EUCOM Economic Analysis - Part I

[Surferbeetle]

Originally Posted by Firn

@Surferbeetle: Just a war of words, but rather heavy ones. It won't get biblical but this crisis will leave its traces in the European mind. Insults and pain tend to do.

Along those lines, some of my reporting on this topic has been, in hindsight, a bit clumsy and light-hearted in some places.

European Banks Unprepared For Greek Exit From Euro, By Elena Logutenkova, Liam Vaughan and Gavin Finch - May 23, 2012 6:50 AM MT, Bloomberg News

Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro.
While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.

The immediate risk for Europe’s banks, and for the euro region, would be a deposit flight from indebted nations such as Portugal, Ireland, Spain and Italy on speculation those countries also might quit the currency. Lenders in Germany, France and the U.K. had $1.19 trillion of claims on those four nations at the end of 2011, Bank for International Settlements data show.

Should Greece go, its new currency probably would suffer an immediate devaluation of as much as 75 percent against the euro, forcing individuals and companies to default on foreign loans, economists at UBS AG (UBSN) said. Unless European leaders could make a credible case that a Greek exit was an exceptional and isolated incident, depositors in other nations might decide to withdraw euros from banks or shift them to countries seen as safer.

The ECB’s unprecedented provision of 1.02 trillion euros in three-year cash in December and February helped calm financial markets in the first quarter by removing concern that banks unwilling to lend to one another would run out of cash. Lenders in Spain and Italy also used the funds to buy sovereign debt, reducing government borrowing costs.

Euro Decline

The rebound was short-lived as doubts about the health of Spain’s banks and questions over Greece’s future returned. On May 9, the Euro Stoxx Banks (SX7E) index dropped beneath the lows of March 2009. The 30-company index of euro-region banking stocks fell 2.4 percent by 2:45 p.m. Frankfurt time today. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers reached 308.398 on May 18, the highest since Dec. 19, two days before the ECB’s first offering of long-term funds. The euro fell today to a 21-month low against the dollar.

Lenders probably would need another 800 billion-euro liquidity lifeline from the ECB to help stem contagion from a Greek exit, Citigroup analysts estimated in a May 17 note.

ECB President Mario Draghi said last week that Greece could leave the euro area and signaled policy makers won’t compromise on their key principles to prevent an exit.

Griechenland: Das grosse Pokern um den Euro, Von: Armin Müller, EUROPA 23.05.2012 | 11:54, Handelszeitung

Alexis Tsipras fordert die Deutschen auf, ihre Sommerferien in Griechenland zu verbringen. Der Chef der linksradikalen griechischen Syriza-Partei will nach seinem voraussichtlichen Wahlsieg am 17. Juni die Auflagen des Rettungspakets nicht akzeptieren. Er setzt darauf, dass Griechenland bei einem Austritt weniger zu verlieren hat als die Euro-Zone.

Die deutsche Bundeskanzlerin Angela Merkel warnt davor, dass sich die Griechen mit der Wahl Syrizas aus dem Euro-Land verabschieden.

Beide Seiten pokern hoch. Drei Viertel der Griechen lehnen einen Austritt aus der Währungsunion ab. Das Land steckt in einer Depression. Griechenland ist auf den steten Kapitalfluss aus der Euro-Zone angewiesen. Wird er gekappt, versinkt das Land im Chaos.

Viele verweisen auf das Beispiel Argentiniens, das 2001/2002 die Bindung des Peso an den Dollar auflöste und den Staatsbankrott erklärte. Dank einer massiven Abwertung zog das Wachstum schon kurze Zeit später stark an. Abwertungen brachten in der Vergangenheit auch Russland, Südkorea oder Island wieder auf Wachstumskurs.

Doch der Fall Griechenland ist ungleich schwieriger. Das Land kann nicht einfach abwerten, sondern muss eine neue Währung einführen, während der Euro weiter existiert. Mit der Abwertung entwerten sich auch die Ersparnisse und die Kaufkraft. Im Irak brauchten die Amerikaner drei Monate, um eine neue Währung einzuführen. In dieser Zeit dürfte sämtliches bewegliches Kapital längst aus Griechenland geflüchtet sein.

