Mish's Global Economic Trend Analysis

Folly of Preserving the Euro at All Costs; Should France Lead Breakup of Euro?

noreply@blogger.com (Mike Mish Shedlock) — Sun, 19 May 2013 15:47:00 +0000

The Local, a website with German news in English reports Economists warn against German euro exit.

“Even a believable rumour that Germany would exit the euro would result in a massive capital flight from the countries of southern Europe to Germany.”

The southern European banking system would then collapse, bringing down entire economies with them, Schmieding said.

The consequences for Germany would be severe. The crisis countries could no longer pay back their debt and Germany’s important export markets would drop off. On top of that German taxpayers would be burdened with immense costs, he said.

On the other hand if you add up the expected growth advantages of euro membership between 2013 and 2025 there would be a profit of nearly €1.2 trillion – or about half Germany’s gross domestic product in a year.

Thomas Straubhaar of the Hamburg HWWI economic institute thinks a return to the D-mark would be “a worst possible scenario.”

“An upward valuation of the D-mark and an accompanying devaluation of the euro would result in a massive debt forgiveness of all other euro-countries – with the costs of that picked up by Germany. This could lead to a currency war and the end of monetary stability.”

Complete Rubbish

As is typically the case in such articles, the eurozone proponents ignore the costs of staying in the euro and overly trump up the benefits. The article perpetuates the myth that German taxpayers will suffer the consequences of a breakup, but suffer no costs if the eurozone stays intact.

Nothing could be further from the truth. As I have pointed out on many occasions, Germany is going to pay a steep price either way, and so will Europe.

The cost to Europe on the current path will be another decade of Southern European depression, resentment, and capital controls. Somewhere along the line, citizens in one or more countries will decide they have had enough, and vote to exit the Euro anyway.

It is a huge mistake to believe Germany can impose its will on Southern Europe forever while not paying through the nose with eurobonds or other transfer mechanisms. If Germany returns to the D-mark, it will get paid back in cheaper Euros, but it least its stands a chance of getting paid back.

On the other hand, target-2 imbalances are so great the cost of a destructive piecemeal splintering of the eurozone coupled with outright default, will be much higher.

Many economists don't see this simply because they do not want to.

Should France Lead Breakup of Euro?

I have argued that the best way to breakup the eurzone would be a German exit. Politically speaking that could be doable once Merkel is gone. But then aagin, perhaps not.

The problem is Germany has been the biggest beneficiary of this failed experiment, and will not give up those benefits easily, even if mathematically it must eventually (and destructively) happen anyway.

In a Bloomberg column, authors Brigitte Granville, Hans-Olaf Henkel, and Stefan Kawalec argue France Must Lead Breakup of Euro

Many observers concede that the euro was a mistake but think there’s no going back. They reckon that dissolving the monetary union would lead to economic chaos, first in Europe, and then around the world. European leaders are afraid that backtracking on the euro project would also be a lethal blow to the larger cause of European integration and could be the beginning of the end of the EU and the single market. These fears give rise to what we regard as the disastrous strategy of defending the euro at all costs.

Although a controlled segmentation of the euro system through the exit of the most competitive countries would actually be the most effective way to help the deficit countries, it could still be seen as a decision by the strong to abandon the weak. Europe’s history makes it difficult for Germany’s leaders to initiate such a move.
Protecting France

The deficit countries, struggling with recession and internal political divisions, and trying to get better terms for assistance from the rest of the EU, might be afraid of worsening their negotiating position by taking the lead. EU institutions, such as the European Commission and the ECB, couldn’t propose the solution we advocate.

French leadership in advancing this idea might work -- and could be the only thing that will. France has played the leading role in EU integration for more than 50 years. The euro is very much a French product.

In 1990, President Francois Mitterrand won Chancellor Helmut Kohl’s support for the single European currency in exchange for France’s acceptance of German unification. Persuading Germany to give up the deutsche mark, whose strength had given the Bundesbank de facto control of monetary policy throughout Europe, was a remarkable French success -- or so France believed.

The euro was seen as the ultimate underpinning for the edifice of European integration. The financial crisis and its aftermath have shown that the euro instead has the potential to destroy the whole project. It impedes the reforms necessary to restore France’s fading international competitiveness. Retaining the present euro system whatever the cost will cripple the French economy, undo French social cohesion, and weaken France’s position in Europe and the world.

As Europe’s founding father, only France has the standing to advocate a strategy of dismantling the euro system for the sake of the European Union. The alternative is economic failure, deeper divisions and bitter resentments among Europe’s nations, putting the most valuable achievements of European integration at risk. One way or another, Europe’s house will be divided.

The question is how much, or how little, this division will sweep away. Splitting the euro in the way we advocate is vital to the survival of the European idea.

(Brigitte Granville is a professor of international economics and economic policy in the School of Business and Management at Queen Mary University of London. Hans-Olaf Henkel is a professor of international management at the University of Mannheim and a former president of the Federation of German Industries. Stefan Kawalec is chief executive officer of Capital Strategy and a former vice minister of finance in Poland. The authors are signatories of the European Solidarity Manifesto.

Read Part One - Save Europe: Split the Euro. The opinions expressed are their own.)

The authors present an interesting viewpoint, well worth a closer look.

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

Poll Shows 46% in UK Want to Exit EU, 30% Want to Stay In

noreply@blogger.com (Mike Mish Shedlock) — Sat, 18 May 2013 23:48:00 +0000

By a wide margin, but not quite a majority (yet), Let's quit EU say 46 per cent of voters in poll.

Asked the exact question Conservatives want to put the public in the 2017 referendum – “Do you think that the UK should remain a member of the EU” – 46 per cent opt to come out, a higher figure than in other recent surveys.

Just 30 per cent say they want to remain.

In a further boost for the eurosceptic cause, 44 per cent want an “in/out” referendum immediately, although 29 per cent are prepared to wait until 2017, David Cameron's preferred option.

The headline figure using ICM’s “Wisdom Index” method – which asks voters to predict the result of the next general election rather than which party they support – puts Labour just three points ahead of the Tories, the party’s narrowest lead since the index was launched last year.

Cameron is hurting himself by not agreeing to a referendum now. For further discussion, please see Cameron Faces Cabinet Crisis of His Own Making; Purposely Self-Inflicted Wounds

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

Protests in Italy Against New Coalition; How Long Will Coalition Last?

noreply@blogger.com (Mike Mish Shedlock) — Sat, 18 May 2013 16:42:00 +0000

The new coalition government in Italy is off to such a rocky start, it's hard to say there ever was a honeymoon.

People want more jobs. Instead, the price for a coalition by former Prime Minister Mario Silvio Berlusconi was a rollback in property taxes.

Here is the result: Thousands rally in Rome against cuts.

Thousands of protesters, led by trade unionists, have rallied in the Italian capital Rome against the policies of the new coalition government. Wielding red flags and placards, they urged the centre-left Prime Minister, Enrico Letta, to scrap austerity measures and focus on job creation.

Public trust in his fragile coalition with the centre-right is dropping, opinion polls suggest. The country is experiencing its longest recession in more than 40 years. National debt is now about 127% of annual economic output, second only to Greece in the eurozone.

