Category Archives: EU

The Euro Zone Race to the Bottom

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While the symptoms get continuous attention as they get threatening enough, the underlying cause-the austerity- does not.

The euro zone, like most of the world, is failing to meet its further economic objectives because of a lack of aggregate demand.

And in the euro zone, the fundamental problem is that the member nations, as credit sensitive ‘currency users’ are necessarily pro cyclical in a downturn, much like the US states, and therefore incapable of independently meeting their further economic objectives.

So even as the euro zone struggles to address it’s solvency crisis that threatens the union itself as well as at least part of what remains of the global financial architecture, the underlying shortage of euro net financial assets continues to undermine output and employment, with GDP growth now forecast to fall to 0 with a chance of going negative in the current quarter.

What this means is that without adopting an alternative to the current policy of applying enhanced austerity as the means of addressing the solvency issue, it all remains in a very ugly downward spiral with social collapse far less than impossible.

So yes, the solvency issue can continue to be managed by the ECB, the issuer of the euro, continuing to buy national government debt as needed. But that doesn’t add net euro financial assets to the economy. It merely shifts financial assets held by the economy from the debt of the national governments to deposits at the ECB. So it does nothing with regards to output, employment, inflation, etc. as recent history has shown.

In fact, nothing the world’s central banks do adds net financial assets to their economies. And much of what they do actually removes net financial assets from their economies, making things worse. Note that last year the Fed turned over some $79 billion in profits to the Treasury. Those profits came from the economy, having been removed from the economy by the Fed’s policy of quantitative easing, which the old text books rightly used to call a tax.

And meanwhile, the imposed austerity that accompanies the bond purchases does directly alter output and employment- for the worse.

Additionally, for all practical purposes, there is universal global support for austerity as the means supporting global output and employment.

So even if the euro zone gets the solvency issue right, with the ECB writing the check to remove all funding constraints, the ongoing austerity will continue to depress the real economies.

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Greek Vote Threatens Bailout

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The obvious hasn’t been making the headlines:

A no vote means a lot more immediate austerity than a yes vote.

A no vote means Greece can’t borrow at all, and therefore govt. checks will only clear if Greece immediately cuts back to where it is only spending tax revenue.

A yes vote means Greece can continue to spend quite a bit more than tax revenues, to the tune of the check from the benefactors.

And with no one in government at any level having any kind of a plan to leave the euro, and no idea how to manage a new currency in any case, that option continues to have no political support.

So the choices are:
Yes, we accept a relatively modest deficit cut as per the EU proposal.
No, we prefer to go cold turkey to a balanced budget and a seriously draconian cut.

Meanwhile, tick, tick, tick, the entire euro economy continues to slow, and continuously nudge up the entire region’s budget deficit, as they all work their way towards the same fate as Greece.

And, tick, tick, tick, the US deficit reduction process moves forward, with multi trillion dollar reductions already proposed by both parties.

Greek Vote Threatens Bailout

By Alkman Granitsas, Marcus Walker, and Costas Paris

November 1 (WSJ) — ATHENS—Greek Prime Minister George Papandreou stunned Europe by announcing a referendum on his country’s latest bailout—a high-stakes gamble that could undermine the international effort to preserve the euro.

A “yes” vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.

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Early Holiday Cheer…

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As discussed last week, the latest euro package just announced is unravelling quickly as markets again realize there is no actual substance, and no operational path with regards to carrying any of it out. So things will deteriorate as described until markets again force further ‘action.’

At the same time, the austerity continues to weaken the euro economies, with Q4 potentially going negative, driving deficits that much higher in the process.

The ‘answer’ remains the ECB writing the check, which they’ve sort of seemed to recognize, but they remain (errantly) concerned that reliance on the ECB is inherently inflationary, and thereby violates the ECB’s mandate for price stability. So it won’t happen until things again get bad enough to force it to happen.

The catastrophic risk remains a failure, when push comes to shove, to allow the ECB to write the check as they have been doing to allow it all to muddle through.

The range of outcomes couldn’t be wider. Write the check and not much happens, don’t write the check and there is unthinkable collapse.

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

Toss in West Texas crude prices heading to Brent levels of about $110/barrel as the strategic petroleum reserve release winds down over the next three weeks and the looks to me like the US consumer crawls back into his foxhole just in time for the holiday season.

Not to mention Japan now darning the torpedoes and buying dollars to take back a bit of the export market they lost by kowtowing to former tsy sec paulson’s demands to not be a ‘currency manipulator’ in the context of still weakening global demand in general.

The number one threat to world order remains a failure to sustain demand. The good news is sustaining aggregate demand is a simple matter once the monetary system is understood. The bad news is there seems to be no one of authority who doesn’t have it all backwards.