Ein Austritt aus dem Euro hätte kurzfristig drastischere Auswirkungen auf die Wirtschaft und das Leben der Griechen als die Sparpolitik, gegen die sie sich jetzt wehren. Tsipras’ Drohung ist nicht glaubwürdig.

In der Euro-Zone wächst das Lager jener, die einen Austritt für verkraftbar halten. Nach dem Motto «Lieber ein Ende mit Schrecken als ein Schrecken ohne Ende» berechnen sie, was das kosten würde. Allein die EZB müsste rund 250 Milliarden Euro abschreiben.

[Watcher In The Middle]

The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”

For Greece, in its fifth year of recession, it may be more effective to offer extra money to help its battered economy recover.

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.

“The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”

Greek EURO Exit Cost Over 1 Trillion Euros

And WHEN (not IF) Greece leaves the EU and moves to an alternate currency, exactly HOW are The Powers That Be (TPTB) going to recapitalize the ECB (European Central Bank)? Inquiring minds want to know.

What these clowns don't understand is that if Greece leaving the euro brings the ECB to it's knees, than literally anybody and everybody else will also have the same, if not far greater impact (Portugal, certainly Spain and/or Italy).

They basically just admitted it's "Game Over".

[Fuchs]

I stopped reading when I read "recapitalizing its central bank".
That's the most stupid and ignorant thought I've ever read about.

I'm capable of reading English, so I've seen quite a bit.

[Surferbeetle]

Given Mr Dallara's position, experience, access to information, and credentials it might be worth our time to revisit the received wisdom that 'a central bank can print to it's heart's content' and does not need to worry about the quantity and quality of it's assets.

The real world is not simple, constraints (consequences) exist, and central banks are not perpetual motion machines. Serious inflation and hyperinflation has visited central banks in Israel, Zimbabwe, and Germany (among others) which thought excessive printing was the answer. Devaluation and flight to quality accompanies excessive printing by central banks. Open market operations are the mechanism by which central banks use assets such as special drawing rights, government bonds, foreign currency, and gold to increase or decrease the amount of base money in the system. The quality and quantity of central bank assets in Europe are a concern in many quarters, keeping in mind that while the European Central Bank is in charge of Euro policy, nations participating within the 17 member Eurozone each have their own central bank. The ECB has mechanisms to encourage, regulate, and protect itself from the Eurozone financal system.

As unemployment spreads across Southern Europe we see the amount of private savings deposits decrease and the number of non-performing private and corporate loans increase, which leads to bank failures at a certain point. Banks are then nationalized, broken up, and sold to save the system since many are TBTF and associated losses are socialized via higher taxes. Tax revenue, however, is also adversely affected by unemployment. State cost and revenue structures become dangerously unbalanced and nations, like Greece, default on their obligations and harm their societies. Since South and North are interconnected via economics (even if the EU and Eurozone dissolve), contagion spreads.

IMO this financial crisis writ large is a turning point for Europe. Very broad brush, the continuum as i see it, ranges from Peace to War via the political continuum of Federalism to Fragmentary Nationalism. The failure of the Holy Roman Empire and the resultant history may be worth consideration...although it is noteworthy that military expenditures within Europe are very low while educational standards are very high this time around.

We will probably see a bit more movement after the upcoming Greek elections and after the next meeting (at least 18 so far according to some reports) of senior Eurozone members on this crisis...if the bank runs don't overtake the political process.

Bottom line, craven politicians eventually have to make hard choices because central banks are not magical institutions that can fix all societal ills by endless printing.

