Tuesday, 26 June 2012

Mish's Global Economic Trend Analysis


Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Germany's Finance Minister Lectures Obama On Debt, Defends Euro, says German Referendum Needed Soon

Posted: 25 Jun 2012 02:06 PM PDT

President Barack Obama should focus on cutting America's own budget deficit before advising Europe on how to tackle its debt problems says German finance minister Wolfgang Schäuble in the Spiegel article in Germany Rejects Obama's Criticism in Euro Crisis
German Finance Minister Wolfgang Schäuble rebuffed recent criticism of Germany's handling of the euro crisis from Barack Obama, telling the US president to get his own house in order before giving advice.

"Herr Obama should above all deal with the reduction of the American deficit. That is higher than that in the euro zone," he told German public broadcaster ZDF on Sunday night.

Obama, worried about the impact of the debt crisis on the global economy and financial markets -- and on his own prospects for re-election --has been urging Europe to step up its efforts to tackle the problem.

In the interview, Schäuble also reiterated his opposition to euro bonds, saying countries must remain individually liable for their public debt as long as they were taking sovereign decisions on how the money was being spent.

"If you spend the money from my account, you won't be frugal with the money," said the finance minister. He added that he was against devoting large sums of money -- for example from the European Central Bank -- to fight the crisis. The roots of the crisis needed to be fought credibly, he said, adding that that was succeeding in Ireland and Portugal, which have both received international bailouts. "It's not succeeding so well in Greece,"he added.

"I don't know when that will happen, and I doubt anyone does," he told SPIEGEL. "But I assume that it'll happen sooner than I would have thought a few months ago."
Wolfgang Schäuble Defends Euro and Jean-Claude Juncker

In an interview with Spiegel published on Monday, Schäuble said he could imagine that Germany will soon have to hold a referendum on a new constitution enshrining greater EU sovereignty.

Please consider these snips from Der Spiegel interview 'We Certainly Don't Want to Divide Europe'
SPIEGEL: Minister Schäuble, the European Union is mired the worst crisis in its history with the euro threatening to break apart. What is at stake?

Schäuble: Our prosperity. The world, with its globalized economy, is changing at a rapid pace. Those who want to keep up cannot go it alone. It only works in collaboration with other European countries and with a European currency. Otherwise we would fall far behind, and that would lead to a substantial loss of prosperity and societal security.

SPIEGEL: Was it a mistake to introduce the euro?

Schäuble: No. The monetary union was the logical consequence of the advancing economic integration of Europe.

SPIEGEL: Nevertheless, the euro is a miscarriage. The necessary political union was absent.

Schäuble: To call it a miscarriage is nonsense. But it's clear that we wanted a political union at the time, but it wasn't possible. Germany would have been prepared to relinquish powers to Brussels, because it was only through Europe that we received a new chance after World War II. But other countries had trouble with the concept, because of special traditions, for example, or because they had only recently regained their national autonomy after the fall of the Iron Curtain. As such, we faced a fundamental question: Do we introduce the euro without having the necessary political union, and do we assume that the euro will bring us closer together, or do we abandon the idea?

SPIEGEL: And in that situation you preferred to take the risk.

Schäuble: If we had always said we would only take steps toward integration if they would immediately work 100 percent, we would never have advanced by so much as a meter. That's why we wanted to introduce the euro first and then quickly make the decisions needed for a political union. Luxembourg Prime Minister Jean-Claude Juncker was right when he said, at the time, that the euro would prove to be the father of future European developments.

SPIEGEL: In the meantime, however, the common currency has, above all, powers of destruction.

Schäuble: Now you're exaggerating. ...

SPIEGEL: You want nothing less than a United States of Europe.

Schäuble: Even though the term is used repeatedly, it doesn't make it any better. No, the Europe of the future will not be a federal state based on the model of the United States of America or the Federal Republic of Germany. It will have its own structure. It's an extremely exciting venture.

SPIEGEL: It sounds more like a new experiment, not unlike the introduction of the euro. And yet you want to transfer as much power as possible to Europe?

SPIEGEL: What would a fiscal union have to look like so that Germany could accept euro bonds?

Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: "Should we spend more money on families or on road construction?"

SPIEGEL: And you seriously believe that this could work?

Schäuble: It's been working for a long time in competition policy. When the current Italian prime minister, Mario Monti, was the EU competition commissioner, he successfully tangled with major international corporations like Microsoft. A European finance minister would, should it become necessary, be forced to take on Italy, for example.

SPIEGEL: Or with Germany. Let's assume the finance minister in Brussels rejected your budget. People here would be incredibly outraged.

Schäuble: There is certainly the risk that there would be national reactions, and that's why all of this requires intensive discussion.

SPIEGEL: With all due respect to your vision, is there truly more willingness today among EU member states to give up sovereignty than there was in the 1990s?

Schäuble: The recognition that this is necessary, and the willingness to do so, has certainly grown due to the crisis, and not just in Germany.
Hypocrisy

The interview reviews a set of arrogant statements, foolish actions, lies, and hypocrisy. Let's start with the hypocrisy.

In response to a comment on "powers of destruction", Schäuble responded "Now you're exaggerating.".

Yet, in response to the opening question "What's at stake?" he responded "Our prosperity. .... Otherwise we would fall far behind, and that would lead to a substantial loss of prosperity and societal security."

A "substantial loss of prosperity and societal security" sounds pretty destructive to me.

Arrogance and Foolish Actions

Defending the introduction of the Euro while admitting these problems were known in advance is arrogant foolishness.

Anyone care to ask how Spain, Greece, or Ireland feels about this position?

Calling for a strengthening of European parliament complete with all their nannyzone ideas, tariffs, and regulations is beyond foolish.

For a prime example, please see EU Takes Great Britain to Court over Garlic; Nannyzone Nonsense; Time for UK to Kiss EU Goodbye

Yet, without a fiscal and political union, the euro cannot function at all. Indeed it certainly hasn't.

Of course Germany expects to be in control of the parliament, but that may not happen, especially if France, Spain, and Italy all agree to do some foolish thing (exactly as they propose right now I might point out!).

The very first thing to go in a political union would be austerity if those countries had their way. Of course, the proposal would contain "strict" budget limitations. Think those would matter when politicians would have the chance to vote on them?

Why should German citizens (or any citizens for that matter) subject themselves to such nonsense?

Outright Lies or Disingenuous Bullsheet?

Schäuble claimed "In the most recent election in Greece, more citizens voted for parties that support the course that was agreed to with Europe than in the first election."

That is a gross distortion of reality at best. There is near unanimous sentiment in Greece against more austerity. Pasok, the only pro-austerity party received a mere 12% of the vote.

Political and Cultural Differences Are Immense

Political and cultural difference make agreements on a new treaty impossible. If anything, odds of hammering these things out in a crisis is all the more difficult, as repeated disagreements about Greece (a very minor player) have shown.

A timing sequence issue also suggests It's Just Impossible.

  1. The Bundesbank said there should be no banking union until there is a fiscal union.
  2. Angela Merkel said that there should be no fiscal union until there is political union.
  3. François Hollande said that there should be no political union until there is a banking union.
  4. The German supreme court will not allow a political union nor a fiscal union, nor a banking union without a German referendum.

Schäuble believes a German referendum will happen soon. How can that be given there is no agreement on eurobonds, the order and timing of events, or anything else substantial?

Recall that French president Francois Hollande even wants to rework the last agreement! Yet, until a treaty is hammered out, no referendum is possible.

Even if by some miracle a treaty is hammered out, how long will the ratification process take? Would German citizens vote for it?  Finally, will the bond markets wait that long?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Greek Finance Minister Resigns Before Being Sworn In; Cyprus Seeks Bailout From Euro Zone Partners

Posted: 25 Jun 2012 11:01 AM PDT

One might think the the newly elected Prime Minister of Greece would have enough common sense to not appoint a finance minister with a history of medical problems. One might also think a person with known medical problems would turn down the position if offered because of the obvious stress.

However, one would be wrong on both counts. Reuters reports Greek finance minister resigns, crisis deepens
Greece's new finance minister resigned because of ill health on Monday, throwing the government's drive to soften the terms of an international bailout into confusion days before a European summit.

