Quantum Pranx

ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Archive for August 5th, 2011

Please Europe, either put up or break up

leave a comment »

by Ambrose Evans-Pritchard
Posted August 5th, 2011

THE DEBT CRISIS IS MOVING AT LIGHTNING SPEED. We must wait to see whether the ECB is really willing to sit back and let the whole edifice collapse. Are the Bundesbankers really so stubborn that they would rather bring down the European financial system, tank the world economy, and cause a deep global depression, rather than enter the bond market on a sufficient scale to back-stop Italy and Spain?

Tough call. 50:50, I’d say. The hardliners are seriously ideological people, and there seem to be some in the upper echelons of German policy-making (though obviously not the floundering bean-counter Schauble, or the battered Chancellor), who suspect that it might be better to lance the boil by forcing an immediate break-up of EMU.

I note that Belgium’s central bank governor Coene hinted that the ECB is withholding bond purchases to force Italy and Spain to push through – you guessed it – yet more growth-destroying austerity. Dangerous game. These 1930s deflationists really are a menace to society. In a nutshell, unless the ECB is willing to step in – I mean really step in, not piss in the wind – until such a time as the revamped EFSF bail-out is ratified by all parliaments and is ready to take the baton (say November), and unless the EFSF itself is quadrupled in size and given a €2 trillion mandate without all the German-imposed ifs and buts, then the game is up.

If the EU authorities refuse to do this, it is best for everybody that it is recognized immediately and that arrangements are made for the orderly break-up of monetary union…  not next year, or next month, but next week. There are two basic choices:

1) a spiralling crisis in the South, leading to a string of countries being blown out of EMU, causing a catastrophic financial collapse akin to 1931. As Citi’s William Buiter told me yesterday, the issue is not how long Italy and Spain can ride out the storm in bond markets. There would be a banking and insurance crisis long before sovereign defaults came into play, simply because the fall in bond prices on the secondary market is causing carnage to bank books (among other transmission mechanisms).

Or 2) Germany and its satellite economies withdraw immediately from EMU (let us say the Netherlands, Austria, Finland, Flanders and Luxembourg). This allows the South to enjoy a much-needed devaluation to restore competitiveness without going through a disastrous Fisherite debt deflation. Their contracts would remain in euros, so they would not need to default.

Temporary capital controls and some form of financial repression would obviously been needed for a few weeks. The German bloc would have to stand ready to recapitalize its banking system with €100bn perhaps (peanuts in the bigger picture) to offset the shock effect on sudden exchange losses on Club Med debt.

This would require French leadership. (I have almost given up on Germany.) Carried out with Napoleonic speed and determination, I think this could conceivably prove the game-changer that halted the downward global spiral. Markets would very quickly see that the greatest impediments to recovery had been removed. We could rejoice, and breathe a little easier again. My guess is that stock markets would surge in Milan, Madrid and Paris, as occurred in London and Milan after the ERM crisis in 1992.

Yes, I know, EMU is not the ERM, blah, blah, sanctity of the Project, blah, blah, blah. But just how different is it really? Will this happen? I don’t see much evidence that anybody is thinking along these lines. (The Buba men seem to want to expel Greece, Portugal, etc, which is not at all what I mean.) Just my instant thoughts on a story that is moving with lightning speed.

More later, after some Rioja, and a Vecchia Romagna to finish.

Austerity top priority as economy sputters, Americans suffer

leave a comment »

from The Huffington Post
Posted: August 3, 2011

WASHINGTON – This week’s big debt deal has left progressives despairing over a disconnect between Washington and the rest of the country that they say has possibly never been wider. Their concern arises from the fact that while the country suffers from a sputtering economy and a grinding jobs crisis, elected officials are celebrating the passage of a massive deficit-reduction bill almost guaranteed to even further slow the economy and cost jobs.