• Israeli Inflation from an International Perspective, by Stanley Fischer and David Orsmond, IMF Working Paper WP/00/178, http://www.imf.org/external/pubs/ft/wp/2000/wp00178.pdf
  
• Hyperinflation, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Hyperinflation
  
• Devaluation, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Devaluation
  
• Flucht in den Franken: Die Angst vor der grossen Welle, Von: Armin MllerFoto: Peter Frommenwiler, HANDELSZEITUNG 1220, 20.05.2012 | 09:25, http://www.handelszeitung.ch/invest/...-grossen-welle
  
• Open market operation, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Open_market_operation
  
• Monetary base, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Monetary_base
  
• Special drawing rights, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Special_drawing_rights
  
• Finanzkrise, Wo ist unser Gold?, Mittwoch, 08.10.2008, 10:57 · von FOCUS-Redakteur Uli Dönch http://www.focus.de/finanzen/doenchk...id_338834.html
  
• European Central Bank, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/European_Central_Bank
  
• Eurozone, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Eurozone
  
• Frozen Europe Means ECB Must Resort To ELA For Banks
  By Dara Doyle and Jeff Black - May 25, 2012 4:01 AM MT, Bloomberg News, http://www.bloomberg.com/news/2012-0...ights-dim.html
  
• Unsecured Creditors Face Losses In EU’s Plan For Failing Banks
  By Jim Brunsden and Ben Moshinsky - May 26, 2012 3:43 AM MT, Bloomberg News, http://www.bloomberg.com/news/2012-0...-banks-1-.html
  
• Bankia Seeks 19 Billion Euros From Spain For Cleanup
  By Charles Penty and Emma Ross-Thomas - May 26, 2012 7:05 AM MT, Bloomberg News, http://www.bloomberg.com/news/2012-0...structure.html
  
• Holy Roman Empire, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Holy_Roman_Empire
  
• Greek legislative election, June 2012, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Greek_l...ion,_June_2012

[Firn]

I think it is worth to point out that much of the economic discussion comes with an US point of view, rather similar to recent military matters. In both cases great resources and stable&strong institutions in law, economy and politics are almost taken as given. Add to that the dominance of the dollar in the world economy and you have a rather unique case. In short some central banks have more freedom of action then others. (A old wise local proverb concerning wealth and card games says that it is easy to stink with the trousers full of ****)

I mostly agree with what you wrote, but I really think we have still room for aggressive actions by the ECB. The recent bank troubles in Spain are terrible news. Three years into the crisis we still have much overrated assets on the balance sheets and with the economy in ever deeper crisis and the housing market worse then ever much needs to be written down. The banks need capital and credit, so the taxpayer and the ECB have to step up. The NYT had recently a couple of good articles:

As Bank Loans Dry Up in Spain, Small and Medium Businesses Fight for Life

Despite the mergers and injections of capital from the banking bailout and reconstruction program begun by the government in 2009, there has been no improvement in lending. According to the Bank of Spain, credit to the private sector fell in March, as it has virtually every month since the fall of 2009. Some businesses say they do not even bother asking for loans anymore.

Getting loans to start a company may be even harder. “How are you going to get new businesses going if there is no one willing to take a risk and lend you money?” said Edward Hugh, an economic guru who blogs on Spain’s economy. “The problems become circular and self-perpetuating.”

Banking officials agree that the restructuring has made credit harder to come by, but they say they can do little about it. “The banks here are asked to provision more capital to guard against loan losses,” an official from CECA, the Spanish savings bank association, said. “And if they are asked for more capital, then the possibilities of giving credit are limited.”

Giant Lender in Spain Asks for Billions to Fend Off Collapse

MADRID — Spain’s banking crisis worsened Friday as the board of Bankia, the country’s biggest mortgage lender, warned that it would need an additional 19 billion euros ($23.88 billion), far beyond what the government estimated when it seized the bank and its portfolio of delinquent real estate loans earlier this month.

A bit to explain the German point of view: Germany Looks to Its Own Costly Reunification in Resisting Stimulus for Greece

MUNICH — When Germany wants to understand Greece and the crisis afflicting Europe it not only looks south to the Continent’s periphery but also turns inward, to the former East Germany, still struggling more than two decades after German reunification.

To an extent not often appreciated by outsiders, the lessons provided by that experience — with the nation pouring $2 trillion or more into the east, by some estimates, to little immediate benefit — color the outlook and decisions of policy makers and the attitudes of voters, a majority of whom would like to see Greece leave the euro zone, polls show.

