Category Archives: Currencies

Alexander Gloy: Merkel to Sinn: “In my office. NOW.”

Yves here. Outbreaks of candor and foresight among the political classes are so rare that they bear watching. As Gloy’s sighting suggests, they have to be arrested quickly lest they prove to be contagious.

By Alexander Gloy, CIO of Lighthouse Investment Management

Hans-Werner Sinn, head of German research institute Ifo, has just put his life into peril. He had to pick a Swiss magazine (“Bilanz”) to express what nobody else is allowed to mention in Germany: “Greece is a bottomless barrel”.

Michael Hudson: Will Greece Let EU Central Bankers Destroy Democracy?

Yves here. This is a long and important post. Hudson reports that he has gotten a great deal of correspondence from Greece saying that articles like this arguing against the pending stripping of Greece by banks are being translated and circulated widely to provide moral support. If you cannot read this piece in full, please be sure to read the discussion at the end of how Iceland stared down its foreign creditors.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Cross posted from CounterPunch.

Promoting the financial sector at the economy’s expense

When Greece exchanged its drachma for the euro in 2000, most voters were all for joining the Eurozone. The hope was that it would ensure stability, and that this would promote rising wages and living standards. Few saw that the stumbling point was tax policy. Greece was excluded from the eurozone the previous year as a result of failing to meet the 1992 Maastricht criteria for EU membership, limiting budget deficits to 3 percent of GDP, and government debt to 60 percent.

The euro also had other serious fiscal and monetary problems at the outset. There is little thought of wealthier EU economies helping bring less productive ones up to par, e.g. as the United States does with its depressed areas (as in the rescue of the auto industry in 2010) or when the federal government does declares a state of emergency for floods, tornados or other disruptions. As with the United States and indeed nearly all countries, EU “aid” is largely self-serving – a combination of export promotion and bailouts for debtor economies to pay banks in Europe’s main creditor nations: Germany, France and the Netherlands. The EU charter banned the European Central Bank (ECB) from financing government deficits, and prevents (indeed, “saves”) members from having to pay for the “fiscal irresponsibility” of countries running budget deficits. This “hard” tax policy was the price that lower-income countries had to sign onto when they joined the European Union…..

At issue is whether Europe should succumb to centralized planning – on the right wing of the political spectrum, under the banner of “free markets” defined as economies free from public price regulation and oversight, free from consumer protection, and free from taxes on the rich.

The crisis for Greece – as for Iceland, Ireland and debt-plagued economies capped by the United States – is occurring as bank lobbyists demand that “taxpayers” pay for the bailouts of bad speculations and government debts stemming largely from tax cuts for the rich and for real estate, shifting the fiscal burden as well as the debt burden onto labor and industry.

Philip Pilkington: Debt, public or private?: The necessity of debt for economic growth

By Philip Pilkington. Journalist, writer, economic anti-moralist and aficionado of political theatre

‘Tis not due yet; I would be loath to pay him before
his day. What need I be so forward with him that
calls not on me? – Falstaff, ‘Henry VII’

The Anxieties of Government and Debt

Apart from debt, there is perhaps one other economic phenomenon that generates exceptionally large amounts of emotive nonsense both on the internet and in real life – and that is government. So it’s quite unsurprising that when government debt is the discussion of the day, passions flare, accusations are hurled and the coming apocalypse is invoked.

It would be interesting to undertake a psychological study of modern man’s aversion to government and to debt. If I were to guess I would say that many people tend to associate government with authority and debt with obligation. Authority and obligation – surely in our era of selfish hedonism no other potential restraints are so terrifying to so many. These phenomena intrude rudely on one of our most cherished contemporary ideological myths: individualism. More specifically, that outlandish individualism conjured up by marketing men to flog their wares and crystallised in novels and narratives written by lonely and isolated individuals like Ayn Rand. It is, of course, a fantasy individualism; one that few truly adhere to in their day-to-day lives – but it is, like the religions of days gone by, an important determinate in the messages people choose to accept and those they choose to reject.

To put the questions of individualism and of liberty aside though, from an economic point-of-view debt is inevitable.

Michael Hudson: Replacing Economic Democracy with Financial Oligarchy

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Cross posted from CounterPunch.