National debt is now about 127% of annual economic output, second only to Greece in the eurozone. Unemployment is at a record high of 11.5% - 38% for the under-25s.

Before taking office, Mr Letta vowed to make job creation his priority, but critics are unhappy that he has focused on property tax reform.

Soon after being appointed, Mr Letta met other eurozone leaders to convey growing public unrest over austerity measures in Italy. But the new prime minister has to maintain a delicate balance between the policies of his own supporters and those of the centre-right, led by Mr Berlusconi.

Protest Pictures From Reuters, BBC

How Long Will Coalition Last?

Inquiring minds are wondering how long this rocky coalition can last. There is no definitive answer but there are a some general rules.

Long enough for Berlusconi to get the tax changes and prosecution immunity he seeks
Not much longer than support for the coalition starts to cost Berlusconi votes
Not much longer than Berlusconi is pretty sure he can win the next election outright

1. Berlusconi got a suspension of property taxes but not the complete rollback he was seeking. Prime Minister Enrico Letta has not said how he will pay for property tax reform so expect some heat from Brussels.

If Berlusconi does not get a complete property tax rollback, the coalition will likely end right then and there. If he does get the rollback, he will have gotten one of the things he wanted.

2. Support for coalition may be costing Berlusconi votes right now.

3. Support for Beppe Grillo waned after the election so Berlusconi could be closing in on the number now.

In all respects, it appears the coalition will splinter sooner rather than later.

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

Hollande Asks ECB to Engage in Japanese Style Currency Debasement

noreply@blogger.com (Mike Mish Shedlock) — Fri, 17 May 2013 18:44:00 +0000

French president Francois has had enough of austerity but claims he "cannot do it alone". The Financial Times reports François Hollande goes on ‘offensive’ over stalled EU economy.

François Hollande promised an “offensive” to bring “more growth and less austerity” to Europe as he launched a bid to resurrect his presidency.

Mr Hollande said the first priority of his second-year “offensive” was a four-point plan to “get Europe out of its torpor” – concentrating on combating youth unemployment and a strategy of investment. “The number one objective is changing Europe’s direction to have more growth and less austerity,” he said.

“I cannot do it alone,” he said, adding that the European Central Bank could “put in liquidity, as is happening in Japan, which has allowed a fall in the yen and helped exports”.

The president promised a 10-year investment programme in digital, energy, health and infrastructure sectors to regenerate growth, saying that it could in part be financed by the sale of some of France’s big state corporate holdings, which have a total market capitalisation of about €60bn. But he made clear that any sales would not be at the expense of ceding state control or influence over vital companies.

Economic Illiteracy

Not only is the Hollande in praise of competitive currency debasement which mathematically cannot work if every country does it (not that it can work anyway without long-term consequences), he also wants to sell France government holdings "without ceding state control or influence over vital companies".

Good luck with that. No one in their right mind would want to buy companies under such conditions.

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

How Clueless Are Manufacturing Future Expectations?

noreply@blogger.com (Mike Mish Shedlock) — Fri, 17 May 2013 08:16:00 +0000

Month in and month out I see unwarranted optimism in Europe and in the US.

For example, on Thursday I stated "Philly Fed Slips Into Contraction (Again); Current Conditions Recessionary, Future Expectations Far Too Optimistic".

Here is the chart I posted:

That chart got me to wondering "just how wrong are future expectations historically?" The data is available, all one has to do is chart it.

I asked Doug Short at Advisor Perspectives if he could produce a chart of future expectations offset by six months to see how expectations actually matched what did happen. Doug graciously produced a pair of charts.

click on either chart for sharper image

Future Expectations Shifted 6 Months Back vs. Actual Results

Note that manufacturers in the Philly region are especially clueless during recessions as to how fast things will improve. They can be wildly off at other times too, as shown by the black ovals.

Since the Philly Fed index is generally noisy (huge month-to-month random fluctuations), we decided to smooth out the lines by showing a 3-month rolling average of current conditions vs. a 3-month rolling average of future expectations.

Future Expectations Shifted 6 Months Back vs. Actual Results (3-Month Rolling Averages)

Charts by Doug Short, annotations in purple and black by Mish.

Optimistic Expectations

Generally speaking, manufacturers' expectations about future conditions are wildly off for many months before during and after recessions.

In the double-dip recession of 80-82, it took 43 months from the end of the first recession for expectations to match reality, then the lines immediately diverged again.

Mid-cycle there were a couple of periods where expectations generally matched reality (as noted by close lines with repeat crossovers). The first was 1985 to 1987, and the second was 1996 to 1999.

In the 1974 and 1980 recessions expectations plunged ahead of the recession. Both appear to be oil related because it has not happened since.

Key Points

Wide variances in expectations vs. current conditions tend to be way over-optimistic.
Current spread of expectations vs. reality is in recession territory, albeit not quite as pronounced (yet) vs. earlier recessions.

Addendum: The heading on the charts originally said six moths forward. It should have said backwards. The caption on the chart itself was correct.

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

EU Emissions Trading in Tatters (As It Should Be)

noreply@blogger.com (Mike Mish Shedlock) — Thu, 16 May 2013 22:48:00 +0000

The Wall Street Journal reports Emissions trading in Europe in Tatters.

The European Union's flagship program to fight global warming—a regional carbon-emissions trading system—suffered a major blow Tuesday when legislators rejected a proposal aimed at saving the market from collapse.

After the European Parliament's rejection, spooked investors drove the already depressed price of carbon emission permits down by nearly half. Benchmark electricity prices also fell. Europe's Emissions Trading System, launched in 2008, was intended to protect the environment by raising the cost of polluting and encouraging businesses to invest in cleaner technologies.

Slack demand for electricity because of the recession and an abundance of permits helped push the price of emitting a ton of carbon below €5 ($6.60) earlier this year, from nearly €30 in 2008.

On Tuesday, the price dropped to €2.55 before recovering partially to €3.20.

Without some intervention to reduce supply, "the ETS will almost certainly collapse," said Kash Burchett, a London-based analyst at consulting company IHS Energy.

"Prices will likely sink below €1 per ton as participants recognize that there is no political will at present to restore the market mechanism to functioning order," he said.

Scheme Flawed From the Start

"Today's vote is a historic failure," said Joris den Blanken, EU climate policy director at environmental advocacy group Greenpeace.

Really? No not really.

Today's vote is one of the few common sense things the EU has done in years. Giving existing polluters credits that they could sell, and credits that new polluters had to buy, is preposterous.

Hopefully this will bury the idea forever, but don't count on it. Please note that I am not praising pollution. I am against this method of doing something about it.

I also disagree with the entire concept of man-made "global warming" in the first place. Even if it exists, the odds that government will do something reasonable about it is close to zero.

For further discussion of EU clean energy silliness, please see Paul Krugman "Was" Right.

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

Philly Fed Slips Into Contraction (Again); Current Conditions Recessionary, Future Expectations Far Too Optimistic

noreply@blogger.com (Mike Mish Shedlock) — Thu, 16 May 2013 17:25:00 +0000

The Philly Fed Business Outlook Survey shows regional activity weakened with current indicators negative. The Six-Month Outlook brightened in what I believe is rampant over-optimism.

