Free Markets, Free People

Greece

Observations: The QandO Podcast for 16 Jan 12

This week, Bruce, Michael, and Dale talk about the Marines incident, re-organizing government, and the coming economic collapse.

The direct link to the podcast can be found here.

Observations

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Will Eurobonds Work?

(Originally posted at Risk and Return)

I have been skeptical and so is James Bianco:

The problem in Europe is simple – they created a common currency – the euro. For years, the market erred. It thought that meant that every sovereign debt had the same rating as Germany. I was buying Greek bonds. I was buying Irish bonds. I was buying Italian bonds. But I thought I was buying German bonds. Then, a couple of years ago, I had an epiphany – no, I was not buying German bonds; I was buying Greece, Italy, and Ireland, or whatever, not Germany.

Those countries, recognizing that they could borrow into infinity because everybody thought they were lending to Germany, pretty much did that and expanded their welfare states to the point where they cannot pay their debts.

Germany has disappointed everybody with its intransigence, its unwillingness to “get with the program,” and endorse massive ECB bond buying and Eurobonds. Their reason? They believe they will be stuck with the bill. Of course, they are right, they will be:

If a Eurobond market comes with with strict discipline/rules on borrowing and paying debt back, it might work.  Unfortunately no one will agree to a Eurobond market with strict discipline/rules.

If a Eurobond market comes with no discipline/rules, then it is just another way to trick the market into thinking they are buying German Bunds.   It will “work” for a while as the crisis will ease until everyone borrows too much money and then comes back much worse.

I am not even sure it will work more than a few days at this point, but maybe. Either way it is not a solution, but a stop gap at best. It is also a stop gap that should not be attempted unless an actual endgame is in sight:

So how do you fix the Euro crisis?  Unfortunately there are only three solutions and all are distasteful:

  • Call off the union and go back to legacy currencies.  This destroys the banking system who will be paid back with devalued/nearly worthless currencies.
  • Massive austerity.  This option is very unpopular among the electorates and will cause a bad recession/depression.
  • Fiscal union.  This is a nice way of saying Germany finally wins WW2.  Is the rest of Europe now ready to take orders from Berlin?  Didn’t they fight two wars to prevent this?

The only reason ECB printing keeps being mentioned is because the three options above are untenable and money printing is the only other thing they can think of.  Money printing does NOT fix anything, it just makes the problem better for a while until it comes back worse than before.

This dovetails with my analysis in The German Dilemma that their are no good options from the German perspective, and in fact fiscal union is far more problematic than commonly realized:

Full Fiscal Integration: Since all other solutions put in place circumstances that are unstable and merely kick the can down the road, the fundamental flaw in the Euro needs to be addressed. That is the lack of a unified fiscal policy. The answer then is the end of sovereignty, the creation of a US of Europe. An obvious objection is that Germany wants to be a sovereign nation. We’ll skip this niggling little detail, but even if they didn’t want to remain sovereign do they want to harmonize laws and economic policy with Greece and some of the other PIIGS? West Germany just  integrated with East Germany and the experience was traumatic featuring massive transfers to East Germans. The PIIGS will still not be competitive with Germany. That means internal adjustments (internal devaluation or austerity) to allow them to become more competitive for the PIIGS’ or massive transfers. Thus unifying the Eurozone under a single fiscal policy means massive transfers from Germany to the PIIGS to harmonize the welfare states and unify the debt and avoid austerity throwing the entire Eurozone into depression. Germans will pay for the debt in one fashion or another.

Cullen Roche points out that in the US we don’t worry much about the need for internal transfers between states to keep the system sound.  Today that is true, though it has led to large conflicts in our past, playing a role in civil unrest, uprisings, the conquest of a continent and near destruction of its former inhabitants and the Civil War. Our unity was easier to envision and still born of blood and tragedy.

I am not saying unification of Europe would lead to such tragedies and conflicts. However, we need to ask if Germany (or really all the countries) want to make the internal transfers that make such a system work? Germans would pay a great deal, Greece and the other PIIGS would suffer internal austerity to the extent that they contribute to the economic re-balancing. Do Europeans, or most importantly the Germans, view themselves as a people who will be responsible for paying all the bills to integrate the Greeks and others?

