Mish's Global Economic Trend Analysis

Prepare for Greece to Leave Eurozone; German Government Calls for Greece to Cede Sovereignty Over Tax and Spending Decisions to Eurozone "Budget Commissioner"; Text of the German Demands

noreply@blogger.com (Mike Mish Shedlock) — Sat, 28 Jan 2012 00:10:00 +0000

Prepare for Greece to exit the Eurozone. Germany has made a request that in my opinion practically guarantees that outcome. The Financial Times has a pair of articles on the matter but the conclusion above is mine.

German Government Calls for Greece to Cede Sovereignty to Eurozone "Budget Commissioner"

Please consider Call for EU to Control Greek Budget

The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.

In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing “all major blocks of expenditure” by the Greek government.

Even before Germany circulated its proposal, the EU and International Monetary Fund had presented a 10-page list of “prior actions” Athens must implement before the new bail-out is agreed. According to a copy of the document, also obtained by the FT, Greece must cut an additional 150,000 government jobs within three years.

Actual Text of Proposal

The Financial Times posted on its website the complete text of the proposal. Here are snips from Assurance of Compliance in the 2nd GRC Programme

1. Absolute priority to debt service
Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.

2. Transfer of national budgetary sovereignty
Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.

Expect Greek "Bank Holiday" Soon

Perhaps I am mistaken but I do not see any chance Greece will agree with this proposal.

German and IMF demands make meaningless any hint of a deal "soon". Germany has signaled it has had enough and will not throw another 130 billion euros down a rathole. The IMF signaled the same thing but not as emphatically.

Thus, if Germany does not back down and the IMF insists on a 10-page list of “prior actions” a Greek exit from the Eurozone is at hand.

Look for a "bank holiday" in Greece soon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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2010-2011 Originations Best Default History on Record; Delinquencies Down 25% from Highs, Foreclosure Inventory Near Peak Level

noreply@blogger.com (Mike Mish Shedlock) — Fri, 27 Jan 2012 21:10:00 +0000

Here are a couple of interesting charts from the LPS Mortgage Monitor, January 2012 Mortgage Performance Observations report. Data as of December, 2011 Month-end.

click on any chart for sharper image

Originations Decline

Government Responsible for Most Refinance Activity

Quality of Loans Improves

Foreclosure Inventory Near Peak Level

Horrendous Performance of Loans in Foreclosure in Judicial States

The quality of recent loans has gone up and delinquencies are lower, but the rest of the data shows numerous problems. Foreclosure inventory is near record levels and more foreclosures wait in the wings. Home sales has stalled and home prices continue to decline according to Case Shiller.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GDP on Recession Track; Real GDP +2.8%, Misses Estimates; Inventory Replenishment Accounts for 1.9 Percentage Points; Five-Year Treasury Yield Hits Record Low

noreply@blogger.com (Mike Mish Shedlock) — Fri, 27 Jan 2012 17:45:00 +0000

The headline real GDP number of 2.8% does not sound too bad until you dig beneath the surface. A full 1.9 percentages points of that 2.8% was inventory replenishment. Real GDP vs. a year ago is +1.6% and that is on a recession track as well.

Five-Year Treasury Yield Hits Record Low

Bloomberg reports Treasury Five-Year Yield Declines to Record Low as GDP Misses Forecast

Treasury five-year note yields fell to a third consecutive record low after slower-than-forecast U.S. growth added to speculation the Federal Reserve will expand asset purchases to spur economic growth.

Ten-year note yields fluctuated as stockpile rebuilding accounted for 1.9 percentage points of the 2.8 percent economic expansion, sparking concern growth may be weaker than expected in the first three-months of this year. Fed Chairman Ben S. Bernanke said Jan. 25 he’s considering additional bond purchases to boost growth after the Federal Open Market Committee announced that the target lending rate would stay low through late 2014.

Yield Curve over Time

click on chart for sharper image

Stock Symbols in Above Chart

$IRX Brown: 3-Month Yield
$FVX Blue: 5-Year Yield
$TNX Orange 10-Year Yield
$TYX Green: 30-Year Yield

Sustained economic weakness is the only reasonable explanation for this decline in yields. Yes, there is Fed intervention. However, the reason the Fed is intervening is "sustained economic weakness".

However, the Fed's actions are counterproductive. Driving down interest rates does not encourage bank lending, rather it does five things the Fed does not want.

Five Unwanted Results of Fed Policy

Low interest rates clobbers those on fixed income - See Hello Ben Bernanke, Meet "Stephanie"
Low interest rates and quantitative easing encourages bond market speculation and sure profits instead of bank lending - See Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned
Low interest rates encourage commodities speculation especially food and energy and that puts a price squeeze on manufactures. Input prices rise, but demand and prices decline. - See Chart of the Day: Apparel Import Data in Square Meters and Dollars; J.C. Penney's Slashes Prices on All Merchandise by "At Least 40%", Offers Every Day Low Pricing
Low interest rates drives up the price of gold - See Gold, Silver, $HUI React to Bernanke Pledge to Hold Rates near Zero "At Least" through Late 2014; Hello Stephanie, Ben Promises More of the Same
The beneficiaries of the Greenspan Fed and the Bernanke Fed policies have been the 1% not the 99%

Fed Policy Not Working

Fed policy is not working, nor will it work.

This is what happens when an academic wonk with no real-world practical thinking sits in a box with other academic wonks with no real world experience and they collectively divine economic policy as if they were god.

The Fed is responsible for the housing bubble, the resultant collapse, and the anemic economic recovery.

GDP on Recession Track

Here is an interesting chart from Doug Short regarding Real GDP and the Next Recession

click on chart for sharper image

Doug Short writes ...

As the chart illustrates, the latest YoY real GDP, at 1.6% is up from last quarter's 1.5% (to two decimal points it's 1.56% versus 1.46% for Q3). At 1.6% the YoY number is below the level at the onset of all the recessions since quarterly GDP was first calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (at two decimal places it was 1.42% versus today's 1.56%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in the same quarter. In that case the recession began three quarters later in December 2007.

In contrast to popular belief, recessions typically start with GDP in positive territory. As you can see, Real GDP vs. a year ago is +1.6% and that is consistent with a recession track.

It is highly likely Bernanke was aware in advance that a full 1.9 percentages points of that 2.8% rise in GDP was inventory replenishment when he pledged on Wednesday to "Hold Rates near Zero "At Least" through Late 2014" and opened the door for another round of Quantitative easing as well.

Nonetheless, for reasons noted above, another round of quantitative easing will be counterproductive. The beneficiaries of Bernanke policy will be the 1%, not the 99%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Portugal 10-Year Government Bond Yield at Record High

noreply@blogger.com (Mike Mish Shedlock) — Fri, 27 Jan 2012 17:39:00 +0000

With an involuntary Greek debt restructuring in the works (see Greek Debt Solution Likely to Trigger Credit Default Swaps) it's time to focus on the next involuntary debt restructuring.

Portugal 10-Year Government Bond Yield

Expect a currency crisis to erupt in Portugal at any time. Round-after-round of emergency meetings (and all of them will fail), are just around the corner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greek Debt Solution Likely to Trigger Credit Default Swaps

noreply@blogger.com (Mike Mish Shedlock) — Fri, 27 Jan 2012 16:12:00 +0000

European finance ministers and politicians have come to the conclusion that a deal, even one involving a credit event, is better than no deal at all. Thus it is increasingly likely the Greek Debt Wrangle will trigger credit default swaps.

Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts

“Politicians seem less concerned than before about CDS triggers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”

Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis.

Greece said it may impose losses on investors who fail to support the debt restructuring by adding a so-called collective action clause, or CAC, into its bond documentation. That would force holdouts to accept the same terms as the majority.

Use of CACs would trigger a restructuring credit event and a payout of default swaps, according to rules from the International Swaps & Derivatives Association.

“A CAC is looking increasingly like the best option,” Citigroup’s Hampden-Turner said. “That route seems to tick a lot of boxes: they don’t have a bond default, the official sector gets treated differently than the private sector, and everybody has to participate in the exchange without anybody getting paid in full.”

ECB Opposition

While the ECB oppose any involuntary restructuring of Greek debt, policy makers such as Dutch Finance Minister Jan Kees de Jager say they aren’t against a credit event.

The softer stance signals Greece is unlikely to get sufficient participation in a voluntary bond swap to make its debt burden sustainable.

The ECB is now alone in its opposition to a credit event. Then again, the ECB alone was against haircuts, soft defaults etc.

As late as May 7, 2011 former ECB president Jean-Claude Trichet insisted there would be "no Greek debt restructuring". I wrote about it in Trichet Reiterates Restructuring "Not on the Agenda", Market Reiterates "Trichet is a Pompous Fool".

Since then there have been two restructurings, and we are now headed for an involuntary restructuring that will trigger credit default swaps.

I suspect an effort will be made to placate the ECB somewhat so that the ECB does not take a loss on the 40 billion euros of Greek debt it stupidly bought, but otherwise, the ECB is about to have this crammed down their throats.

Portugal waits on deck.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Cameron Rebukes Euro Leaders at Davos, Calls Financial Transaction Tax "Quite Simply Madness" ; Mathematical Impossibilities

noreply@blogger.com (Mike Mish Shedlock) — Thu, 26 Jan 2012 20:47:00 +0000

Bickering in Davos at the World Economic Forum has taken center stage as U.K. Prime Minister Cameron rebukes euro leaders over crisis

David Cameron has delivered a firm rebuke to Germany at the World Economic Forum, calling on Berlin to contribute significantly more resources and guarantees to help solve the eurozone crisis.

The British prime minister stressed on Thursday that although progress had been made, particularly with the European Central Bank’s funding of the European banking system, policymakers were still far from finding a solution to the underlying problems of the crisis. He criticised eurozone leaders for being distracted by other issues, such as the introduction of a financial transaction tax – an initiative he described as “quite simply madness”.

His speech in Davos reflected British officials’ long-standing and deep frustration with Germany’s leadership of the single currency area and called for a much stronger firewall to prevent contagion within the eurozone, common European sovereign debt and for powerful countries committing to reduce their trade surpluses as much as the struggling countries seek to minimise their deficits.

The sentiments chimed with many British and US delegates at the WEF who have criticised Germany for seeking to persuade other countries to “become more German” without the corollary that Germany must “become less German” by importing more and allowing its trade surpluses to shrink.

Tobin Tax

Cameron is correct regarding the financial transaction tax, commonly known as a "Tobin Tax" named after Nobel Laureate economist James Tobin who originally proposed the idea for currency transactions only. Now they want to tax everything.

Mathematical Impossibilities

The sentiment expressed by Germany that other nations need to become "more like Germany" as in "export more" sounds good when you hear it, but it is a mathematical impossibility.

Not every nation can be an exporter. If one country has a balance-of-trade trade surplus, another country must have a trade deficit.

Thus, the only way for other countries to become more like Germany is for Germany to become less like Germany.

The same holds true for the trade relationship between the US and China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Steen Jakobsen on Maximum Intervention "Now is the Time You Need Metals – Particularly Gold and Gold Stocks"; Fool in the Shower

noreply@blogger.com (Mike Mish Shedlock) — Thu, 26 Jan 2012 16:36:00 +0000

Steen Jakobsen, chief economist for Saxo Bank in Denmark has some interesting thoughts to share on gold an metals in an email update that just came in.

Steen writes ...

Interesting session with Fed yesterday! Both the ECB and the FED have now clearly showed that the changed board of directors is far more willing to print money and keep rates low forever than ever before in central banking history – which is probably not a good thing or is it?

It’s a wait and see game now – the FOMC action left plenty on the table for both the bulls and the bears. For the bulls this is ‘easy money’ for longer and low rates will have to work.

For the bears it’s sign of incoming depression when Fed feels obliged to signal low rates for longer.

The truth is probably somewhere in between. There is reason for low rates, but also printing money to the extend the major central bank does it makes all of us speculators chasing, again, investments which we would not normally engage in as commodities, metals, housing et al. We are effectively all being forced to take more risk for same return with low interest now predicted into the financial “forever”.

Sometimes the best analysis on an issue, and in my case almost always, comes from someone else – with reference to the FOMC I personally really enjoyed Caroline Baum’s piece: 'Fool in the shower' to Give Fed a Good Scalding

Not only a gifted journalist and writer but excellent arguments and stories. Please do read her take on Fed’s difficult balance.

Today’s market open carry plenty of positive momentum, however Greek PSI and Portugal could ruin the party short-term.

Medium-term all things positive seems to have been priced in:

More QE in both US, UK and Europe including low rates and basically banks funded through 2012

A forced voluntary deal in Greece – the real test is the next payment three month down the road

A fiscal compact by next Monday where Germany will declare victory and then allow EFSF/ESM to be merged

Iran on the back-burner at least for now.

We now see market slightly expensive relative to historic numbers in our bottom up models, but not enough to create warning signal, however our cyclical/technical model are turning down s from here. Plenty of talk of Demark highs, cyclical tops in place, fresh money now being invested and very high survey data combined with bull/bear ratio and VIX volatility all indicating “full speed ahead”, so the momentum is positive and the mean-reverting models are very negative. May the best ‘model’ win! I am still 70 per cent in cash for the rest.

My good colleague Peter Garnry kindly provided me with this chart(which is now part of Stress Indicators) on key central bank’ balance sheet in percentage of their countries GDP. Simple stuff, scary stuff:

Note how Europe or rather ECB in the space of six month have done more expansion than the FED has done in three years in terms of printing money(relative to GDP) – again – buy some paper producers! The world could run out of paper to print those debasing currencies on pretty soon!

