When someone with no background or experience in Europe pontificates about the Euro Crisis one wonders what the point of Business Television is. Maybe Mort Zuckerman plays golf with Michael Bloomberg but otherwise we are at a loss what his special insight about the Crisis should be. Maybe the 0.001 % really know something that could help solve the World's problems - or maybe they are just part of the problem?
We want to keep this post short and to the point: those members of the Commentariat who think that Fiscal Union will solve the current Euro Crisis will be in for a rude awakening - in a few years time, but maybe much earlier. A chain is only as strong as its weakest link, and there are quite a few weak links in the Euro-Chain. Even mighty Germany (as those on One Euro jobs there know already) is not as strong as it might appear. Its performance is strong only because the other countries are weak, bit like the conundrum in the currency markets where a strong currency means that the other side of the trade is by definition weak). Debts in Germany are also sky-high, especially if you include all private and bank debt and - most importantly - unfunded pension promises etc. How the poor German taxpayer, squeezed that he is by a relatively efficient (and merciless) tax collecting system, is supposed to carry the burden of all the freeloaders in the Euro Gravy train remains to be seen. I would not put my money on it except in very short term trades.
Anyone who can endure a certain amount of (intellectual) pain would do well to have a close look at the French President's speech to party loyalists held in Toulon on December 1st. While the French are often said to be particularly rational followers of the 'Cartesian' tradition we were aghast at the incoherent reasoning cobbled together in this effort to explain and possibly solve the current crisis in the EU. If the analysis is wrong the solutions cannot be the right ones and while a temporary patching up of the Euro structure might well work it gives little cause for longer-term optimism.
All the razzmatazz surrounding today's autumn statement by the UK Chancellor of the Exchequer cannot disguise one fact: the country is helplessly exposed to the decisions of a man without any practical business experience or specialist economic background. Having a (minor) title, going to the 'right' schools and having the 'right' friends still seems to count for more than competency. Only consolation - the situation is not much better in many other countries. It is a sad indictment of our so-called Western Democracies that wide-ranging decisions can be taken by individuals that owe their wafer-thin legitimacy to an election that is often fought on image and broken election promises.
An article in the Financial Times compares a possible break-up of the Euro Zone with the period after the end of the old Soviet Union. We think that contrary to some observers Greece would not announce any date for the Switchover - it would all happen on one weekend, without any warning. Monday all accounts are denominated in Drachmas and Banknotes are stamped over. One little detail, what happens to bank notes circulating outside Greece that have been issued in Greece (all Euro notes can be traced to the issuing country). Whatever the likely disturbances, lower quotes for Drachmas would start a stampede to book holidays in Greece, buy property etc.
There is talk that the UK government may subsidise first-time home buyers. Apart from problems of policing the eligibility one has to ask how this proposal fits in with the urgent - not to say existential - need to bring public spending under control. Like Germany the UK benefits from the fact that the flight out of countries that are perceived as unstable makes it a 'safe haven' as capital has to be invested somewhere. This effect is similar to the one in the foreign exchange markets where the sale of one currency necessitates the purchase of another one - even if that one has blemishes as well. It is all a relative game, but the situation may one day change, perceptions or facts, and suddenly the UK will be exposed with all its weaknesses. Spending is still rising, despite all pronouncements to the contrary, and no one seems to have the will to impose fair, balanced and effective spending discipline. So all those putting their faith - and money - into the UK markets have been warned!
Recently some prominent and not so prominent economists have suggested that the Fed should target nominal GDP growth when setting its policy. The only thing these wise analysts have forgotten to mention is the question of how to make sure that not all - or even the majority - in nominal GDP growth will be accounted for by price inflation.
Another nuggett of wisdom from the Bank of England's American import. Maybe he also thinks that pigs might fly. It always struck us as more than strange that there was no (more) suitable economist among the UK population.
The (securely tenured) economist Robert Shiller seems to need some help in understanding stock market movements. In the New York Times he tries to explain the recent stock market volatility. But if he - or anyone else - thinks that this volatility was anything particularly exceptional he should just have a look back and he will find that the Cuban Missile Crisis of President Kennedy's stand-off with the Steel Industry in the early sixties also caused sharp sell-offs in the stock market. In the big picture a drop of 15 or even 20 per cent is nothing out of the ordinary. Any investor worth his salt knows that markets tend to decline more rapidly than they rise and if anything should be glad that he is offered the opportunity to acquire shares at much reduced prices.