Are Europeans ready to think about their home countries in the same way Texans think of Texas? Their state, but completely subordinate to the US? Will they be able to secede? We answered that question in the US with a war of incredible savagery and destruction. My guess is a unified Europe would be far less stable. They will not choose a civil war comparable to the US, but instead countries leaving over time as well as never entering the union. That leaves us with all the problems we have now still being there. Without a European populace overwhelmingly in favor of a true union this will not work. We would be faced with a PIIGS like crisis with every election and the possibility of secession in each of the former countries.

The necessity of creating a union where there is no possibility of secession, where citizens are more loyal to the European sovereign entity than their own countries is incredibly unappreciated. Half measures will not work. If Texas were to get upset about staying in our own Union it would not matter how overwhelmingly popular the idea of leaving was in the Texas legislature, the US military will ensure that Texas stays a subordinate state. We decided that issue in 1865 at the cost of well over 600k casualties.

If a similarly firm enforcement of Eurozone union is not agreed to (and setting aside a war to force union) then why should the market assume the system will remain intact? Why consider the bonds issued by the various states, or the Eurozone as a whole, deserve a AAA rating?  My belief is that eventually the Eurozone will suffer other crises as states face local elections that wish to leave for one reason or another. Critically Eurobonds and fiscal Union make it easier for countries to leave, since the debt will be the Eurozone’s, not theirs. They can leave and stick the remaining members with the bill. That is an incentive which virtually ensures instability.

Treaties don’t matter if there is no enforcement mechanism, and all enforcement mechanisms at the end of the day have to have a credible belief in military force behind them to matter. Otherwise those who wish to exit can just thumb their noses at whoever stays behind. Has there ever been a successful union where the underlying members could leave? Not that I am aware of.

There are no good options, only more or less realistic ones.

Observations: The QandO Podcast for 06 Oct 11 (UPDATED)

In this podcast, Bruce Michael, and Dale discuss Herman Cain, the Occupy Movement, and Europe.

UPDATE: Well, no sooner do I post this podcast where I question why the Chinese would be interested in pouring some money into the European Stabilization Fund, the Chinese provide an answer. They wouldn’t.

Also last night, the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, put further distance between China and the eurozone bail-out, saying that Europe’s bloated welfare state meant that people did not work hard enough.

“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies,” Jin Liqun said in an interview with Al Jazeera television. “I think the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of whack.”

Eurozone leaders had been hoping that China would use some of its trade surplus to back the bail-out fund.

Now they need to hope something else.

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.

Beware of Greeks holding referendums

Well it looks like the much touted Euro economic package for Greece may be coming apart more quickly than expected, thanks to the bombshell announcement by Greek PM George Papandreou.  Papandreou has decided, apparently without consulting anyone else, that the package should be put up for a vote.  As the Wall Street Journal points out, a no vote could be disastrous:

A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.

A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown.

Of course the country is already facing a financial meltdown, austerity measures have sparked violent protests for months and the purpose of the package agreed upon by European leaders was designed to help avert a meltdown and save both the Greek economy (as much of it as can be saved), while propping up the Euro.

As you might imagine, the surprise announcement was not favorably met by other European leaders.  In fact, it wasn’t met favorably by a lot of Greek leaders who apparently had no idea that a referendum was in the offing.

Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, refused to rule out a Greek debt default.

"The Greek prime minister has taken this decision without talking it through with his European colleagues," he said in Luxembourg.

Asked whether a Greeks "no" vote would mean bankruptcy for Greece, Juncker responded: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on."

I think most understand that no matter how the “question is formulated”, a vote against the plan would most likely send Greece spiraling down the drain and the fear is it would take the Euro with it

Markets, which had calmed down after the plan was announced, have had the expected reaction to the Papandreou referendum plan. They’ve headed down:

Greek Premier George Papandreou said he will put the nation’s bailout deal through a referendum, potentially undoing a long-awaited agreement struck last week and sending European stocks down 3.3 percent. The region’s bank shares fell 6.4 percent.

"European leaders feel as if they’ve been blindsided by Papandreou," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.