Now is the time where you need your metals – particularly gold and gold stocks. The above issues shows you clearly and forcefully that we have moved from a ‘Maximum Intervention’ period into a ‘Maximum printing’ phase – this will give the policy makers a false sense of “improvement” and hope for a turning point not dissimilar to the comments seen exactly one year ago in Davos –

This new hope will stop the move towards the “Endung” – as the ultimate solution remains the same: Germany needs to decide for or against Europe – end of story – they will cave in last day, last minute but only if forced to do so, this more of same pretend-and-extend will delay this from Q1 to Q2 or Q3 meanwhile the balances or rather imbalances inside the system will increase making the ultimate price(loss) yet higher – but why bother with something which is more than one week away? As someone commented today by this time next year most of today’s politicians could be out of office anyway: China, France, Italy, Greece etc…

The story is always the same: Politicians spend money – the private economy tries to keep up. Meanwhile the challenge for us skeptics is best defined by Keynes old comment: ‘The market can stay irrational longer than I can stay solvent’ – and that is the bet Princess Merko-cy is playing when she kissed the frog and got an Italian prince with a huge balance sheet in Frankfurt. A true fairytale it is!

Safe travels,

Steen

As pertains to metals and Baum I agree. Here is my favorite line from "Fool in the Shower".

Two policy makers -- no names were attached to the forecasts -- expect the funds rate to first begin rising in 2016. (My money is on New York Fed President Bill Dudley and Governor Janet Yellen.) That would mean eight years of 0 percent interest rates. There will be a revolution in this country before then if the economy is lousy enough to warrant 0 percent interest rates for that long. Even the fool in the shower knows that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Chart of the Day: Central Bank Balance Sheet as Percent of GDP: Fed, ECB, BOJ, BOE

noreply@blogger.com (Mike Mish Shedlock) — Thu, 26 Jan 2012 16:20:00 +0000

Here is an interesting chart by Peter Garnry, an Equity Strategist at Saxo Bank in Denmark.

The race is on to see which central bank can load up its balance sheet with the most garbage the fastest.

Reader Scott says ...

Lemme see here, the EFSF was, once upon a time, going to lever itself up by taking the first 20% of losses on PIIGS sovereign bonds. This would give it the 'firepower' to quell the crisis in the Eurozone. How laughable that now seems. Such an arrangement would not even protect the ECB's 'investment' . Instead we hear rumors of schemes to foist the ECB's holdings off onto the EFSF with the ECB's 30% haircut already attached. So now, if I get this right, the EFSF is now the bailout mechanism for the ECB's SMP and that the PSI must now be broadened to become the PPSI or Public Private Sector Involvement and ESM is to be readied by this summer to take the place of the EFSF . And all of this just to deal with Greece. Given the failed bailouts, collapsed arrangement, lies, violations of EU law, summits, press conferences can Merkel, Sarkozy, Barroso and Rehn cobble together only to have fall apart before everyone realizes the jig is up? That they have no solution because there is no solution. The system is bankrupt.

The system is indeed morally and mathematically bankrupt. Some points above may not be perfectly accurate in entirety but the idea conveyed is certainly accurate. The key question is "when does everyone realize the jig is up?"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Merkel Casts Doubt on Saving Greece, Insists ECJ be Empowered to Police Nannyzone; ECB insists on Profits on Greek Bonds; IMF Takes Tougher Stance; Greek Socialists Reject EU Mandates

noreply@blogger.com (Mike Mish Shedlock) — Thu, 26 Jan 2012 06:41:00 +0000

Amazingly, smack in the midst of deal to save Greece from bankruptcy, the ECB not only insists on taking no losses on Greek bonds its holds, it wants a profit on them because it bought them at what seemed at the time to be a substantial discount. The discount was imaginary. The bonds were trading at 7% at the time.

Uncomfortable Days for ECB

The Financial Times reports Uncomfortable days for ECB

The ECB started buying Greek bonds in May 2010, when the eurozone debt crisis first erupted. The objective of Jean-Claude Trichet, president, was to stabilise financial markets. The assumption was that bonds bought at market prices would be held until maturity, when the ECB would book a tidy profit.

Having taken action when the private sector held back, it justifiably feels it should not have to pay a price now, said Erik Nielsen, chief economist at UniCredit. “In an emergency, the fire brigade goes in – but the deal is that it is protected.”

Economists estimate that a 70 per cent “haircut” on the face value of the ECB holdings could leave a loss of more than €20bn – a significant but not disastrous sum given the size of the reserves held by the ECB and eurozone national central banks. But the ECB’s resistance to accepting losses is not just principled. Agreeing to take a loss could be viewed as providing financial assistance to Greece – and in violation of the European Union’s ban on central banks funding governments.

ECB Itself Puts Deal at Risk

It is the ECB's insistence to be made whole that is a primary source of bickering about lowered coupon rates.

I commented on this mess previously in Greek Bondholders Reject Deal; History Lesson on Defaults; The ECB's Dilemma; Deadline Laugh of the Day.

In that post I showed a calculator that suggests the IMF and Germany are angling for a haircut between 75% and 79%.

To top it off, taxpayers in the EMU states would have to cover all the ECB's losses as well.

Should the deal go through, another 100+ billion euros will be thrown down the Greece rathole. In my estimation that still will not bring Greek debt down to 120% of GDP by the targeted 2020 date, up from the targeted 2015 date, up from the targeted 2013 date.

Bear in mind, with the original 21% haircut idea, Greece was supposed to be at an 80% debt-to-GDP by 2013. So not only did timeframes stretch, the targeted debt levels did as well.

IMF Throws Its Hat Into the Ring

Today the IMF threw its hat into the ring with a tougher stance over Greek debt.

On Wednesday [IMF Chief Christine Lagarde] argued that if Greece’s private creditors did not accept a big enough writedown, the European Central Bank might have to take a reduction in its own Greek debt holdings. “The balance between the participation of the private and the public sector is a concerning question,” Ms Lagarde said.

Ruffled Feathers and Spooked Investors

There was no official response from the ECB but it is safe to presume the IMF's stance ruffled a lot of feathers.

However, look at the situation from the point of view of investors. If the ECB and IMF never have to take losses, and everyone else does, then investors are buying subordinate debt that should have a much higher yield.

The situation is obviously a complicated mess in more ways than one.

Place the Blame on Arrogant Fools

Place the blame for this Grecian dilemma squarely on the shoulders of former ECB president Jean-Claude Trichet, an arrogant fool who insisted on buying Greek bonds, overriding strong objections by then Bundesbank president Axel Weber who resigned in protest of the move.

Merkel Casts Doubt on Saving Greece, Insists ECJ be Empowered to Police Nannyzone

In a candid interview with The Guardian, Angela Merkel casts doubt on saving Greece from financial meltdown

Angela Merkel has cast doubt for the first time on Europe's chances of saving Greece from financial meltdown and sovereign default, conceding that Europe's first ever multibillion euro bailout coupled with savage austerity was not working after a two-year crisis that has brought the single currency to the brink of unravelling.

In an interview with the Guardian and five other leading European newspapers, the German chancellor also insisted – against widespread resistance elsewhere in the eurozone and in the UK – that the European court of justice (ECJ) be empowered to police public spending and budget policies of the 17 countries in the euro.

She also called for the eventual creation of a European political union, with many more national powers ceded to a central government, a strengthened bicameral European parliament, and the ECJ assuming the role of Europe's supreme court.

Days before the latest EU summit, which, at Merkel's insistence and evoking scant enthusiasm elsewhere, is to finalise an international treaty between eurozone governments entrenching German-style fiscal and budgetary rigour in all single currency countries, the chancellor admitted having doubts about the strategy she had pursued during the crisis.

Despite the prime minister's blockade and the belief in Berlin that he blundered, Merkel sounded conciliatory.

"I am convinced that Great Britain wants to remain a member of the European Union. Of course, it's never easy for 27 states to hold together … We need to find that balance with everyone time and again, including the United Kingdom wherever possible."

On her "vision" for the future of the EU, though, there is unlikely to be any "balance" struck with No 10 because Merkel's hopes for a Europe united politically under a single government are at odds with Britain's views. Besides, Merkel's project would require substantial transfers of powers to Brussels that would run foul of Cameron's EU referendum law.

"My vision is one of political union because Europe needs to forge its own unique path. We need to become incrementally closer and closer, in all policy areas," the chancellor said. "Over a long process, we will transfer more powers to the [European] Commission, which will then handle what falls within the European remit like a government of Europe. That will require a strong parliament. A kind of second chamber, if you like, will be the council comprising the heads of [national] government."

"And finally, the supreme court will be the European court of justice. That could be what Europe's political union looks like in the future – some time in the future, as I say, and after a goodly number of interim stages."

There was no immediate reaction to Merkel's interview from Cameron.

Candid Interviews or Candid Lies?

I am suspicious of "candid interviews". Every time one of these European leaders starts acting pessimistically, another kick-the-can rescue is pulled out of the hat.

I also get the sense Merkel is fighting for her political life. That be the case, she has all the more reason to say anything that suits her purpose. Then again, it's always safe to assume politicians are babbling lies for political purposes.

In this case it is clear she is throwing an olive branch to Cameron. After that affair in December, it would be appropriate for him to throw Merkel an anchor.

Rest assured she would connive with Sarkozy once again to weigh the UK down with a financial transaction tax, except for two things.

After all his Pompous "France will go it alone" buffoonery, Sarkozy pulled the Tobin Tax off his agenda bowing to French banks.
Sarkozy is not going to be reelected.

For details please see

Merkel's Motives

My take is Merkel finally realizes Sarkozy is toast and the Tobin Tax is toast for now, and now Merkel wants to suck up to Cameron to help save her political career.

Is there any reason to believe anything else?

Greek Socialists Reject EU Mandates

For an article that shows just why the Greek bailouts are ultimately doomed even if another rabbit is pulled out of the hat, please consider Greek deputies join populist backlash

A revolt by socialist lawmakers over one clause in a new structural reform package has highlighted a populist backlash as Greece races to complete talks with international lenders on a medium-term fiscal programme.

More than 60 backbenchers, among them a former European commissioner, voted against the lifting of restrictions on Greek pharmacy opening hours, as part of measures liberalising more than 130 “closed-shop” professions.

A group of conservatives were among another 90 deputies who abstained, forcing the coalition government to withdraw the article. Andreas Loverdos, health minister, appeared poised to make concessions to the rebels, saying it would be presented again “with improvements” as a separate piece of legislation.

The uproar in the chamber was emblematic of continued unwillingness by Greece’s political class to accept the discipline imposed by its European partners and the IMF in return for a second bail-out, even as the country stands on the brink of a disorderly default.

“I cannot understand a parliamentary vote that puts the interests of 12,000 pharmacists above those of 11m Greeks . . . the house must finally stop protecting these mini-oligarchs,” said Giannis Ragousis, defence undersecretary and a socialist backer of market liberalisation.

A Pame [communist trade union] official said: “Greece faces three more years of austerity, even if the latest package succeeds in stabilising the economy, and people are already facing extreme hardship.”

Eventually, Will Come a Time When ....

I am sticking with what I said on November 23, 2011 in Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

That time may be at hand.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chart of the Day: Apparel Import Data in Square Meters and Dollars; J.C. Penney's Slashes Prices on All Merchandise by "At Least 40%", Offers Every Day Low Pricing

noreply@blogger.com (Mike Mish Shedlock) — Wed, 25 Jan 2012 21:02:00 +0000

Here is a chart of apparel trends sent to me last week by reader Tim Wallace.

click on chart for sharper image

Wallace Writes ....

Dear Mish

As I have been saying over the past several months there is a tremendous unit drop going on in the import apparel industry, but it is not reflected in reporting because dollars keep going up, at least until recently when they flat-lined.

The attached chart looks at the two criteria together, dollars imported and units imported reflected as meters square. As you can see, the dollars kept going up but the units turned south back in May, yes the very May my petroleum distillates distinctly show the economy turning south.

Things are just starting south like towards the end of 2007. Give it time.

Demand is plummeting.

Regards,

Tim

For Tim Wallace's latest report on gasoline and petroleum usage, please see Year-Over-Year Gasoline and Petroleum Usage Charts; Shares Decline as Chevron Warns of Weaker 4th Quarter Earnings.

JC Penney's Slashes Prices on All Merchandise by "At Least 40%"

I had forgotten about the apparel chart from Wallace but was reminded of it today by this headline news story today in USA Today: Penney's slashing prices on all merchandise

J.C. Penney is permanently marking down all of its merchandise by at least 40% so shoppers will no longer have to wait for a sale to get the lowest prices in its stores.

Penney (JCP) said Wednesday that it is getting rid of the hundreds of sales it offers each year in favor of a simpler approach to pricing. On Feb. 1, the retailer is rolling out a three-tiered strategy that offers "Every Day" low pricing daily, "Monthly Value" discounts on select merchandise each month and clearance deals called "Best Price" during the first and the third Friday of each month when many shoppers get paid.

Penney's plan comes at a time when stores are struggling to wean shoppers off the profit-busting bargains that they have come to expect in a weak economy. The move is risky because shoppers who love to bargain hunt may be turned off by missing the thrill they might get from feeling like they're getting a deal.

"The big question on investors' minds will be how customers react to a single price point versus a perceived discount under the old strategy," says Citi Investment Research analyst Deborah L. Weinswig.

The plan is the brainchild of former Apple executive Ron Johnson who became Penney's CEO in November.

How Pricing Strategy Works

Sale prices become everyday prices. The company will use last year's sales figures to slash all prices at least 40% or lower than last year's prices. So, a woman's St. John's Bay blouse regularly priced at $14.99 could have the "Every Day" price of $7.
Fewer sales. The retailer will pick items to go on sale each month for a "Monthly Value." Items that don't sell well go on clearance and will be tagged "Best Price," signaling to customers that it's the lowest price.
New tags. The retailer used to pile stickers on price tags to indicate each time an item was marked down. Now, when an item gets a new price, it gets a new tag. A red tag indicates an "Every Day" price, a white tag a "Monthly Value" and a blue tag a "Best Price."
Simpler pricing. Penney will use whole figures when pricing items. You won't see jeans with a price tag of $19.99, but rather $20.