Soon after the Socialist Party won Greece’s national elections in autumn 2009, it became apparent that the government’s finances were in a shambles. In May 2010, French President Nicolas Sarkozy took the lead in rounding up €120bn ($180 billion) from European governments to subsidize Greece’s unprogressive tax system that had led its government into debt – which Wall Street banks had helped conceal with Enron-style accounting.

The tax system operated as a siphon collecting revenue to pay the German and French banks that were buying government bonds (at rising interest risk premiums). The bankers are now moving to make this role formal, an official condition for rolling over Greek bonds as they come due, and extend maturities on the short-term financial string that Greece is now operating under. Existing bondholders are to reap a windfall if this plan succeeds. Moody’s lowered Greece’s credit rating to junk status on June 1 (to Caa1, down from B1, which was already pretty low), estimating a 50/50 likelihood of default. The downgrade serves to tighten the screws yet further on the Greek government. Regardless of what European officials do, Moody’s noted, “The increased likelihood that Greece’s supporters (the IMF, ECB and the EU Commission, together known as the “Troika”) will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.”

The conditionality for the new “reformed” loan package is that Greece must initiate a class war by raising its taxes, lowering its social spending – and even private-sector pensions – and sell off public land, tourist sites, islands, ports, water and sewer facilities. This will raise the cost of living and doing business, eroding the nation’s already limited export competitiveness. The bankers sanctimoniously depict this as a “rescue” of Greek finances.

Bill Black: Bad Cop; Crazed Cop – the IMF and the ECB

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from http://neweconomicperspectives.blogspot.com/2011/05/in-praise-of-sorkins-praise-of.html“>New Economic Perspectives

Greetings again from Ireland. One of the many mysteries about the current crisis is why anyone listens to the IMF or anyone that supported its anti-regulatory policies. Prior to the crisis, even the IMF had begun to confess that its austerity programs made poor nations’ financial crises worse. In the lead up to the crisis the IMF was blind to the developing crises. It even praised nations like Ireland during the run up to the crisis, missing the largest bubble (relative to GDP) of any nation, an epidemic of banking control fraud, and the destruction of any pretense to effective Irish banking regulation.

Crises reveal many deficiencies and one of the most glaring was the European Central Bank (ECB).

Jean Pisani-Ferry on Europe’s Tiger and German Nightmares

This INET interview with Jean Pisani-Ferry gives a useful overview of how Greece and Ireland came to have sovereign debt woes and the viability of the remedies proposed for each. Pisani-Ferry argues, as many other economists do, that austerity measures will not succeed in Greece because they will prove to be politically unsustainable.

Michael Hudson: Breakup of the euro? Is Iceland’s rejection of financial bullying a model for Greece and Ireland?

Yves here. This piece describes how voter opposition may derail rule by bankers via IMF, European Commission, and ECB austerity programs in Europe.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Cross posted from CounterPunch.

Last month Iceland voted against submitting to British and Dutch demands that it compensate their national bank insurance agencies for bailing out their own domestic Icesave depositors. This was the second vote against settlement (by a ratio of 3:2), and Icelandic support for membership in the Eurozone has fallen to just 30 percent. The feeling is that European politics are being run for the benefit of bankers, not the social democracy that Iceland imagined was the guiding philosophy – as indeed it was when the European Economic Community (Common Market) was formed in 1957.

Marshall Auerback: To Save the Euro, Germany Has to Quit the Eurozone

By Marshall Auerback, a portfolio strategist, hedge fund manager, and Roosevelt Institute fellow

When the euro was launched, leading German politicians used to argue, with evident relish (and much to the chagrin of the British in particular), that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. This is becoming both economically and politically unsustainable. If the objective is to save the currency union, perhaps policy makers are looking at this the wrong way around. In the end, paradoxically, to save the European Monetary Union, the least disruptive way forward would be for the Germans, not the periphery countries, to leave.

Marshall Auerback: IMF’s Predatory Policies Likely to Continue with New Leadership

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

It doesn’t matter who leads the IMF when the institution is governed by ideology.