Vassilis Rapanos, 64, chairman of the National Bank of Greece, was rushed to hospital on Friday, before he could be sworn in, complaining of abdominal pain, nausea and dizziness. Greek media said he had a history of ill-health.

The office of Prime Minister Antonis Samaras, who himself only took office last Wednesday following a June 17 election, said Rapanos had sent a letter of resignation because of his health problems and it had been accepted.

Samaras himself has only just emerged from hospital after undergoing eye surgery to repair a damaged retina. Both he and Rapanos had already said they would not be able to attend the June 28-29 European summit.
Cyprus Seeks Bailout

In other news, the New York Times reports Cyprus Seeks Bailout From Euro Zone Partners
The euro zone's sovereign debt crisis took a turn for the worse Monday as Cyprus said it would seek aid from the euro zone's bailout funds.

"The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy," the government said in a statement.

Earlier in the day, the ratings agency Fitch downgraded the island nation's government debt to junk status. Cyprus last year received a three-year, €2.5 billion loan from Russia.

Greece, Portugal and Ireland have already received bailouts.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

EU Takes Great Britain to Court over Garlic; Nannyzone Nonsense; Time for UK to Kiss EU Goodbye

Posted: 25 Jun 2012 08:19 AM PDT

If you are looking for solid reasons why the UK should kiss the EU goodbye, then I can provide one: Brussels acts over garlic tax.
The European Commission is taking Britain to court in a battle over an unpaid bill of millions of pounds in duty on imports of garlic.

The European Commission announced legal action after an ultimatum to pay £15m to Brussels or face action in the European Court of Justice expired.

The wrangle is over the fact that import tariffs on frozen garlic from outside the EU are lower than the rates for fresh garlic.

And, according to the Commission, UK authorities carelessly levied the lower rate applicable to frozen garlic on imports of the fresh product from China, in breach of EU customs rules.

All customs duties charged on imports of goods coming from a non-EU country are collected by member states on behalf of the EU and paid to the common EU budget as part of each member state's annual contributions.

One quarter of the total raised from such duties is held back by the national authority to cover collection costs.

A Commission statement explained: "Between 2005 and 2006, the UK customs authorities allowed imports of fresh garlic from the People's Republic of China, erroneously stating that it was frozen garlic, subject to significantly lower import duties than fresh garlic.
Nannyzone Nonsense

For starters, there should be no tariffs on garlic at all, fresh, frozen, freeze dried, or otherwise. This is not just about garlic. This is about agricultural tariffs in general.

Pater Tenebrarum at the Acting Man Blog discusses free trade including the following absurdity regarding sale of cabbage.
Mind, we do believe that free trade, free movement of capital and open borders are essential and important achievements. But here is a little comparison that shows you quickly and easily what isn't (hat tip to one of our readers at Seeking Alpha):

  • Pythagoras' theorem – 24 words.
  • Lord's Prayer – 66 words.
  • Archimedes' Principle – 67 words.
  • 10 Commandments – 179 words.
  • Gettysburg address – 286 words.
  • US Declaration of Independence – 1,300 words.
  • US Constitution with all 27 Amendments – 7,818 words.
  • EU regulations on the sale of cabbage – 26,911 words.

Tenebrarum sarcastically asks "How on earth did we ever buy and sell cabbage before there were such edicts from the bureaucracy in Brussels?"

Who Benefits From This Nonsense?

Such tariffs are primarily for the benefit of French farmers who could not otherwise compete in the global marketplace.

Not only do consumers have to pay higher prices for no reason, but 25% of such taxes go straight to the nannycrats' pockets, disguised as "collection costs".

The nannycrats wanted prime minister David Cameron to sign a nanny-agreement last December, but the only reason he didn't was the possibility the EU would implement a financial transaction tax.

For details, please see my December 10, 2011 post Britain Seethes, Germany Sulks, France Gloats; UK "Big Loser" Falls into "French Trap"?; Who is the "Real Loser"? Bazooka Math

The idea that the UK fell into a French trap is totally absurd. Cameron would have been willing to sign that fool agreement had not France insisted on a financial transaction tax. Then had he signed, the UK would have been subject to the tax by popular vote later. Thus it was France who made the foolish move if they wanted Cameron to sign.

Nonetheless, Cameron did make a huge mistake and he also painted himself into a corner by stating it would be "disastrous" for the UK to leave the EU.

Why? Disastrous for who?

The UK would get to shed arcane EU regulations on damn near everything, but especially agricultural tariffs that cost UK citizens plenty. The UK can stop sending money to the EU that goes into creating policies that further cost UK citizens money.

Whatever downside there is to leaving the EU, would be more than made up for by shedding EU bureaucracy and idiotic rules entirely. 

Time for UK to Kiss EU Goodbye

There is no reason for the UK to be in the EU. Agricultural tariffs including garlic taxes are proof enough. Financial transaction taxes, supported by France and Germany, are icing on the cake.

The UK wisely avoided a eurozone entry. It would benefit from telling the EU to go to hell over agricultural tariffs and financial transaction taxes as well.

If the EU is stupid enough to sponsor agricultural tariffs for the primary benefit of French farmers at the expense of everyone else, then let them. There is no reason UK citizens should have to suffer as well.

Put it to a vote David Cameron.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Is There a Limit on Central Bank's Ability to Inflate?

Posted: 25 Jun 2012 12:24 AM PDT

On Friday, ECB President Mario Draghi announced ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral. Reaction from the German central bank was immediate: Bundesbank Swipes at Draghi as European Fault Lines Deepen
"We're critical of this," Bundesbank spokesman Michael Best said yesterday. In terms of collateral, "we won't accept what we don't have to accept," he said.

Fault Lines

Looser collateral is the latest issue to divide Europeans days before a summit that Italian Prime Minister Mario Monti said must succeed or risk a bond-market selloff. German policy makers are reluctant to put too much on the line to help debt- strapped nations before they fix their budgets and banks. French and Italian leaders are pushing for a wider range of crisis- fighting tools.

Those debates have flared on the ECB's Governing Council too. Two years ago, the German central bank came out and opposed the ECB's unprecedented decision to buy the bonds of distressed nations as part of a broader push to stamp out a crisis that was starting to spread from Greece. While the German central bank ultimately went along with the plan, it has since been largely shelved and deemed ineffective by most ECB officials.

Weidmann Letter

In February, Bundesbank President Jens Weidmann wrote to Draghi warning of the risks the ECB is taking in lending more than 1 trillion euros ($1.3 trillion) to banks. The ECB's Target2 system, which calculates debts between the euro region's central banks, shows that the amount owed to the Bundesbank has soared as Germany helps fund the region's most indebted nations.

Earlier this year, the German central bank shunned another measure aimed at easing collateral requirements.

The ECB's latest announcement is a "clear sign that the Bundesbank opposes any further increase in risks on the euro system's balance sheet," said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.
Target2 and ELA Explained

If you do not know what target2 balances are, or if you want to understand how much Germany is really at risk of (most have it wrong), then please see Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"

Do Central Banks Face "Power Limits"?

In light of loosening collateral standards by the ECB to one step above junk, some might be wondering about limits on central bank actions.

The Bank of International Settlements (BIS) says Central Banks Face Power Limit as Debt Persists
"Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed," the Basel, Switzerland-based BIS said in its annual report, published today. "Both conventionally and unconventionally accommodative monetary policies are palliatives and have their limits."

"In the middle of all this we find the overburdened central banks, pushed to use what power they have to contain the damage," Stephen Cecchetti, BIS economic adviser, said on a conference call. "There are very clear limits to what central banks can do. It's critical for the health of the global economy to break the vicious cycles and reduce the pressure on central banks."

"As the benefits of extraordinary monetary easing shrink and become less certain, the risks of expanding central bank balance sheets are likely to grow," Jaime Caruana, general manager of the BIS, said in prepared remarks for a speech in Basel today. "Such hazards may materialize in ways that are not completely clear today."

