by ilene - July 6th, 2015 8:30 pm
Courtesy of Martin Armstrong via ArmstrongEconomics
Brussels has been dead wrong. The stupid idea that the euro will bring stability and peace, as it was sold from the outset, has migrated to European domination as if this were “Game of Thrones.” Those in power have misread history, almost at every possible level. The assumption that the D-marks’ strength was a good thing that would transfer to the euro has failed because they failed to comprehend the backdrop to the D-mark.
Germany moved opposite of the USA toward extreme austerity and conservative economics because of its experience with hyperinflation. The USA moved toward stimulation because of the austerity policies that created the Great Depression, which led to a shortage of money, and many cities had to issue their own currency just to function. The federal government thought, like Brussels today, that they had to up the confidence in the bond market and that called for raising taxes and cutting spending at the expense of the people. The same thinking process has played out numerous times throughout history. Our problem is that no one ever asks: Hey, did someone try this before? Did it work? This is why history repeats – we do ZERO research when it comes to economics. It is all hype and self-interest.
Greece should immediately begin to print drachma. By no means has the introduction of a new currency been a walk in the park. There is always a learning curve, as in the case of East Germany’s adoption of the Deutsche mark, the Czech-Slovak divorce of 1993, and the creation of the euro itself. However, the bulk of transactions today are electronic, meaning we are dealing with an accounting issue more than anything. The euro existed electronically BEFORE it became printed money. Greece should do the same right now.
The difference concerning East Germany and others was the fact that there was no history. This is more akin to the 1933 devaluation of the dollar by FDR whereby an executive order reneged on promises to pay prior debt in gold. This would be similar. The new drachma should be issued at two-per euro, only because the people will think the drachma should be worth less than a euro based on pride. If the new drachma is issued at par, the speculators…
by ilene - July 6th, 2015 6:30 pm
Courtesy of Mish.
Every age group but 65 and older voted “No” in the referendum as the following Greek “No” Vote Demographics shows.
click on chart for sharper image
The following email was to a reader of mine. The email comments on the state of affairs in Greece as well as my proposed Way Forward.
“No Dreams and Nothing to Lose”
Nothing to Lose writes …
I don’t give a **** for politicians, I just care about my country.
I am a 30 year unemployed person with a bank account that has less than $10,000 left. What do I have to lose?
I don’t have dreams for my life anymore. And I haven’t even begun to live. For 5 years we suffered, and we are no better off.
Before the IMF came, Greek debt was around 118% of GDP. After two bailouts, debt is now close to 175% of GDP.
Is that progress?
The official unemployment rate is close to 30%, imagine how much the unofficial might really be….
by ilene - July 6th, 2015 4:03 pm
Courtesy of James Howard Kunstler
While the folks clogging the US tattoo parlors may not have noticed, things are beginning to look a little World War one-ish out there. Except the current blossoming world conflict is being fought not with massed troops and tanks but with interest rates and repayment schedules. Germany now dawdles in reply to the gauntlet slammed down Sunday in the Greek referendum (hell) “no” vote. Germany’s immediate strategy, it appears, is to apply some good old fashioned Teutonic todesfurcht — let the Greeks simmer in their own juices for a few days while depositors suck the dwindling cash reserves from the banks and the grocery store shelves empty out. Then what?
Nobody knows. And anything can happen.
One thing we ought to know: both sides in the current skirmish are fighting reality. The Germans foolishly insist that the Greek’s meet their debt obligations. The German’s are just pissing into the wind on that one, a hazardous business for a nation of beer drinkers. The Greeks insist on living the 20th century deluxe industrial age lifestyle, complete with 24/7 electricity, cheap groceries, cushy office jobs, early retirement, and plenty of walking-around money. They’ll be lucky if they land back in the 1800s, comfort-wise.
The Greeks may not recognize this, but they are in the vanguard of a movement that is wrenching the techno-industrial nations back to much older, more local, and simpler living arrangements. The Euro, by contrast, represents the trend that is over: centralization and bigness. The big questions are whether the latter still has enough mojo left to drag out the transition process, and for how long, and how painfully.
World affairs suffer from the disease of terminal excessive complexity. To make matters worse, much of the late-phase complexity operates in the service of accounting fraud of one kind or another. The world’s banking system is mired in the unreality of so many unmeetable obligations, cooked books, three-card-monte swap gimmicks, interest rate euchres, secret arbitrages, market manipulation monkeyshines, and countless other cons, swindles, and hornswoggles that all the auditors ever born could not produce a coherent record of what has been wreaked in the life of this universe (or several parallel universes). Remember Long Term Capital Management? That’s what the world has become.…
by ilene - July 6th, 2015 3:26 pm
Courtesy of Lance Roberts via STA Wealth Management
During the last year, the Federal Reserve has hinted that the period of "ultra accommodative monetary policy" was coming to an end. The Fed started that process last October by terminating the latest "Quantitative Easing" program which induced massive amounts of liquidity into the financial markets. Subsequently, the Fed has turned its focus towards the near ZERO level of the "Fed Funds" rate.