Price Deflation Hits Penney's

Here is another way of looking at things: Price deflation hits J.C. Penny's. In turn, this will place pressure on other retailers to do the same.

Those who think Bernanke's attack on the dollar can stave this off have another thing coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gold, Silver, $HUI React to Bernanke Pledge to Hold Rates near Zero "At Least" through Late 2014; Hello Stephanie, Ben Promises More of the Same

noreply@blogger.com (Mike Mish Shedlock) — Wed, 25 Jan 2012 19:04:00 +0000

In a press statement regarding today's FOMC meeting, the Fed announced that economic conditions would "likely warrant exceptionally low levels for the federal funds rate at least through late 2014".

If It Doesn't Work, Keep Doing It

As noted in Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned, this policy decision is highly unlikely to accomplish what Bernanke wants.

Bernanke's policy now boils down to "if it doesn't work, we'll keep doing it until it does". Those on fixed incomes have been crucified by the Fed's policies and will continue to be crucified by the Fed's policies until low interest rates work.

Reaction of Gold, Silver, $HUI to FOMC Statement

$HUI 10-Minute Chart

Gold 10-Minute Chart

Silver 10-Minute Chart

The $HUI gold miner index blasted higher on the FOMC announcement. Interestingly gold and silver blasted higher before the announcement.

Treasuries rallied as banks and brokers font-ran the trade.

This is all well and good for the 1% and for the banks that front-ran the bond trade, but it sure is not doing anything good for those on fixed income or most of the 99%.

I wrote about the plight of those on fixed income in detail, nearly one year ago in Hello Ben Bernanke, Meet "Stephanie".

Hello Stephanie, uncle Ben promises more of the same.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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My Horrific Experiences With Sony Customer Support

noreply@blogger.com (Mike Mish Shedlock) — Wed, 25 Jan 2012 17:43:00 +0000

I have a Sony laptop computer. It is less than a year old. It was not cheap. I bought the best components, memory and hardware components options available including 3-year in home support.

A couple of months ago the monitor developed a problem (a line of dead pixels down the entire length of the screen). I knew it was a hardware failure because I run a dual monitor setup and the line did not appear on the second screen.

I ignored that problem because it was relatively minor. However a hard drive failure cannot be ignored.

Unfortunately I experienced a hard drive failure at the beginning of January and was dead in the water. I could not boot.

Please follow this chain of events (Mac users, please try not to laugh too loudly).

My Sony Support Experience

I called Sony support and told them of my problems. They told me my computer was out of warranty even though it was less than a year old and under standard warranty. I told them I had a 3 year warranty. They told me I they had no record of it but gave me another Sony phone number to call to verify my warranty.
I suggested that rather than me hang up and dial Sony, that Sony should dial Sony and verify my service contract. The technical rep said that was not possible.
I called the service number at Sony the tech rep gave me and that service rep verified my date of purchase as less than a year old. The service rep also gave me my 3-year in-home service contract number.
I called back Sony technical support and gave them my service contract number. The technical rep said they could not find that service contact and would not help me. The tech rep told me to call back the service rep and get the right number.
I called back up the service rep, and I did indeed have the right number. The service rep agreed to call the tech rep and stay on the line to verify the number. Apparently service can call technicians but not vice-versa. Some of these calls took 20 minutes.
The service rep informed the technical rep of my purchase date of the service contract (less than a year old), and that it was for 3-years. At that point the tech rep agreed to help me. The service rep hung up.
The tech rep then took my serial number and other information but said before he could schedule a service call he needed a copy of my receipt. I did not have a copy of my receipt. Given the Sony service rep verified my purchase date and 3 year service contract I failed to understand why I need a written receipt. As you might expect I was quite upset and talking rather loudly at this point.
The service rep said he needed to know whether the computer was to be repaired under the service contract or the 1-year standard warranty. As you might imagine I did not see why any of this mattered as my date of purchase was confirmed by Sony as was my 3-year warranty.
Well this mattered to the technician who demanded a receipt. The technician gave me a Sony website in which I could look up my order and get a receipt. I said "If I can go to a website on Sony and look up my order, why can't you?"
As you can probably guess from what has transpired so far, the tech rep could not do that. It was now late in the day and I had company over and a backup PC was working but without a lot of programs I frequently use and need. I waited overnight to get the receipt.
The next day I attempted to get a receipt but the website URL the tech rep gave me was invalid.
Once again I called the service contract rep and that person gave me the right address. I said why don't you look up my purchase day and get it to the tech but this time the service rep was uncooperative.
I go to the Sony website and find my order. I print out my order and fax it to the tech rep. I call the tech rep number and the tech informs me he has scheduled a service call and someone would call me shortly to arrange a time within three days.
I was suspicious of that claim, so the next day I called up the service rep who indeed verified the tech rep did not schedule a service call.
The service rep put in the order noting they had received my fax and that everything was in order.
I was told I would get a call within 3 days. I was actually shocked to get a call the next day but the pleasant surprise quickly ended on news they had to order parts and I would get a another call within 3 days when the parts would be ready.
Two days later the parts arrive and I get a call and schedule a time.
The rep brings out another monitor and another hard drive.
The monitor is bad. It has a line of dead pixels in a different spot.
The tech rep installs the hard drive and leaves me with a set of install disks.
One might think that the on-site technician might actually load the disks they delivered but one would be wrong. These guys are 100% without a doubt strictly hardware only. They do not load disks. Even ones they hand deliver.
It is late in the evening and once again I had company. The next day I run the setup disks and get an I-O error. I cannot tell what is wrong.
I call Sony and they suspect another hard drive problem and tell me someone will call me within three days to schedule an appointment.
I am screaming at the top of my lungs at this point as I have had it. The rep agrees to do nothing but schedule another call. I ask for his supervisor and an transferred to a "national customer relations specialist" NCRS.
I ask the NCRS to send me a new computer. He tells me that the computer I have is no longer available. That was a direct lie because in advance (in expectation of lies) I had gone on the Sony website and could order the exact computer I already had.
I informed the NCRS that the computer was still orderable and he said he did not have the authority to do what I asked. If a national customer relations person does not have that authority, one has to wonder "Do they have ANY authority?"
I asked to be transferred to his superior and was put on hold. His superior (and the NCRS refused to tell me the title of that person) would not take my call but whoever that person was did tell the NCRS that if the next delivery did not work they would pro-rate a refund.
I demanded to talk to the NCRS superior but the NCRS would not comply.
At that point I had had enough. I had been without my computer for 11 days and had loaded trial versions of software I use on another computer to get by, but I was still running in limited mode in a number of ways.
I do an online search for computer repair for my city at 4:30 PM. The first two places did not answer the phone or had a messages they were closed. The owner of a third local repair shop in Barrington Illinois did answer the phone. He was open until 7:00PM and Barrington is only a half hour away.
He agreed to look at my computer. I brought in my computer, the install DVDs Sony gave me, and an external hard drive backup I had of my computer. He took one look at the install disks and said "this one is bad" (it had a discolored spot on the DVD). He changed the bios on my machine to boot to an external DVD drive and fortunately the external drive was able to read the install disks. It was now going on 8:00PM and the owner had stayed an hour past closing to help me but the configuration was only 70% done.
The owner had to go but the next day when I called in, he had reset my drive to the original Sony state, removed all the Sony bloatware including Norton. He loaded all my personal files from an external hard drive I brought in. Above and beyond the call of duty, he found every ICON on my computer and went out and loaded trial versions of every software program I had.
Now that is service. I had my Microsoft Office Key as well as keys to the other programs I use. I had no idea how to configure my POP account at SBC on to my Microsoft Exchange account but he did that off the top of his head. By accident, I found someone (a business owner) who not only understands computers but someone who also understands the value of a customer.
Five days later (two over the weekend) Sony did come by and replace my monitor. It might have been done sooner but I was out of town on Friday.

Moral of the Story

Have file backups. I did.
Don't count on Sony
I have had bad experiences with Dell as well so don't count on Dell or any other mass producer either.
Instead find a local computer shop that understands computers and the value of a customer.

If you live in NW Illinois, the place I found that helped me is BarringtonComputer. The owner is Richard Zatek.

By the way, I left out one interesting detail.

Barrington Computer has the ability to access a computer remotely. Zatek gave me a way to see what was happening remotely to my computer. When I checked on it at midnight (from my backup machine at home), Zatek was also dialed into my computer and we exchanged messages right on my computer remotely using notepad, at midnight. We could see what each other was typing. That is pretty cool as well as exceptional service.

One good thing came out of this. I am pleased to have found someone who knows computers and also understands the value of a customer. Sony sure doesn't.

Addendum:

I received many emails regarding this post. Here is one from attorney "BR" who says ...

Dear Mish,

I’m a big fan of your site and it is pretty much required reading for me most days. I read your account of your travails with “Big Corporate Customer service” with great empathy. I encountered a very similar experience two years ago getting a burner part replaced on my natural gas hot water heater. It took six weeks, 7 separate “house calls,” at least 15 different phone calls, and nearly being divorced before the problem was rectified. And it was a parts problem for which the company had issued a “recall,” so it wasn’t a unique or unexpected problem.

I’ve become convinced that this type of customer “service” is viewed as being a “feature” and not a “bug.” And it crosses all lines of products and services, but especially those covered by “warranties.” They are actively discouraging you from insisting on your right to the free repairs and other services for which you have already paid when you purchased your warranty. In my judgment it represents a calculated effort by corporate types to maximize the profits they obtain under extended warranty agreements. It really is a form of fraud.

Lesson learned is that while P.C. stands for piece of crap, warranties are worth even less.

Very truly yours,

BR

Addendum Two

I received many comments about the poor quality of consumer products. I failed to mention a possible remedy.

I asked the store owner if he custom built computers and he said it would not be cost-effective. After all, he still would be using components straight from China.

Instead he said, never buy a computer from a normal retail store or through the "consumer division" of a PC maker. Sony only has a a consumer division. HP and Dell have business divisions.

Unfortunately, that may not mean support will be much better, but rather the components will likely be of a higher quality. Large businesses might buy hundreds of computers or more at once. To get repeat business, the computers need to be more durable and have no built-in bloatware (trial software and other garbage).

Addendum Three

I received many emails like this from Mac users but here is one from a person at VMC Consulting Corporation with a email address at Microsoft.

Reading your recent “Horrific Experiences” post, I just want to make a friendly suggestion.

Next time you want the best Windows machine money can buy, get a Mac.

No kidding.

The Mac is the best Windows machine you can buy, and the support is fantastic. I don’t know where you live, but if it’s a major city, I bet there’s an Apple store nearby.

You can either use “Boot Camp” and run entirely in Windows, or you can be booted into the Mac OSX, and run Windows inside of Parallels, which is a fantastic Virtualization program.

Cheers,

David

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Proposes Mortgage Bailouts, Handouts, Copouts Exactly One Paragraph After Stating "Top to Bottom: No Bailouts, No Handouts, and No Copouts"; How the Taxpayer Ripoff Works

noreply@blogger.com (Mike Mish Shedlock) — Wed, 25 Jan 2012 08:55:00 +0000

Inquiring minds are reading the complete text of President Obama's State of the Union Address to see what distortions, lies, and hypocrisy it contains.

I found a nice Orwellian set of paragraphs smack in the middle of his speech.

And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.

That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.

Let’s never forget: Millions of Americans who work hard and play by the rules every day deserve a Government and a financial system that do the same. It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.

Top to Bottom: More Bailouts, More Handouts, More Copouts

While reading the first paragraph above I knew without a doubt a huge bailout proposal was coming up.

Sure enough, the very next paragraph contained a massive bailout proposal and in more ways than is readily apparent at first glance. For starters "responsible homeowners" don't need mortgage relief. Secondly, $300 a month is a lot of dough so I would like to see an accounting.

Finally, and most importantly, every loan that is refinanced will be paid off in full. Thus, any bank, hedge fund, mortgage provider, or GSE that is paid off on a nonperforming loan will be immediately made whole.

This is a massive backdoor bailout of banks, mortgage companies, hedge funds, foreign banks, and anyone else holding mortgage related garbage.

In case you were wondering about the big rally in bank shares this year, this proposal just might have something to do with it.

The Orwellian irony of it all comes in the third paragraph with Obama's bald-faced lie "It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts."

How the Taxpayer Ripoff Works

The New York Times explains the ripoff in President to Offer Way for Easing Home Debt

The White House plans to propose legislation that could allow a few million homeowners to reduce monthly mortgage payments by refinancing their current loans into new ones guaranteed by the Federal Housing Administration.

The program would broaden the availability of government-backed mortgages to include many borrowers whose loans are held by private companies and who have been unable to persuade those lenders to reduce their interest rates. Existing federal programs focus mostly on borrowers whose loans are owned by the government.

The new program will be directed at people whose mortgage debts exceed the value of their homes, according to a senior administration official who spoke on the condition of anonymity because the details have not yet been finalized. The official estimated that the program could benefit two million to three million homeowners who have loans that are not guaranteed by the government, and that the program’s cost would not exceed $10 billion.

$10 Billion?! Really?

The proposal as outlined rates to take every ~~"responsible"~~ underwater mortgage held by banks, Fannie Mae, Freddie Mac, hedge funds, foreign banks, and pension plans, and transfer all of them to the FHA. The idea this will only cost $10 billion is absurd.

The "small fees on the largest financial institutions" are absolutely guaranteed to not cover the cost of this monstrous proposal. Indeed there is something in Obama's proposal for everyone except "responsible citizens".

