angela merkel

by

Don’t Mention The War

angelamerkel

It is wrong to suggest that people should be held accountable for the actions of their ancestors. Blaming each other for the deeds of our ancestors is the cause of vast tracts of human suffering and conflict. Tribes and nations have fought each others for centuries — and, in some places, continue to do so — based on the actions of that tribe or nation’s forefathers. This is irrational. We cannot change the actions of our ancestors. That is perhaps one reason why John Cleese’s portrayal of an idiot hotelier beating down his German guests with a spiel of cringe-inducing World War 2 and Nazi clichés is so absurdly funny.

That being said, we do have a responsibility to learn from and not repeat the mistakes of our ancestors. Failure to learn from the mistakes of one’s ancestors is the point at which the actions of past generations become relevant in a discussion of the present.

There is a line of reasoning that suggests that the first person to compare their opponent to Adolf Hitler or Nazism in an argument on the internet just lost the argument. I tend to see this view as generally correct. The acts and beliefs of the Nazis were unusually horrific, and comparing your opponent or the person or group you are criticizing to the Nazis is often an act of rhetorical desperation, and often a symptom of a lack of imagination. However, what is generally correct is often locally wrong. Sometimes, a Nazi or World War 2 analogy really cuts to the core of a problem.

This, I believe, is one of those times. Having the German government and its allies trying to dictate to the Greek people the terms of Greece’s euro membership, the standards by which they should run their government, and economy, and civil service, and welfare state must feel painfully close to a new German occupation. Greece is a country, we should not forget, that suffered greatly under a German military occupation less than a lifetime ago. It is now experiencing a brutal and prolonged economic depression at the hands of a new generation of austerity obsessed Germans.

Greece has been a willing victim for German austerity. The Greeks have taken Merkel’s medicine. Greece has done a huge amount of spending cuts, so many in fact that by 2012 they had a primary surplus.

Unfortunately, Merkel’s and the Troika’s medicine was a load of horse shit. Instead of recovering, the Greek economy just got even more depressed. Unemployment has been at Great Depression levels ever since Merkel and the Troika began dictating how the Greeks ran their economy. Greek real GDP continues to trend downward. Indeed, Europe itself remains in an epic depression. The austerians keep making it worse.

Now, nobody is saying that the Greeks are blameless. Obviously, they took on a load of relatively unproductive debt they couldn’t afford, and they colluded with financiers to falsify economic data to get into the eurozone. But the country has already suffered massively as a result of those decisions (which of course were not Greece’s alone — the creditors clearly did not do their homework).

The goal now should be getting Greece — and the wider continent and world, which would also suffer greatly from a default cascade or economic slump as a result of the Greek crisis — out of the mess they are in. What Greece really needs is debt forgiveness. Even the IMF recognizes that Greece’s debts are unrepayable. But that is not Merkel and Schaüble’s goal. Instead of recognizing that their policies have failed, and that a change in course is necessary, their goal for Greece is complete capitulation to the stormtroopers. Their goal for Greece is punishment, in order to set an example to other euro members who might get into fiscal trouble.

The great irony — and the thing that makes the Nazi references really begin to stick — is that earlier German governments received massive debt relief. Indeed, after Germany started the Second World War — which killed 50 million people, including 6 million who died in the holocaust — it had its war debt written off, allowing the West German economy to begin to recover and rebuild. Indeed, Germany was the biggest defaulter of the 20th century. Yet now the very descendants of those Germans refuse the same treatment for today’s Greeks, whose troubles pale against the crimes of Germany’s Nazi past.

This is sickening. Not only are they shredding to pieces the European unity and the European Union that has kept war-torn Europe at piece with itself for the past seventy years, they are doing it in the name of an ignorant program of austerity that does nothing other than punish and degrade. And they are doing it in complete ignorance of how their own ancestors benefited from others’ forgiveness. Do they not understand the value of European unity? Of economic growth? Of peace or prosperity?

In choosing the path of sadomasochism, punishment and German supremacism, Schaüble and Merkel and their allies are risking turning what is already a terrible depression for the continent — and a ravaging for Greece — into something deeper, gloomier and more painful.

by

As Soon As The First Nation Leaves, A Trickle Will Turn To A Cascade…

If enacting a levy on Cypriot depositors was a call for a bank run, then saying that the actions in Cyprus are a “template” for future recapitalisations in other Eurozone countries — as the Dutch Euro Group President Jeroen Djisselbloem did yesterday —  was screaming it from the rooftops awash in a demented stupour, drunk on bullshitty Smets-Wouters DSGE and the ridiculous notion that the Euro is sustainable.