When a former economic adviser to Ronald Reagan claims that the US debt amounts to $211 trillion one has to wonder who ever believes a word uttered by a representative of that 'science'. Adding up all future entitlements and other spending to arrive at this gargantuan number is the same as adding an individual's expected lifetime spending and declaring that he was 'in debt' by the resulting amount. The number would not be pretty - not for anyone past or present. This type of facile calculation forgets completely that the spending would (hopefully) be paid for by future earnings. To forget the income (or tax) side of the equation is a mistake that no serious economist should ever make. It produces good (and alarmist) headlines only.
Reading Roubini's view that Karl Marx may have made a valid point about Capitalism chimes with a neglected aspect of economic discourse (especially as practiced by commentators employed by financial service firms). Quite apart from the fact that from an environmental perspective growth - in the number of humans as well as in economic activity - has to end at some stage, even if not in the immediate future, the desperate clamor for growth at any cost is distracting from the fact that maybe the distribution of income and wealth may have a larger role to play in healing society's problems. What would a world of zero growth (at least in the industrial countries) look like? We would still generate a large amount of wealth year in year out. But maybe a shift in the relative pieces that different individuals take out of the given cake would make a more substantial contribution to increase the sum-total of human happiness than squeezing out an extra decimal point in GDP growth.
The Eurocratic 'Elites' seem to think that the issuance of a Bond guaranteed by all member states of the Eurozone would be the magic bullet that solves the sovereign debt crisis in Euroland and saves the Eurozone from breaking up. This may well be the case - for a while. But as economic and fiscal problems get papered over for a few more years the underlying tensions will only increase while those responsible for policy at the moment will have started to enjoy their well-padded retirement at the expense of their hapless taxpayers. The crunchtime will come when one of the states that have pledged to guarantee those 'Euro-Bonds' will no longer be able (or willing) to suffer from the burden of debt service. WE have (unfortunately successfully) argued back in 2004 that to accept bond spreads on Italian bonds that are just a tiny amount above the yields offered by German Bunds is a highly risky investment strategy. We hope - but are not confident - that we do not turn out to have warned in vain again.
When even seasoned financial commentators that usually display a certain amount of independent thinking argue that financial chaos is certain if Germany (and other 'northern' Euroland member states) don't continue to subsidise countries such as Greece, Ireland and Portugal one knows that the last vestiges of rational economic thought and any sense of democratic governance and financial responsibility is on the way out. Letting Greece or any other country go bust would certainly create difficulties in the short-term but the humongous financial resources (including central bank money created ex nihilo) would be much better applied to paper over the cracks in the financial system. In the long run this would be cheaper for the 'North' and the 'South' would either learn the lesson of good housekeeping once and for all or continue to slide further down the slippery slope of relative (and maybe absolute) decline in living standards.
The Euro has no democratic legitimacy, it is a construct created by (mostly unelected) bureaucrats, with unintended consequences (they are always the ones that count in the end).
Government spending in most countries is on an upward trajectory since early 1970s, no end in sight, in every election, in every country and from every party/politician you only hear about new 'projects', 'laws' etc that mean more spending.
But government can never spend 100% of the whole GDP, a limit will be reached and we are near it. Sooner or later those paying the bills will realise that more money does not buy more happiness in a finite life, why not make do and withdraw some of one's services.
That governments cannot cut 5 or 10 percent of GDP from their fiscal programs is an indicator for the lack of courage, best to cut all spending by an equal percentage, quick and avoids endless bickering.
Recommendation: avoid all banks in weak member states of the Eurozone, even check that any Euro Notes are not issued by central banks of these countries. Remember that 100 British Pounds in 1951 are worth only £ 4 in purchasing power today. It is a bit better in 'hard' currency countries but even worse in other countries. Germany's Mark (Euro) lost nearly 80 per cent of its purchasing power in the same period.
The proposed introduction of a 0.15 per cent tax on financial transactions and a 35 per cent tax on profits from proprietary trading by the banks (let's hope there are profits!) will do nothing but further strangle the financial marketplace. In an environment where the overall economy stagnates for the better part of the past ten years this can not be seen as an intelligent measure. In addition, the definitions required to make the fiscal net reasonably workable (which transactions? which institutions? - if only banks will that not give a tremendous boost for the 'shadow banking system'?) will not be worked out all that easily. As always, the political kleptocracy's instinct is to rely more on tax increases rather than conduct a root-and-branch reform of misdirected spending policies.
The headline that another Euro 100 billion (!!) might be spent by (mainly unaccountable) politicians and (international) bureaucrats on behalf of the citizen-slaves staggers the mind. In terms that can be understood by the man on the street that means that an average family of three Greek citizens indirectly benefits from a windfall of nearly 30,000 Euro. We have watched with alarm as the political class all over the 'Western Democracies' has allocated an ever-increasing amount of the national wealth creation towards the pursuit of the pet projects that benefit their client lobbies. The spending for the Greek bailout reaches new peaks of irresponsibility and is a blatant attack on all honest and parsimonious savers and investors. Those readers not only interested in protecting their wealth from predatory politicians but also looking for ways to stop misgovernment in its tracks should look at supporting Dirdem as more direct democratic control of decision making offers the only hope of turning things around.
