is at least 75 percent then it would consider triggering so-called “collective action clauses” retroactively inserted into the bonds issued under Greek law — about 85 percent of the 200 billion euros being restructured.

Those clauses in practice force all affected creditors to comply.

But it’s this distinction between debt issued under domestic laws and that sold under internationally-accepted English law that some say has consequences for other troubled euro nations eyeing Greece’s so-called Private Sector Involvement, or PSI.

A GIFT FROM GREECE

In essence, English-law Greek bonds, as is the case for many emerging market sovereigns, trade as if they were senior to local-law debt — at almost twice the price in fact right now. That’s because the terms of foreign-law bonds cannot be altered by an Athens parliament, and agreement for debt swaps is needed bond-by-bond, unlike local laws that aggregate majorities across all debtors and make blocking minorities more difficult to muster.

A paper released this week by Jeromin Zettelmeyer, deputy chief economist at the European Bank for Reconstruction and Development, and Duke University Professor Mitu Gulati reckons this legal gulf could well encourage other debt-hobbled euro zone countries and their creditors into mutually acceptable and beneficial debt restructurings.

This would involve an agreed switch in the legal status of the debt in return for relatively modest haircuts.

“Holders of local-law governed bonds in other euro zone countries that are perceived to be at risk might want to make a trade for English-law governed bonds,” the economists wrote. “Depending on how much these bondholders would be willing to pay to make this trade, it could serve the interest of the country as well to make it.”

The sovereign gets a chance to reduce a crippling debt burden while bondholders get greater contractual protection in any future restructuring.

Given that the Greek precedent of retroactive legislation vastly increases the allure of foreign-law bonds, which credit rating firm Moody’s says now make up less than 10 percent of all euro zone government bonds, a window of opportunity may open up.

“Effectively, this is a large gift from the Greeks to the parts of the euro zone that face debt crises. By conducting its debt exchange in the way it did, Greece has in effect resurrected the plausibility of purely voluntary debt-reduction operations in Europe.”

Although Berlin, Paris and Brussels insist the Greek case is a one-off and European Central Bank liquidity has insulated the wider banking system, Portugal’s 10-year bonds still trade as low as 50 cents in the euro and many creditors reckon it will be very difficult for the country to avoid some restructuring.

Even the 10-year debt of fellow bailout recipient Ireland, which many investors reckon has the underlying economic capacity to go back to the markets next year, is still trading at less than 90 cents in the euro and many doubt its imminent market return.

“We still expect a sizeable growth undershoot and deficit overshoot and expect that Ireland will need a second financing package (which may include PSI) beyond 2013,” economists at Citi said on Monday.

What’s more, if Europe’s new fiscal pact is rejected by voters in a planned referendum there in the coming months, Ireland would lose access to the financial backstop of the European Stability Mechanism and likely unnerve many investors.

Yet voluntary debt swaps with some debt relief stemming from more modest haircuts than Greece may well be the best way to ensure these two countries avoid outright default and return to private financing in a reasonable amount of time.

And if such exchanges were wholly voluntary, it would also mean credit default swap insurance would not pay out — a stated aim for many euro policymakers concerned about the speculative nature of a market where it’s possible to buy insurance on something you don’t own.

One danger is that the prospect of countries opting for such a swap may scare creditors in larger countries like Italy and Spain where currently no bond haircut is expected by the market, thanks in large part to the ECB’s liquidity injections.

And the upshot for many economists is that there will be a longer-term price to pay for governments for tinkering with the rules of the game, as many investors view it, via the likes of retroactive bond legislation and obfuscation of CDS markets.

“Investors will expect a premium for bearing this regulatory risk,” Morgan Stanley’s Manoj Pradhan told clients in a note, adding that only central bank liquidity floods were now obscuring the resultant higher financing costs and there would be a dangerous blurring of lines between macro and market risks.

But given that indiscriminate cheap lending was seen as at least partly responsible for the credit binge and bust of the past five years, maybe higher risk premia are not all bad.

I agree that the ECB is ‘backing off’ and will only again engage if it gets bad enough.

Back to the analogy of watering the flower only when it’s about to die.

They don’t realize that it needs continuous watering in the normal course of events.

14 more days to the Greek payment date.

Unfortunately, looking like darned if you do and darned if you don’t.

ECB after the LTROs: It is up to governments now

After the implementation of the second 3-year LTRO last week, the ECB now is likely to believe it has done enough to stabilise the Euro area’s financial system and, implicitly, the funding situation for peripheral governments. Any announcement of further non-standard measures seems unlikely at this stage, as the Governing Council now views the ball as being squarely in the court of governments.