Dijsselbloem

This question, I think, needs answering:

Dijsselbloem is yet to respond to the question, other than to say that his claim that it was a “template” did not in fact mean that he meant that it was a template. 

Tyler Durden jokes that the only conceivable reason for this could be an insane pseudo-Keynesian conspiracy to trick people and businesses holding cash to go out and spend or invest it, thus raising aggregate demand and generating recovery:

Last week, when we commented on the absolutely idiotic Eurogroup proposal (now voted down and replaced by an equally idiotic “bank resolution” proposal which will see uninsured deposits virtually wiped out) to tax uninsured and insured deposits, we jokingly suggested that this may be merely the latest ploy by the legacy status quo to achieve one simple thing: force depositors across the continent (and soon, world) to pull their money out of a malevolent, hostile banking system and push that money into stocks, or simply to spend it.

Given the utter folly of the levy itself and the subsequent comments, this might as well be as good an explanation as any. The easiest and quickest way to destroy the fractional financial system is to convince depositors around Europe or the world that their deposits are under threat. The European policy elite has displayed a slavish tendency to protect bondholders from losses, but not depositors upon whom the banking system is utterly dependent. If bondholders do not buy bonds, then it becomes harder for governments to finance themselves (although it must be noted that around the world, interest rates are at all-time-lows in every developed country with its own currency, suggesting a run on bonds by bond vigilantes is a relatively small possibility). But if depositors withdraw their money en mass, the banking system collapses.

I believe that this slavish devotion to preventing losses is fundamentally unhealthy, as capitalism without the potential for loss is robbed of any internal stabilisation mechanism. If bondholders or depositors cannot lose their money, they have no incentive to be prudent with it. But with the danger of a Eurozone bank run looming putting bondholders ahead of depositors is unhealthier still. Protecting government borrowing at the expense of confidence in the banking system is a dire error.

And it is not like there is really a hard choice between the interests of bondholders and depositors. If the European policy elite would deal with the huge social upheaval that the Euro system has created — namely, very high unemployment, youth unemployment and slack resources following the burst housing bubble in the periphery — then both depositors and bondholders could sleep easier at night. All this would take is a firm, long-term commitment from domestic and supernational governments to lending, tax incentives and spending to support business growth. A Europe that is growing, producing additional goods, services, energy and resources that people want and need will be far more stable than one that is shrinking and weakened (in both supply and demand) by forced and centrally-planned fiscal consolidation imposed by the policy elite. People want jobs, contrary to the assumptions of certain neoclassical economists who believe that all unemployment is voluntary. People want business, not to be subject to humiliation and subjugation to meet an arbitrary debt target set by delusional central planners actively weakening economic activity. And, the only way for peripheral nations to get this is through leaving the Euro, which may very well soon start to happen. And once it does, a trickle will turn to a cascade as the leavers begin to quickly recover from their Merkel-inflicted wounds.

In the long run, 25% unemployment in Spain and Greece (as well as elevated unemployment throughout the periphery) will come back to hurt the core, whether that is through weak demand for core-produced goods and services, social unrest, Eurozone-rupture, etc. And Dijsellbloem may yet see how foolish his template was.

by

There Is No Surer Way To Destroy A Banking System Than Giving Depositors A Haircut

mullet 2

No, not that kind of haircut.

I’m talking about the kind of haircut where depositors lose a portion of their money. This can destroy confidence in a fractional reserve banking system, as depositors in other banks and other countries fear that they too might be forced to take a haircut, leading to mass withdrawals, leading to illiquidity. And — as part of an E.U. bailout of the Cypriot financial system this just happened in Cyprus:

Eurozone finance ministers have agreed a 10bn-euro (£8.7bn) bailout package for Cyprus to save the country from bankruptcy.

The deal was reached after talks in Brussels between the ministers and the International Monetary Fund (IMF).

In return, Cyprus is being asked to trim its deficit, shrink its banking sector and increase taxes.

For the first time in a eurozone bailout, bank depositors are facing a levy on their savings.

