Free Markets, Free People

Greece


“Because it is all about me!” Obama asks Euro leaders to keep Greece in Eurozone till after the election

No I’m not kidding.  Talk about political gall.

There’s a meeting taking place in Europe:

Representatives from the International Monetary Fund, the European Central Bank and the European Commission are due to arrive in Athens next month to assess Greece’s reform efforts.

They are expected to report in time for an 8 October meeting of eurozone finance ministers which will decide on whether to disburse Greece’s next €31bn aid tranche, promised under the terms of the bailout for the country.

American officials are understood to be worried that if they decide Greece has not done enough to meet its deficit targets and withhold the money, it would automatically trigger Greece’s exit from the eurozone weeks before the Presidential election on 6 November.

Oh my … election.  Hey Europe, this is about me!  Suck it up and hold off doing anything until after I win!

American officials are understood to be worried that if they decide Greece has not done enough to meet its deficit targets and withhold the money, it would automatically trigger Greece’s exit from the eurozone weeks before the Presidential election on 6 November.

They are urging eurozone Governments to hold off from taking any drastic action before then – fearing that the resulting market destabilisation could damage President Obama’s re-election prospects. European leaders are thought to be sympathetic to the lobbying fearing that, under pressure from his party lin Congress, Mitt Romney would be a more isolationist president than Mr Obama.

Amazing.  Disturbing.  But not surprising.

~McQ

Twitter: @McQandO

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Observations: The QandO Podcast for 17 Jun 12

This week, Bruce, Michael and Dale talk about Niel Munro interrupting the president, and the Greek elections.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


Around the economic world in a few minutes

A post to update you on what is happening, economically around the world.

In Asia, some not so good signs.  In China, housing prices fell in 100 Chinese cities for the 5th straight month.  Chinese manufacturing has also cooled significantly:

Manufacturing activity in China and across a wide swath of Asia slowed in May, heightening fears that the turmoil in Western economies is dragging down one of the few remaining engines of global growth.

Two purchasing managers indexes for China fell in May, briefly rattling investors Friday and stoking speculation Beijing may have to respond aggressively to support growth. Indonesia posted its first trade deficit in nearly two years, and South Korea’s exports, considered a bellwether for Asia, unexpectedly fell for a third straight month.

"The green shoots of recovery that we were seeing a month or so back are wilting away," said Rob Subbaraman, chief Asia economist at Nomura Securities. "The crisis in Europe is one reason; the other one is the China slowdown. But I think less appreciated is that the height of uncertainty about the outlook has caused Asian firms and multinationals in Asia to pause in their investments, and I think that’s the bigger factor right now."

China’s official PMI, based on government data, showed manufacturing continuing to grow but by the barest of margins, falling to 50.4 in May from 53.3 in April. A figure above 50 indicates expansion. An index produced by HSBC and Markit showed Chinese manufacturing was worse, falling to 48.4 in May from 49.3 a month earlier.

"We feel that in China a very powerful stimulus"—combining fiscal outlays and cuts to banks’ reserve requirement ratio—"is required to arrest the slowdown in growth," said Frederic Neumann, co-head of Asian economic research for HSBC. "These numbers today suggest this is coming sooner rather than later. If that stimulus is not delivered, then China is indeed looking at a hard landing."

Both the US’s non-recovery recovery and the Eurozone crisis are being blamed for this slowdown.

The economies of Asia, both the emerging markets and the more developed countries, are being hit by a double whammy of slowing domestic growth and the impact of the European debt crisis on Asian exports and finance.

Signs of distress are proliferating.

In India, the government reported Thursday growth in the first three months of the year at the slowest pace in the past nine years—up 5.3% from the year-earlier quarter, well below the 8% pace of recent years. "A gasping elephant," said Leif Lybecker Eskesen, HSBC’s chief India economist, in a note to investors.

In China Friday, an official gauge of manufacturing activity fell to a lower than expected level, which is likely to add to market concerns about China’s slowdown. China’s official Purchasing Managers Index fell to 50.4 in May, compared with 53.3 in April and lower than the median forecast of 51.5. A reading below 50 indicates contraction. The Ministry of Commerce, meanwhile, is blaming "worse-than-expected" economic performance in Europe for disappointing export data.