[Surferbeetle]

Originally Posted by Firn

I think it is worth to point out that much of the economic discussion comes with an US point of view, rather similar to recent military matters. In both cases great resources and stable&strong institutions in law, economy and politics are almost taken as given. Add to that the dominance of the dollar in the world economy and you have a rather unique case. In short some central banks have more freedom of action then others. (A old wise local proverb concerning wealth and card games says that it is easy to stink with the trousers full of ****)

Wow! Almost spilled my beer when I read that one.

Well, the beauty of SWJ/a free market of ideas/the inter-webs is that anyone is able to take a position and advance/defend it if they can, everybody learns something in the process, and hopefully the, uh, cream rises to the top.

So, as we watch the slo-mo bank-run and hear the whooshing sound of big money running to the hoped for safety of Bunds and Treasuries I am wondering how all this recent activity impacts the monstrously large, global over the counter derivatives market (~ 600 trillion USD in the second half of 2010 keeping in mind that the combined GDP of the EU was in the neighborhood of 16 trillion USD in 2010) beyond further politicizing the regulatory frameworks? BIS says that interest rate swaps are the largest component of this market, JP Morgan has recently been in the news in this arena, and I wonder who is next...

OTC derivatives market activity in the second half of 2010, Monetary and Economic Department, May 2011, http://www.bis.org/publ/otc_hy1105.pdf

After contracting by 4% in the first half of 2010, total notional amounts outstanding of over- the-counter (OTC) derivatives rose by 3% in the second half, reaching $601 trillion by the end of December 2010 (Graph 1, left-hand panel, and Table 1). Notional amounts outstanding of credit default swaps (CDS) continued to contract, falling by 1% after the 7% decline in the first half, while outstanding equity-linked contracts shrank by 10%. Gross market values1 of all OTC contracts went down by 14%, driven mainly by the 17% decline in the market value of interest rate contracts. CDS market values fell by 19%. Overall gross credit exposure2 dropped by 7% to $3.3 trillion, compared with a 2% increase in the first half of 2010.

J.P. Morgan’s losses reveal market chaos, By David Weidner, MarketWatch, May 11, 2012, 3:16 p.m. EDT, http://www.marketwatch.com/story/jp-...aos-2012-05-10

Already two alternate narratives are making their way into the media. The first is that J.P. Morgan’s $2 billion trading loss and $800 million or more blow to earnings is the result of some rogue in England known in the markets as the London Whale. See MarketWatch report on J.P. Morgan loss.

The second narrative is one told by The Financial Times in the aftermath: that this loss is inconsequential.

“So far the numbers are not enough to dent J.P. Morgan’s balance sheet, nor its capital-adequacy ratios much, nor its ability to return money to shareholders,” the publication said in its “Lex” column, adding that it would only serve to give “ammo” to bank critics.

[Watcher In The Middle]

This is the type of situation that scares me:

Europe continues to fight the wrong battle, and continues to spread contagion risk.

It is clear that Greece has had a solvency issue now for over 2 years. The ECB and Troika chose to treat it as a liquidity problem. Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity. That is scary because if they feel to see the problem correctly now, they will fail miserably. Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any “solution” from the EU must now address that risk, and it is not the same as solvency. Programs that can protect against solvency may do nothing for the redenomination risk.

Not only did Europe fail to address the problems, but in spite of convincing themselves that all these programs prevented contagion risk, they actually ensured contagion risk. That contagion risk, that they forced on themselves is now coming back to haunt them, and must be carefully addressed in any policy “solutions”.

Europe Fighting the Wrong Battles Again with Dangerous Consequences

Want to see the really scary parts? - check out those pie charts. 82% of the interest due on bonds are to either ECB bonds (29%) or Troika loans (53%). Only 18% is private sector.

And then take a look at the Greek indebtedness maturing within the next 6 years - only 2% is private sector.

When I read the entire post - there's just no out. And it's obvious that there's no workable 'firewall' to make a practical solution of "What happens in Greece stays in Greece".