"Let’s never forget: Millions of Americans who work hard and play by the rules every day" will be royally screwed by Obama's proposition in the form of higher taxes down the road.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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CalPERS Earned 1.1% on Investments in 2011, Plan Assumptions are 7.75%

noreply@blogger.com (Mike Mish Shedlock) — Wed, 25 Jan 2012 05:25:00 +0000

Pension plans rebounded sharply in 2009 and 2010 from the devastating losses in 2008. However they never got back to even. 2011 was another poor year, and in spite of the start to 2012 I expect this year and/or next year to suffer more losses, or alternatively the market to limp along with no gains for a number of years.

In other words, pension plans are already in trouble and things are about to get worse. For example, the LA Times reports CalPERS earns 1.1% on investments in 2011

The nation's largest public pension fund, the California Public Employees' Retirement System, posted a 1.1% return on its investment portfolio in 2011, Chief Investment Officer Joseph Dear told his board.

The 2011 performance was well below the estimated average annual return of 7.75% that the fund's actuaries say is needed to meet current and future obligations to its members.

The $229.5-billion CalPERS provides retirement and other benefits for 1.6 million state and local government employees and their families.

CalPERS' annual investment results, whose volatility has echoed that of the overall markets, have become the focal point in an ongoing debate about looming pension fund liabilities and the ability of future generations of taxpayers to continue financing them. Gov. Jerry Brown has said he wants to overhaul state and local government pension programs, but whether he and the Legislature have the political wherewithal to do so in an election year remains unclear.

During the 2011 calendar year, CalPERS lost 7.95% on its public equity investments, lost 2.29% on its hedge fund investments, earned 12.38% on bonds and earned 9.92% on real estate.

CalPERS had a return of 11.6% for fiscal 2010 and a massive recession-related loss of 23.4% for fiscal 2009.

Note those first set of numbers are for the calendar year, the latter set for the fiscal year. Fiscal year returns post on June 30.

I have been saying for years that it is going to be next to impossible for pension plans to make their plan assumptions. Even 5% annualized for the next decade will be very hard to get in a stocks and bonds portfolio with bond yields so low.

A move to equities risks another 2008-style plunge.

Pension benefits and plan assumptions are simply too high. A taxpayer revolt in California over those promises is inevitable.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Japan Faces Moment of Truth: First Annual Trade Deficit Since 1980; New Trend or Simply the Tsunami Effect?

noreply@blogger.com (Mike Mish Shedlock) — Wed, 25 Jan 2012 01:49:00 +0000

Japan is in deep serious trouble the moment it enters a sustainable period of negative or neutral current account balances. If Japan becomes dependent on foreigners to finance rollovers on its debt either the Yen sinks or interest rates rise. Interest rates at a mere 3% would currently consume all of Japan's tax revenue.

Japan’s Fiscal Pressure Intensifies

Bloomberg reports Japan’s Fiscal Pressure Intensifies as Tax-Boost Plan Insufficient

Japan’s government said it will probably miss its goal of balancing the budget by 2020 even with its proposed doubling of the sales tax, underscoring the scale of the nation’s fiscal challenges.

The primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, the Cabinet Office said in Tokyo today. Hours after the release, Prime Minister Yoshihiko Noda reiterated his call for opposition lawmakers to engage in talks on boosting the sales levy.

“To balance the budget, the rate needs to rise further,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, referring to the sales-tax level. “We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

Japanese PM Reshuffles Cabinet to Push Tax Hike

Please consider Japanese PM reshuffles cabinet to push tax hike

Japanese Prime Minister Yoshihiko Noda carried out an anticipated cabinet reshuffle last Friday in a bid to consolidate his grip on power amid continued infighting within the ruling Democratic Party of Japan (DPJ).

Noda dumped Defence Minister Yasuo Ichikawa and Consumer Affairs Minister Kenji Yamaoka, both of whom are prominent supporters of the powerful DPJ faction headed by Ichiro Ozawa. At the same time, he promoted former DPJ president and foreign minister Katsuya Okada to deputy prime minister.

Okada has been given the task of implementing Noda’s highly unpopular plan to double Japan’s sales tax. Noda described the new lineup as “the best and strongest to push ahead with the inevitable topic of administrative, political and tax reforms,” adding, “Mr Okada will not waver or run away from a major task. He is a politician who will produce results.”

The government only announced its draft proposals for tax and social security reform on January 6. The plan involves a hike in the consumption tax rate from the present 5 percent to 8 percent in 2014 and to 10 percent in 2015. The government’s ambiguous language implies further increases in the future, with some in business circles pressing for a rate as high as 25 percent, according to the Yomiuri Shimbun.

Quite the Hike

To go from 5% sales tax to 25% would be quite the hike.

How long will this Prime Minister last? What happens if tax hikes do not go through or they raise insufficient revenue?

First Trade Deficit Since 1980

While pondering the above questions, please consider Japan logs first trade deficit since 1980

Japan logged its first annual trade deficit in 2011 for over 30 years as the aftermath of the March earthquake raised fuel import costs even as slowing global growth and the yen's strength hit exports, threatening to erode the country's ability to fund its huge public debt with domestic savings.

Few market players expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge past investments abroad, as a steady inflow of profits and capital gains from overseas outweigh the trade deficit.

But the trade data underscores a broader trend in which Japan's competitive edge in the global market is eroding and it is increasingly reliant on fuel imports due to the loss of nuclear power, with reactors staying closed after routine checks due to public safety fears following the March disaster.

"What it means is that the time when Japan runs out of savings -- 'Sayonara net creditor country' -- that point is coming closer," said Jesper Koll, head of equities research at JPMorgan in Japan.

"It means Japan becomes dependent on global savings to fund its deficit and either the currency weakens or interest rates rise."

Japan logged a trade deficit of 2.49 trillion yen ($32 billion) for 2011, Ministry of Finance data showed on Wednesday, the first annual deficit since 1980.

Total exports shrank 2.7 percent last year while imports surged 12.0 percent, reflecting reduced earnings from goods and services and higher spending on crude and fuel oil.

In a sign of the continuing pain from slowing global growth, exports fell 8.0 percent in December from a year earlier, roughly matching a median market forecast for a 7.9 percent drop, due partly to weak shipments of electronics parts.

Imports rose 8.1 percent in December from a year earlier, in line with a 8.0 percent annual gain expected, bringing the trade balance to a deficit of 205.1 billion yen, against 139.7 billion yen expected. It marked the third straight month of deficits.

Bank of Japan Governor Masaaki Shirakawa said on Tuesday he did not expect Japan to continue logging a trade deficit as a trend and did not foresee the country's current account balance tipping into the red in the near future.

But Japan's days of logging huge trade surpluses may be over as it relies more on fuel imports, which may weaken the yen in the longer term.

Running a current account deficit would spell trouble for Japan as it means it cannot pay the cost of financing its huge public debt without overseas funds, although few analysts expect this to happen in the foreseeable future.

Japan Faces Moment of Truth

This is a moment of truth for Japan, perhaps the first of many. The question at hand is critical: Is the trade deficit a new trend or simply the long-lasting spillover from the tsunami?

Today's answer may be different than tomorrow's.

A prolonged European recession coupled with stubbornly high oil prices and a slowdown in China is the disaster scenario for Japan.

That scenario is not at all unlikely. A deep European recession is a given and I believe a serious slowdown in China is a given as well. By pressing for tax hikes, it seems Japan's prime minister feels the same way, regardless of what the Bank of Japan says for public consumption.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economic Insanity from Gingrich on Marijuana Use: Life imprisonment With No Parole; Who Benefits from War on Drugs? Big-Brother Expansionist Ideas: Gingrich Proposes "Free Radios" for Everyone in Cuba!

noreply@blogger.com (Mike Mish Shedlock) — Tue, 24 Jan 2012 18:25:00 +0000

Anyone wondering what kind of economically-illiterate, big-brother expansionist ideas Newt Gingrich might embrace as president can find the answer in several recent articles regarding his positions on marijuana usage, food stamps, drug testing, and surprisingly even "free radios".

Please consider Gary Johnson hammers Newt for ‘hypocrisy’ on executing marijuana users

Former New Mexico Gov. Gary Johnson went on offense against Newt Gingrich Monday, attacking the former House speaker’s proposal to execute marijuana users as hypocritical, considering the GOP contender has himself admitted to smoking pot.

Johnson is currently seeking the Libertarian Party nomination for president, and is a proponent of legalizing the drug.

“Ideas are important, especially in a presidential campaign,” said Johnson. “But some of Speaker Gingrich’s ideas over the years are nothing short of scary. Under his legislation, anyone coming home to the U.S. and caught carrying enough marijuana (2 oz.) to distribute would be sentenced to life imprisonment with no parole — or if caught twice, would be sentenced to death.”

Gingrich defended the legislation, the Drug Importer Death Penalty Act of 1996, in November as a way to get tough on Mexican drug cartels.

Newt: Give the death penalty to drug cartel leaders

Next up, please consider Newt: Give the death penalty to drug cartel leaders

Republican presidential candidate Newt Gingrich says he supports using the death penalty as punishment for leaders of drug cartels who bring drugs into America.

Gingrich made the comments when asked in an interview with Yahoo! News if he still stands by a bill he introduced in Congress in 1996 allowing those convicted of smuggling drugs to be put to death.

“I think if you are, for example, the leader of a cartel, sure,” Gingrich told reporter Chris Moody. “Look at the level of violence and the level of violence that they’ve done to society.”

Elaborating, he said: “You can either be in the Ron Paul tradition and say there’s nothing wrong with heroine and cocaine or you can be in the tradition that says, ‘These kind of addictive drugs are terrible, they deprive you of full citizenship and they lead you to a dependency which is antithetical to being an American.’”

Gingrich Lies About Paul's Position on Drug Usage

For starters Gingrich purposely lied about Paul's position. Ron Paul never said "there's nothing wrong with drug usage". Indeed he has stated over and over he does not favor their use.

What Paul has said, is he does not believe government should prosecute those who take drugs. I don't either. Legalizing drugs would take the profit out of them, stop countless robberies by addicts seeking to get drugs, and lower their overall usage.

Primary and Secondary Beneficiaries of Gingrich's Expanded War on Drugs

The primary beneficiaries of Gingrich's expanded war on drugs would be the gang-bangers, drug lords, and smugglers from Mexico. Higher costs and reduced supplies mean more profits for those who succeed at smuggling.

The war on drugs can never succeed here. Unlike Singapore, the US is not going to put to death everyone who sells marijuana. Nor should we in the first place. It is not the government's role to interfere in the personal lives of citizens.

The secondary beneficiary of Gingrich's proposal would be prison guards and union leaders.

Indeed it is the unions who were behind California's inane strike-three law. Californian's pay out the nose and unions have benefited massively by the economically inept and morally corrupt ideas Gingrich espouses for the entire nation.

Yahoo News Interview with Gingrich

Finally please consider Newt Gingrich on drug laws, entitlements and campaigning: The Yahoo News interview

Three Republican presidential candidates have shown an openness to handing over control of drugs and medical marijuana to the states. Would you continue the current federal policy making marijuana illegal in all cases or give the states more control?
I would continue current federal policy, largely because of the confusing signal that steps towards legalization sends to harder drugs.

I think the California experience is that medical marijuana becomes a joke. It becomes marijuana for any use. You find local doctors who will prescribe it for anybody that walks in.

Why shouldn't the states have control over this? Why should this be a federal issue?
Because I think you guarantee that people will cross state lines if it becomes a state-by-state exemption.

I don't have a comprehensive view. My general belief is that we ought to be much more aggressive about drug policy. And that we should recognize that the Mexican cartels are funded by Americans.

Expand on what you mean by "aggressive."
In my mind it means having steeper economic penalties and it means having a willingness to do more drug testing.

In 1996, you introduced a bill that would have given the death penalty to drug smugglers. Do you still stand by that?
I think if you are, for example, the leader of a cartel, sure. Look at the level of violence they've done to society. You can either be in the Ron Paul tradition and say there's nothing wrong with heroin and cocaine or you can be in the tradition that says, 'These kind of addictive drugs are terrible, they deprive you of full citizenship and they lead you to a dependency which is antithetical to being an American.' If you're serious about the latter view, then we need to think through a strategy that makes it radically less likely that we're going to have drugs in this country.

Places like Singapore have been the most successful at doing that. They've been very draconian. And they have communicated with great intention that they intend to stop drugs from coming into their country.

In 1981, you introduced a bill that would allow marijuana to be used for medical purposes. What has changed?
What has changed was the number of parents I met with who said they did not want their children to get the signal from the government that it was acceptable behavior and that they were prepared to say as a matter of value that it was better to send a clear signal on no drug use at the risk of inconveniencing some people, than it was to be compassionate toward a small group at the risk of telling a much larger group that it was okay to use the drug.

It's a change of information. Within a year of my original support of that bill I withdrew it.

Ron Paul and Barney Frank have introduced a similar bill almost every year since.
You have to admit, Ron Paul has a coherent position. It's not mine, but it's internally logical.

Speaking of Ron Paul, at the last debate, he said that the war on drugs has been an utter failure. We've spent billions of dollars since President Nixon and we still have rising levels of drug use. Should we continue down the same path given the amount of money we've spent? How can we reform our approach?

I think that we need to consider taking more explicit steps to make it expensive to be a drug user. It could be through testing before you get any kind of federal aid. Unemployment compensation, food stamps, you name it.

It has always struck me that if you're serious about trying to stop drug use, then you need to find a way to have a fairly easy approach to it and you need to find a way to be pretty aggressive about insisting--I don't think actually locking up users is a very good thing. I think finding ways to sanction them and to give them medical help and to get them to detox is a more logical long-term policy.
Sometime in the next year we'll have a comprehensive proposal on drugs and it will be designed to say that we want to minimize drug use in America and we're very serious about it.