For the weeks leading up to the agreement, Democratic and Republican leaders were essentially trying to out-austere each other. It’s that bipartisan enthusiasm for reducing the government’s budget – and the speed with which both parties abandoned a job-creating agenda – that left-leaning analysts say demonstrate how beholden elected officials from both parties have become to the rich, and how out of touch they are with the problems of the poor and the middle class.

“If these people were rational policymakers, they would not focus on deficit reduction right now,” said Neera Tanden, chief operating officer at the Center for American Progress. “They would focus on stimulus right now.”

“What’s crazy about Washington is that the only thing we talk about is deficit reduction; that nobody talks about jobs,” Tanden said. “It’s borderline insane.”

To liberal economists like University of Texas professor James Galbraith, the explanation lies in what he calls the Washington elite’s “deficit hysteria.” From this perspective, the spending cuts signed into law Tuesday were the culmination of the investment of hundreds of millions of dollars by moneyed interests into the development and inculcation of a specific Washington consensus that anyone who doesn’t believe the government is dangerously overextended — and who doesn’t consider the danger of deficits as very, very serious — is a wild-eyed radical.

“The rich have drawn a political box around what can be done here,” said Damon Silvers, policy director for the big umbrella union AFL-CIO. “They are gutting the modern state in order to avoid a real conversation about taxes.” While Washington lauds its cuts, the traditional arguments in favor of deficit reduction probably have never been weaker than they are right now.

THE ARGUMENT AGAINST AUSTERITY

None of the economic signs that augur for deficit reduction are remotely visible. Quite to the contrary: A high unemployment rate, enormous unused capacity, inadequate market demand, cheap capital and record-low interest payments, incipient deflation, crumbling infrastructure and underwater homeowners all point to this being an ideal time to increase government borrowing – to invest in infrastructure, provide debt relief to homeowners and generally increase demand and create jobs.

With American banks and other businesses sitting on trillions of dollars they refuse to lend or invest, one can hardly accuse deficit-spawned borrowing of “crowding out” private loans. And with people lining up to lend money to the U.S. government for long periods of time at near record-low rates, one can hardly argue that the deficit is driving up interest rates.

Thomas Palley, an economist at the New America Foundation, says Republicans’ focus on the deficit regardless of economic conditions is logically consistent because their core interest is limiting government.

But Democrats have been brought in, too. The fully bipartisan nature of Washington’s deficit obsession was brought home in early 2010, when President Barack Obama created a commission to reduce the deficit and chose a pair of deficit hawks to be its leaders.

“What is going on now I think has everything to do with the fact that you have almost a second generation of deficit obsessives who occupy all the strategic positions in public policy discourse,” said Galbraith. And over time, Democratic leaders haven’t just embraced deficit reduction as a goal, they have explicitly bought into government austerity as the primary solution.

There is, of course, another way to reduce the deficit: Stimulate economic growth and grow out of it. “We have a huge deficit because we have a huge recession,” said Larry Mishel, head of the left-leaning Economic Policy Institute. Democrats could have, as an anti-deficit strategy, decided to put all their energy into pushing for a pro-growth agenda. But they chose not to. Last November, when Obama decided to make a statement about the deficit, he did so by freezing pay for federal workers.

Read the rest of this entry »

The Debt Deal con: Is it fooling anyone?

leave a comment »

by Brandon Smith of Alt Market
Posted August 4, 2011

ALTERNATIVE ECONOMIC ANALYSIS BRINGS WITH IT A CERTAIN NUMBER of advantages and insights, but also many uncomfortable burdens. Honest financial research is a discipline. It requires us to not only understand the fundamentals, but to question the fundamentals. It requires us to look beyond what we would LIKE to see in the economy, and accept the reality of what is actually there. With this methodology comes the difficulty of knowing the dangers ahead while the mainstream stumbles about well behind the curve. It means constantly having to qualify one’s conclusions, no matter how factual, because the skeptics and opposition base their views on an entirely different set of rules; farcical rules that no longer (or never did) apply to the true state of our country’s fiscal health.