Early Friday, South Korea said its exports unexpectedly contracted for a third consecutive month in May compared with a year earlier. South Korea is the first country in Asia to release trade data for the month and is often a harbinger of regional trends.

Meanwhile in Europe, the UK’s manufacturing is reported as slumping with activity dropping to its lowest level in three years.  The Eurozone jobless rate stands at 11%.  Additionally the Eurozone crisis is now beginning to effect countries with close proximity and ties which are not a part of the Euro:

The euro zone’s deepening fiscal crisis continued to take its toll on some of the neighboring economies of central and eastern Europe in May, as surveys released Friday indicated manufacturing activity contracted again in May.

The countries in Europe’s center and east have close trade and financial ties with the euro zone, and some have seen demand for their exports weaken as the currency area’s economy has stalled, while western Europe banks have cut their lending to the region.

A double whammy.  And, finally, within the Eurozone itself, companies are trying to prepare for the Greek withdrawal from the zone (and possibly Spain’s as well):

As European officials race to quell fears that Greece may exit the euro, many companies doing business in the troubled country are preparing for the worst.

Most executives, analysts and others agree on one thing: the impact of a Greek withdrawal from the euro zone is impossible to predict. That’s why multinational companies are rehearsing for any number of contingencies. They range from a paralysis in cross-border payments to a civil breakdown in Greece to a broader breakup of Europe’s common currency.

Retrieving their cash is among the companies’ gravest concerns. If Greece were to revert to its former currency, many companies fear that any euros left there would be converted into less-valuable drachmas. Should that happen, Greece is widely expected to impose capital controls to keep the remaining cash in the country.

Can you say “completely mess?”

Meanwhile, here, the business climate remains unsettled, hiring still isn’t showing any real turnaround and the economy continues to bang along the bottom (one assumes, it could drop again if the Euro crisis explodes) with no real trend upward.

~McQ

Twitter: @McQandO


Denial is not just a river in Egypt

Dale’s post, “Fantasy v. Reality” is spot on.  And there are plenty of examples of his point to be found.  One of the characteristics of those who live in the fantasy side of things is their continued denial of the real cause of Greece’s problems specifically and Europe’s problem generally.

They, like certain politicians on this side of the pond, want to lay it off on others – the implication being that if that situation is changed, the problems that Greece and other countries are encountering will resolve themselves.

Here’s an example:

And then what? And then the strategy would appear to be to cauterise the amputation; to circle the wagons; to issue the most ringing and convincing proclamation to the markets that no more depredations will be tolerated; and to get the Germans to stump up, big time, to protect Spain and Portugal. We are told that the only solution now is a Fiscal Union (or FU). We must have “more Europe”, say our leaders, not less Europe – even though more Europe means more suffering, and a refusal to recognise what has gone wrong in Greece.

The euro has turned out to be a doomsday machine, a destroyer of jobs, a killer of growth, because it entrenches and exacerbates the fundamental and historic inability of some countries to compete with Germany in making high-quality goods with low-unit labour costs. Unable to devalue their way back into the game, these countries are forced to watch industry wilt under German imports, as the euro serves as a giant trebuchet to fire swish German saloon cars and machine tools across the rest of Europe.

Germany is almost alone in recording economic growth in the first part of 2012; Germany is doing well from the euro; and so the theory is that Germany should pay to keep the whole racket going by bailing out the improvident and the uncompetitive, just as London and the South East subsidise the rest of the UK.

Alas, it is not a strategy that is likely to work. As Angela Merkel has made clear, there is little political support – let alone popular support – in Germany. EU leaders may want a fiscal union, but it is deeply anti-democratic. We accept large fiscal transfers in this country because Britain has a single language and a single political consciousness in a way that Europe never will. Rather than creating an “economic government of Europe”, the project will lead to endless bitterness between the resentful donors and the humiliated recipients, as these diminished satrapies will be instructed to accept cuts and “reforms” – designed in Berlin and announced in Brussels – as the price of their dosh.

Or, “it’s all Germany’s fault”.

Germany implemented Greece’s labor laws, work week, retirement age, public pensions and government subsidies.  You didn’t know that?  It’s Germany’s fault that it has all caught up with Greece in a down global market.  If Germany wasn’t so damn good, Greece would be in such damn bad shape.