This attack on depositors will have clear implications for depositors and banks in other bailout-prone areas of the Eurozone — Spain, Italy, Greece, Portugal. If the EU is prepared to impose haircuts of up to 10% on depositors in Cyprus as part of a bailout package, which countries’ depositors will be forced to take a haircut next? Mattress-stuffing Cypriots will be 10% better-off than their compatriots with confidence in the banking system. Even if only 10% or 20% of bank customers in Spain choose to withdraw their funds, that has the potential to cause serious liquidity problems.

Whether or not this actually happens is another question — although with unemployment running high throughout the Eurozone, those with savings may be particularly wary of losing them. This decision — no matter how many times Draghi and Merkel and Barroso reassure the crowds — makes bank runs throughout the Eurozone much more likely as savers seek to avoid the possibility of a haircut by moving to cash or tangible assets.

And this madness was totally avoidable.

by

The Nobel WTF Prize

So the European Union won the Nobel Peace prize for “having over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe.”

Is this a joke? Nigel Farage thinks so, exclaiming that “this goes to show that the Norwegians really do have a sense of humour.”

The Telegraph reports:

The award of the prestigious prize sparked a mixed response in Greece, where living standards have crashed as the economy has contracted 20 per cent in the last three years, despite bailouts totalling 240 billion euros (£200 billion).

With social tensions still high, more than 7,000 police had to be deployed to protect Mrs Merkel on a visit to Athens this week, when she was derided by some as a reincarnation of the Third Reich.

Rena Dourou, an MP for the Left-wing Syriza opposition, said of the award: “At first, many people thought this was some kind of joke. It is a very big surprise.”

The European economic system really isn’t working. Many predicted at the inception of the Euro that a single monetary policy could not work for such a wide and diverse collection of countries and economies with many language barriers, many nationalisms, and very low inter-state labour mobility. Indeed the architects of the Euro admitted that they did not have the policy tools at the inception of the Euro to make the system work.

Instead of fostering “peace, reconciliation, democracy and human rights” as the Nobel Committee contends, as the ideological integrationists have pushed for more and more integration  the European system has in recent years led to more friction between the nations. In the early years of the Euro, Eurozone nations could access to credit at a single rate:

Cheap capital flowed into nations like Greece, Spain, Italy and Portugal, leading to property bubbles and the acquisition of unsustainably high levels of government and household debt. Once the global economy weakened, the Emperor was left wearing no clothes as the property bubbles burst. Such an unsustainable debt spree would have typically led to large-scale money printing operations in the periphery to keep the debt serviceable, but under the new European regime, nations can no longer do this. This has been a shock for the periphery, which is struggling to come to terms with the new reality of spending cuts, tax hikes and elevated unemployment. Here’s industrial production in Spain, Greece and Italy compared to the United States during the Depression era:

Unsurprisingly, trust in European institutions is collapsing:

And as a result, support for extreme political parties is rising. Opinion polls suggest that an election in Greece today would put the Neo-Nazi Golden Dawn party in third place. Simply, the European system that was supposed to bring Europe together could well be on the verge of tearing Europe apart.

Awarding the Peace Prize to the war-mongering, extrajudicial-assassination-approving, NDAA-signing, promise-breaking imperialist Barack Obama was not enough for these clowns. They seem fully determined to obliterate any last semblance of respectability the Nobel Peace Prize once had.

by

The New European Serfdom

So let’s assume Greece is going to leave the Eurozone and suffer the consequences of default, exit, capital controls, a deposit freeze, the drachmatization of euro claims, and depreciation.

It’s going to be a painful time for the Greek people. But what about for Greece’s highly-leveraged creditors, who must now bite the bullet of a disorderly default? Surely the ramifications of a Greek exit will be worse for the international financial system?

J.P. Morgan — fresh from putting an LTCM alumnus in charge of a $70 trillion derivatives book (good luck with that) — is upping the fear about Europe and its impact on global finance:

The main direct losses correspond to the €240bn of Greek debt in official hands (EU/IMF), to €130bn of Eurosystem’s exposure to Greece via TARGET2 and a potential loss of around €25bn for European banks. This is the cross-border claims (i.e. not matched by local liabilities) that European banks (mostly French) have on Greece’s public and non-bank private sector. These immediate losses add up to €400bn. This is a big amount but let’s assume that, as several people suggested this week, these immediate/direct losses are manageable. What are the indirect consequences of a Greek exit for the rest?