Since we are in Florida, can you provide an idea of how your administration would handle relations with Cuba?
I think we need a very aggressive model. I describe it as a Cuban Spring. If you have a U.S. government that says Assad should go, why aren't they aggressively saying Castro should go?

Would you open up trade relations with Cuba as president?
It's probably not part of it, but I think you would look at under what circumstance would you change and could you offer the Cuban people. For example, immediately after a free election, all the embargoes would drop as of that day. You could have the carrot of saying, the second there's a free election, we should do everything we can to help the Cuban economy flourish.

President Obama has opened more air travel to the island. Would you shut down those flights?
No, but I would very aggressively move towards maximizing dissent inside Cuba. Mostly covert, and also just subsidies. Go back and look what we did in Poland for example when we aggressively supported Solidarity.

What kinds of items would you subsidize?
You might try to find a way to give virtually every Cuban a free radio. You might want to try to find a way to maximize your ability to broadcast into Cuba so that you have a continuous alternative model of information.

Free Radio Insanity

I do not care whether Gingrich is speaking figuratively or literally, the idea of free radios is complete nonsense.

Exactly would the founders of the constitution think about giving free radios to everyone in another nation?

I will tell you what they would think. They would think just as I do, that the proposal is economic insanity as well as foolish intervention into the affairs of other nations.

Icing on the Nutcake

If you are seeking icing on the nutcake then check out Gingrich's statement on Ron Paul regarding drug usage: "You have to admit, Ron Paul has a coherent position. It's not mine, but it's internally logical."

Ron Paul has a logical position. Gingrich doesn't. The war on drugs has been a miserable failure. Gingrich wants to make it an even bigger failure, and a very costly one at that too.

Has Gingrich figured out the cost of arresting and imprisoning everyone who sells drugs? The answer is obviously not.

Three Questions for Gingrich

How much will it cost to administer drug tests to everyone getting a government subsidy?
How much more chipping away at states' rights does Gingrich want?
How can this proponent of big government even call himself a Republican?

Mish Food Stamp Proposal

When it comes to food stamps I have a far better set of ideas than drug testing.

Do not let those on food stamps buy frozen pizza, potato chips, snacks of any kind, soft drinks, etc.
Explicitly limit food stamp users to generic (store brand vs. name brand) dried beans, rice, peanut butter, pasta, canned vegetables, canned soup, soda crackers, fresh vegetables, fresh fruit, frozen (not bottled) juice, poultry, ground beef, chuck steak, bread, cheese, powdered milk, eggs, margarine, and general baking goods (flour, sugar, spices).
Calculate a healthy diet based on current prices, number in the family, ages of recipients, and base food stamps allotments on that diet.

My proposal will not only lower the cost of the food stamp program, healthy diets would lower Medicaid and Medicare costs as well. Moreover my proposal would give people a strong incentive to get off the food stamp program without intrusive, costly big-brother ideas like drug testing which cannot possibly work for the simple reason that anyone who fails will steal to get food rather than starve. Also note that Gingrich's proposal would harm innocent kids on the program. My idea would help them nutritionally.

Given that Gingrich himself admits "Ron Paul has a coherent, logical position" pray tell why can't we try it?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned

noreply@blogger.com (Mike Mish Shedlock) — Tue, 24 Jan 2012 13:02:00 +0000

A pair of articles by Austrian economist professor Antal E. Fekete just might have one wondering who is more in the loony bin, mainstream economists like Krugman or those consistently chanting about the death of the dollar coupled with hyperinflation.

Premature Obituaries

Please consider Premature Obituaries

It is open season for wild monetary prognostications. More premature obituaries on the dollar have been posted on the Internet. For example, see Jim Willie’s The US Dollar Paper Tiger (Gold-Eagle, January 11) with epitaphs like “the U.S. dollar rising to the cemetery”, or “dollar death dance”. Or see another article, Jeff Nielsen’s entitled Maximum Fraud in U.S. Treasurys (Gold-Eagle, January 3). It betrays maximum misunderstanding about keeping the dollar on a life-support system. It assumes that the Fed and the U.S. Treasury are fighting tooth and nail to keep the value of government debt high lest it collapse in want of support from Japan, China, and other countries.

These views hang the picture upside down. In actual fact, the Fed and the U.S. Treasury desperately want to beat down the value of the dollar. The greatest obstacle frustrating their effort is the stubbornly high and still increasing value of U.S. Treasurys. Captains of the world’s monetary system are yanking levers and twisting throttles which are no longer connected to anything. The captains are no longer in control. Yet they continue to wave their batons feverishly and pretend that the orchestra is paying attention. They want Jim Willie, Jeff Nielsen and everyone else to believe that the falling interest-rate structure is the outcome of their deliberate monetary policy. In fact, the Fed and the U.S. Treasury are trying to stop the rate of interest from falling further. They instinctively realize the threat of falling interest rates brings deflation and depression in its train. The dollar is much too strong, contrary to the wishes of policy-makers.

It is not so easy to beat down the value of the dollar as suggested by Keynesian textbooks, even if you have the key to print shop where the presses are running. The dollar’s strength prevails in spite of the withdrawal of Chinese and Japanese support of the U.S. bond market, and in spite of the destructive monetary policies of the American guardians of the dollar.

This observation reveals the prevailing profound misunderstanding about the nature of this financial crisis. To set the matter right, in this article I shall recapitulate the argument that I have been presenting on the Internet for the past ten years. ....

Like Mises, I also object to the use of the word hyperinflation, albeit for a different reason. It suggests that the phenomenon is linear and follows the laws of the Quantity Theory of Money. The more money is printed, the higher do prices go.

However, we are here facing highly non-linear phenomena. Our economy is torn to pieces by runaway vibration. We are victimized by the self-destruction of the monetary system subjected to oscillating money-flows boosted by the resonance of fluctuating interest rates resonating with fluctuating prices.

The vampire of risk free bond speculation

When the central bank intervenes in the market to control the rise of interest rates, it inadvertently makes prices fall; and when it intervenes to stop prices from falling, it inadvertently makes interest rates rise. The upshot is that the central bank intervention, rather than tempering movements, aggravates them.

At the present junction the Fed is buying bonds to combat deflation. Bond speculators know this, will buy the bonds first, driving down interest rates in the process. The result is more deflation, not less.

The Keynes-inspired central bank action is counterproductive. Policy-makers are blind and don’t see this. They stick to their selfdefeating monetary policy. They actually become the quartermaster general of the depression they are trying to avoid. As if cursed by a particular kind of madness, policy makers saddle society with the vampire of risk-free speculation.

The problem cannot be cured because bond speculation cannot be eliminated. It should be clear that as long as the world does not succumb to a military conflagration such as a world war destroying supplies of goods and production facilities, the danger is not inflation as predicted by the Quantity Theory of Money. The danger is deflation due to risk free-profits with which Keynesian economics inadvertently tickles speculators.

The majority of hard-money analysts call for a hyperinflationary collapse of the dollar. Their analysis is faulty. Like a cornered rat, the dollar is capable of putting up a vicious fight for survival. In the words of Mark Twain, all the obituaries on the dollar are premature. The dollar is not a push-over. A yen-yuan coalition (or any other combination of existing or yet to-be-invented fiat currencies) cannot send it into oblivion.

Cheerleaders for fiat money in academic circles, in the media, and in financial journalism will not be able to live down the shame that will be their lot when the world economy collapses. The excruciating economic pain that people will suffer as a consequence will be their responsibility. The break-down in law and order will be their fault. As history and logic conclusively prove, fiat money is not a viable monetary system. It is prone to succumb to the sudden death syndrome. Whether caused by inflation or whether caused by deflation, sudden death is assured.

It should not be beyond the wit of human intelligence to see this coming and fend off the disaster by making a timely return to sound money, based on a monetary unit of a positive value as mandated by the American Constitution.

Essential Agreement

I am in general agreement with Fekete's analysis but would debate one essential point. The central bank does not want banks to "buy commodities to prevent prices from falling" as Fekete suggests, rather the central bank wants banks to lend.

After all, I rather doubt the Fed wants to see oil at $150 or gold at $3000. Instead, the Fed wants banks to lend, businesses to borrow, businesses to hire, and for that cycle to feed on itself.

Three Key Points Regarding the US Economy

The US is a credit-based economy.
Fractional reserve banking is the enabler for unlimited credit expansion.
In a credit-based economy it is extremely difficult to generate much inflation without an expansion of credit.

Three Conditions Necessary for Credit Expansion.

Banks must not be capital impaired
Credit-worthy borrowers must want to borrow
Banks must feel (rightly or wrongly) they have credit-worthy borrowers to lend to

Money Multiplier Theory Fatally Flawed

The money multiplier theory to which most if not all hyperinflationists subscribe is horrendously flawed. It assumes just because money is available it will be lent (not only that, but lent 10 times over).

Credit-based fiat-systems just do not work that way ever, and it's especially apparent in a debt-deleveraging cycle.

Businesses do not want to expand and falling interest rates clobber those on fixed incomes. The rational thing for consumers to do is cut debt. The rational thing for banks to do is buy treasuries.

I have been saying this for years to no avail. A recent post Graphical Representations of Bernanke's Effort to Stimulate Bank Lending shows just how hard Bernanke is spinning his wheels.

Bernanke tripled money supply in three years and nearly all of it is parked as excess reserves at the Fed.

I talked about this recently in an interview on Capital Accounts: Mish on Capital Account Live TV: Discussion of Money Supply, Inflation, the Fed, and SOPA

I certainly do not agree with the approach Bernanke is taking, but it is certainly not going to cause hyperinflation. The fact remains that hyperinflation is a political event, not a monetary event.

For a discussion of the politics of hyperinflation and some amusing hyperinflation predictions that have failed already please see Hyperinflation Nonsense in Multiple Places

Mainstream Economists' Monetary Insanity

With that discussion on hyperinflation looniness out of the way, let's turn our attention to Mainstream Economists' Monetary Insanity also by professor Antal E. Fekete.

According to Krugman, in spite of the ‘false alarm’ sounded by the Austrian economists over the debasement of the dollar, inflation is still only 1.5 percent. ‘Who could have predicted that so much money printing would cause so little inflation?’ he asks rethorically. ‘Well, I could, and I did’, he boasts, ‘because I understand Keynesian economics that Mr. Paul reviles.’

In the event, unknown to Krugman, I also predicted the same thing. Unlike Krugman I did more than simply predicting that inflation was not the danger. I warned that Keynesianism would lead to deflation and depression. Money-printing has become counterproductive. Krugman doesn’t understand that it will boomerang. I stated that, unwittingly, Bernanke is the Quartermaster General of the Great Depression II (see: Front-Running the Fed, www.professorfekete.com, February 9, 2010). He doesn’t understand the monstrous mistakes prophet Keynes made concerning the role of speculation in the money-creation magic. The fact is that central bank buying makes speculation risk free in the bond market. In comparison, speculative risks in the commodity market appear forbidding. All the speculator has to do in order to reap risk-free profits is to preempt the Fed. He buys the bonds before the Fed has a chance. Then he turns around and dumps them into the lap of the Fed at a profit. The Fed is helpless: it must buy at the higher price. Keynes completely misrepresented the ability of the central bank to stay in charge, given its compulsive drive to suppress interest rates when confronted with a profit hungry pack of bond speculators.

Friedman’s analysis of the Great Depression couldn't be more wrong. In 1933 deflation was brought about not by the gold standard but, au contraire, by abolishing it. Here is what actually happened. Roosevelt has removed the only competition government bonds have, gold. The most conservative investors saw their gold confiscated and, willy-nilly, they were forced into the next most conservative instrument, Treasury bonds. Speculators became emboldened and bid bond prices sky high for risk free profits. Had gold been still available, bondholders would have severely punished the speculators for their daredevilry. They would have sold the overpriced bond and stayed invested in gold until bond prices came back to earth from outer space. Then they would have bought their bonds back at a profit.

The same thing is happening all over again. When a central bank increases the monetary base three-fold in three years, this is a clear invitation for bond speculators to move in and make a killing. But what the central bank utterly fails to understand is that, contrary to its hopes, new money is not going to the commodity market. Speculative risks there are far too great. Instead, new money is going to the bond market where the fun is. Bond speculation is risk-free. Speculators know which side the bread is buttered. Krugman doesn’t.

Krugman’s joy over the supposed defeat of Austrian economics is premature. Bernanke’s Fed in blissful ignorance is still putting money in the hands of speculators which they use to place bets on the further fall of interest rates and commodity prices. The day of reckoning comes when falling interest rates destroy capital and, together with it, destroy budding job opportunities. The lethargy of businessmen will continue. They will not start hiring as long as the interest-rate structure is in falling mode.

Welcome to the world of Keynes-inspired Great Depression.

I nearly responded to that article by Krugman as well. I too called for record low rates across the entire yield curve and at a time when oil was $140 to boot.

Not every Austrian-minded person (I am not an economist) saw things the way Krugman did.

However, it is sad to say, most did. In 2010 I feared Krugman would take up Robert Murphy's Debate Challenge and that Murphy would make an inflation is coming soon claim and get blown out of the water. The debate never happened.

Recently, Ambrose Evans-Pritchard proclaimed "America Overcomes Debt Crisis". I took Pritchard to task in Debt and Deleveraging: Did the U.S. Overcome the Debt Crisis? Light at the End of the Tunnel Anywhere? Five-Pronged Solution

Click on the link for some interesting charts on the global debt problem. Here is my solution presented in the article.

Five-Pronged Solution

US monetary policy and ECB monetary policy is partially to blame for these crises as Pritchard says. Reckless fiscal policies by governments everywhere is another part of the problem. The five-pronged solution which Pritchard does not mention is ...