Really.  That’s what this guy is pushing.  I mean, my goodness, imagine – “high-quality goods with low-unit labor costs”.  How dare they?  How can one pump up a welfare state and keep it going with competition like that?  It is Germany’s job to enable Greece’s work 38 hour week. Germany’s job to ensure their generous pension plans, early retirement, subsidies and welfare payments.

How dare they do otherwise.  They owe Europe.  They owe the rest of Europe the lifestyle they desire but can’t afford.

What is wrong with that country?

~McQ

Twitter: @McQandO


Fantasy vs. Reality

Greece’s long vacation from reality is very nearly over. Not that you’d believe it from listening to the country’s politicians. In the aftermath of Greece’s last elections, voters rejected further austerity, and instead sought refuge in fantasy. That fantasy is perhaps best exemplified by Alexis Tsipras, who emerged from the election with the power to block approval of any further austerity by blocking the formation of a government.

Indeed, I now have some doubt as to whether Mr. Tsipras is actually sane:

Leftist Alexis Tsipras, 37, emerged with the power to block them. Greece, he said, could ditch its spending cuts and renounce its debts to EU partners, yet enlist their help in keeping the euro currency some 80 percent of Greeks cherish.

Not. Gonna. Happen.

And everybody with a lick of sense knows it’s not gonna happen. Not in Greece. Nor, apparently, anywhere else on the Euro Zone’s periphery, as money is fleeing it with alacrity.

Foreign bank deposits have fallen 64% in Greece, 55% in Ireland and 37% in Portugal; in Italy, the fall is 34% and Spain 13%. Foreign government bond holdings have dropped 56% in Greece, 18% in Ireland and 25% in Portugal; in Italy the fall is 12% and Spain 18%. So if Italy and Spain were to move to the average for the other three, a further 200 billion euros would flow out.

The Greeks are not being punished by rich Germans. They aren’t the victims of speculators or criminals. They are merely being forced to pay the price that reality is about to impose for decades of enthusiastic socialism, and the attendant corruption, debt, and malfeasance it has encouraged. Their problem isn’t "austerity"; it’s the unsustainable political and economic fantasies that have sustained the county’s political culture.

Greece is a failed state.  Spain is about to become a failed state. No doubt a list of "enemies" will be promulgated to try and paper over whose fault all this actually is. The sacrifice of scapegoats in times of crisis is, after all, a venerated European tradition.

But, that won’t help, or stop what is coming. Reality is relentless. And the really scary thing about that is that there are lessons in all this for us, which I am not entirely sure our own political class will heed—or is even capable of recognizing.

~
Dale Franks
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Observations: The QandO Podcast for 20 May 12

This week, Bruce, Michael and Dale talk about Greece, and the folly of governments.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


Things that should be obvious

Reality is a great test of belief. Sometimes, the things you believe are confirmed by experience. Sometimes they aren’t. And sometimes, reality is so at odds with what people believe, they have to be complete dolts to keep believing it. But, I constantly see people who believe things that simply can’t be true, and it bothers me.

Ultimately, reality tells you whether what you believe is true or not. And if reality conflicts with what you believe, it isn’t reality that’s got it wrong.

The Stimulus Cheerleaders

Basically, it’s the unreconstructed Keynesian crowd. Popularly led by Paul Krugman—who is a Nobel Laureate economist—they continue to argue that the problem with the economy is that the government simply didn’t spend enough to properly stimulate the economy.

There’s so much wrong with that, it’s hard to know where to start.

First, let’s accept that in a range of circumstances, it actually is true that the government can stimulate the economy via deficit spending. As long as there’s not too much debt in the economy as a whole, you can prime the economic pump through deficit spending, especially if you have a fiat currency. We’ve done it lots of times since WWII.

So, up to a point, even if you have a credit bubble that collapses, you can re-inflate it by essentially transferring that debt to the Government via deficit spending.

Up to a point.

As I’ve mentioned previously, the newest ECB research indicates that, in developed economies, once you reach a government debt load of about 100% GDP, it begins to drag on the economy, reducing economic growth by about 1% annually. So, what should be 3% annual GDP growth becomes 2%. And as the debt gets bigger, the drag gets bigger, faster.