Greece and Ireland appear to have lost an important political ally with the sidelining of Dominique Strauss-Kahn as both plead for more financial assistance from European partners to avoid an early restructuring of debt. The key word is “appears,” as in truth, arsenic remains arsenic, even if it is coated in sugar by an ostensible champagne socialist like Mr. Strauss-Kahn.

David Apgar: Trash Trichet’s Stockholdings to Save the Euro Zone

By David Apgar, the founder of ApgarPartners LLC, a firm that helps companies and development organizations learn by treating goals as assumptions to be tested by performance results. He blogs at www.relevancegap.blogspot.com.

The best hope for the euro zone may be to find a few bank stocks rattling around in European Central Bank (ECB) Governor Trichet’s brokerage account. There’s no chance that the long-time French civil servant would compromise his policy views to benefit himself, but it’s the kind of made-for-muddled-media factoid that, if found, could put a quick end to the farce he and the ECB perpetuate in pretending Greece is not bankrupt. Europeans tolerate this farce and the crisis it prolongs only because it will suppress the euro and block export-led recovery in the US. And if there’s one thing more attractive to the Euro-policy crowd than ending a crisis of the euro, it’s blocking US recovery.

A leader in this week’s Economist lays out the dimensions of the problem.

Jeffrey Frankel: The ECB’s three mistakes in the Greek crisis and how to get sovereign debt right in the future

Yves here. While Frankel’s take on the ECB’s errors has some merit, his recommendation, of imposing much harder limits on eurozone members who run deficits in excess of permitted levels, is more debatable.

Any country running a large intra-eurozone trade deficit is going to show rising debt levels. If the increase in debt funds investments that increase economic productivity, that might work out fine in the long run, but that seldom proves to be the case. We’ve seen that big debtors either rack up rising government debt levels directly (Greece) or have rising private sector debts that eventually result in outsized financial sectors that produce financial crises that lead to collapses in tax revenues that then lead to rising government debt levels (or directly via bailouts, see Ireland). Note in most countries the explosion in debt to GDP is primarily the result of the impact of the global financial crisis on tax revenues). So fiscal deficits cannot be addressed independent of trade and cross border capital flows.

By Jeffrey Frankel, Professor of Economics at the Kennedy School of Government, Harvard. Cross posted from VoxEU

It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank. Number one: Letting Greece join the euro in the first place

More on Greece Restructuring and Eurozone Worries

While the Euro recovered from its stumble last week and the EU officialdom put out a round of denials of a story on Friday that Greece was considering an exit from the eurozone, the Euro tea leaf readers are still chewing over the significance of a not at all secret secret meeting over the weekend. The trigger is the fact that Greece is already on the verge of breaking the terms of its loans last year. This is hardly a surprise; austerity does not work and the Greek debt burden was clearly unsustainable. Per the Guardian:

Euro Whacked by Reports that Greece May Leave the Eurozone?

The Euro has fallen from roughly 1.49 to the dollar to 1.43 in a mere two days, which is a huge move. Many pundits have argued that the ECB’s newly accommodative stance is the trigger, but there may be additional forces at work. Most experts have deemed the idea that any eurozone member would exit the currency to be simply inconceivable, that it would be too costly and disruptive. But with the hair shirt that Greece is being asked to wear, all bets may be off.

As of this juncture, this reports in Der Spiegel does not appear to have gotten traction among the Usual Suspects in the MSM. Headline: “Greece Considers Exit from Euro Zone” (hat tip readers John M and Illya F).

Commodities Tank

We’ve been sayin’ the commodities runup and the fixation on inflation looked like a rerun of spring 2008: a liquidity-fueled hunt for inflation hedges when the deflationary undertow was stronger. That observation is now looking to be accurate.

But what may prove different this time is the speed of the reversal. With investors acting as if Uncle Ben would ever and always protect their backs, markets moved into the widely discussed “risk on-risk off” trade, a degree of investment synchronization never before seen. All correlations moving to one historically was the sign of a market downdraft, not speculative froth. And as we are seeing, that means the correlation will likely be similarly high in what would normally be a reversal, and that in turn increases the odds that it can amplify quickly into something more serious.

Michael Pettis: Is it time for the US to disengage the world from the dollar?

By Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management. Cross posted from China Financial Markets

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost.