Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Europe

As the Euro and the Pound come under pressure bend over and kiss Europe’s economy goodbye

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On May 24, 2010

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The catch-22 continues.  First, the Euro under pressure:

Global Markets Overview: A sudden drop in the single currency reverses an early tentative advance for stocks as traders once again frett about the fragility of the eurozone economy

Second, the Pound under pressure:

Speculators extended their short positions in sterling to record levels after the recent UK election as worries escalated over the government’s finances

Third, austerity in Britain:

Britain will be a “leading voice for fiscal responsibility” within Europe as it embarks on a sustained programme of cutting public spending, chancellor George Osborne said on Monday.

Announcing an initial £6.2bn of cuts for the current financial year, Mr Osborne said it was important to cut the deficit urgently so that debt repayments did not “spiral out of control.”

Fourth, a bank in Spain goes under:

The euro came under renewed attack on Monday as concerns over Europe’s fiscal problems intensified after Spain’s central bank took control of a savings bank.

CajaSur, a 146-year-old lender owned by the Catholic Church, was taken over by the Bank of Spain in the latest move by the central bank to restructure the country’s troubled mutually owned banks, or “cajas”.

Here’s the catch-22.  Investors are worried about deficits, so they get out of bonds or demand higher rates and attack currencies.  The response to that by governments is to slash spending: austerity.  But austerity will crash out the economy, which will hurt the stock market and weaken the state’s ability to repay bonds.

As long as governments feel they are at the mercy of the hot money, and as long as the hot money insists that governments both be fiscally austere and have good economies, there is no way out.

Notice, that while China has significant issues, it does not have this issue because it does not rely on hot money.  No smart government should.  Currency flows are far too fast, not only should there be a tax on all currency flows but every smart country should make it essentially impossible to move large amounts of money in and out of its economy quickly without taking a huge haircut.  Flighty money is more trouble than it’s worth.  Money that wants to come, and stay, and really invest in the economy should be welcome, but fast money should be heavily discouraged.   The harm done by such money is far larger than the good.

Likewise the hot money needs to be taught a lesson.  Such “investors” seem to think that they deserve higher than market returns in exchange for lending money.  The people borrowing money are expected to bear all the risk, and expected to get less than market returns (since they’re giving the surplus to the hot money).  Would you borrow money under such circumstances?  Of course  not, which is why no one who doesn’t have a sure thing does, which is why the economy doesn’t grow, because the idle money thinks it deserves most of the returns and none of the risk, and entrepreneurs aren’t interested in that deal.

Greek Mistakes, European Misery and the Coming Decade of Suck

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On May 7, 2010

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1) killing bankers isn’t what’s needed.  The people who need to be scared are their own rich, and their own politicians, who voted for the cram down instead of deciding to end tax evasion, primarily by the rich, and which by itself is enough to close the gap and avoid austerity measures.

2) Voting in right wing governments.  You get what you vote for.

When you refuse to tax the rich, the only other option is to soak the middle class and the poor.

Meanwhile the Brits have voted for cuts, cuts, cuts.  They too are about to get what they asked for.  Austerity.

This contagion is going to spread, because Europe is fundamentally in the same mode as the US: spare the rich, cram down the middle class.  The lesson taken by the elites from the crisis was that the rich must be appeased at all costs, because if they aren’t, they will go on strike, and crash the world economy.

What happened yesterday on the stock market proves it–nearly a 1,000 points off the DOW in seconds.  The stock markets are no longer free markets, their movements are controlled by a relatively small number of actors with very deep pockets, who can make them go up or down whenever they choose.

There was an opportunity to break the power of these folks—to wipe them out, but it required calling their bluff, not caving to them.  That opportunity has now passed.  While the world economy remains very fragile and could go into a tailspin any time if anything goes wrong, best guess is we have another really lousy recovery and economic cycle to look forward to, if austerity measures don’t crash it out entirely.  Over 80% of any gains will go to corporate profits, virtually nothing to ordinary citizens, and we’ll have another lost decade in which for virtually everyone the economy sucks.

There are solutions, but it’s clear that the elites in most countries aren’t willing to do anything about it, and frankly the population keeps voting for right wing governments (whether called that or not), so they’re getting what they vote for.  (Say what you will, Obama was the most right wing of the major Democratic candidates.)

So, get ready for another era during which the deep liquidity, the hot money, is completely catered to—even more than it was in the last era.  And get ready for an era in which, to paraphrase George Bush “who cares what you think? is the unofficial motto of government when dealing with ordinary people.

Shock Therapy in Greece

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On March 8, 2010

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Whatever the problem, the solutions are always the same:

This austerity plan aims at saving some € 4.8 billion at the expense of the Greek population, for the purpose of repaying creditors. The money saved will also be used to pay the fees of Goldman Sachs, a bank which we now know helped the government conceal part of its debt. Among the measures to be taken:

- a freeze on recruitment and reduction of civil servants’ salaries (heavily reduced 13th and 14th months, reduced bonuses, coming after a 10 % decrease in salaries decided in January);
- a freeze on retirement pensions;
- VAT increase from 19% to 21%, despite the fact that this is an unfair tax that hits poorer people harder;
- dramatic cuts in social budgets, including the Social Security budget.

Somehow progressive tax increases never seem to occur.  Somehow a pan-European Tobin tax never happens.

The interesting question though is this: how many European governments played the exact same games Greece did?  How many are concealing their true fiscal picture, which is much worse than people think?

The answer, dear friends, is most of them.  Including the Germans, who have been acting very high and mighty.

The only people in the world even stupider about financial engineering than the US were the Europeans, who bought toxic waste by the boatload.

They forgot what Americans forgot.  There’s no free lunch.

Ever.

Nice country you have there, be a shame if anything happened to it

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On January 7, 2010

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is the title of an email a friend sent to me about the threats made by Britain and the Netherlands to Iceland, when Iceland’s President refused to ratify a bill which would have required Iceland to pay 5.5 billion US to the Netherlands and Britain.  When Iceland’s banks failed, Britain and the Netherlands made up the deposits, and now they want Iceland to pay.  If Iceland doesn’t, they have threatened to spike both its entry to the European Union and its 10 billion dollar aid package from the IMF.

The President’s decision means there must be a referendum to determine the fate of the bill.  A lot of folks are decrying this and insisting that Iceland should pay, but the background and the consequences aren’t that simple.

First, by European law, only the first 20K of each account is covered.  Iceland already passed a bill in which they agreed to pay that back, and that bill was not vetoed.  England and the Netherlands insisted that they cover all of the money, not just the amount legally required.

Second, Iceland is a small country,with a population of 316,960.  That isn’t even as large as most Canadian suburbs.  The cost per citizen, including children, people out of work, and seniors, would be $17,352.  Given Iceland is in complete economic collapse, that is a massive burden they simply can’t afford.

Third, the banks were essentially unregulated.  Britain, yes Britain, gave them licenses to operate despite the fact that other European nations lobbyed against it.  Given how lightly regulated British banks were, this means that Icelandic banks were being used by the City (London) to do things too dubious even for the City.  And given what the City was (and is) willing to do, that means they were black holes. You put your money in a country like Iceland where the banks are set up for those sort of unregulated operations, you take your bloody chances.  The old saying “you can’t cheat an honest man” applies.  The depositors wanted largely unregulated earnings.  In exchange they need to accept the risk that comes with it.

Fourth, a fifth of the population had signed a petition asking the President to block the law and force a referendum.  Responding to that is democracy.

Fifth: the corporations are limited liability corporations.  Are countries responsibility for all the debts of limited liability corporations in their country?  I don’t think so.

Britain and the Netherlands are extorting money with what amounts to threats to turn Iceland into a third world country where people may well starve to death.  They are doing so to bail out depositors who were greedy or stupid enough, or both, to be put money into banks set up precisely because they were doing stuff too risky even for London to do and which are limited liability companies.

After Gordon Brown used anti-terrorism laws to seize Icelandic assets, this is a further descent into thuggery and blackmail and those who say that Icelanders should pay it all off should think very carefully if they want their country to be forced to pay off all its private companies debts to foreigners.

For shame.

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