What are the implications for political/society instability when Greece implements the Drachma - it's not only devaluation risk, but also conversion risk. The conversion risk may be a greater problem.

[Surferbeetle]

Originally Posted by Watcher In The Middle

When I read the entire post - there's just no out. And it's obvious that there's no workable 'firewall' to make a practical solution of "What happens in Greece stays in Greece".

What are the implications for political/society instability when Greece implements the Drachma - it's not only devaluation risk, but also conversion risk. The conversion risk may be a greater problem.

You post some interesting links and ask some interesting questions, which make me think about how the 'discussion' between the philosophers Immanuel Kant (22 April 1724 – 12 February 1804) and Thomas Hobbes (5 April 1588 – 4 December 1679), regarding the primacy of Democracy or that of State Power, compares to today's events.

"Greece: Western Mistress, Eastern Bride" is how Robert D. Kaplan leads off the chapters describing Greece in his book: Balkan Ghosts (A Journey Through History). The turbulent political and economic history described comes across as very much a Hobbesian world:

"Greece is Europe's last port of call, where the Balkans begin to be dissolved completely by the East. As such, approaching from the opposite direction, Greece is also where the oxygen of the West begins to diffuse the crushing and abstract logic of the Mesopotamian and Egyptian deserts."

Can Syzriza (or any other Greek political party or movement), credibly gain the acquiescence of the populace, negotiate a compromise with the EU, and manage to sustainably extract, appropriate, and regulate Greek capital without causing strife? If so, extend and pretend may still be a possibility. Access to commodities, geography, history of civil war, diaspora size, education, ethnic and religious composition, political incidents, changes in GDP, etc are all tea leaves that may be examined to gauge the possibility of internal national strife (protests or otherwise). Meanwhile, Christine Lagarde of the IMF has bravely started a public discussion regarding the relative wealth of EU members (~ a combined GDP of 16 trillion USD in 2010) and the role that taxation plays in Western Society, but that is only part of the puzzle. I think you are right about the importance of conversion risk, this along with macro imbalances, fiscal policies, and 'North and South' concerns of EU members, may all be memes too far at the moment (for developing political consensus)? As a result, capital controls are being actively looked at. At this point then it appears to me that the actions of the EU, and surrounding nations, seem to be more focused upon political and economic concerns than those of significant social unrest.

Long story short: I am still in European financial equities. Things change all the time, so we will see what comes...

• Balkan Ghosts (A Journey Through History), Robert D. Kaplan, ISBN 0-679-749810
  
• Seeing the Elephant (The US Role in Global Security), Hans Binnendijk and Richard L. Kugler, ISBN 1-59797-100-6
  
• Strong Societies and Weak States, Joel S. Migdal, ISBN 0-691-01073-0
  
• Leashing The Dogs of War (Conflict Management in A Divided World) edited by Chester A. Crocker, Fen Osler Hampson, and Pamela Aall, ISBN 10-929223-96-X
  
• Greek Civil War, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Greek_Civil_War
  
• Israel-Cyprus Deal On Gas As Lebanon Won’t Negotiate, by Eduard Gismatullin - Apr 19, 2012 6:26 AM MT, Bloomberg News, http://www.bloomberg.com/news/2012-0...on-energy.html
  
• Greeks Must Stop ‘Trying To Escape Tax,’ Lagarde Tells Guardian, By Mike Harrison - May 26, 2012 12:04 AM MT, Bloomberg News, http://www.bloomberg.com/news/2012-0...-guardian.html
  
• Swiss eye capital controls if Greece goes, by Alice Ross in London and Haig Simonian in Zurich, May 27, 2012 5:47 pm, Financial Times, www.ft.com
  
• Notfallszenario der Nationalbank, SNB prüft Einführung von Kapitalverkehrskontrollen, sollte die Euro-Krise eskalieren, Sebastian Bräuer, Daniel Hug, 27. Mai 2012, NZZ am Sonntag, http://www.nzz.ch/aktuell/wirtschaft....17055832.html

[Watcher In The Middle]

The real issue with Greece that I see is that both the ECB and the Troika are the primary (and immediate) creditors to Greece. If Greece just decides to default on their 'deal' and fail to implement the austerity programs, then both the Troika & ECB cut them off. So Greece goes into default. But their money (the Euro) is still at it's full convertibility rate, ie Greek euro = Italian euro = French euro = German euro.