He said the move underscored the current risk in Europe and threw a wrench into the region’s stability plan.

The Dow dropped 2% on the news.

While our attention is on the Palinization of Herman Cain, we need to really keep an eye on this impending crisis.  If Greece has a referendum and the vote is “no”, what Cain did or didn’t do in the 1990s isn’t really going to matter much.  We’ll have another financial tsunami headed our way and we’d better begin to batten down the hatches.

~McQ

Twitter: @McQandO

Observations: The QandO Podcast for 25 Sep 11

In this podcast, Bruce Michael, and Dale discuss the Republican presidential field, and the apparently inevitable Greek default,

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.

The Greek tragedy (or socialism runs out of other people’s money)

And, of course, Greece isn’t the only country going through this at the moment, it is only the worst off of the bunch.   In fact, it is a case study in the end result of socialist programs (although you’d think, given its fairly recent collapse, that much could have been learned from the Soviet Union).   Greece has, for decades, piled up more and more debt than the other European socialist countries and, with the global economic downturn, was the first of the Euro zone to hit the shoals of bankruptcy – although Europe is doing everything it can to forestall that.

The problem is that socialism and its benefits (whether they’re affordable or not) are like being hooked on heroin.  Even if you know you have too, you just can’t seem to get off the stuff.   Addicts deny reality, fight the cure because it is horribly painful and thus somehow come to believe they can continue to survive on the drug as they have before.   And it slowly and inexorably kills them.

Greece, if it isn’t able to kick the habit, is on its economic death bed.  Europe understands this and also sees the possibility that Greece’s inability to break this habit, i.e. pass and impose austerity measure – draconian austerity measures – might also mean the death of Europe’s currency, the Euro and conceivably the break up of the European union.

That’s how serious it is.

But the addict continues to fight the cure.  Led by the two major unions, Greece has been shut down for 2 days as protesters vent their spleen about the unacceptability of these austerity measures.   The irony, of course, is the measures are being imposed by a socialist government which has been given no choice but to impose such measures.

However, that government is seen as week and socialist members who supported the measures at first are now opposing them.

But the austerity program has met with resistance from within the ranks of Mr. Papandreou’s own party, especially over the privatization of state companies whose workers have traditionally been at the heart of the Socialists’ constituency.

As many as four Socialists in Parliament have said they will consider opposing the measures, including one who opposes the planned privatization of the water utility of Thessaloniki, in her district.

Another Socialist, Alexandros Athanasiadis, said he would vote against the plan to reduce the state’s stake in the Public Power Company to 34 percent from 51 percent. Some of the company’s coal-burning plants are in his district in northeastern Greece.

Naturally the socialists oppose privatization because, you know, the government has done such a bang up job to this point of running businesses it has no business being involved in.  Why?  Because the government, and therefore the parliamentary members, control the jobs, pay and pensions.   More heroin.  As government gets more involved in areas it has no business and it (those who run it) begin to understand the power such intrusion brings them, they’re loathe to give it up, even when they’re doing a horrible, inefficient and costly job that could be better and more cheaply done by private industry.

The symbiotic relationship between the unions and the MPs is mutually beneficial and ensures an incumbent who properly plays the game (support union demands) remains in power (see public sector unions and Democrats here).  That, of course, has led to unaffordable pensions, wages which aren’t competitive and a public stuck with the ever increasing bill.

Well, the bill has come due.

On Monday, Mr. Venizelos, a Socialist veteran known for his ability to rally his troops, told lawmakers that the measures might be “tough and even unfair” but that they were unavoidable. “We have to finally come to our senses and get serious,” he said.

With 2 days of protests, one has to wonder whether indeed the Greeks are going to actually come to their senses and get serious”, because if they don’t the repercussions could be devastating.

And knowing all of that, and looking at our debt problems, one also has to wonder why we seem bent on creating an addiction of our own, given the real world examples of where that must eventually lead.

It makes absolutely no sense, does it?

~McQ

Twitter: @McQandO

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US in worse shape than Greece

I’m not sure how many times we or our politicians have to hear this, but to this point, it hasn’t made the impression it should:

Much of the public focus is on the nation’s public debt, which is $14.3 trillion. But that doesn’t include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won’t find a solution overnight.