The wildcard is obviously contagion to Spain or Italy? Could a Greek exit create a capital and deposit flight from Spain and Italy which becomes difficult to contain? It is admittedly true that European policymakers have tried over the past year to convince markets that Greece is a special case and its problems are rather unique. We see little evidence that their efforts have paid off.

The steady selling of Spanish and Italian government bonds by non-domestic investors over the past nine months (€200bn for Italy and €80bn for Spain) suggests that markets see Greece more as a precedent for other peripherals rather than a special case. And it is not only the €800bn of Italian and Spanish government bonds still held by non-domestic investors that are likely at risk. It is also the €500bn of Italian and Spanish bank and corporate bonds and the €300bn of quoted Italian and Spanish shares held by nonresidents. And the numbers balloon if one starts looking beyond portfolio/quoted assets. Of course, the €1.4tr of Italian and €1.6tr of Spanish bank domestic deposits is the elephant in the room which a Greek exit and the introduction of capital controls by Greece has the potential to destabilize.

A multi-trillion € shock — far bigger than the fallout from Lehman — has the potential to trigger a default cascade wherein busted leveraged Greek creditors themselves end up in a fire sale to raise collateral as they struggle to maintain cash flow, and face the prospect of downgrades and margin calls and may themselves default on their obligations, setting off a cascade of illiquidity and default. Very simply, such an event has the potential to dwarf 2008 and 1929, and possibly even bring the entire global financial system to a juddering halt (just as Paulson fear-mongered in 2008).

Which is why I am certain that it will not be allowed to happen, and that J.P. Morgan’s histrionics are just a ponying up toward the next round of crony-“capitalist” bailouts. Here’s the status quo today:

Greece no longer wants to play along with the game?

Okay, fine — cut them out of the equation. In the interests of “long-term financial stability”, let’s stop pretending that we are bailing out Greece and just hand the cash over to the banks.

Schäuble and Merkel might have demanded tough fiscal action from European governments, but they have never questioned the precept that creditors must get their pound of flesh. Merkel has insisted that authorities show that Europe is a “safe place to invest” by avoiding haircuts.

Here’s my expected new normal in Europe:

After all — if the establishment is to be believed — it’s in the interests of “long-term financial stability” that creditors who stupidly bought unrepayable debt don’t get a big haircut like they would in a free market.  And it’s in the interests of “long-term financial stability” that bad companies who made bad decisions don’t go out of business like they would in a free market, but instead become suckling zombies attached to the taxpayer teat. And apparently it is also in the interests of “long-term financial stability” that a broken market and broken system doesn’t liquidate, so that people learn their lesson. Apparently our “long-term financial stability” depends on producing even greater moral hazard by handing more money out to the negligent.

The only real question (beyond whether or not the European public’s patience with shooting off money to banks will snap, as has happened in Greece) is whether or not it will just be the IMF and the EU institutions, or whether Bernanke at the Fed will get involved beyond the inevitable QE3 (please do it Bernanke! I have some crummy equities I want to offload to a greater fool!).

As I asked last month:

Have the 2008 bailouts cemented a new feudal aristocracy of bankers, financiers and too-big-to-fail zombies, alongside a serf class that exists to fund the excesses of the financial and corporate elite?

And will the inevitable 2012-13 bailouts of European finance cement this aristocracy even deeper and wider?

by

Austerity & Extremism

I noted yesterday that anything the government gives you, the government can take away, and that dependency on government services — which might be withdrawn — leaves citizens weak and unfree.

One cause for the withdrawal of government that I neglected to mention (intentionally, as I hoped someone would pick it up in comments) was the matter of austerity. While the example I was bouncing my ideas off — of denying treatment to smokers or the obese — remains theoretical, the withdrawal of government services and spending as a result of austerity is very much a reality, especially in Europe.

To wit:

That more austerity produces less GDP (and very often bigger deficits due to falling tax revenues — as exemplified by Portugal) is self-evident. That society is — for lack of a better word — pissed with this outcome is the clear reality on the ground. Made dependent upon government largesse, society now finds the crutch of services, spending and government jobs withdrawn. And of course, this has political blowback.

As Tyler recently put it “nationalism is back with a bang”. But it’s not just the nationalists who are doing well, so too are the far left. Just as in the 1930s many people who have been failed by the mainstream parties are angry, and their instinctual reaction is to reject the political mainstream and look to the fringes.

Let’s look at Greece.