Get rid of the central banks
Get rid of fractional reserve lending
Return to a gold standard.
Minimize governments
Embrace free market policies

Please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited for a discussion of how a gold standard can fix trade imbalances.

That solution prompted "halfacunk" to taunt ... "Remember how you said the money-multiplier is a myth? Well, if it is, then we're not using a fractional-reserve system! Please be consistent."

My reply was ...

FR Lending was the enabler of the debt bubble. It fueled the housing bubble. Lending does not expand because money is available. However, FR allows it to expand without limit when banks want to lend. I am consistent.

Once again I see things from the standpoint of credit and Bernanke's failure to get banks to expand credit. Professor Fekete frames the debate a bit differently, but we both came to the same conclusions on front-running bonds, falling yields, and premature obituaries for the dollar.

Few in the Austrian camp got this right. The monetarists certainly got things flat out wrong. And as far as Krugman and the Keynesians go, all one can say is the day of reckoning will arrive, yet the exact timing and nature of the ensuing credit crisis is unknown.

Lessons Not Learned

One might have thought the Monetarists and Keynesians would have learned something from Japan. Instead, and in spite of debt to the tune of 230% of GDP, they came to the amazing conclusion "Japan did not do enough".

Two Rules

There is never enough debt to satisfy Keynesians.
There is never enough fiat currency to satisfy Monetarists.

I confidently predict Japan will have a currency crisis before the US and when it happens I am equally confident Krugman and the Keynesians will make an excuse for it rather than admitting they were dead wrong.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greek Bondholders Reject Deal; History Lesson on Defaults; The ECB's Dilemma; Deadline Laugh of the Day

noreply@blogger.com (Mike Mish Shedlock) — Tue, 24 Jan 2012 09:37:00 +0000

Reuters reports Euro zone ministers reject private bondholders' Greece offer

Euro zone finance ministers Monday rejected as insufficient an offer made by private bondholders to help restructure Greece's debts, sending negotiators back to the drawing board and raising the threat of Greek default.

At a meeting in Brussels, ministers said they could not accept bondholders' demands for a coupon of four percent on new, longer-dated bonds that are expected be issued in exchange for their existing Greek holdings.

Greece says it is not prepared to pay a coupon of more than 3.5 percent, and euro zone finance ministers effectively backed the Greek government's position at Monday's meeting, a position that the International Monetary Fund also supports.

The aim of the restructuring is to reduce Greece's debts by around 100 billion euros ($129 billion), cutting them from 160 percent of GDP to 120 percent by 2020, a level EU and IMF officials think will be more manageable for the growth-less Greek economy.

Negotiations over what's called 'private sector involvement' (PSI) have been going on for nearly seven months without a concrete breakthrough. Failure to reach a deal by March, when Athens must repay 14.5 billion euros of maturing debt, could result in a disorderly default.

World Will Not End

There is so much concern over a disorderly default that I am wondering if the market would rally following news the world did not end (just as it hasn't dozens of times before on defaults). Spain has defaulted 15 times before, France 9 times, Brazil 10 times in the last 115 years, Russia 7 times, and the UK 3 times, China 3 times, and India 3 times.

The world did not end then and it will not end now. For discussion, dates, and frog tales, please see Princess Merkozy Kisses Frog, Turns into Hopelessly Indebted Club Med Prince; Berlin Ready to See Stronger ‘Firewall’

History Lesson on Defaults

The history lesson ought to be clear by now: If you are going to default (and Greece will - actually it already has - just not in a manner that will trigger a credit event), then do it sooner rather than later.

Look at all this needless bickering for years starting with former ECB president Jean-Claude Trichet's insistence "there will be no haircuts".

Greece is now on its third haircut. What could have and should have been a 50 billion euro problem in total is now a 200 billion euro problem with another 100 billion euros waiting on deck. Worse yet, the ECB itself is sitting on 40 billion euros of junk (in a self-inflicted wound) wondering what to do about it.

The ECB's Dilemma

Courtesy of Google Translate and Zeit Online, please consider The ECB's Dilemma

Greece in the negotiations to take on debt rescheduling - and even if a voluntary agreement has been reached, the question remains whether enough investors participate in the end, to establish debt sustainability (and only then the IMF will continue to pay money). This raises the question of what to do with their stocks, the European Central Bank in the amount of about 40 billion €.

The answer is: There is no simple solution.

Let us assume that the ECB is involved in a debt restructuring. That would - through reduced distributions from the central bank profits - a burden to taxpayers. And it would ultimately be a form of state funding: The Federal Reserve would have the money made available to Greece. This can be very difficult to reconcile the official justification, that the intervention served only to keep open the monetary transmission channel. Would immediately begin a debate on the risks arising from the purchases of Italian or Spanish bonds. Anyway, it would be difficult for the central bank to defend its bond program arguments.

Let us assume that the ECB is not involved in a debt restructuring. Then you continue the public debate on the program spared - that this program would be less effective. Because de facto central bank would receive the status of preferential creditors, which have fewer resources in the countries concerned for the operation of non-public liabilities. Private investors have to fear that at first the ECB will be served before they have their turn - go on as in the case of Greece the debt section logically deeper in order to achieve a desired debt ratio, if the ECB will cut out. In this case, affect bond purchases by the Fed might not reassuring to investors, but discourages this: Each bond, which the ECB purchases, means greater potential losses for banks and investment companies.

The ECB has a choice: Either your program is not credible - or ineffective.

Door Number Three

The third option and most likely one is the ECB will get Greece to buy those bonds back at the discount price the ECB paid, making Greece's problem bigger as noted in Limits of Voluntary Deal Hit as Greek Bondholders Draw Line in the Sand; Separating Fact from Fiction in Selective Reporting.

Separating Fact from Fiction in Selective Reporting

The proposal is for the ECB to sell its bonds back to Greece so that Greece will then take a hit.

With that in mind, look at this preposterous claim by a senior official "The bonds’ rate “is the only issue,” said a senior official directly involved in the negotiations. “We have to accommodate the needs of the Greek economy."

I see two sentences and two lies. Indeed the entire article is crammed pack with lies made by various IIF and EMU officials.

Haircut Calculator Revisited

Let's go over that Haircut Calculator again.

30 Year Greek Bonds yield 22.5%. Since the calculator tops out at 20% let's assume a discount rate of 20%.

Greece and the IMF insist on something under 4%. Let's assume 3.6%. This is what the losses look like.

At 4% with a 15% discount rate, bondholder losses only drop from 79% to 75%.

Are the finance ministers really bickering over that feeble percentage difference or are the finance ministers fearing still more losses down the road and would just assume take the total hit now and get it over with?

While pondering that question, here is another one to think about.

Is Debt to GDP of 120% Sustainable?

Reader Andrea from Italy pinged me with this perspective...

Hi Mish,

Reading that "The IMF wants to put Greece on a path for a debt-to-GDP ratio of 120 percent by 2020." I could not avoid to think this:

For the sake of comparison, Italy is currently at 120% debt-to GDP ratio, with a much stronger economy than Greece, a better capacity to tackle fiscal evasion (there are huge margins for improvement), a deficit below 3% now and targeted to be 0 by 2013 (let's see if they get there, anyway they will not get extremely far from this), and despite all of this, Italy is a big mess and it is almost impossible for them to get decent rates on the bond market.

So, what they can expect with Greece at 120% debt-to-GDP by 2020? Even a kid can understand that it will never work!

Best regards,

Andrea

The IMF and Germany desperately want a deal that will take Greece to a projected debt-to-GDP ratio of 120% by 2020. Why? Even if the plan worked (which it won't) what good would it do?

Would someone please put Greece out of its misery? The best chance is a total and complete 100% writeoff right now.

Deadline Laugh of the Day

Those looking for the laugh of the day can find it in this Bloomberg headline EU to Have No Deadline for End of Greek Talks.

For two weeks we heard that a deal had to be reached by Monday (yesterday) or Greece would default. Monday came with no deal, and suddenly there is no need for another deadline.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Obama's Praise and Support of Union Bullying

noreply@blogger.com (Mike Mish Shedlock) — Tue, 24 Jan 2012 05:47:00 +0000

Paul Munsch is the owner of St. Louis Paving in St. Louis, Missouri. He and his employees have faced years of bullying by the union bosses with whom President Obama continues to side.

Please listen to this video message.
Note, the video starts out grainy, I believe on purpose.

Link if video does not play: Obama Isn't Working

I support the idea and the message, but not the candidate who put that video together. Nonetheless, it was very effective message.

I also support Rand Paul's national right-to-work legislation. No business owner should have to put up with such union bullying. Forced collective bargaining is slavery.

Please consider

President Obama's Slave Trade; Senator DeMint Says Team Obama Acts Like Thugs; Death of Right-to-Work?

Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Fannie, Freddie Would Need Another $100 Billion From Taxpayers for Obama's Proposed Mortgage Writedowns; Obama Seeks Vote-Buying Opportunity; What's the Real Cost?

noreply@blogger.com (Mike Mish Shedlock) — Mon, 23 Jan 2012 23:22:00 +0000

Fannie Mae and Freddie Mac have already cost US taxpayers over $200 billion. If Obama gets his way on mortgage writedowns, the GSEs estimate it would take another $100 billion.

Since such estimates are always overly-optimistic by a factor of 3 to 10, I estimate the cost to taxpayers would be $300 billion minimum.

Please consider Fannie, Freddie writedowns too costly: regulator

The regulator for Fannie Mae and Freddie Mac told lawmakers that forcing the two mortgage firms to write down loan principal would require more than $100 billion in fresh taxpayer funds.

In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.

It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.

"Principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure," FHFA's acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20.

About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.

"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in the letter.

Another barrier to principal writedowns, aside from pushing losses at the two firms even further, DeMarco said, was the costs associated with new technology and training to servicers that would be needed to launch a program that offers principal forgiveness.

The Federal Reserve, in a white paper to Congress earlier this month, said write-downs "had the potential to decrease the probability of default" and "improve migration between labor markets."

However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard -- the concept that rescue efforts breed further behavior that exacerbates the existing problem -- and could prompt other borrowers to stop making timely loan payments.

Calculating the Maximum Cost

At least we know an approximate maximum cap. Negative equity totals $750 billion. Add in cost on implementing the program, graft, fraud, etc. and the cap (right now) is a conservative $760 billion or so. Factor in declining property values and a conservative cap is $800 billion or so.

Obama Seeks Vote-Buying Opportunity

Notice the ridiculous comment by the Fed: write-downs "had the potential to decrease the probability of default". Of course they do.

Write off the entire loan and there would be no chance of default. That does not mean it's a smart thing to do. Unless of course you are President Obama seeking to buy votes in November.

Addendum

Greg Fielding of the Bay Area Real Estate Trends blog writes ...

What's interesting in the letter is that they promote principal reduction as costing $100 billion, but the "potential" savings of mods and forbearance is only a few percent. And the data they use has no assumptions for an increase in the overall number of foreclosures as negative equity grows. This whole thing smells of incompetence and corruption.

Mish says ... Exactly!

Not to mention vote buying and I am quite sure back-door bailouts of banks as well (who will be permitted to sell "assets" to Fannie and Freddie in advance).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Princess Merkozy Kisses Frog, Turns into Hopelessly Indebted Club Med Prince; Berlin Ready to See Stronger ‘Firewall’

noreply@blogger.com (Mike Mish Shedlock) — Mon, 23 Jan 2012 21:07:00 +0000

Steen Jakobsen, chief economist for Saxo bank in Denmark, pinged me with an interesting set of comments this morning. Please consider the tale of the frog and the indebted princess.

This morning I had the pleasure of being on CNBC together with a pundit from a major investment bank. He claimed that if Greece went bankrupt then no one would lend them any money and it would leave them without trading partners. I countered that this would happen anyway if we continue to ignore the losses that creditors need to take on their Greek investments. Only through a Schumpeter-like “Destruction of Capital”, after all, can we give Greece a fighting chance to survive.

Why is everyone so afraid of a default? Are we supposed to believe we have banished them forever?

History is full of nations going bankrupt – and in no circumstances has it ever meant a complete loss of trading, credit, etc. Quite the contrary - it's precisely the default and accompanying devaluation that often sows the seeds of a recovery.

Here, according to a Wikipedia article on sovereign defaults, are a few examples of major European sovereigns that have defaulted over the years:

Spain - 15 times! (1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939) Isn't it interesting that it defaulted most often when it was getting "something for nothing" in the form of New World gold riches?

England - a modest 3 times (1340, 1472, 1596)

France - 9 times. (1558, 1624, 1648, 1661, 1701, 1715, 1770, 1788, 1812)

AND now for the much loved BRIC countries:

Brazil - 10 times inside the last 115 years (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986-1987, 1990)

Russia (1839, 1885, 1918, 1947, 1957, 1991, 1998)

India (1958, 1969, 1972)

China (1921, 1932, 1939)

The complete list in the above link includes a list of 39 African sovereign defaults, 26 Asian sovereign defaults, a whopping 91 European sovereign defaults, and for the Americas, a stunning 154 sovereign defaults.

Wow! Could it be that some of the “competitiveness” the BRICs and other countries have today is based on episodes of cleaning the slate and declaring a new beginning? Why must we hang on forever to old debt and past mistakes?

Down with the pro-zombie Keynesians and up with the lessons from history!

Also…please, please let this talk about whether or not the ECB is doing QE stop right now. The ECB’s balance sheet is up 38% since July 1st of last year. The same period saw the Fed’s balance increase by one per cent! Talk about printing money.

It seems that the Princess Merko-zy did indeed kiss the frog and it morphed into a hopelessly indebted Club Med Prince. And then they lived happily ever after? My compatriot Hans Christian Andersen would have been proud of today’s politicians and their penchant for perpetuating fantasy.