Over the last several FOMC meetings, Chairwoman Janet Yellen has hinted on numerous occasions that the Fed will begin increasing the overnight lending rate sometime in 2015. She has been adamant that the Federal Reserve has been "watching the data" closely to determine the appropriate timing of those increases. Not surprisingly, Wall Street has also been singularly focused on this issue. The increase in lending rates is the final step in ending the extremely long period of "accommodative policy" measures that has been a primary support of asset prices.
The problem for the Fed, as I discussed recently, is that they may have already missed their best opportunity to begin increasing interest rates. To wit:
"While the Federal Reserve hopes that they can effectively raise interest rates without cratering economic growth, the problem is that the bond market may have already beaten them to the punch.
While I do not expect Treasury rates to rise very much, the increase in borrowing costs in an already weak economic environment has an almost immediate impact. The chart below shows the periods in history where Treasury rates have risen and the impact of subsequent rates of economic growth."
But it is not JUST interest rates that suggest that the best opportunity for the Fed to hike rates is likely behind them.
One of the important factors for continued economic expansion, and required to offset the drag caused by tighter monetary policy, is an increasing rate of wage growth to support an expansion in consumption. As shown in the chart below the correlation between wage growth and economic growth is very high. This relationship, of course, is not surprising given that the economy is almost 70% driven by consumption which is supported by wages.
by ilene - July 6th, 2015 2:54 pm
Courtesy of The Reformed Broker, Joshua Brown
My pal Ari Wald (Oppenheimer Asset Management) has an interesting take on the “feel” of the market versus the objective reality.
While Wald maintains an overall bullish bent, he notes that identifying winners and losers has been more important this year given the trendless nature of the S&P 500. High dispersion and flat indices make for a frustrated investor class, despite our proximity to the all-time highs:
If the alternative is a bearish view, we believe a bullish S&P 500 outlook remains warranted. However, reality is probably somewhere in the middle as stock-level trends vary considerably. At last week’s low, the S&P 500 was down 3.6% from its all-time high of 2134, but the market environment feels worse than this is because the dispersion of performance has widened sharply. For instance, the spread between the best (Health Care, +24%) and worst (Energy, -24%) performing S&P 500 sectors over the last 52 weeks is the widest since February 2010. This is a reason we continue to place greater emphasis on our sector and stock calls than our market one.
Josh here – If you’re a devoted stockpicker, now is finally your time to shine after five years. Try not to f*** it up.
Oppenheimer Asset Management – July 6th 2015
by ilene - July 6th, 2015 2:40 pm
Courtesy of Mish.
There’s theory and there’s practice. There’s also practical matters even if theory and practice are in alignment.
People keep emailing me stories that Greece can and will print euros, so it will never run out of money. Such stories have been running for years actually.
Let’s take a peek at a few of them, and why they are all false from a practical point of view.
June 15, 2012: What if Greece Just Printed the Euros It Needs?
Writer Valentin Petkantchin asked “Why would an extreme leftist such as Tsipras bother switching to drachmas – with the disastrous consequences for the Greek population and his own political future – when Greece already has the capacities to simply print euros?“
His twofold view was twice wrong.
- On one hand, Greece can create euros in a few “clicks” under the cover of the opaque Emergency Liquidity Assistance (ELA) program. Greece is already estimated to have created up to 96 billion euros to help its banks using the ELA.
- On the other hand, the Greek central bank is able to turn on the printing press the old-fashioned way. Greece has the physical means to create any amount of euros it wants.
We have already seen what can and has happened to the ELA.
I will get to the practical side of “Greece has the physical means to create any amount of euros it wants” in just a moment.
July 5, 2015: ZeroHedge wrote Greece Contemplates Nuclear Options: May Print Euros, Launch Parallel Currency, Nationalize Banks.
Says ZeroHedge: “While Greece and the ECB may be on the verge of a terminal fall out, Greece still has something of great value: a Euro printing press.“
July 5, 2015: Breitbart writes Greece will Never Run out of Money–It Will just Print More….
by ilene - July 6th, 2015 2:01 pm
Earlier today we reported that as Bloomberg correctly leaked, the ECB would keep its ELA frozen for Greek banks at its ?89 billion ceiling level last increased two weeks ago. However we did not know what the ECB would do with Greek ELA haircuts, assuming that the ECB would not dare risk contagion and the collapse of the Greek banking system by triggering a waterfall solvency rush in Greek banks if and when it boosts ELA haircuts. Turns out we were wrong, and as the ECB just announced "the Governing Council decided today to adjust the haircuts on collateral accepted by the Bank of Greece for ELA."
Full Press Release:
ELA to Greek banks maintained
- Emergency liquidity assistance maintained at 26 June 2015 level
- Haircuts on collateral for ELA adjusted
- Governing Council closely monitoring situation in financial markets
The Governing Council of the European Central Bank decided today to maintain the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on 26 June 2015 after discussing a proposal from the Bank of Greece.