From the WSJ:

Two political mavericks—one a soft-spoken former Communist, the other a firebrand nationalist—are tapping into public anger at incumbents and the harsh austerity measures Greece must adopt to stay in the euro, as support for mainstream parties withers ahead of May 6 elections.

Right-wing economist Panos Kammenos and left-wing lawyer Fotis Kouvelis are poles apart ideologically. But they are currently among the most popular party leaders in Greece, and their parties have sprung from nowhere to challenge Greece’s political establishment and the austerity policies that many Greeks blame for deepening their country’s economic crisis.

Between them, Mr. Kammenos’s Independent Greeks and Mr. Kouvelis’s Democratic Left could win around 20% of the vote. Their rise is cutting deeply into support for Greece’s two mainstream parties — the conservative New Democracy party and the center-left Socialists, known as Pasok — that share power in a fractious coalition government.

Given the utter train wreck that the Greek economy is, it is shocking that these figures are not significantly higher. In the recent first round of the French Presidential election, the far left and far right polled over 30%, a post-WW2 high.

All over Europe, the unemployed and dispossessed are becoming increasingly frustrated with the status quo.

From Bloomberg:

Europe’s front against austerity has expanded in recent weeks after Spain struggled to meet European Union-imposed deficit targets, election campaigns in Greece faced anti- austerity rumblings and a revolt against extra spending cuts in the traditionally budget-conscious Netherlands propelled Prime Minister Mark Rutte’s coalition toward an early breakup.

Europe has been here before. Hitler came to power, lest we forget, on the back of a devastating period of German austerity.

As I noted in November:

After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Bruning was finally forced out. Just two years of austerity, and Germany was willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered “austerity” pain. In Germany’s 1932 elections, the Nazis and the Communists came out on top — and by early 1933, with Hitler in charge, Germany’s fledgling democracy was shut down for good.

It’s the same story; more austerity means more misery, means more political and social rumbling, means a greater support for radical political parties. We haven’t gotten anywhere near the scope or magnitude of the 1930s (yet), but the present European contraction has not dampened the technocratic fervour for deeper and faster cuts and tax hikes (which, quite obviously lead to bigger deficits, which trigger more austerity, ad infinitum). Could this at some point mean revolutions that put radicals into power? It becomes increasingly plausible.

And the initial problem in my view is excessive dependency on the state and centralisation. If the state makes up 50% of GDP, cutting spending in the interests of paying down debt will cause a severe contraction throughout the entire economy. If the state makes up 15% of GDP, less so. If the state is only a small fragment, austerity in the interests of paying down debt — even during a recession or depression — is feasible. If the state is a goliath, it will lead to a crippling economic contraction (and of course, the attendant realities of public fury and politcal extremism).

Centralised systems are always and by definition fragile to shocks and mismanagement, because the activities at the centre are transmitted throughout the entire system; poor decisions at the centre metastasise throughout the system. In a robust decentralised system, mismanagement only hurts at the local level, because there is less of a mechanism for the transmission of shocks.

The lesson sticks: anything the government gives you, the government can take away (sometimes deliberately, sometimes not). That could be healthcare, that could be security, that could be economic growth. If it’s delivered by central fiat, it’s fragile.

by

Angela Merkel Still Doesn’t Understand Capitalism


Last December I took the time to explain capitalism for Angela Merkel:

Capitalism means both successes and failures. It is a fundamentally experimental system, with a continuous feedback mechanism — the market, and ultimately profit and loss. Ideas that work are rewarded with financial success, and ideas that don’t are punished with failure. With capitalism, systems, ideas and firms that fail to produce what the market wants fail. They go bankrupt. Their assets, and their debt is liquidated.

When that mechanism is suspended by a government or central bank that thinks it knows best — and that a system that is too interconnected to fail is worth saving at any cost — the result is almost always stagnation. This is for a number of reasons — most obviously that bailouts sustain crippling debt levels, and are paid for through contractionary austerity. But it is larger than just that.

In nature, ideas and schemes that work are rewarded — and ideas and schemes that don’t work are punished. Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

These bailouts and interventions have tried to turn nature on its head — bailed out bankers and institutions have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure.

Obviously she did not read my advice.

Reuters reports:

Angela Merkel is not happy that financial markets have not made any contribution to resolving the financial crisis.

Right; financial markets need to contribute to resolving the financial crisis?