So, the result will be expanded bank runs in Greece (assuming there's any money left in Greek banks), Portugal, Spain, and possibly Italy. Why? Because nobody wants to go back to their original pre-euro currency, because if you are in one of the PIIGS and you have to have your money revert back to the national (pre euro) currency, you just suffered an immediate devaluation in your holdings. Move your money into Euros - immediately. And get the money in your hands.

So, the smart move is to make a hard withdrawal of your money in euro (or dollar) denominated currency. It's already been happening, and now it's accelerating.

The smart money says that to stop the outflow (bank runs), the EU has to kick Greece out of the euro & force Greece to move to the drachma.

But the problem with doing that is that once you start that process, the ECB and Troika holdings of Greek sovereign debt (and non-sovereign Greek debt) just basically became radically devalued, if not functionally worthless. And those are big numbers. But it doesn't just stop with Greece.

So what does the ECB and the Troika do? They have got no good options.

Truth of the matter is that right now Greece holds the cards. They've just shown Portugal, Spain, Iceland, and Italy the way to deal with this situation. IMO, they get to 'party on' while other (primarily the Northern European) nations get to keep picking up the tab.

Not to worry. In 6 months or so, when the US finances melt down (say January - April, 2013), we'll make the entire European quandary look like a sideshow.

[Watcher In The Middle]

Then we get this:

Spain may recapitalize Bankia (BKIA.MC) with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday.

Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008.

Another 19 Billion Euro Bailout - for Bankia

Short summary:

1) Spanish government source
2) Float what amounts to be 19 billion euros of junk bonds
3) Sells them off to the ECB at face value.
4) Uses the proceeds to "recapitalize" Bankia.

Greece all over again....only on a far larger (and completely unaffordable) scale.

[Watcher In The Middle]

Here's somebody to pay attention to.

And the Smart Money Says....

Now if it's Switzerland that sets down the initial capital controls, then everybody else in the EU will have to follow. No choice.

"Capital Controls" = A ban on money transfers in/out of country. Limits on the amount of cash that can be withdrawn from a bank or ATM.

Think what that immediately does to the business environment. For products like pharmaceuticals or petrochemicals being produced at different facilities located in different nations, imagine the headaches. Think about the effects on a corporation like EADS.

I watched the different Sunday Washington "talking heads' all pontificating over US political fights (like over Bain Capital), and it's more than clear to me that those folks are truly clueless over just how bad and on-the-edge economic issues are in Europe.

If there are nation-by-nation capital controls implemented all across the EU, then the entire EU marketplace start to crumble - and anybody who believes those negative economic effects won't reach US shores is just flat out nuts.

As an aside, now we know why all those US multinationals with all those cash hordes held outside of the US wanted so desperately to cut a deal to be allowed to move that money back into the US at a more favorable tax rate. There's going to be a whole lot of CFO's/corporate treasurers with large cash positions in the different EU countries who are going to be sweating blood.

[Fuchs]

Originally Posted by Watcher In The Middle

I watched the different Sunday Washington "talking heads' all pontificating over US political fights (like over Bain Capital), and it's more than clear to me that those folks are truly clueless over just how bad and on-the-edge economic issues are in Europe.

Admittedly, wrong continent and the trade relations aren't that huge anyway. Few %GDP.

The more worrying problem is that the talking heads don't have a clue how unsustainable the U.S. economy is and that any recovery of the usual kind is only an acceleration towards the next huge crash.

[Firn]

Smart money has been terribly wrong in so many occasions in those last years that I certainly do not stand in awe. Many top guys of said smart money were smart in the sense that they earned lots of money despite the very mixed bag of performances.