"The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings."

Note the negative slope of current conditions and future expectations. Current conditions are in recession territory.

Philly Fed at a Glance

Business Outlook Survey	May vs. April					6 Months From Now
Series Data	Apr Index	Increase	No Change	Decrease	May Index	Apr Index	Increase	No Change	Decrease	May Index
Business Conditions	1.3	23.8	41.8	29.0	-5.2	19.5	44.5	36.3	12.2	32.3
New Orders	-1.0	27.4	35.5	35.3	-7.9	24.3	47.2	34.2	12.7	34.5
Shipments	9.1	23.9	39.3	32.4	-8.5	26.5	47.1	29.1	15.4	31.7
Unfilled Orders	-8.7	12.6	60.5	21.9	-9.3	-2.1	24.4	61.7	7.5	16.9
Delivery Times	-13.8	10.2	68.3	16.2	-6.0	-4.5	12.1	69.4	10.2	1.9
Inventories	-22.2	25.3	52.2	21.1	4.1	-13.3	19.6	55.2	20.8	32.3
Prices Paid	3.1	18.1	69.2	11.2	6.9	26.6	36.8	51.9	6.0	30.7
Prices Received	-7.5	7.0	81.3	10.3	-3.3	8.3	24.5	63.4	6.3	18.2
Number of Employees	-6.8	13.7	63.9	22.4	-8.7	8.2	23.9	56.8	14.0	10.0
Average Workweek	-2.1	14.7	54.7	27.2	-12.4	6.6	26.4	53.9	12.3	14.1
Capital Expenitures	-	-	-	-	-	7.8	25.4	52.4	13.9	11.5

Key May Index Numbers

Business Conditions: -5.2
New Orders: -7.9
Shipments: -8.5
Unfilled Orders: -9.3
Number of Employees: -8.7
Average Workweek: -12.4

Margin Squeeze

Price Paid +6.9
Prices Received -3.3

Looking ahead, future expectations rose from 19.5 to 32.3, yet businesses are not backing that optimism up with a huge jump capital expenditure plans or hiring plans although both showed small increases.

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

Brussels Puts Spain Under Surveillance; Brussels Denies Putting Spain Under Surveillance

noreply@blogger.com (Mike Mish Shedlock) — Thu, 16 May 2013 06:15:00 +0000

Here is an amusing set of back-to-back headlines regarding Spain.

Via Mish-modified Google translate from La Vanguardia Brussels Puts Spain Under Surveillance for Economic Imbalances

Spain will be placed under European supervision and its political leeway in deciding what reforms the economy agree will be reduced.

European monitoring will take place in the labor market and a review of the pension system and some economic reforms from now must be agreed with Brussels. Spain gets "two extra years to reduce the deficit to make reforms to improve the competitiveness of the economy" in exchange for increased reinsurance the sources said.

It will be the first time the EU put in place the new mechanism adopted following the outbreak of the crisis to allow Brussels to monitor the implementation of the reform agenda, make proposals and, above all, ensure that measures are taken According to the schedule.

This sort of preemptive rescue aims to give the impression to markets that are under control and problems being solved, which is crucial in the case of this country case to avoid asking the rescue.

Brussels Denies Spain Put Under Surveillance

Via Google translate from El Economista, Brussels Denies Spain Put Under Surveillance.

The European Commission (EC) has denied today that it has decided to put under surveillance to Spain for their excessive macroeconomic imbalances and restated preliminary analysis indicates reform plan that the country is broadly taking adequate steps to correct its problems.

"I've seen the press reports, speaking on decisions yet to be taken, based on anonymous sources who always suggests a dubious credibility," said community spokesman Economic and Monetary Affairs, Simon O'Connor, in the daily briefing of the EC.

EU sources have stressed that the preliminary analysis of the national reforms of Spain "is very positive and nothing is going in that direction" of the country placed under surveillance, but recalled that this possibility exists in the excessive imbalances procedure, such and as agreed at the time.

The idea that anything positive is happening in Spain that would allow it to meet its budget targets is of course preposterous. Indeed, Spain was granted two more years because it could not possibly meet its targets.

Of course, Italy cannot meet its targets, France cannot meet its targets, Slovenia cannot meet its targets, and in fact no country in Europe is likely to meet its budget deficit target.

Should the denial be correct, it's simply a sign that the larger countries are now so off-target on their own accord, they have granted kick-the-can extensions elsewhere.

However, I suspect the first headline is the accurate one and Brussels is simply looking for a word less harsh-sounding word than "surveillance".

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

Breakout in Japanese 10-Year Bond Yield

noreply@blogger.com (Mike Mish Shedlock) — Wed, 15 May 2013 17:57:00 +0000

Curve Watchers Anonymous has its eye on global interest rates. For example, please consider this chart of 10-Year Japanese bonds.

click on chart for sharper image

Chart courtesy of Steen Jakobsen, chief economist at Saxo Bank in Denmark.

I have been paying close attention to Japanese yields in light of this statement by the Bank of Japan chief: "I do not expect a sudden spike in long-term bond yields."

I commented on the statement on Saturday in Expect a Spike in Long-Term Japanese Interest Rates; Currency Crisis Just Around the Corner.

As a Yen-followup, please consider Will Shinzo Abe Succeed with Constitutional Changes to Militarize Japan and Further Destroy the Yen?

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

Triple Dip Recession in France; It's Not the Weather

noreply@blogger.com (Mike Mish Shedlock) — Wed, 15 May 2013 07:46:00 +0000

France slipped into its third recession in four years as Germany barely went into positive territory, underperforming general expectations.

The Financial Times reports France contracts in 1st quarter as Germany returns to growth

French GDP shrank by 0.2 per cent in the first quarter, the same rate of decline as the final three months of 2012, according to Insee, the national statistics office. Investment, measured by gross fixed capital formation, remained weak, falling a further 0.9 per cent after 0.8 per cent in the fourth quarter. Exports fell and construction output fell.

The second consecutive quarter of contraction put France back into recession, its third in four years.

Germany, by contrast, managed to swing back into growth, but only barely. First-quarter GDP grew by 0.1 per cent, up from a downwardly revised contraction of 0.7 per cent in the fourth quarter of last year, according to a preliminary estimate by the Federal Statistics Office.

The German growth figures were likely to have been dragged down by poor weather and many economists are expecting it to continue to grow as exports pick up.

The country’s powerful engineering union, which includes the carmaking sector, agreed a pay deal with employers on Wednesday, giving workers a pay rise of 3.4 per cent in July and a further 2.2 per cent in May 2014.

It's Not the Weather

Blaming the German slowdown on the weather is complete silliness.

More importantly, the idea that German exports will rise given stated pay raises and a weak and weakening eurozone economy is absurd.

For more on the eurozone, and France in particular, please see Social Mood Darkens in Europe, Especially France, as Eurozone Economy in Freefall.

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

In Rare Praise of Teachers

noreply@blogger.com (Mike Mish Shedlock) — Wed, 15 May 2013 06:59:00 +0000

I do not frequently stand with teachers. It's not that I have anything against teachers. I don't. Teaching is an honorable profession.

Those who understand my stance, know full well my problems sit with teachers' unions, administrators, and union work rules.