Now, ever since Reagan and Congress began serious, constant deficit spending in the 80s, there have been worries that the government debt would begin to crown out private markets, and slow the economy. But it never happened.

Well, until now, as we crossed that 1:1 GDP to debt ratio.

Moreover, the idea that we haven’t spent enough to stimulate the economy is simply farcical. In 2008, the total national debt was less than $10 trillion. Now it’s over $16 trillion. So no matter whether or not we spent X amount of money marked "stimulus", we’ve spent so much money that we’ve added more than $6 Trillion in debt in just 4 years. That’s a lot of stimulus.

Arguing that we needed to spend more is…counterintuitive. If $6+ trillion won’t do it, then it probably can’t be done.

Besides, we already learned there was a fundamental problem with Keynesian economics when we had stagflation in the ’70s, which was supposedly impossible.

The Greeks

Here’s the thing about looting the system. Once you’ve looted it…it’s been looted. The Greeks seem utterly incapable of understanding that the system can’t continue to dole out benefits once you’ve looted it. It’s not the Germans that are making life difficult for the Greeks, by refusing to give them more money. It’s the Greeks that have made life difficult for themselves by spending themselves into a 1.28:1 Debt to GDP ratio.

Austerity, of course, isn’t pleasant—at least not the way they’ve implemented it. What they needed was public sector austerity, i.e., spending cuts, not private sector austerity, i.e., tax increases. Instead, they got both. What they needed were massive spending cuts, and debt repayment.

But, of course, in a country where practically every cop, teacher, and fireman is a unionized employee of the state, and half of the private citizens get some sort of cushy government benefit payment, much public sector austerity was a political non-starter. So they gave themselves a little public austerity and a lot of private austerity…and the economy collapsed. I mean, no matter what they did, they were in for a tough time, but they chose the most destructive path possible, then blamed it on the Germans.

The thing is, the Germans are historically…impatient with foreigners that they find troublesome. But the Greeks have decided that, having looted their economy completely, it’s the Germans’ fault somehow. The Greek position is, "We want to stay in the euro without worrying about our deficits, borrow money from Germany, never pay it back, and tell anyone who questions this to go screw."

The Germans, as are their wont, are unamused.

Californians

The list of odd things Californians believe that are directly contradicted by observable reality is, of course, far to long to be described here. A representative sample, however, includes:

  • Maintaining a permanent class of illegal immigrants in modern-day helotage will not reduce employment among the minority citizenry. Giving them full access to state benefits and education will not strain the schools, medical system, or state budget.
  • California must have the strictest environmental, tax, and employment regulation possible. This will not result slower economic growth, or a business exodus to another state. Similarly, stringent environmental regulation for the benefit of small fish or birds, and significantly reducing the water available for irrigation, will have no effect on farming in the central valley, and, hence, agricultural prices paid by consumers.
  • It is completely possible to allow state employees to retire as young as 50, with an annual pension payment 85% of their highest salary, and fully meet our pension obligations, because the Dow will be at 24,000 by 2009, and 24,000,000 by 2099, thus making the latest round of pension increases perfectly sustainable through investment.
  • If we’re taxing California workers 10% of their income, and we have a $16 billion budget deficit, the problem is that we obviously aren’t taxing enough. We should, therefore, tax higher income earners much more, because they can never leave California and move to Arizona. Or Texas.

California is just Greece with movie stars.

Conclusion

I could go on and on, but, you probably get the point.

The problem with reality is that it doesn’t care what you believe. It just is. The longer you ignore it, the more forceful it is when it re-asserts itself. But if I could point to one thing as the worst modern problem we have today, it would be an absolute refusal to acknowledge reality, accompanied by a steadfast refusal to recognize any of the warning signals it obligingly gives before its assertion becomes horrific, rather than merely unpleasant.

If you make the decision to ride this thing down in flames, reality will be perfectly happy to let you do it.