The only problem? Domestic banks in the PIIGS countries are fast concentrating their exposure to their own sovereign’s debt, and this is increasing the leverage in the system and the risk of systemic contagion. The LTRO is merely a massive dose of morphine applied to reduce he pain from the mortal wound that the EU has inflicted on its finances over the years. It has succeeded in reducing the pain, but the problem remains that ever increasing doses will be needed to hide the pain until that wound kills the patient if the EU refuses to go in and perform emergency surgery.

Please also note two other interesting pieces from my colleagues today:
Equity Strategist Peter Garnry correctly points out EBA’s deadline will not be met on bank capital requirement rules: Extension on EBA’s capital could support rally in stocks and Peter Bo Kiaer piece on how Apple may disappoint: Apple Earnings: Another miss in the making.

Finally, the stress indicators have now more or less “mean-reverted” back to 200 day moving-average from here we need more than just hope to keep the game going. Note how ECB deposit and the REPO value continues down, while the banking stress has diminished – for a while.

I am off to the one country in Europe which makes sense: Switzerland.
Safe travels.

Given Switzerland's currency peg, I do not think the Swiss Central Bank makes that much sense either. Perhaps in relative terms.

Berlin Ready to See Stronger ‘Firewall’

Interestingly, Steen wrote the above before this news came out: Berlin Ready to See Stronger ‘Firewall’

Berlin appeared to soften its longstanding resistance to increasing the funds only hours after the International Monetary Fund warned that the eurozone needed more money to build “a larger firewall” to prevent the crisis from spreading to its core economies.

In return the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments.

For Ms Merkel, increasing the fund risks a showdown with a restive parliament that is sceptical of further exposing German taxpayers to the rescue effort. But she is now said to be willing to take that risk if she can put her stamp on the budget rules in the fiscal compact.

“We think we can get the ESM approved if we link it to solid new budget rules,” a German official said. One European official in turn said Germany was “framing the debate” about budget rules with a possible trade-off on the size of the bailout fund.

Steen Nailed Two Key Points

The ECB has Launched QE disguised as an LTRO
Chancellor Merkel Kissed the Debt Frog

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Crony Capitalism and the Entitled Class of Wall Street Financiers; Bill Moyers Interviews David Stockman, Ronald Reagan's Budget Director

noreply@blogger.com (Mike Mish Shedlock) — Mon, 23 Jan 2012 17:49:00 +0000

David Stockman former budget director for President Reagan, appeared on Bill Moyers and presented his message about money, Wall Street financiers, and crony capitalism.

Link if Video does not play: David Stockman on Crony Capitalism

Money dominates politics, distorting free markets and endangering democracy. “As a result,” Stockman says, “we have neither capitalism nor democracy. We have crony capitalism.”

Stockman shares details on how the courtship of politics and high finance have turned our economy into a private club that rewards the super-rich and corporations, leaving average Americans wondering how it could happen and who’s really in charge.

“We now have an entitled class of Wall Street financiers and of corporate CEOs who believe the government is there to do… whatever it takes in order to keep the game going and their stock price moving upward,” Stockman tells Moyers.

Click on the above link for a full transcript. Here are a few select quotes.

DAVID STOCKMAN: A massive amount of resources are being devoted, being allocated or being channeled into pure financial speculation that has no gain to society as a whole, has no real economic contribution to the process by which GNP is created, GDP is created and growth occurs.

By 2007 40 percent of all the profits in the American economy were coming from finance companies. 40 percent. Historically it was 15 percent.

So the financialization means that as we attracted more and more resources and capital, and we made speculation easier and easier, and we funded it with almost free overnight money, managed and manipulated by the Fed, that's how the economy got financialized. But that is a casino. Casinos -- they're, you know, places for people to go if they want to speculate and wager. But they're not part of a healthy, constructive economy.

BILL MOYERS: What do you mean by the free money that banks are using overnight?

Well, by that we mean when the Fed, the Federal Reserve sets the so-called federal funds rate at ten basis points, where it is today, that more or less guarantees banks can go into the Fed window, the discount window, and borrow at ten basis points.

And then you take that money and you buy a government bond that is yielding two percent or three percent. Or buy some corporate bonds that are yielding five percent. Or if you want to really get aggressive, buy some Australian dollars that have been going up. Or buy some cotton futures. And this is really what has been going on in our markets.

The cheap funding, which is guaranteed by the Fed, the investment of that cheap funding into speculative assets and then pocketing the spread. And you can make huge amounts of money as long as the music doesn't stop. And when the music stops then all of a sudden, the cheap, overnight money dries up. This is what's happening in Europe today. This is what happened in 2008.

And then people are stuck with all these risky assets, and they can't fund them. They owe cash to the people they borrowed overnight from or on a weekly basis. That's what creates the so-called contagion. That's what creates the downward spiral. Now, unless we let those burn out, it'll be done over and over. In other words, if, you know, if a lesson isn't learned, then the error will be repeated over and over.

BILL MOYERS: The Bush administration came to the rescue of some of the county’s largest financial institutions, to the tune of 700 billion tax-payer dollars.

DAVID STOCKMAN: We elect a new government because the public said, you know, "We're scared. We want a change." And who did we get? We got Larry Summers. We got the same guy who had been one of the original architects of the policy in the 1990s, the financialization policy, the too big to fail policy.

Who else did we get? We got Geithner as Secretary of the Treasury. He had been at the Fed in New York in October 2008 bailing out everybody in sight. General Electric got bailed out. Morgan Stanley, Goldman Sachs, all of the banks got bailed out, and the architect of that bailout then becomes the Secretary of the Treasury. So it's another signal to the financial markets that nothing ever changes. The cronies of capitalism are in charge of policy.

....

The Congress is owned lock, stock and barrel by one after another, after another special interest. And they logically say how can we expect, you know, anything good to come out of this kind of process that seems to be getting worse. So how do we turn that around? I think it's going to take, unfortunately a real crisis before maybe the decks can be cleared.

BILL MOYERS: But on the basis of the record, the lessons of the past. The experience you have just recounted and are writing about. Do you see any early signs that we might turn the ship from the iceberg?

DAVID STOCKMAN: No. I think we've learned no lessons. We really have not restructured our financial system. The big banks that existed then that were too big to fail are even bigger now. The top six banks then had seven trillion of assets, now they have nine or ten trillion.

Rather than go to the fundamentals which have been totally neglected-- we've simply kind of papered over the current system and continued the game of having the Federal Reserve and the Treasury if necessary prop up all of this leverage and speculation, which isn't helping the economy.

And when we talk about zero interest rates. That’s not helping Main Street. Our problem in this economy is not our interest rates are too high. The zero interest rates are just more fuel for leverage speculation for what’s called the carry trade and that is causing windfall benefits to the few but it’s leaving the fundamental problems of our economy in worse shape than they’ve ever been.

In 1985 Stockman wrote The Triumph of Politics: The Inside Story of the Reagan Revolution. 30 years later Stockman laments...

"I was in the middle of being very disgusted with what my own Republican Party had done and what Bush had done and the Paulson Treasury. And then when I saw this, I got the title for my book, “The Triumph of Crony Capitalism.”

It's so disappointing to see that the Obama administration, which in theory should've had more perspective on this than a Republican administration under Bush, to see that one, they appointed in the key positions the same people who brought the problem in: Geithner and Summers and all of those, and secondly, that Obama did nothing about it."

Stockman's new book, The Triumph of Crony Capitalism, rates to be a good one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Debt and Deleveraging: Did the U.S. Overcome the Debt Crisis? Light at the End of the Tunnel Anywhere? Five-Pronged Solution

noreply@blogger.com (Mike Mish Shedlock) — Mon, 23 Jan 2012 10:45:00 +0000

Citing the latest report on "Debt and Deleveraging" by the McKinsey Global Institute, Ambrose Evans-Pritchard proclaims America overcomes the debt crisis as Britain sinks deeper into the swamp.

Britain has sunk deeper into debt. Three years after bubble burst, the UK has barely begun to tackle the crushing burden left by Gordon Brown. The contrast with the United States is frankly shocking.

US debt is already lower than Spain (363pc), France (346pc), or Italy (314pc), and may undercut Germany (278pc) before long -- given the refusal of the European Central Bank to offset fiscal contraction with monetary stimulus.

One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.

In hindsight, the US property boom was remarkably modest compared to what happened in Spain, or what is happening now in China now where the house price to income ratio in Beijing, Shanghai, and Shenzhen is near 18. America’s ratio peaked at 5.1 and is already back to its modern era average of three. The excesses have been unwound.

Personally, I am coming to the conclusion that the US crisis in 2008-2009 was largely a case of botched monetary policy and could easily have been avoided. The growth of M3 money -- which the Fed stopped tracking thanks to a young Ben Bernanke -- was allowed to balloon in the bubble, then collapse in 2008.

US Did Not Overcome Debt Crisis

There is a big difference between alleged "light at the end of the tunnel" and "America Overcomes Debt Crisis" as Pritchard claims. US consumers may be one-third of the way through, but US debt-to-GDP ratios are low only because unsustainable government spending has taken up the slack.

The US has not started government debt deleveraging and until that is nearly finished there will not be light at the end of the tunnel, let alone the end of the crisis. Optimistically, the best one can possibly assert is one can possibly see light at the end of the "consumer tunnel". The government tunnel immediately follows.

Moreover, one should not be "tempted to ask what all the fuss was about in the US". Just because other nations are worse, does not mean the US had no problem.

Five-Pronged Solution

US monetary policy and ECB monetary policy is partially to blame for these crises as Pritchard says. Reckless fiscal policies by governments everywhere is another part of the problem. The five-pronged solution which Pritchard does not mention is ...

Get rid of the central banks
Get rid of fractional reserve lending
Return to a gold standard.
Minimize governments
Embrace free market policies

Please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited for a discussion of how a gold standard can fix trade imbalances.

Eurozone Structural Problems

The European crisis now was foreseen in advance by many, including Pritchard.

Certainly the ECB's "one size fits Germany" interest rate policy fueled the property bubbles in Spain and Ireland, as well as imbalances in Italy, Greece, and Portugal.

Unlike the US, the eurozone has the structural additional problem of being a monetary union without a fiscal union. Not one such currency union in history has ever survived.

Bailing out Greece and Portugal and Ireland will not fix structural problems including the ECB's "one size fits all" interest rate dilemma.

Debt and Deleveraging

Here are some excerpts from the McKinsey Global Institute PDF.
Click on any chart below for a sharper image.

Executive Summary

The deleveraging process that began in 2008 is proving to be long and painful, just as historical experience suggested it would be. Two years ago, the McKinsey Global Institute published a report that examined the global credit bubble and provided in-depth analysis of the 32 episodes of debt reduction following financial crises since the 1930s. The eurozone’s debt crisis is just the latest reminder of how damaging the consequences are when countries have too much debt and too little growth.

In this report, we revisit the world’s ten largest mature economies to see where they stand in the process of deleveraging. We pay particular attention to the experience and outlook for the United States, the United Kingdom, and Spain, a set of countries that covers a broad range of deleveraging and growth challenges.

Deleveraging Only Just Begun

1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.
2 Defined as an increase of 25 percentage points or more.
3 Or latest available.

The United States: A light at the end of the tunnel

Since the end of 2008, all categories of US private-sector debt have fallen relative to GDP. Financial-sector debt has declined from $8 trillion to $6.1 trillion and stands at 40 percent of GDP, the same as in 2000. Nonfinancial corporations have also reduced their debt relative to GDP, and US household debt has fallen by $584 billion, or a 15 percentage-point reduction relative to disposable income. Two-thirds of household debt reduction is due to defaults on home loans and consumer debt. With $254 billion of mortgages still in the foreclosure pipeline, the United States could see several more percentage points of household deleveraging in the months and years ahead as the foreclosure process continues.

[Mish Note: notice the key phrase "months and years ahead"]

Even when US consumers finish deleveraging, however, they probably won’t be as powerful an engine of global growth as they were before the crisis. One reason is that they will no longer have easy access to the equity in their homes to use for consumption. From 2003 to 2007, US households took out $2.2 trillion in home equity loans and cash-out refinancing, about one-fifth of which went to fund consumption.

Without the extra purchasing that this home equity extraction enabled, we calculate that consumer spending would have grown about 2 percent annually during the boom, rather than the roughly 3 percent recorded. This “steady state” consumption growth of 2 percent a year is similar to the annualized rate in the third quarter of 2011.

US government debt has continued to grow because of the costs of the crisis and the recession. Furthermore, because the United States entered the financial crisis with large deficits, public debt has reached its highest level—80 percent of GDP in the second quarter of 2011—since World War II.

The next phase of deleveraging, in which the government begins reducing debt, will require difficult political choices that policy makers have thus far been unable to make.

That last sentence, coupled with the fact that consumer deleveraging is only 1/3 finished is precisely why the headline title by Pritchard that "America Overcomes the Debt Crisis ..." is quite inaccurate.

Not only that, but growth assumptions remain absurdly high as do earnings forecasts.

The McKinsey study is certainly supportive of my employment thesis: Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation

Moreover, and importantly, risks are all skewed to the downside because the European recession is going to prove to be a major disaster as noted in Italy Faces 2-Year Recession says IMF; European Recession Neither Mild Nor Short

Spotlight on UK and Spain

10 Largest Economies Composition of Debt

1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.
2 Q1 2011 data.

UK household debt, in absolute terms, has increased slightly since 2008. Unlike in the United States, where defaults and foreclosures account for the majority of household debt reduction, UK banks have been active in granting forbearance to troubled borrowers, and this may have prevented or deferred many foreclosures. This may obscure the extent of the mortgage debt problem. The Bank of England estimates that up to 12 percent of home loans are in a forbearance process. Another 2 percent are delinquent.