Far too often I hear requests for tax increases allegedly "for the kids" when really the tax increases are for the teachers and administrators, not the kids.

Something Different

Today, I want to report something different. I want people to know that sometimes teachers want to do something that is genuinely for the kids. In this instance, state law does not permit it.

Please consider Michigan District Fires All Teachers, Closes Every School.

Summer break has started very early for kids in one Michigan school district.

Buena Vista schools have been closed for five days already, and on Monday, the district's website stated that the school would be closed until further notice. For good reason, this decision has parents, and the community, up in arms.

The problem in Buena Vista is that the school district, educating approximately 450 kids, is out of money. All the teachers have been laid off and a financial emergency has been declared. The district has suffered from declining enrollment, which, in turn, has led to a loss of $3 million in state funding since 2010.

In an effort to keep schools open, teachers said they would work without pay. This is not possible under Michigan law so educators have been left in limbo. To make matters worse, the staff has also lost their health insurance.

The Buena Vista School District website states that they consider it their "highest calling to be entrusted with the care and education of the community’s children."

Buena Vista Announcement

From the Buena Vista School District Website:

3. Teachers have offered to work for free until Friday, May 10. Why did the District lay them off?

Michigan law requires that employers pay employees for work performed. We thank the teaching staff for their dedication, and understand their frustration. However, we must follow the law.

Over the past day, many staff who have been laid off have asked how they may volunteer their time. Staff who make the personal decision to do so should contact the District regarding the logistics of that volunteering. However, we must stress that under current circumstances, there is no ability to compensate staff for their services and there is no indication that there will be money for such compensation at any time in the future.

7. How should teachers and staff obtain their belongings from their classrooms and work areas?

The District buildings will remain open and, we understand, the Principals have volunteered to remain in their buildings, on an unpaid basis, into the indefinite future. Staff should report to their building principals and, in an orderly fashion, collect their belongings. Additionally, staff should turn in, to their building principal, their school-issued items, such as keys, phones, laptops, etc.

For the sake of order, we ask that these tasks be completed by Friday, May 10, 2013.

That notice came out on May 1.

I salute the teachers in the Michigan Buena Vista School District for having the kids best interest at heart when they volunteered to work for free to close out the school year. Sadly, a blatantly bad Michigan law did not permit such action.

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

Will Shinzo Abe Succeed with Constitutional Changes to Militarize Japan and Further Destroy the Yen?

noreply@blogger.com (Mike Mish Shedlock) — Tue, 14 May 2013 19:38:00 +0000

As noted previously Shinzo Abe Seeks Constitutional Changes for a More Militaristic, Authoritarian Japanese Society. Today's question is: Will Abe Succeed?

The answer boils down to election math. Japan News shows 63 and 100 are crucial figures in upper house election.

click on chart for sharper image

Resolving the problems of the divided Diet and revising the Constitution depend on two key numbers--63 and 100.

The House of Councillors election this summer will determine whether the ruling bloc will wrest control of the Diet's upper chamber from the opposition or whether the opposition bloc will retain dominance.

Prime Minister Shinzo Abe's economic policy also will be put to a test in the election. If he wants to press ahead with his policies with little opposition, the ruling parties must gain 63 seats to win a simple majority in the upper house.

For the other major issue--revision of the Constitution--the ruling bloc needs to gain 100 seats to ensure a two-thirds majority, essential to move this issue forward.

The number of uncontested seats of the ruling Liberal Democratic Party and its coalition partner New Komeito in the House of Councillors is 59--50 LDP seats and nine for Komeito.

The upper house has 242 seats, so if the two parties win 63 seats in the upper house election, their combined total will be 122 seats. This will mean the ruling bloc will hold a simple majority in both houses, making it easier for the Abe administration to govern.

The uncontested seats of the four parties that support revising the Constitution--the LDP, Nippon Ishin no Kai (Japan Restoration Party), Your Party and the New Renaissance Party--is 62. As a two-thirds majority of 162 seats is needed to move ahead with the revision process, the four parties need to win at least 100 seats.

If these parties can obtain the cooperation of Komeito, which has shown a cautious attitude toward constitutional amendment, the two-thirds hurdle will be cleared if they win 91 seats.

The House of Councillors (upper house) election is in July. Wikipedia explains ...

The 23rd Elections to the House of Councillors for the upper house of the National Diet, the legislature of Japan, is expected to be held in July, 2013. The House of Councillors is elected by halves to six year terms. In 2013, the class of Councillors elected in 2007 will be up.

The House of Councillors outcome will determine just how crazy Japan is likely to get.

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

Wine Country Conference Speaker Presentations All Posted (Hussman, Chanos, Martenson, Pettis, Mauldin, Mish)

noreply@blogger.com (Mike Mish Shedlock) — Tue, 14 May 2013 18:26:00 +0000

In case you missed it, please note that all of the presentations at the Wine Country Conference have now been posted. They are about 45 minutes each except for my short opening remarks.

Mike “Mish” Shedlock Conference Welcome Remarks
Chris Martenson: A Grand Experiment: Q&A with John Mauldin
John Mauldin: Unsustainability: Q&A with Lauren Lyster
Jim Chanos: China: The Edifice Complex: Q&A with Lauren Lyster
Mike “Mish” Shedlock: A Brief Lesson in History: Q&A with Chris Martenson
John Hussman: An Unstable Equilibrium

Speaker presentation material, Yahoo! Finance media interviews, and associated articles on Advisor Perspectives are now available online at Wine Country Conference Speaker Slides.

If you enjoy the videos and slides please consider making a Donation to the Les Turner ALS Foundation. Specify "Mish Campaign" on the donation to earmark funds for research.

All told, we raised nearly $500,000 for ALS research, subject to final audit. $100,000 of that came from a very generous matching donation from the Hussman Foundation.

Thanks again for a successful 2013 WCC and we look forward to many more! The 2014 conference will raise money for autism research and programs.

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

UK Does Not Need EU or Vice Versa; Problem Entirely in Cameron's Head

noreply@blogger.com (Mike Mish Shedlock) — Tue, 14 May 2013 17:01:00 +0000

Wolfgang Münchau writing for the Financial Times correctly asserts Lord Lawson is right – Britain does not need Europe

In discussing the pros and cons of Britain’s membership of the EU, the most important point to remember is this: the terms of an exit are freely negotiable. This means that the economic consequences will depend to a large extent on those exit terms.

In his article in the Times last week, Lord Lawson, a former UK chancellor, argued that the regulatory costs of the single market for the British economy exceed the economic costs of an exit. As a consequence he favours an exit. Is the analysis correct? Does the conclusion logically follow?

I do agree with most of his analysis, especially his point that, for the UK, the single market carries higher costs than benefits. For the EU as a whole, the single market has been a macroeconomic non-event. Its impact on aggregate gross domestic product is statistically imperceptible.

David Cameron, Britain’s prime minister, may also find it easier to negotiate favourable exit terms than a treaty change. The latter would be needed if he wanted to put substance to his goal of a fundamental change in Britain’s relationship with the EU. It would have to be agreed by all members, their parliaments, and it would need to pass in several referendums.