Another economics professor and former IMF economist, Harvard University's Ken Rogoff, adds his voice to the chorus of those who perpetuate the false thesis that only a closer (full?) fiscal (and therefore political) union of the EU member states can save the Euro. As we have explained in another post, this theory confounds the problems of individual states' reckless fiscal and economic policies with the problem of the global banking system.
The former head of the German Bundesbank, Axel Weber, claims that there is nothing wrong with the Euro per se but that closer control of the budgets in the member states are required. But keeping a lid on the deficits in the states will do little to make sure that the competitiveness of individual economies does not diverge too much over time. One will have to see if there is any appetite for Brussels to control wages and prices in each state in command-and-control style.
At the same time a Jeremy Warner (Daily Telegraph) forgets to consider that it would be perfectly simple for a member state of the Eurozone to default and reset the level of its internal and external indebtedness. The main obstacle in the way of this solution to the problems the PIGS face is that the banking systems in the Eurozone are dangerously overexposed to transnational lending.
Antonio Borges, the head of the IMF's European department thinks that the value of assets that Greece may be able to sell off could be as high as Euro 250 billion. We would risk a bet that this 'expert view' is at least twice the amount that might ever be reached in a fire-sale of Greek State assets. Given that our financial fate is in the hands of such experts one can only be pessimistic about the outlook for the financial system - and the Eurozone in particular.
UK Example for Euro Periphery Countries: Osborne
Maybe the Chancellor lives in another country, but one can only describe this statement as delusional. So far most policies are only intentions and what is saved on some measures is dissipated on additional spending schemes that are added without much democratic oversight.
The well-meaning proposals to avoid a break-up of the Eurozone quite often lead to the recommendation to give more power to a Federal Government that will have more power than the Governments of the individual member states. This is nothing but propaganda by the centralists of all persuasions - be they in the bureaucracies in Brussels, in the Media, Finance or Academia. The main problem at present is the linkage of the bad debt problem in the banking system with the overindebtedness of certain member states. This leads to the (false) conclusion that only by bailing out these states and setting up measures that avoid any state getting into trouble again in the future it will be possible to keep the Eurozone intact. But this means barking up the wrong tree. Policies should primarily focus on safeguarding the banking system. When that has been achieved it is perfectly practical to let individual member states declare bankruptcy and leave it to their politicians to sort out their problems.
When economists from the pulpit of their tenured positions complain(Stimulus by Fed Is Disappointing, Economists Say, New York Times, 24 April 2011) that the policy of Quantitative Easing (aka Money Printing) has not been sufficiently forceful I would like to remind them that the policy was wrong right from the beginning. The Keynesian policies of macro economic management - pushing buttons in fiscal or monetary aggregates - give politicians and all those arguing for a powerful state tools to play with but they are not the only - or even correct - reply to problems that stem for wrong micro-economic policies in tax, employment or international trade management.
The iron law of bureaucracy manifests itself when the pampered and unelected bureaucrats of the IMF start to allow capital controls as a policy tool for governments that have run out of ideas. The increasingly mad spending spree that has been fostered by politicians of all parties since the early 1970s has hit a wall and rather than realise that their policies are unsustainable the political establishment - cheered on by the media and 'experts' - resorts to more and more desperate measures. When a country starts on the slippery road towards state control there is no way but to progress more and more deeply into a morass of regulation. Each step requires more detailed control, each measure has to be policed, interpreted and so on until each activity is only possible under detailed conditions set by the political 'Kommissars'. Capital controls open a temporary reprieve to the control freaks that dominate our lives already to a large extent and investors are well-advised to take the necessary steps before they and their investments are trapped in some 'welfare paradise' where welfare means a fat political class ruling over a peasant population that is just treated as a tax cow. Already some 'developed' states tax 60 per cent of the average (!) wage earner's income - happy were the days when the 'poor' medieval peasant had to pass a tenth of his produce to his landlord.
In this state of competitive devaluation of all currencies many wonder where this spectacle will lead us to. Above all, people wonder what these 'currencies' are really worth. We can give them the answer: all the fiat paper currencies have a value that can easily be verified - it is the value of the paper they are printed with.
When Jacques Delors talks about defects in the design of the Common Currency he forgets that the main problem is not the Euro per se but the risk to the banking system if a country wants to or has to leave the Euro. Without that risk it would be perfectly possible for a country to become bankrupt while remaining in the Euro. Already in 2005 Temple Associates has warned investors not to invest in the weaker member countries of the Eurozone.