~
Dale Franks
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Observations: The QandO Podcast for 19 Feb 12

This week, Michael, and Dale talk about the controversy over the HHS contraception mandate.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


Greece goes cold turkey

And no, that’s not a joke about Turkey.  What you’re seeing in Greece is what you see in any drug rehab program … the results of withdrawal.  In this case, the addiction isn’t to heroin or cocaine, but other people’s money.  And Greece passed the tipping point of dependency years ago, decades ago.

But the money has finally run out and the addict doesn’t have the necessary money for the next fix.

Result?  Violence, denial and the refusal to accept the treatment.

More than 40 buildings were set ablaze in an orgy of looting that left scores injured as protesters vented their anger at the caretaker government and parliament’s ordering of a further €3.3bn of savings by slashing wages and pensions and laying off public sector workers.

[…]

But the scenes of mayhem on the streets of Athens and all across the country leave big questions unresolved regarding Greece’s capacity to stick with the savage austerity. The country is in its fifth year of recession and has little prospect of halting a steep decline in living standards.

[…]

Meanwhile street battles between police firing rounds of teargas and demonstrators hurling firebombs and marble slabs left Syntagma square, the plaza in front of the parliament building, resembling a war zone.

Rubbish bins burned and plumes of smoke and asphyxiating clouds of toxic chemicals filled the air.

The explosions were so loud, they could be heard inside parliament and the teargas drifting across square reached the debating chamber. The buildings that were set on fire included cinemas, banks and a number of shops, and Greek television reported that dozens of citizens and at least 40 police officers had been injured.

Why?  Because the caretaker parliament has, of necessity, tried to do what is necessary to return the country of Greece to fiscal sanity.  And that entails drastically reducing or eliminating decades of entitlements that the government granted but which was obvious the country couldn’t afford.   Among them:

Parliament backed drastic cuts in wages, pensions and jobs on Sunday as the price of a 130-billion-euro ($172 billion) bailout by the European Union and International Monetary Fund …

That included a roll back of Greece’s minimum wage.   This doesn’t settle anything though.  Although the vote was important, EU leaders are still not convinced that implementation will ever happen:

The EU welcomed the vote, but told Greece it had more to do to secure the funds and avoid a disorderly default next month that would have "devastating consequences."

Euro zone finance ministers meet on Wednesday, and the fragile ruling coalition of Prime Minister Lucas Papademos has until then to say how 325 million euros of the 3.3 billion euros in budget savings will be achieved.

A government spokesman said political leaders also had until Wednesday to give a written commitment that they will implement the terms of the deal, reflecting fatigue in Brussels over what EU leaders say have been a string of broken promises.

So this has turned into a series of attempts and votes and “guarantees” and failures leading to this latest attempt to keep Greece afloat – something the rest of Europe, according to reports, deems as critical.

There’s also a vote in April, a month after the demand that the deal agreed upon is scheduled to be implemented.  Many observers believe the vote will be driven to the extreme left or right by these events.  That, of course, would set up political polarization which will be difficult, if not impossible, to overcome.  A preview of that problem was seen after this vote:

The leaders of two of the three major political parties in Prime Minister Lucas Papademos’s interim coalition government — the Socialists and the center-right New Democracy party — agreed on the new round of austerity after days of tense debate, maneuvering and threats. The leader of the third, the right-wing Popular Orthodox Rally, refused to endorse the measures and later withdrew from the coalition.

In the debate on Sunday night before the vote, Mr. Papademos appealed to lawmakers to do their “patriotic duty” and pass the measures, saying they would be saving Greece from bankruptcy in March, when a bond issue comes due that Greece cannot repay without foreign help.

In a sign of how the crisis has frayed the political order in Greece, the three leading political parties all moved swiftly to expel lawmakers who had broken ranks with leaders in the voting.

Although we’re likely to deny any applicability of the crisis there to our circumstances, our country is headed in the same direction, albeit later and more slowly.  But the end-state will be the same.  The difference is just a matter of degree, not design.  Greece is simply the first of many countries who’ve tried to redistribute income to support a socialist inspired lifestyle from a diminishing pool of workers. 

It is our future, if we don’t change our ways … drastically.

~McQ

Twitter: @McQandO


Observations: The QandO Podcast for 29 Jan 12

This week, Bruce, Michael, and Dale talk about the SOTU speech, Republican race, and slow collapse of the EU.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.