[Mish Note: This is why I said Cameron was being disingenuous about calling for a referendum. One of the conditions he placed on the referendum was successful renegotiation of a new treaty, something Cameron has to know is not going to happen, at least along the lines of what the UK wants. See Cameron Faces Cabinet Crisis of His Own Making; Purposely Self-Inflicted Wounds]

The legal basis for an exit clause is softer than for a treaty change. Article 50 of the Treaty on European Union, one of the two treaties known together as the Lisbon Treaty, provides the option of an exit.

Lord Lawson’s strongest argument relates to the changing nature of the EU. If Britain decided to remain a member, it would find itself pushed to the outside as the eurozone integrates. The financial transactions tax and banking union are two early examples of an integration that occurs without Britain’s participation. There will be many more. The euro is what splits the EU – or rather the British decision not to join it. The rest is an inevitable denouement.

The EU’s incipient banking union may be too slow to resolve the eurozone crisis, but potent enough to drive a wedge between the eurozone and the UK. A banking union means that the eurozone will ultimately end up with its own financial centre.

My overall conclusions, however, concur with his. There may be reasons why the UK may wish to remain a member of the EU. But whatever they are, they are not economic.

Problem Entirely in Cameron's Head

For some reason Cameron is wedded to the idea the UK belongs in the EU without ever adequately explaining why. Avoidance of nannycrat rules and regulations alone is well worth the cost (if any) of an exit. But there really is no cost, only benefits, if the UK negotiates a successful exit.

And the price for staying in will be expensive. Sooner or later the EU is going to impose a Financial Transaction tax that will be hard for London to avoid. There will be further rounds of inane rules and regulations on food, on energy, on imports, on everything.

Moreover, Cameron may lose the election to a Labor party that may embrace silly tax schemes as well as other inane ideas.

In short, there are all kinds of things that can go wrong if the UK stays in, and there is little that can go wrong if the UK negotiates reasonable exit terms. And it is actually in everyone's interest to do just that.

The problem is entirely in Cameron's head.

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

Social Mood Darkens in Europe, Especially France, as Eurozone Economy in Freefall

noreply@blogger.com (Mike Mish Shedlock) — Tue, 14 May 2013 06:20:00 +0000

A PEW study on European Attitudes shows social mood is darkening in the Eurozone, but especially in France.

The 78 page study "The New Sick Man of Europe: The European Union" is worth a look in entirety, but let's turn the spotlight on France.

France in Free Fall

The euro crisis first undermined France’s economy, and now there is strong evidence that it has severely eroded French public attitudes toward the economy, the European project and the country’s domestic leadership. Moreover, France has always bridged Europe’s north and south. French language and culture has Latin roots, but France has historically been considered in the same economic and political league as Germany and Britain. And in their public attitudes, the French were neither Northerners nor Southerners, but a hybrid of the two. Now, measured by a number of indicators, the French look less like Germans and a lot more like the Spanish, the Italians and the Greeks.

In the current poll such sentiment reaches a new low, with just 9% saying the economy is performing well. And that judgment is down 21 points since 2007. Only 11% of the French think their economy will improve over the next 12 months, making the French among the most pessimistic of Europeans. And just 9% think their children will be better off financially than their parents, by far the gloomiest forecast for the next generation.

The economic downturn over the past six years has also sharply increased the portion of the French population suffering basic deprivation. And reported incidences of not having enough money to pay for food and health care over the past year have increased more in France since 2007 than in any other of the EU countries surveyed.

The French have long had their doubts about whether European economic integration has been good for the French economy. In 1991, the year before creation of the single European market, a plurality of 44% feared that integration would weaken France. Today, these doubts have morphed into strong convictions. Nearly three-quarters (77%) of the French think closer business ties with the rest of Europe have undermined their overall economy.

In 2004, 69% had a positive opinion about the Brussels-based institution. But by 2013, just 41% have a favorable view. Moreover, more than half (53%) of the French oppose giving more decision making power to Brussels. And only 40% would consider financial assistance to other EU nations facing economic distress, down from 53% in 2010. Nevertheless, 63% of the French want to keep the euro and not go back to the franc.

Opinion Gap With Germany Widens

That 33-point difference six years ago is now a 66-point difference, as just 9% of the French and 75% of Germans see their economy as good. Moreover, the French and the Germans differ so greatly over the challenges facing their economies that they look as if they live on different continents, not within a single European market. Fully 80% of the French say unemployment is a very big problem; less than a third (28%) of the Germans agree. About two-thirds (68%) of the French think inflation is a major issue, while just 31% of Germans are similarly worried about rising prices. And 71% of the French are very troubled about public debt; only 37% of the Germans share such intensity of concern.

The French and the Germans also disagree on whether to help out other European Union nations in distress. And their positions have flip-flopped. In 2010, roughly half (53%) the French backed bailouts, while only 42% of Germans agreed. Today, about half (52%) of the Germans support such financial assistance, while just 40% of the French do so.

French Attitudes Worsen - Look More Like Greece, Spain Italy

More than nine-in-ten Spanish, Italians and Greeks think their economy is doing poorly, as do roughly nine-in-ten French. About two-thirds or more in all four countries think their governmental leader has done a bad job handling the economic crisis. Nearly three-quarters of the French, Greeks and Italians believe that economic integration has been bad for their country. More than half of the French, Spanish and Greeks look unfavorably on the EU. And by all of these indicators, French attitudes have worsened dramatically since 2007, much as has sentiment in Spain and Italy, for which there are comparable data.

Support For Further Integration Wanes

Leaders are still committed to the eurozone project with Brussels having still more control, but the average European citizen sure isn't.

Interestingly, just 18% in France back a Keynesian solution to their woes even though socialists are in control.

A pair of key charts from the report shows increasing skepticism towards further integration.

People’s confidence in the European Union as an institution is waning even faster. A median of only 45% now think favorably of the Brussels-based organization. That support is down 34 percentage points in Spain, 21 points in France and 20 points in Italy.

For now, the majority in France, Germany, Italy, Spain, and Greece want to remain on the euro even as distrust of the nannycrats in Brussels mounts.

Given such strong sentiment against further integration, I wonder how long support for the euro can last, but it sure is not forever. Adding fat to the fire, the euro itself cannot possibly survive in its current state.

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

Cameron Faces Cabinet Crisis of His Own Making; Purposely Self-Inflicted Wounds

noreply@blogger.com (Mike Mish Shedlock) — Mon, 13 May 2013 17:33:00 +0000

Over the weekend, the UK Secretary of Defence and the Education Minister caused a stir when they publicly stated on Sunday they would vote to leave the European Union if a referendum were to be held now.

Cabinet Crisis Erupts

The Guardian reports David Cameron faces EU cabinet crisis as ministers break ranks.

David Cameron is struggling to maintain Tory discipline over Europe after cabinet loyalists Michael Gove and Philip Hammond said on Sunday they would vote to leave the European Union if a referendum were to be held now.

Gove, the education minister, confirmed for the first time that he believes that leaving the EU would have "certain advantages", while Hammond, the defence secretary, later said he too would vote to leave if he was asked to endorse the EU "exactly as it is today".

This is fresh on the heels of an announcement last week that former cabinet minister Michael Portillo and Lord Lawson call for Britain to leave the EU. Lawson was Thatcher's longest-serving chancellor.