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Germany, the 10th plague

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Ok, it’s a stretch, but the biblical story of the 10 plagues does come to mind.

One by one various member nations have seen their funding taken away. The process begins with interest rates spiking to the point where, for all practical purposes, they can’t fund themselves without outside assistance.

There has been blood in the streets of Greece.

And the latest spread of the contagion to French interest rates, however politically incorrect, does bring to mind the plague of frogs, which was closely followed Sarkozy’s begging for the ECB, only to be turned down by Germany’s still hard hearted Merkel.

So might it be with the 10th plague, the killing of the first born, which, in the case of the euro is Germany, we will see the final liberation of the euro zone from it’s enslaving institutional structure?

Maybe next spring? When the chauffeur drives up in a Nissan to take them to the promised land?

Watching those German rates closely!

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Sarkozy Yields on ECB Crisis Role

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He’ll be back…The way things are going there is no alternative, a point market forces continue to make.

And no amount of tea from China, at any price, would be sufficient given current institutional structure and policy.

And more discussion on whether Greece should be allowed to default, even as haircut talk rises to 60%, and as the notion of ‘voluntary’ comes under further discussion. After all, if they don’t have to pay their debts, why should any other member nation have to pay its debts? etc.

Sarkozy yields on ECB crisis role, pressure on Italy

By Julien Toyer and Andreas Rinke

October 24 (Reuters) — European Union leaders made some progress towards a strategy to fight the euro zone’s sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis.

Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market.

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From a friend in the euro zone public financial sector

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“The problem is that in Europe you have 2% of people, acting in bad faith, that pursue the agenda that Alain Parguez has denounced several times and who are also unfortunately in top decision making positions. Then there is the 0.001% of people who understand the problems and try to solve them, but in general they have limited influence. Finally the 98% majority, composed of perfect idiots, is mostly influenced by the first group and thinks the second group is made of marginal people and dangerous side-liners.”

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GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT

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The news out of Europe has turned from mixed for the last week or so to troubling.

On the one hand they seem to realize that the answer is the ECB writing the check, and on the other they seem to be saying they don’t want to do that. And on the one hand they say Greece won’t default, and on the other is a serious discussion of the ramifications of default. And as the haircut talk on private holders of Greek debt has gone from 21% to 50% and maybe more, the ECB says they will keep their Greek bonds which will presumably mature at par, but at the same time additional ECB capital calls are under consideration due to what they call increased risk of loss.

The idea that the EFSF alone writing checks to support Portugal, Spain, and Italy would weaken the credit worthiness of the core has also been discussed, which is why talk of ECB support had materialized.

Meanwhile, even as the austerity continues to bite, perhaps to the point where the austerity is now causing deficits to be larger, additional austerity measures continue to be demanded and imposed.

And where the banks stand with regard to solvency is anyone’s guess as well.

In other words, it’s all moving further away from any sense of resolution, with uncertainty about as high now as it’s ever been, as is the potential for a catastrophic financial event.

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Retail Sales and euro dynamics

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Agreed.

Fundamentally, the 8%+ US federal budget deficit continues to support sufficient aggregate demand for modest GDP growth. Market participants don’t seem to understand this and were discounting a far higher probability of a recession than otherwise.

The strong euro/weak dollar strong stock dynamic continues, with the ECB continuing it’s strong euro policy of forced austerity in exchange for funding. However, this policy also slows growth in the euro zone, which tends to push deficits higher through softer tax revenues and higher transfer payments. At some point this means the ECB has to reconsider a policy designed to bring deficits down that is instead causing them to rise. The problem is they have no such alternative policy, and instead are looking for tight fiscal policy to drive exports. The problem with that is that without a policy of buying $US (the old German model), instead of exports rising, the euro rises to the point where trade stays relatively balanced, as has been the case since the inception of the euro.

Meanwhile, they seem to have responded adequately to the solvency issue with the ECB writing the check as needed. But with a slowing economy the checks the ECB must write get geometrically larger, which, while not an operational constraint, are a daunting political challenge that can quickly throw it all into even more disarray.


Karim writes:

  • Better than expected at 1.1% headline and 0.6% control group, and net +0.5% revisions to July and August control group.
  • Motor vehicles and parts clearly lifted in mid to late Q3 from end of supply chain disruptions
  • And lower gas prices also helping
  • These forces are looking to bring Q3 and Q4 growth near 2.5%, lower than the 3% plus that the Fed was looking for in Q2, but stronger than the post-debt ceiling debacle private sector consensus.
  • Also strong enough to delay need for ‘additional measures’ from Fed, though they will continue to be discussed in light of risks from Europe (via trade impact as well as financial conditions impact (fx, equities, bank lending,etc).

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