ELA can only be provided against sufficient collateral.
The financial situation of the Hellenic Republic has an impact on Greek banks since the collateral they use in ELA relies to a significant extent on government-linked assets.
In this context, the Governing Council decided today to adjust the haircuts on collateral accepted by the Bank of Greece for ELA.
The Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area. The Governing Council is determined to use all the instruments available within its mandate.
What does this mean? Since it is almost certain that the haircut is being increased (as decreasing the ELA haircut makes no sense since Greek banks still have about €20 billion in ELA collateral buffer and instead the ECB would have simply raised the total ELA amount), it means that the ECB just took its first practove step toward launching a Greek bank bail in. [ZH: it has since been confirmed that haircuts are being raised].…
by ilene - July 6th, 2015 1:29 pm
Courtesy of Wade of Investing Caffeine
Watching Greece fall apart over the last five years has been like watching a slow motion train wreck. To many, this small country of 11 million people that borders the Mediterranean, Aegean, and Ionian Seas is known more for its Greek culture (including Zeus, Parthenon, Olympics) and its food (calamari, gyros, and Ouzo) than it is known for financial bailouts. Nevertheless, ever since the financial crisis of 2008-2009, observers have repeatedly predicted the debt-laden country will default on its €323 billion mountain of obligations (see chart below – approximately $350 billion in dollars) and subsequently exit the 19-member eurozone currency membership (a.k.a.,”Grexit”).
Source: MoneyMorning.com and CNN
Now that Greece has failed to repay less than 1% of its full €240 billion bailout obligation – the €1.5 billion payment due to the IMF (International Monetary Fund) by June 30th – the default train is coming closer to falling off the tracks. Whether Greece will ultimately crash itself out of the eurozone will be dependent on the outcome of this week’s surprise Greek referendum (general vote by citizens) mandated by Prime Minister Alexis Tsipras, the leader of Greece’s left-wing Syriza party. By voting “No” on further bailout austerity measures recommended by the European Union Commission, including deeper tax increases and pension cuts, the Greek people would effectively be choosing a Grexit over additional painful tax increases and deeper pension cuts.
And who can blame the Greeks for being a little grouchy? You might not be too happy either if you witnessed your country experience an economic decline of greater than 25% (see Greece Gross Domestic Product chart below); 25% overall unemployment (and 50% youth unemployment); government worker cuts of greater than 20%; and stifling taxes to boot. Sure, Greeks should still shoulder much of the blame. After all, they are the ones who piled on $100s of billions of debt and overspent on the pensions of a bloated public workforce, and ran unsustainable fiscal deficits.
by ilene - July 6th, 2015 12:46 pm
Courtesy of Mish.
It's quite rare for me to agree with economist Paul Krugman on much of anything, or him with me.
Today, I think Krugman is essentially correct with his New York Times Op-Ed on Ending Greece’s Bleeding.
Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief.
Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.
But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.
What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work:
Debate Over Austerity
I can accept the above paragraphs completely. I disagree with what comes after the colon.
Immediately after the colon Krugman writes "Austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose."
My disagreement is over austerity. I do not label tax hikes in the middle of an economic depression 'austerity'; I label them 'stupidity'. And Greece did not do enough to reduce its bloated public sector.
What Greece most needs is reform of all sorts. There was virtually no reform in Greece on work rules, pensions, ease in starting a company or firing workers. Guaranteed pensions in Greece are higher than in Germany.
Chance of Escape
Krugman quickly gets back on track with his statement "The landslide victory of the 'no' side offers at least a chance for an escape from this trap."…
by ilene - July 6th, 2015 10:16 am
Courtesy of Pam Martens
The fallout from yesterday’s Greek referendum is now spilling over into the share prices of global banking stocks in morning trading, with some down as much as 7 to 5 percent, raising the specter that if Germany doesn’t soon focus on the bigger financial stability picture, it could create more bailouts in short order.
The rumored close vote by the Greek people in a referendum yesterday turned into a landslide 61 percent vote against the tough austerity measures being offered by the European Commission, the European Central Bank and the International Monetary Fund in exchange for continued loans to the struggling country.
News reports since the vote indicate that German Chancellor Angela Merkel and Wolfgang Schäuble, the German Finance Minister, have no plans to quickly cave in to Greek demands for a more generous deal than the one offered prior to the referendum. Yanis Varoufakis, Greece’s Finance Minister, resigned this morning in hopes of allowing friendlier negotiations to proceed. The outspoken Varoufakis has called the Sunday vote an historic moment in time “when a small European nation rose up against debt-bondage.” Schäuble is in no mood to hear phrases coming out of Greece like “debt bondage.”
Merkel is scheduled to meet today with French President Francois Hollande, followed by a full conference among Eurozone leaders tomorrow.
Italian bank stocks were leading decliners with Banca Monte dei Paschi di Siena declining more than 7 percent at one point this morning with Banca Popolare di Milano losing as much as 5 percent in morning trading. Even Germany’s Deutsche Bank was off by as much as 2.65 percent.