David Cameron faced growing Tory pressure on Europe last night when the former cabinet minister Michael Portillo threw his weight behind the call by Lord Lawson for Britain to leave the EU.

As Boris Johnson entered the fray, by saying that Britain should be prepared to quit if it fails to secure better membership terms, Portillo said he "fervently" hopes the British people have the "guts" to vote no.

The intervention by a second Tory grandee came as Charles Moore, Margaret Thatcher's official biographer, revealed that the late prime minister came to believe after she left office that Britain should quit the EU. Writing in this week's issue of the Spectator, Moore says that Thatcher kept her views private after she was advised that her views would push her to "the fringes of public life".

Cameron pledged in his speech on the EU in January that he would hold a referendum by 2017 after negotiating a series of reforms to the EU with fellow European leaders.

But the former defence secretary writes: "I have not been impressed by Mr Cameron's pledge. Given his party's electoral prospects, I doubt if he expects to have to deliver on it. But in any case, he seems to have decided already that Britain should stay in."

Purposely Self-Inflicted Wounds

These wounds are self-inflicted. No one believes Cameron has any intention of holding a referendum as promised, because no one can possibly believe one of Cameron's pre-requirements for the referendum.

Recall that Cameron pledged to hold a referendum after he is re-elected. He may not survive that vote. But even if he does, his next condition on holding a referendum was renegotiation of the treaty with the rest of Europe.

There is virtually no chance of that happening, at least along the lines of Cameron's pledge. So why the promises?

Clearly, Cameron would rather lie about the referendum and take the punishment than tell the truth. Hopefully a full-scale cabinet revolt and a full-scale revolt by the party will knock some sense into him before he loses the election.

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

Paul Krugman "Was" Right

noreply@blogger.com (Mike Mish Shedlock) — Mon, 13 May 2013 08:24:00 +0000

Before discussing Paul Krugman and how right he was, let's first take a look at the Spiegel Online report EU To Impose Tariffs on Chinese Solar Panels.

Back in 2008, the German solar manufacturing industry was riding the crest of a wave of growth fuelled by generous subsidies and high demand. That year, the darling of the German solar industry, SolarWorld, logged a 31 percent annual increase in revenue for a total of €900 million ($1.18 billion) and expanded its operations by opening North America's largest solar cell plant.

Four short years later, in 2012, the company announced €492 million in losses, and today SolarWorld is in the midst of a major debt restructuring deal to stave off bankruptcy.

Ironically, SolarWorld made it just long enough to see the success of the effort it spearheaded to slap tariffs on Chinese companies it suspected of conducting price dumping in order to wipe out the competition.

On Wednesday, the European Commission in Brussels agreed to impose punitive tariffs of 47 percent on Chinese solar goods.

Last year, China sold €21 billion worth of solar panels and related components in Europe. But all of that is just about to get a lot more expensive with a 47 percent cost increase on panels made in the country. The levies are likely to see a response from China, which has already threatened tariffs seen as reactive in an industry that grew by a power of ten in the last five years as solar panels dropped in price by more than 75 percent. And as with any quickly growing industry, the road has been rocky and strewn with wrecks.

SolarWorld helped launch the anti-dumping case with a formal complaint filed together with other solar companies with European Commission last July and a similar case in the United States that resulted in tariffs of up to 250 percent on Chinese solar module manufacturers.

Clean Energy Hypocrites

Please note the irony in these tariffs. The EU is hell bent on promoting "clean energy" but does not want clean energy if the cost is too cheap. Obama's position is similar.

Supposedly China is dumping solar panels below cost? So what? If the EU and US were really interested in clean energy and reducing emissions, the only thing better than cheap solar panels would be free solar panels.

Step back for a second and think of the benefits of free panels. On one side of the equation, the EU and US would lose a few hundred solar panel making jobs. However, hundreds if not thousands of businesses and individuals would employ solar panels if they were free.

Think of all the trucking jobs, dock unloading jobs, and installation jobs, that would result from free solar panels. Whatever jobs were lost in manufacturing (if any), would come back 100 times over in other jobs.

Ironically, and in spite of all the protests from manufacturers, I rather doubt any manufacturing jobs were lost in the first place.

Did you catch the key words in the first sentence in the Spiegel article? Here is the key sentence again: "Back in 2008, the German solar manufacturing industry was riding the crest of a wave of growth fuelled by generous subsidies and high demand."

Without generous subsidies, the European solar panel manufacturers were not profitable in the first place.

And so the clean energy hypocrites are also trade hypocrites. It's OK for the EU to offer energy subsidies but not China.

The economic illiterates in Brussels would tax the sun for providing free energy if they could. However, they cannot do that so they tax the closest thing.

Mittal urges EU to protect itself against China imports

With that backdrop, it should not be surprising to learn Mittal urges EU to protect itself against China imports.

Lakshmi Mittal has urged Europe to erect trade barriers to protect its manufacturers as the Indian steel tycoon attacked policy makers for stifling demand through tough austerity measures.

The owner of the world’s biggest steelmaker by sales said the future of EU manufacturing depended on politicians in Brussels helping industry face what he said was unfair competition from China.

The London-based entrepreneur said Brussels should consider applying higher tariffs on imports of Chinese-produced steel, similar to the ones to be imposed on solar panels made in China. He argued that Chinese producers of steel were over producing, lowering the price of the metal globally.

Insanity of Protectionism

Cheaper prices are a good thing. The cheaper steel prices, the cheaper cars and anything made out of steel will be.

Whatever consumers do not spend on steel, they will spend on something else. Once again there will be more doc unloading jobs, more trucking jobs, more installation jobs, etc., etc.

Cheaper prices of goods and services is always a good thing.

What About Krugman?

So what does this have to do with Krugman? Actually, everything. After all, Krugman "was" right.

The key word is "was". Before Krugman's mind turned to mush (probably a result of acquiring the "conscience of a liberal"), he was on the right side of free trade.

In 1997 Krugman wrote a brilliant article "In Praise of Cheap Labor", stating "Bad jobs at bad wages are better than no jobs at all".

I wrote about Krugman's position in Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All?

Please check it out. Krugman "Was" Right. However, the definition of "was" requires one to go back to 1997 to see just that.

Petition of the Candle Makers

The EU's preposterous "unfair advantage" argument was lampooned by French economist Frederic Bastiat back in 1845 when he penned 'Petition of the Candle Makers'.

In his article, candle makers were incensed that the light of the sun could be had for free. The sun's unfair trade advantage was to the "detriment of fair industries" who could not compete against the sun's price.

Something had to be done to "shut off as much as possible, all access to natural light, and thereby create a need for artificial light" so that "industry in France will encouraged".

For further reading, and a case involving alleged "unfair competition" from Skype, please see Extremely Difficult to Keep Up With Economic Stupidity.

How and Why We Forget the Obvious

It is a simple statement of fact that the more goods and services we receive for our money, the better off we all are. The cheaper, the better!

Time and time again we forget free trade and lower prices are a benefit!

We forget because unions, socialists, and corporations forced to compete against the sun (or Skype), scream "unfair advantage" at the top of their lungs, via political contributions to politicians willing to "tax the sun" to be re-elected.