What financial markets? The markets have just become another manipulated manifestation of central planning. The more dollars, euros and yen that central banks pump into markets the less traders will be trading fundamentals  — i.e. basing their trading on the inherent value of securities, and allowing the needs and wants of society to determine economic output — and the more they will be trading the prospects for more central bank and government intervention, more QE, more hopium.

Central planning always and inevitably has unsolicited side-effects (in this case, that markets would be corrupted and junkiefied), and usually side-effects which are not necessarily visible or detectable to the person doing the planning no matter how sophisticated their pseudo-scientific simulations appear to be. Central planners are always making decisions with incomplete information, and the missing information very often has a large and appreciable effect on outcomes. In a small and decentralised system, this is not a problem; decision-makers can usually locally adjust their behaviour to a new trajectory as they get new information. But for central planners, operating from the centre of a system, policy is always centralised and generalised, slow to adapt to local information, slow to adjust to local trends and patterns, broad and sweeping rather than subtle and local.

Very simply: the only way that financial markets could ever have solved the financial crisis is if government had left them alone enough for them to adapt to the new post-bubble reality. At the very most, this meant providing a safety net for the poor and the jobless while the market worked out its problems. Instead, our leaders chose to preserve and thus crystallise possibly the most-deranged and malinvestment-fuelled bubble economy in human history, full of greedy and parasitic companies of no real value to society, and which in a market economy would have gone bust long ago.

And now central planners (and Nixon was right — they’re all central planners now) want to whine about the markets not doing what they desire?

The great delusion of Western governments in this era has been that everything appears to them to be a problem for them to fix. If they identify a problem, they will find a way (usually with our tax money) to address it. They almost never realise or even consider that sometimes the problems that they identify are best addressed by being left alone (with at most the provision of a safety net for the poor and vulnerable). If you’re holding a hammer, every problem will look like a nail. And government keeps bashing society with the hammer of centralisation and central control. And society is not a nail.

Lao Tzu understood this in stating:

The wisest course is to keep the government simple and inactive, for then the world stabilises itself.

by

Britain Isn’t Working

George Osborne claims that spending cuts will produce a recovery.

From the Guardian:

The main test of a budget at this time is what it does for the recovery and growth of the British economy. George Osborne has repeatedly made clear that he wants to be judged by this test. He believes that deficit reduction is a growth policy which will be vindicated by its results. Growth has been postponed but, he insists, it is about to happen. So is he right?

It doesn’t look like it:

UK GDP has ground to a halt, while the United States has ticked slightly upward.

Now here’s unemployment:


Looks painful.

But at least we’re paying off the debt right? Nope:


Readers are of course advised to ignore the nonsensical future projections — particularly those for the United States — and focus instead on the fact that the UK is still amassing debt in spite of austerity.

So what the hell are we doing? Unemployment is ticking up, GDP is stagnant, and debt is still rising? Is this policy supposed to be working? Does the Cameron government not understand that cutting government outlays during a recession to pay down debt leads to falling tax receipts, which leads to bigger deficits (exactly what has happened!)?

The truth is — as Keynes noted — that the time for austerity at the treasury is the boom, not the bust. The only exception to this is if you can give back enough money to the taxpayer in tax breaks to offset the deleterious effects of spending cuts (as Ron Paul recommends), which itself is a form of spending. That way, government outlays remain roughly the same.

Cutting government waste is always a good idea; but using the savings to pay down debt (which very often in the modern world means sending the money overseas) during a recession seems like a very bad one. And it should be noted that the Cameron government isn’t even really cutting back much on what I consider to be waste. Britain spent billions effecting regime change in Libya.

by

The Greek Non-Rescue

So Greece has been “rescued”.

Or, not.

From Robert Peston:

What we had overnight is an agreement in principle, not a final definitive rescue of Greece. Before we crack open the vintage Ouzo, let’s just see how it goes down with the relevant private-sector lenders, politicians in the only creditor country that really matters — Germany — and Greek citizens.

That “agreement in principle”?

From Zero Hedge:

  • Even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out.
  • Even in best case scenario, the country will need at least €50 billion on top of €136 billion.
  • A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance since they received the report about the advisability of allowing the second rescue to go through.

The deeper truth emerges from the BBC:

“The funds that are coming in are not staying in Greece, are not being invested in Greece, are not here to help the Greeks get out of this crisis,” Constantine Michalos, president of the Athens Chamber of Commerce and Industry, told the BBC.

“It’s simply to repay the banks, so that they can retain their balance sheets on the profit side.”