---

Spain is not Greece. It is a modern developed economy with a relative strong national and regional institutions which handled its (national) public debt very well for many , many years. It has also a stable government.

Spains initial crisis was in some ways pretty US-like. A low saving rate, cheap and easy credit and lax oversight led to a great party which inflated the wealth of the citiziens especially due to ever higher housing prices. As everything was on a high investors from abroad wanted to join the fun and kept it going. Then the bubble burst and now the private demand has collapsed, entering a vicious downwards spiral with too little help from the state which hit the austerity brake too soon.

The Spanish banks have, as we have seen still a lot of overvalued assets on the balance sheets as one has to expect during such a terrible local crisis without aggressive action. Bankia has been composed of many regional banks with hardly any relative foreign assets, making them fully exposed to the Spanish crisis. The state will step in, no doubt about that.

Personally I think that Spain must stimulate its economy with help from the ECB. A considerably higher debt of 85% of the GDP with an economy not in deep depression would even make for lower yields, but most important of all it would put so much wasted potential back at work.

[Fuchs]

Originally Posted by Firn

Spain is not Greece. It is a modern developed economy with a relative strong national and regional institutions which handled its (national) public debt very well for many , many years.

I've read this meme often enough, its popularity seems to stem from Krugman.

No, Spain's fiscal policy has been 100% incompetent and disastrous for a long time. They had faked prosperity and decent budgets like the Greeks, their methods was merely less brazen. They had a huge bubble.
Now either they understood that there was a bubble - then they had horrible policy because they allowed it to grow and blow up.
Or they did not understand there was a bubble - then they were utterly stupid, way below common sense.


This is a country which never got its youth unemployment under control (never below 17%).


I don't get why so many people are so lenient regarding the Spanish and their horrible economic policies whenever the language is English. May it be that the U.S. and London housing bubbles would otherwise create too much cognitive dissonance among anglophones?

[J Wolfsberger]

Originally Posted by Fuchs

I've read this meme often enough, its popularity seems to stem from Krugman.

Krugman among others. But the nice thing about Krugman is that he'll reverse course and say exactly the opposite if you wait for a little while. I think of him as the man who argues with himself - and loses.

As for the "cognitive dissonance among anglophones," I think its a language independent epidemic. The root cause is economic illiteracy. But that's probably a topic for another board.

[Fuchs]

Economic policy should be context sensitive.

An economic advisor can contradict an earlier statement and be totally consistent in his economic science at the same time. Most people don't get that, as they're used to ideology instead of scientific models.

[J Wolfsberger]

Originally Posted by Fuchs

Economic policy should be context sensitive.

An economic advisor can contradict an earlier statement and be totally consistent in his economic science at the same time. Most people don't get that, as they're used to ideology instead of scientific models.

In general I agree with you. Willingness to change one's position as a consequence of following the data is a necessary component of intellectual integrity.

I also agree that economic policy should be context sensitive. In Mr. Krugman's case, however, the context seems to be ... something other than current world wide economic problems.

As to the use of models, having spent a good bit of my early career developing, maintaining and applying some very complex, high fidelity models and simulations, I can assure you they will lie to you faster than a shady used car salesman.

That is especially true when they are used to bolster an ideological position (ala Krugman) rather than evaluate circumstances.

[Fuchs]

I succeeded to get a 1.3 grade for my diploma dissertation (microeconomics, fiscal policy) without making use of a single equation.


Krugman's worst fault is imho his short term focus.
It's difficult to stand an argument against him (/his position) without resorting to long term arguments.

[Firn]

Well Spain did have a relative firm grip on the national deficit, as I wrote, however did nothing to reign in the happy private/regional party where the credit drinks got too cheap for the good of most. Some got more fun out of it then others but for all the deflationary morning came. That hardly anybody tries to keep such bubbles under control is deeply human. Who wants to bust a good party? Certainly not the politicians who think they are doing great due to their own wise rule and are glad to get reelected...

Unemployment was always high, even if you account for the black labour market, and this has to be Spains biggest weakness. It should have put all that pre-crisis inflow of cheap money to much better use, just like the US, especially with an eye on youth unemployment. A good economic policy would have given them much more liberty of action, now they are hounded by the markets and the crisis.