Bill Gross runs Pimco, a based in Newport Beach, Calif., manages more than $1.2 trillion in assets and runs the largest bond fund in the world.  Gross went on to say:

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That’s much more than Greece, that’s much more than almost any other developed country. We’ve got a problem and we have to get after it quickly."

[…]

"We’ve always wondered who will buy Treasuries" after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. "It’s certainly not Pimco and it’s probably not the bond funds of the world."

Now whether you realize it or not, that’s a good share of the bond market saying, "yeah, you know, not interested". That’s scary. And with China recently unloading some of its US debt notes, it’s not a happy picture for the US, fiscally. As Gross points out, in overall financial condition, we’re worse off than the basket case of Europe – Greece.

We have been getting these warning for literally decades.  We’ve done absolutely nothing substantial to mitigate them.  In fact, we added more to the pile (Medicare D and ObamaCare).   We’re going to crash.   It is time for a huge reality check, gut check or whatever you want to call it.  But like the shopping addicted, we have got to cut up the credit cards, cut spending to the bone, get government out of areas it has no business and take as much power of the purse away from the Fed as we can.  

This is beyond absurd.  And the time to address it is now (if it’s not already too late).

~McQ

Twitter: @McQandO

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You can pay me now or you can pay me later …

This speech by Dave Cote, CEO of Honeywell (to the Chamber of Commerce) was forwarded to me by a friend.  It is one of the best summaries of our fiscal/financial problems I’ve seen in a while.  Usually, when I see a 34 minute video I’m loath to give the time necessary to watch it, but this one is both fascinating and deeply disturbing. Take the time.

Cote lays out in words and charts our coming fiscal train wreck if we don’t do something “proactively”.  As he says in the speech, we can do what is necessary to solve the problem or at some point, the bond market (as it did in the case of Greece) will do it for us.  One will be painful, the other is catastrophic. 

You can read the speech here if you prefer.   And if you’d like a copy of the charts and visuals, they’re here.

Dale’s post below about “Following the House of Bourbon” is essentially given facts and figures by this presentation.  For instance, the discussion about China’s defense expenditures being paid for by our interest payments.  Cotes points out that if spending remains unchanged through 2020, we’ll be paying almost a trillion dollars in interest a year.   At this point, foreign governments own 45% of our 9 trillion in debt.  China owns at least a trillion of it.  And there’s no end in sight of the sale of government debt here.

The last point Cote makes that echoes Dales warning is about how quickly this will happen if we don’t do something.

While the problem builds slowly and inexorably, financial markets respond abruptly. When that decline does happen, it won’t be a case of minor monthly changes that give us 15 months to adjust. The hurt will come overnight as the herd moves against us. And then it’s too late.

That could happen at any time without warning triggered, as Dale points out, by some seemingly insignificant occurrence that normally would receive only passing attention. I don’t think, for the most part, people understand that very important point or they’d be beating down the doors of Congress. 

Cotes also addresses “political will”  and whether we have the will to do what is necessary (and endure the political consequences) to get this nation’s fiscal policy on the road to sanity.  He notes that the public is more engaged now that in quite some time (and that’s a good thing) but are really focused on the wrong things (although they do recognize the gravity of the situation, he thinks they’re focused on fairly irrelevant portions of it).

The distilled point of course is politicians only have the spine the public gives them and unless they’re assured the public is behind doing what has to be done to solve the crisis, their risk-averse nature will have them continue to kick the can down the road. 

Anyway, highly recommended.  It will give you a great idea of what our situation is, where we’re headed and what the results of continuing to ignore it promise.

~McQ

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Observations: The Qando Podcast for 16 May 10

In this podcast, Bruce, Michael, and Dale discuss DADT, The Euro, and the spiraling cost of ObamaCare…even before we’ve gotten any of it.

The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

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 2009, they can be accessed through the RSS Archive Feed.

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Observations: The Qando Podcast for 09 May 10

In this podcast, Bruce, Michael, and Dale discuss unemployment, Greece, and the BP offshore drilling leak.

The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

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 2009, they can be accessed through the RSS Archive Feed.

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