This reminds me of a comment made by Andrei Canciu yesterday:

I think that even the original (i.e. current) architecture of the Euro would have been workable if it were not for the “innovations” in the banking system during the last 10 years. That is, overindebtedness would have always been solved through defaults by punishing the the irresponsible lenders (i.e. those tight spreads between Northern and Southern European countries), while the defaulting countries would have gotten some post-default aid.

I read somewhere that a Greek default would have been totally manageable 10 years ago. That’s no longer the case with the shadow banking system and the incomprehensible web of derivatives.

And there we have our problem: this isn’t really about Greece at all. It’s about the fundamentally perverse nature of the global economic system that cannot withstand a default or liquidation without bringing down the entire system. Even if China and Japan threw all their FX reserves into bailing out the Eurozone this would merely postpone the systemic breakdown. Because, the problem is the system. The global economic system needs to be able to withstand defaults, liquidations, crises. It needs to be robust. And the Byzantine workings of the shadow banking system — where everyone owes money to everyone else, and if one falls they all fall — is a hyper-fragile juggernaut that is bound to come down eventually. If it’s not Greece it will be something else. And that will be a good thing — because we will be abe to switch to an economic system less prone to absurd bubbles, hyper-fragility, and forced bailouts.

Anyway, I am still virtually certain that this bailout is a total sham, and — even if stomached by Germany and international creditors — is doomed to abject failure.

Why?

It’s demanding even greater and deeper austerity from an already-bleeding Greek nation. As I’ve said before, austerity in a depressed economy usually results in larger budget deficits as a result of falling tax revenues. Simply, this medicine is poison. Very shortly, Greece may well be back in the hole.

by

Euro Psychoanalysis

Joe Wiesenthal does some interesting analysis on Greece:

In a post last night, economist Tyler Cowen asked: “Is the goal simply to irritate the Greeks so much that they leave the Eurozone on their own?”

Here’s what might be going on.

Sometimes in life you give someone a “shot” at something that maybe they don’t deserve. You hire them, despite the fact that their qualifications were marginal. Or something like that. Bottom line is, you think you’re doing them a favor, and you’re also putting your reputation on the line a little bit. But you expect that they’ll step up and really appreciate the opportunity they have. And you expect they’ll kill it.

And when they fail — which is likely, because they might not have deserved the opportunity — you’re furious at them, because you gave them this great opportunity and they totally blew it, and they made you look like an idiot at the same time. And you just hate them for it.

And that’s what’s going on now. Europe feels like it gave Greece a “shot” with Euro membership, and multiple bailouts. And now it looks to Greece, and sees people rioting, and the reforms not happening, and they’re furious like never before. Merkel, Schaeuble, and the rest just can’t fathom that Greece was given this great shot to be a rich, wealthy European nation and it’s totally blowing it.

Well, if that’s so, Europe never really understood the creature it was creating. For all the talk of the supposed various benefits of the Euro — lower inflation, integrated markets, and so forth— its one huge dilemma — that nations were now budgeting in a currency they didn’t control, and so could not just monetise debt — was always brushed aside. Of course, policymakers were aware of some of the problems, at least in an abstract sense.

As Romano Prodi put it in 2001:

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

I suppose what was never understood was that the problems might grow and multiply to the extent that they would pose a threat to global economic stability before such “policy instruments” were created.

I suppose the moral of the story is that it is dangerous to create systems with inherent problems, and assume that the solutions to these problems will naturally emerge later at a time of “crisis”.

And certainly, there does seem to be a sense of punishing Greece for their fiscal misdeeds (even though Germany themselves were the first nation to violate the Eurozone’s deficit rules).

From the BBC:

Some eurozone countries no longer want Greece in the bloc, Finance Minister Evangelos Venizelos has said.

He accused the states of “playing with fire”, as Greece scrambled to finalise an austerity plan demanded by the EU and IMF in return for a huge bailout.

Simply, if Europe wants to maintain the global status quo, the ECB needs to crank up the printing press, and fast, to pump huge liquidity into the system. Of course, this creates huge problems down the road, as exemplified by Japan.

If not, they had better be ready for huge changes to the global financial order. Personally, I believe that the global financial system is fundamentally broken, and that printing more money, kicking the can down the road and hoping for the best will just lead to a worse and bigger breakdown down the line. I favour liquidation. But policymakers can be very reactionary.