Overall, this may mean that the UK has a similar level of mortgages in some degree of difficulty as in the United States. Moreover, around two-thirds of UK mortgages have floating interest rates, which may create distress if interest rates rise—particularly since UK household debt service payments are already one-third higher than in the United States.

Spain: The long road ahead

The global credit boom accelerated growth in Spain, a country that was already among the fastest-growing economies in Europe. With the launch of the euro in 1999, Spain’s interest rates fell by 40 percent as they converged with rates of other eurozone countries. That helped spark a real estate boom that ultimately created 5 million new housing units over a period when the number of households expanded by 2.5 million. Corporations dramatically increased borrowing as well.

As in the United Kingdom, deleveraging is proceeding slowly. Spain’s total debt rose from 337 percent of GDP in 2008 to 363 percent in mid-2011, due to rapidly growing government debt. Outstanding household debt relative to disposable income has declined just 6 percentage points. Spain also has unusually high levels of corporate debt: the ratio of debt to national output of Spanish nonfinancial firms is 20 percent higher than that of French and UK nonfinancial firms, twice that of US firms, and three times that of German companies. Part of the reason for Spain’s high corporate debt is its large commercial real estate sector, but we find that corporate debt across other industries is higher in Spain than in other countries. Spain’s financial sector faces continuing troubles as well: the Bank of Spain estimates that as many as half of loans for real estate development could be in trouble.

Spain has fewer policy options to revive growth than the United Kingdom and the United States. As a member of the eurozone, it cannot take on more public debt to stimulate growth, nor can it depreciate its currency to bolster its exports. That leaves restoring business confidence and undertaking structural reforms to improve competitiveness and productivity as the most important steps Spain can take. Its new government, elected in late 2011, is putting forth policy proposals to stabilize the banking sector and spur growth in the private sector.

Note how Spain was massively skewered by the ECB's "one size fits Germany" interest rate policy. That structural problem remains in spite of all the can kicking by the US and ECB with lending schemes and the LTRO.

Let's return to the report for one more chart from the report.

US Household Debt Ratios

There are a lot of optimistic assumptions in that report. The above chart highlights one of the biggest assumptions.

Certainly one can make a case that the change from single-household worker families to dual-household worker families (both husband and wife working), accounts for the rise is sustainable debt loads from 1955 to 1985.

How much of the rest is sustainable? I suggest little to none of it is. The stock market boom of the 90's followed by housing bubble in the 2000's is what made families "feel" wealthy.

Negative Stock Market Returns for another Decade?

With global growth slowing, coupled with an enormous change in boomer demographics, combined with massive amounts of deleveraging still to come in the top 10 economies, the likelihood the stock market puts in another sustainable boom as it did in the 90's is highly unlikely. When households feel wealthy they are apt to take on more debt.

In a debt deleveraging cycle, not only does feeling wealthy go away, so does the likelihood of strong returns in the stock market. Indeed, I have made the case for Negative Returns for Another Decade

For the sake of argument let's assume an optimistic case of 4-5% annualized returns for another decade. Is that enough to keep that household debt trend intact?

Of course not. The idea the trendline itself should go up over time is complete silliness unless there is a structural change as there was in the 60's and 70's when women went to work en masse.

Nonetheless, the McKinsey Global Institute report is well worth a look in entirety. Click on the first link at the top for an opportunity to download the full 64-page report.

Obvious flaws aside, the report is a great read containing a wealth of information on debt levels of countries and what has been done to address the issues so far.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Limits of Voluntary Deal Hit as Greek Bondholders Draw Line in the Sand; Separating Fact from Fiction in Selective Reporting

noreply@blogger.com (Mike Mish Shedlock) — Mon, 23 Jan 2012 07:01:00 +0000

The bickering over a half percentage point reduction on the discount rate continued over the weekend as Greek Bondholders Draw Line in the Sand

Private owners of Greek debt have made their “maximum” offer for the losses they are willing to accept, the bondholders’ lead negotiator has said, implying that any further demands could kill off a “voluntary” deal and trigger a default.

One banker said Friday’s demand by official creditors, led by the International Monetary Fund, for a further interest rate cut of 50 basis points on new long-term bonds to be swapped for existing Greek debt “may have put a voluntary deal out of reach”.

Mr Dallara said the IIF’s position tabled with Greek authorities on Friday night – believed to include a loss of 65-70 per cent on current Greek bonds’ long-term value – was as far as his side was likely to go.

“I think it's clear we are at the limits of a voluntary deal,” Mr Dallara said, recalling that eurozone heads of state had committed to keeping the restructuring voluntary at a high-stakes EU summit in October. “It is clear to me we are at a crossroads.”

The IMF wants to put Greece on a path for a debt-to-GDP ratio of 120 percent by 2020. Anyone remember the original proposal a year or so ago? The idea then was austerity measures would put Greece at an 80 percent debt-to-GDP ratio by 2013-2014.

That Fantasyland proposal was soon followed by haircuts of 21% on Greek debt which I said would not work, then 50% which I said would not work, and now 65-70% which once again I suggest will not work.

Greece is in a depression and things are going to get worse. Portugal and Spain are also in depressions.

Ambrose Evans-Pritchard thinks Italy is headed for depression as well. Please see Money Supply Figures Suggests Italy Headed Into Depression; Non-Performing Spanish Loans Hit 134 Billion Euros, 7.51% of All Loans, Highest in 17 Years; Eurozone Unemployment Charts for a discussion.

Granted, 2020 is a long way off, but recall the Maastricht Treaty requires a debt-to-GDP ratio of no more than 60%.

European Debt-to-GDP Ratios

CNN has a nice interactive map of European Public Debt at a Glance.

Germany, France, Belgium, Italy, Portugal, Ireland, Spain, and Greece are all in violation. In fact, 13 out of 17 nations are in violation of the treaty. Estonia, Slovenia, Finland, and Luxembourg are the only exceptions.

The map is from 2010 and some countries such as Spain that were on the edge before are no longer on the edge.

Greek Talks Hit a Snag Over Rates

The New York Times reports Greek Talks Hit a Snag Over Rates

Greece’s private creditors, which hold about 206 billion euros, or $265 billion, in Greek bonds, are resisting accepting a lower rate. They argue that they are already faced with a 50 percent loss on their existing bonds and that the lower rate would increase the hit they would take.

It would also make it more difficult to describe the deal as voluntary. A coercive deal, bankers warned, could lead to a technical default and the initiation of credit-default swaps, or insurance, an outcome that all sides were trying to avoid.

[Mish: No - not ALL sides are trying to avoid that]

With the Greek economy forecast to shrink by 6 percent this year and 3 percent next year, the ultimate goal of Greece’s lowering debt to 120 percent of gross domestic product by 2020 is seeming more and more unrealistic. With G.D.P. plummeting, the International Monetary Fund is insisting that Greece’s debt load — currently 160 percent of G.D.P. — be reduced more quickly and that the private sector pay its fair share.

A majority of the funds the monetary fund has disbursed so far has been paid out to Greece’s bondholders as opposed to helping Greece itself. Of the close to 20 billion euros that the fund has disbursed, two-thirds has gone to repay bondholders — an increasing number of which have been hedge funds betting that this trend will continue.

CDS Holders Have Vested interest in a "Credit Event" Not a Deal

Hedge funds that have plowed into Greek debt did so with credit default swaps. Those CDS holders would be made whole on any "credit event".

They have no vested interest in reaching a deal. So not "all" sides want to reach a deal as stated in the article.

Other creditors are upset that the ECB itself will not partake in haircuts. The ECB holds 55 billion of the 206 billion euros of Greek debt. The rest of the EMU according to fixed percentages are on the hook for that debt.

The Times reports ...

The [ECB's] refusal to take a loss has been regularly cited by investors as unfair, and many have said that they will sue Greece if they have to take a loss while the bank does not.

To get around this, officials are now discussing the possibility that Europe’s rescue fund might lend money to Greece to allow it to buy the bonds back from the European Central Bank at the price the bank paid for them — thought to be about 75 cents on the euro. The central bank would then not have to take a loss on these holdings. By selling them back to Greece, it would remove itself as an obstacle to a broad restructuring agreement.

Separating Fact from Fiction in Selective Reporting

The proposal is for the ECB to sell its bonds back to Greece so that Greece will then take a hit.

With that in mind, look at this preposterous claim by a senior official "The bonds’ rate “is the only issue,” said a senior official directly involved in the negotiations. “We have to accommodate the needs of the Greek economy."

I see two sentences and two lies. Indeed the entire article is crammed pack with lies made by various IIF and EMU officials.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Australia Roundup: Oceanfront Homes for 65% Off; Chain Sales and Contingent Offers; Retailers Brace for More Job Cuts; Cusp of a White-Collar Recession

noreply@blogger.com (Mike Mish Shedlock) — Sun, 22 Jan 2012 19:20:00 +0000

Reader "Brisbane Bear" from down under sent potpourri of links on the dwindling prospects for the Australian economy.

Oceanfront Homes for 65% Off

In apples, rot starts at the periphery and spreads to the core. In real estate, rot starts in condos and vacation homes, then slowly encompasses city after city.

Please consider Investors snap up coastal property bargains in Queensland.

While prices soar in some coastal towns close to mining centres, astute buyers are managing to secure ocean- front homes in traditional tourist locations for $500,000 or more off peak prices as vendors cave after years of trying to sell.

One buyer scored an oceanfront unit in a marina development at Cardwell, halfway between Cairns and Townsville, for $157,000 - almost $300,000 less than it sold for in 2006. The unit had been on the market for three years.

A penthouse with ocean views in the same development sold for $570,000 less than its 2007 sales price.

RP Data senior analyst Cameron Kusher said buyers of the most affordable seaside holiday homes needed to be prepared for a long commute. But he said coastal market values had fallen across Queensland, meaning bargains could even be found in popular locations.

Chain Sales and Contingent Offers

When all else fails, buyers accept any offer they can get including contingent sales as noted by The Age in Risky ride on the vendor-go-round.

SELLING a home is stressful at the best of times. Failing to sell at auction in the midst of a property downturn can be its own kind of nightmare.

But imagine if it turned out that the only way to sell your home depended on the buyer having to sell theirs first.

It is a scenario Gavin and Verity Carson never considered when their Abbotsford terrace house went to auction and was passed in.

After later negotiations with a bidder broke down, they were left at a loss about what to do next. Looming was the threat of a lengthy wait in the private sale market, already flooded with thousands of unsold homes.

"All the people that had been interested were no longer interested - we had to really start the campaign from scratch," Mr Carson said, adding that they already faced a $10,000 advertising bill for the auction.

"Ideally, we would have sold at auction," Mr Carson said. "We did end up taking a lower value than we were expecting but that's really just indicative of the market at the moment. We're glad that it's over - put it that way."

In Britain, subject-to-sale transactions can often evolve into "chain" sales involving multiple properties that must all settle on the same day.

Retailers Brace for More Job Cuts

Following a dismal Christmas selling season, Retailers brace for job cuts

THE battered retail industry is bracing for a fresh wave of job cuts, with the crucial Christmas shopping season failing to deliver a much-needed surge in sales.

Analysts predict a clutch of struggling retailers will fall into administration in March, joining a list of failures over the past year that includes the booksellers Borders and Angus and Robertson, and the clothing retailers Colorado and Fletcher Jones.

At the same time as they slash costs in their stores, retailers are pouring resources into information technology - pinning hopes of a return to growth on tightening the link between physical and online shopping.

In November, a month when typically volumes rise in the run-up to Christmas, retail sales fell from a 0.2 per cent growth in October to no growth in November, while department store sales in trend terms fell 0.2 per cent.

"You've seen the Bureau of Statistics retail sales for November, and it's pretty dismal," said a David Jones spokeswoman, Helen Karlis.

"There's no sugar coating, it's just what's happening. Flat growth is probably a good thing in this environment."

The Australian National Retailers Association's chief executive, Margy Osmond, said retailers looked at the flat November retail sales with disappointment ''and concern''.

"At this stage, many retailers have chosen to reduce staff hours rather than lose valuable people, but there is a real concern in the sector about keeping jobs," she said.

Cost cutting would continue in the retail area, said the Commonwealth Bank's retail analyst, Andrew McClennan.

"But also there is no doubt there are going to be significant layoffs through further business failures," he said.

Cusp of a White-Collar Recession

Please consider Bank on white-collar crisis

AUSTRALIA is on the cusp of a white-collar recession with insiders warning that thousands of jobs are at risk in the finance sector, after it emerged yesterday that ANZ planned to cut 700 jobs.

But The Saturday Age has established the job cuts will total as many as 1000 by the end of this year, which will be more than the bank shed at the height of the global financial crisis.

They come a day after the Royal Bank of Scotland announced plans to close its investment banking business, leading to the loss of more than 200 jobs in Australia.

Economists have warned Australia is vulnerable to a recession this year with a wholesale funding squeeze in Europe raising debt costs for banks such as ANZ.

Experts say thousands of jobs will be lost from the industry this year as banks scramble to adjust to an era of low credit growth and higher funding costs.

This comes on top of cuts of 2150 jobs between March 2009 and last September in ANZ's Australian division. "We have run a policy of shedding jobs through attrition since October last year," an executive said.

"Temps have not been rehired once their contract has expired. Secondments have been stopped. We have outsourced two whole floors of operations staff from a [Melbourne] office to Manila [in the Philippines]. If you count all those jobs since October, along with what will be announced in the next week … we will lose more staff than we did as a result of the GFC."

Australia is not on the "Cusp of a White-Collar Recession", Australia is smack in the midst of a general recession affecting nearly all aspects of the economy but mining. As China slows, mining will slow as well.

Expect the real estate rot to spread to the core, sooner rather than later. The collapse in commercial real estate values, condos, and homes will be stunning.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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