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

German Finance Minister Throws Cold Water on Single Bank Resolution Agency; For How Long?

noreply@blogger.com (Mike Mish Shedlock) — Mon, 13 May 2013 03:19:00 +0000

Germany's Finance minister, Wolfgang Schäuble, has an uncanny ability to tread a very narrow line on formation of an EU banking union. He frequently crosses over the line in both directions but never very far, and never for long.

Every time he gives an inch to solidarity, he quickly takes it back, and vice versa. And here we go again.

Weeks before the European Commission is due to present its plan for a single bank resolution agency and rescue fund, Schäuble threw the plans in doubt with a warning EU bank rescue agency needs treaty changes.

Germany’s finance minister has warned that a single EU bailout agency and rescue fund for ailing banks is legally untenable until the bloc’s treaties have been overhauled.

In today’s Financial Times, Wolfgang Schäuble calls for a “two-step approach” that would leave bank rescues in the hands of “a network of” national authorities until treaty changes can take place.

Mr Schäuble’s declaration comes just weeks before the European Commission is due to present its plan for a single bank resolution agency and rescue fund – widely touted as the second pillar in the eurozone’s much-vaunted “banking union” – throwing the proposal into doubt even before it is unveiled.

“The EU does not have coercive means to enforce decisions. Its historical roots are young. Its democratic legitimacy could be improved upon,” Mr Schäuble writes. “What it has are responsibilities and powers defined by its treaties. To take them lightly, as is sometimes suggested, is to tamper with the rule of law.”

Lawyers for the European Commission and the European Central Bank, which has joined Brussels in pushing for quick adoption of a resolution authority after last month’s creation of a common EU bank supervisor in Frankfurt, have argued that existing treaties allow for centralising powers to shut down or restructure weak banks.

But Mr Schäuble writes that the treaties “do not suffice to anchor beyond doubt a new and strong central resolution authority”. He added that promises to create an authority quickly would cost the EU credibility, saying: “We should not make promises we cannot keep.” Even limited changes to EU treaties can take months if not years.

While he acknowledges his “two-step” plan would lead to “a timber-framed, not a steel-framed, banking union”, Mr Schäuble said it would be adequate until treaties were changed. However, the ECB has expressed concern about keeping resolution at a national level after centralising bank supervision, saying it would undermine Frankfurt’s ability to make independent judgments about a bank’s health.

It's crystal clear the banking union proposal is in violation of both the eurozone treaty and the German Constitution, but such things only seem to matter on an on again off again basis. Most likely this is just another election ploy attempting to hoodwink potential AfD party members into thinking CDU/CSU will not let a full-fledged banking union happen without treaty changes.

Given past wishy-washy politics from both Chancellor Angela Merkel and Schäuble, I would not trust this stance one bit if I was a potential AfD voter.

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

German Export Machine Hits Skids; Imbalances Intensify: Exports Drop 4.2% YoY, Imports Drop 6.9% YoY

noreply@blogger.com (Mike Mish Shedlock) — Sun, 12 May 2013 16:59:00 +0000

Eurozone imbalances continue to grow even as German exports slump. Why? German imports slumped even more, and the German current account surplus grew.

Via Mish-Modified Google Translate from Les Echos, please consider Germany's Export Machine Slumps in March.

The German trade surplus grew in March for the third consecutive month in raw data (to € 18.8 billion after € 16.8 billion in February) detailed figures released Friday, yet the report shows much weakness.

First, calculated seasonally adjusted data, the trade surplus fell slightly on a month to € 17.6 billion after € 17.7 billion in February.

Then, based on gross figures published by the Federal Statistics Office, both imports (€ 75.8 billion) and exports (€ 94.6 billion) increased compared with February, annual rate the situation is quite different.

In one year, exports fell 4.2% after a decline of 2.8% yoy in February. As for imports, their decline is stronger and reached 6.9% compared to March 2012.

In one year, German exports to the euro area fell by 7%, while their decline was limited to 2.2% to European countries outside the euro area and 2.6% to non-European countries.

All of the alleged eurozone austerity (there really isn't much austerity as it's mostly tax hikes instead of spending cuts), has not fixed any imbalances.

Germany's trade surplus managed to grow even with a collapse in German exports. Yet, Germany is slowing rapidly along with the rest of Europe.

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

Expect a Spike in Long-Term Japanese Interest Rates; Currency Crisis Just Around the Corner

noreply@blogger.com (Mike Mish Shedlock) — Sun, 12 May 2013 01:26:00 +0000

I expect a spike sometime in the near future in long-term Japanese interest rates. People have been saying this for years, but the time may finally be at hand.

The following headline is what tipped me off: BOJ chief expects no spike in long-term Japan interest rates.

Japanese long-term interest rates should not shoot higher as a result of money flowing out of government bonds, Bank of Japan Governor Haruhiko Kuroda said on Saturday.

Kuroda added, however, that it would be natural for long-term rates to rise over time if Japan meets its goal of pushing inflation up towards two percent.

He said a shift in funds from Japanese government bonds to stocks and into lending was already taking place but that the BOJ was increasing its balance of JGB holdings at an annual pace of 50 trillion yen.

"The BOJ dealt with short-term volatility in bond prices by adjusting its market operations," Kuroda told reporters after a two-day meeting of G7 finance officials.

"I do not expect a sudden spike in long-term bond yields. In the long-run, if the economy recovers and inflation heads towards two percent, we might see nominal interest rates rise but that's natural."

Currency Crisis Just Around the Corner

When Japanese inflation spikes higher (and it will), the only way the Bank of Japan will be able to suppress long-term rates is to buy every long-term bond on the market.

A currency crisis in Japan is now just around the corner.

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

Read Between the Lines: IMF Admits Spain is Bankrupt; Get Your Money Out While You Can

noreply@blogger.com (Mike Mish Shedlock) — Sat, 11 May 2013 16:38:00 +0000

It should be obvious to anyone reading this blog that Spain is in an economic depression as well as bankrupt. It is equally obviously that eurozone imbalances and a flawed treaty are to blame.

Finding mainstream organizations willing to admit Spain is bankrupt is another matter. Yet today, Jeremey Warner writing for The Telegraph says just that.

Warner says Spain is officially insolvent: get your money out while you still can

I'd not noticed this until someone drew my attention to it, but the latest IMF Fiscal Monitor, published last month, comes about as close to declaring Spain insolvent as you are ever likely to see in official analysis of this sort. Of course, it doesn't actually say this outright. The IMF is far too diplomatic for such language. But that's the plain meaning of its latest forecasts, which at last have an air of realism about them, rather than being the usual dose of wishful thinking.

Let's take the projected budget deficit first. This is expected to decline quite steeply this year to 6.6 per cent of GDP, but that's mainly because the cost of bailing out the banking sector fell substantially on last year's budget. On a like-for-like basis, there has in fact been very little fall in the underlying deficit. And nor on the present policy mix is there ever likely to be, for that's where the deficit is projected to remain until the end of the IMF's forecasting horizon in 2018.