Loose policy also poses risks for developing nations by fueling credit- and asset-price booms, complicating efforts to stabilize price gains, the report said. In emerging economies, interest rates have been raised "only hesitantly" out of concerns about stoking further capital inflows.

On the debt crisis in Europe, the BIS said it's "hard to escape" the conclusion that the solution to the crisis will have to include a pan-European banking system.
Politically Impossible to Avoid Breakup

Emphasis added to key ideas. I agree with all the points above except the last one.

I suggest it is "hard to escape" the conclusion that the eurozone will break up. Efforts to resist that breakup will only make the breakup when it does occur more violent.

Reasons To Expect Breakup


Key Breakup Idea 

Here is the key idea from It's Just Impossible

  1. The Bundesbank said there should be no banking union until there is a fiscal union.
  2. Angela Merkel said that there should be no fiscal union until there is political union.
  3. François Hollande said that there should be no political union until there is a banking union.
  4. The German supreme court will not allow a political union nor a fiscal union, nor a banking union without a German referendum

Central Banks Do Have Limits

Except as noted, I agree with the BIS position on limits. I have explained many times.

First note that the Fed (central banks in general) cannot give away free money. They can provide liquidity (but not capital). They will stretch what they are willing to do, but even in the case of the ECB accepting near-junk as collateral, it is only with a haircut.

For further discussion of liquidity vs. capital including some statements by a Fed governor, please see No Helicopter Drop For Failed Banks

Can The Fed Cause Hyperinflation?

I put together other key ideas in Hyperinflation Nonsense in Multiple Places. Here are some snips.
I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is "Hyperinflation Would End The Game"

  • Hyperinflation by definition would destroy the currency and thus the banks
  • Hyperinflation would destroy the wealthy and all their corporate bond holding
  • Hyperinflation would destroy the Fed
  • Hyperinflation would destroy the wealthy political class

To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend. I discussed those ideas above and in far more depth in Fiat World Mathematical Model.

Note that the Fed has no power to give money away. Nor would they do so if they could.

Unlike the Fed, Congress could give money away.

I do not know if giving everyone in the US $60,000 would do it or not, but giving everyone $60,000 a month indefinitely would sure do it.

How likely is that?

The answer is 0%.

Theory vs. Practice

Please note that banks do not want hyperinflation or even massive inflation. The reason is simple: Banks will not want to be paid back with cheaper dollars, especially worthless dollars, and Congress is beholden to itself and the banks.

Hyperinflation could theoretically come from massive sustained political will to bail out the little guy at the expense of the banks, the wealthy, and the political class. However, unlike Mugabe and Zimbabwe, neither the banks nor the Fed nor the political class wants to bail out the poor at the expense of the wealthy.

Indeed, Bernanke's, Paulson's, and Geithner's actions to date have done the exact opposite!

We have bailed out the banks at the expense of the ordinary taxpayer (keeping the little guy in debt).

This is what it comes down to: In theory, Congress can easily cause hyperinflation. In practice, they won't, and neither will the Fed. As Yogi Berra once quipped "In theory there is no difference between theory and practice. In practice, there is."

Unlike super-deflationist Robert Prechter, I expect gold to hold its value over the mid-term (another swoon is always possible) as the Fed fights massive deflationary forces of excess leverage, excess debt, boomer demographics, global wage arbitrage, cutbacks in state and local governments, and most importantly - consumer attitudes towards debt.

In the final analysis, it's all about attitudes. The Fed cannot force consumers or businesses to borrow or banks to lend (and it wouldn't for reasons stated, even if it could). In a fiat credit-based system, that is what matters.
Attitudes the Key

In a credit-based economy such as the US and Europe, attitudes are the key. The Fed can print at will, but it cannot make consumers spend or businesses expand or hire.

The Fed is desperately (and foolishly) trying to get consumers to lever up once again, however attitudes of consumers have changed.

Boomers need to deleverage heading into retirement and Generations X and Y, are loaded up with student debt, struggling to find jobs. This is a deflationary setup, not an inflationary one.

For more on generational attitudes, please see Three Key Reasons Housing Not Coming Back: Demographics, Student Debt, No Jobs

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.




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