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This crisis has given me again faith in macro. For example I did expect relative high inflation around 2010-11 after all that easing in 2008, but basic macro (liquidity trap etc) and decent logic helped some to get it right. Krugman was one of them. With demand that low and the economic heart, the banks, pumping the lifeblood of the economy so slowly and out of sync the inflation has indeed been very low by historical standards.

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The earthquakes in Northern Italy have not just caused once again a tragic loss of life but inflicted very significant damage on our cultural heritage and economy. If the destruction of old castles and churches is tragic then the collapse of relative modern industrial buildings is a scandal.

[Fuchs]

Originally Posted by Firn

Well Spain did have a relative firm grip on the national deficit, as I wrote, ...

What they did was they postponed the bill. Not impressive.

What's more interesting is is their mild trade balance deficit of at most 1% GDP p.a..

This trade balance deficit indicates that Spain was almost sound if seen as a black box. They just proved unable to organise their economic activity in a way that's sustainable and meeting the demands (such as proper distribution of jobs = income to the youth). They had almost as much output as input, but they failed at the allocation. Badly.

Assume they had had no bubble - would they have been then able to sustain the government without substantial budget deficit? NO.
Why not? After all, the outside view on the black box reveals no such problem.
The answer is that they have absolutely huge dysfunctionalities in their society, and instead of addressing them properly they elected a liar who played in a small war and meanwhile the people partied in a party which the black box was able to sustain, but not their very own society, the inside of the black box.
Spain is a puzzle that cannot be joined. Little fits togethe, they have major work to do.


Now maybe this made more clear why I am so disgusted by references to how exemplary Spain was until the crisis (which is all too often presented as if it was merely a 100% exogenous shock).

For example I did expect relative high inflation around 2010-11 after all that easing in 2008, but basic macro (liquidity trap etc) and decent logic helped some to get it right. Krugman was one of them. With demand that low and the economic heart, the banks, pumping the lifeblood of the economy so slowly and out of sync the inflation has indeed been very low by historical standards.

I expected and expect huge USD inflation, but I do so for a game theory reason. The liquidity trap is actually a reason FOR huge inflation.
As usual, Krugman is on the (very) short term side on this.

My reasoning is strategical; the U.S. has exploited the reserve currency status of the USD a lot and can be expected to go on with it, but it's not going to be able to go on forever. The U.S. economy is unsustainable (see balance of trade, savings rate coupled with population growth rate).
At some point the idea of a surprise inflation is going to be irresistible and it will happen.
The huge financial meltdown and crisis was a huge opportunity for such a huge surprise inflation, not the least because the huge deflationary forces in the economy had to be countered with easy money. Now all they would have needed to do was tell the Fed to buy U.S. treasuries in order to improve overall cash liquidity - buy almost all treasuries. Then burn them. What would happen when deflationary forces and all the other special effect disappear? HUGE inflation for one or two years, price rigidities broken (wages!) - and the damage would be on part of the USD cash owners - such as the Bank of China or how they're called. The average American has no savings (thus savings rate close to zero), almost no American has substantial savings in liquid assets (M3).

Apparently, Obama and Bernanke do not think alike - or he thinks it's better to do this even later. After all, trade partners proved to be hugely gullible and resumed to tolerate trade balance deficits at almost the old volume
Maybe the U.S. is with its political institutions too incapable to pull something like this off anyway. In that case they will eventually do it by accident, with more pain and less benefit.
I say the U.S. gets a huge inflation within 15 years that clears a lot of the accumulated old imbalances. This is imo independent of their fiscal situation and dependent on trade and savings instead.

Regarding

...pre-crisis inflow of cheap money...

Wrong country for this story. East Europe and Greece had this symptom, not Spain.


http://www.tradingeconomics.com/spain/balance-of-trade
Not that much apparently. This is the weird thing. They financed their construction bubble themselves in the end. It was a huge resource mis-allocation, a stupidity on huge proportions.