Next year, the deficit is expected to be 6.9 per cent, the year after 6.6 per cent, and so on with very little further progress thereafter. Remember, all these projections are made on the basis of everything we know about policy so far, so they take account of the latest package of austerity measures announced by the Spanish Government.

The situation looks even worse on a cyclically adjusted basis. What is sometimes called the "structural deficit", or the bit of government borrowing that doesn't go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018. By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US.

So what happens when you carry on borrowing at that sort of rate, year in, year out? Your overall indebtedness rockets, of course, and that's what's going to happen to Spain, where general government gross debt is forecast to rise from 84.1 per cent of GDP last year to 110.6 per cent in 2018. No other advanced economy has such a dramatically worsening outlook. And the tragedy of it all is that Spain is actually making relatively good progress in addressing the "primary balance", that's the deficit before debt servicing costs.

I don't advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it's the only rational thing to do.

Inquiring minds with time on their hands may wish to slog through the 93 page IMF World Economic Financial Survey, Fiscal Adjustment in an Uncertain World that Jeremey Warner mentioned in his article.

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

Germany France Feud Erupts Again; German Central Bank Head Blasts France

noreply@blogger.com (Mike Mish Shedlock) — Sat, 11 May 2013 05:29:00 +0000

The simmering stew between Germany and France boiled over again this week as German Central Bank Head Blasts France.

France needs more time to get its budget deficit under control. That much was made clear last Friday when the European Commission announced it was granting Paris until 2015 to bring its budget deficit below the maximum 3 percent of gross domestic product allowed by European Union rules ensuring the stability of the euro.

But on Wednesday evening, Jens Weidmann, the president of Germany's central bank, the Bundesbank, said he is adamantly opposed to the move. "You can't call that savings, as far as I am concerned," he told the daily Westdeutsche Allegemeine Zeitung in an interview. "To win back trust, we can't just establish rules and then promise to fulfil them at some point in the future. They have to be filled with life," Weidmann said.

France had originally hoped to reduce its budget deficit below the 3 percent limit this year, but with its economy suffering, the deficit is likely to be closer to 4 percent and slightly higher in 2014.

Immediately following the announcement from Brussels, French Finance Minister Pierre Moscovici said that Paris planned to scale back its austerity measures. "We don't want excessive consolidation for our country, we don't want austerity beyond what is necessary," he said.

Expect Budget Failure in 2013, in 2014, in 2015

With socialists in complete control of France, especially with Francois Hollande at the helm, do not expect France to meet its deficit targets this year, next year, or in 2015.

Indeed, given that French presidential terms are 5 years in length, it may be quite some time before France shows any economic improvement at all, let alone be able to meet terms of the eurozone treaty.

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

Huge Bubble in India Home Prices Ready to Burst

noreply@blogger.com (Mike Mish Shedlock) — Fri, 10 May 2013 18:50:00 +0000

Here are some interesting charts by Deepak Shenoy on the India Housing Bubble.

India HPI

click on any chart for sharper image

India home prices have been going up at a compound annual growth rate (CAGR) of 26% since March of 2009.

Mumbai and Delhi

Shenoy reports Mumbai is growing at a CAGR of 30%, and Dehli is up 47% from a year ago and 250% since March 2009.

Note the transaction volume in Delhi. Transaction volumes and prices are interesting in Bangalore and Chennai as well.

Bangalore and Chennai

Shenoy has details on five other cities as well. Inquiring minds may wish to take a look.

He writes "While India as a composite country is not at a bubble stage right now, it’s important to note that various bubbles are building up in individual cities. If any of these bubbles worsens, then it is likely that other cities will follow. There are no un-correlated prices in a crisis."

I would suggest that India as a composite certainly is in a housing bubble. The overall HPI shows just that.

India Inflation

India Consumer Price Index data by YCharts

Home prices have increased far more rapidly than reported inflation, which I propose is hugely understated.

Inflation measures typically do not reflect actual property prices and certainly do not reflect other asset bubbles.

For a discussion, please see Hugely Negative Real Interest Rates Fuel Yet Another Housing Bubble; A Word About "Inflation" and Treasury Yields.

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

US Crude Exports to Canada Triple; Brent WTI Crude Spread Lowest in Over Two Years

noreply@blogger.com (Mike Mish Shedlock) — Fri, 10 May 2013 17:07:00 +0000

Brent vs. WTI

Brent Crude Oil Spot Price

Brent WTI Spread

Brent WTI Spread

Note the drop in the spread between the US West Texas Intermediate (WTI) crude future and the Brent future, a benchmark price of European, African and Middle Eastern oil.

The futures diverged sharply in late 2010 and are now converging.

US Crude Exports to Canada Triple

Bloomberg reports Brent Pressured by U.S. Tripling Crude to Canada.

U.S. oil exports are poised to reach the highest level in 28 years as deliveries to Canada more than triple, helping bring down the price of the global benchmark Brent crude relative to U.S. grades.

The shipments will rise to at least 200,000 barrels a day by the end of the year, according to Ed Morse, head of global commodities research at Citigroup Global Markets Inc. Exports were 59,600 in 2012 and haven’t averaged more than 200,000 since 1985. The U.S. restricts companies from sending American crude abroad, with Canada an exception.

The premium for Brent, used to price European and West African crude, over U.S. West Texas Intermediate narrowed to less than $8 a barrel this week from $25.53 in November.

Exports to Canada doubled in February from a year earlier to 124,000 barrels a day, the highest level since 1999, according to U.S. Energy Information Administration data. Canadian refineries might be able to process “a couple hundred thousand barrels a day” from the U.S., Adam Sieminski, the EIA’s administrator, said in an interview in Houston.

Gasoline Prices

The government probably won’t change export rules while parts of the country still pay $4 a gallon for gasoline, said Stacey Hudson, a senior research associate with Raymond James & Associates Inc. in Houston. Shipments to Canada are a way to tap into a foreign market while avoiding that debate.

Does This Debunk Peak Oil?

Inquiring minds may be wondering if this debunks peak oil theory. No it doesn't. Here's a quick three-point explanation.

US energy consumption has fallen yet price is still high.
High prices allows for marginal production.
New techniques allow production in previously unworkable oil fields.

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

Nikkei up another 3% as Yen Breaks .99; Japanese Bonds Halted; Be Careful of What You Ask

noreply@blogger.com (Mike Mish Shedlock) — Fri, 10 May 2013 06:07:00 +0000

The Yen continued its plunge Wednesday evening (Thursday in Japan) dipping below the .99 level after having busted the 1.00 level to the downside for the first time since April 2009.

click on chart for sharper image

In response, the Nikkei rose as much as 3%, now up a "modest" 375 points (2.65%) as of 1:00AM Central.

Zerohedge reports Japanese Government Bonds Halted Limit Down; Yields Spike To 10 Week High; Worst Day In 5 Years.

Prime Minister Shinzo Abe is playing not with matches but with dynamite with his 2% inflation mandate widely known as "Abenomics". So far, Abe's policies are popular (at least from exporters), yet I caution once again "Be Careful of What You Ask, You May Get It".

There is no reason at all to believe Japan can easily contain this mess should inflation get out of hand. A mere rise in interest rates to 3% would consume Japan's entire tax revenue just on interest on its national debt.

This will not end well for Japan.

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