After a while, you begin to expect that a majority of the public will buy into any number of government or Federal Reserve con games and swindles as the process of full spectrum collapse rolls onward. However, this expectation is not always accurate…

A majority of Americans were against the bailouts, TARP, quantitative easing, the “too big to fail” concept, etc. Sometimes a government action is so fraudulent that even those who aren’t educated on the specifics can smell the grift in play. The recent debt ceiling debate and resulting debt deal are fuming with the hot stench of predigested disinformation, so much so that no one seems to be happy with it, even people who a month ago were begging for it. When you have to parade around a hobbled shooting victim in order to get any applause for your legislation, then you may be in trouble…

Though their reasons and motivations vary, everyone, whether on the so called “Left”, or the so called “Right”, is asking “Was anything really accomplished here?” The question is a valid one. To discern the exact nature of the debt deal, we must first cut through the web of misconceptions that surround it. While no American is satisfied with the final plan, many are disenchanted for the wrong reasons. Let’s clear the fog (or light a match), as it were…

Where are the spending cuts?

Were any cuts actually made in this debt plan that has been painted by the MSM as a “historic landmark” in spending reform? If you think yes, then you have been hornswaggled. Only yesterday I came across perhaps the most profoundly inept New York Times Op-Ed piece I have ever seen (and that’s saying something):

http://www.nytimes.com/2011/08/02/opinion/the-tea-partys-war-on-america.html?_r=1

In it, Joe Nocera, a typically impotent mainstream financial hack, proceeds to outline the debt deal snafu in grade school fashion, claiming not only that cuts in spending attributed to the bill will destroy our fragile economy, but that all the blame for this destruction rests squarely on the shoulders of Tea Party Republicans, who are apparently no better than “terrorists”. Yes, that’s right, fiscal conservatives are now terrorists hell bent on our nation’s demise. Gee…we didn’t see that one coming. While I am not particularly happy with the direction the Tea Party has taken since 2010, especially the constant attempts by Neo Conservatives (fake conservatives) to co-opt the movement, the Tea Party is hardly to blame for any destabilization of the economy, if for no other reason than they accomplished nothing in the deal. Nocera’s idiocy is made embarrassingly apparent in his outcries against spending cuts, because NO cuts were actually made.

First, the $2 trillion plus compromise we hear about so often is slated to take place not over the next ten months, but the next ten years! Only $917 billion in cuts are officially mandated by the bill. The final $1.5 trillion will be voted upon at a later date. Only $21 billion in cuts will be applied to discretionary spending in 2012, $42 billion in 2013, and the remaining cuts after 2014. This strategy, by itself, is wholly inadequate in making even the slightest dent in our national debt, being that our government’s spending has grown exponentially with each passing year.

In June of 2009, our national debt stood at $11.5 Trillion. Today, it climbs past $14.5 trillion. That’s an increase of $3 trillion in the span of two years. Now, I don’t know where men like Boehner, Reid, or Obama, learned simple math, but I can tell you their numbers don’t add up. Even if current spending levels stay static (which they won’t), by 2013, we will have to increase the national debt to at least $17.5 trillion, while only cutting $63 billion from the budget. Wow….sounds like progress to me.

Even worse (yes, it gets worse), the spending cuts that were finalized are based not on current spending, but on PROJECTED spending, or what is often called “the baseline”. That means, essentially, that no existing programs or subsidies are specifically facing cuts, only programs and subsidies that have yet to be created! So, Obama could ostensibly forgo an extra $2 million taxpayer subsidized vacation to Hawaii or Manila, and then claim this as a “spending cut”. Imagine it! We could save so much money as a country by not buying all the things we could have bought beyond what we already buy! Huh?

So, no official spending cuts until after elections. No specific programs identified for cutting. No cuts to current deficit spending. Debt ceiling elevated yet again. All that debate and noise, and nothing has changed…

Read the rest of this entry »