Worry about idiocy not inflation (part 5) Undetected systemic risk - Humans

Dear reader,

unfortunately again there is a serious crisis developing within the big crisis (Spain) and again the author here hasn't got the time needed to reflect on more specific stuff like the correlation or struggle between German government and the Bundesbank for instance. Unfortunately also because the eurozone enters its next phase with serious risk of systemic failure, unfortunately foreseeable because the main 'actors' of the scene pose a systemic risk in themselves without nyone noticing or caring for that matter. The whole procedure of the demise of the European currency is a story of systematic denial , going even that far that some main players even denying that there is a crisis ! "Crisis of the Euro ? What crisis ? It's a success story .. just look at ultra low inflation figures, well within thee predefined limits !"

As always a bunch of things the author here reads almost on a daily basis reaches a critical mass sometimes and there is enough information to fill another blog post with some remarks. Remarks on the eurozone could actually need some 10-20 commentators nowadays, because of the sheer quantity of (unwanted) developments in this formally calm monetary area.To be honest the whole project was started as a kind of desperate act to prevent the eurozone to collapse , since the author here at least recognized the dangerous path it was on leading to the abyss. Simply by raising some level of awareness among the 'usual followers'. Fortunately the ECB at least had the courage to stop complete breakdown of the euro area, giving the other 'actors' in the drama the breathing space to take some necessary steps to prevent a repetition of events. So the ball was in the court of those politicians who created the whole thing with some serious flaws in its design (as we know now). It seems the effects of the double LTRO named 'Big Bertha' is coming to an abrupt ending, since once again the political leaders went to sleep yet again, instead of taking immediate and long overdue action.

The current crisis chapter is dominated by bad news from Spain, which was however not that surprising given the fact that the collapse of the real estate sector dragged down banks, confidence and perhaps ultimately the state, too. Once again events are dramatic enough in speed and scale that nothing short of brunt and large scale action can prevent a complete catastrophe. But this blog entry is not about the steps which are going to be taken by the EU without any doubt because there isn't currently much of an alternative in sight. It is more about the one way street the community of states holding the euro currency, but also others have taken. The one way street it seems to this author following more a map of insanity than reason and resulting in measures of 'there is no alternative' because the end of the road has been reached again and at that point there is indeed very little room for maneuver left.

So the final trigger of this blog entry was an op-ed article by esteemed journalist Florian Eder of the German newspaper 'Die Welt': Just spend the money, someone will pay where he states the basic flaw of current emergency measures:

"Es ist der falsche Weg. Eine Ausweitung der gemeinschaftlichen Haftung auf die spekulativen Geschäfte spanischer Banken und damit auf die Folge einer geplatzten Immobilienblase verringert die Verantwortung des Einzelnen. Sie verschleiert Verantwortlichkeit. Das ist das Grundübel der Krise ebenso wie der Versuch, Griechen, Italiener, Spaniern, Franzosen ihre Folgen weitgehend zu ersparen." engl.: "It is the wrong way. An extension of common liability of speculative deals of Spanish banks and with it of the results of a bursted real estate bubble reduces the responsibility of the individual. It disguises responsibility. That's the basic flaw of the crisis as is the attempt to save the Greeks, Italians, Spanish, French from their consequences."

Christine Lagarde: Shoot the messenger ?

Dear reader,

as always the author wants to bring in some 'food for thought' into the discussion. It is not intended to provoke, on the contrary. In order to add some facts to an odd discussion which started last Friday after Christine Lagarde
gave an interview to the Guardian newspaper, in which many people see a 'provocation' where only publicly known facts were communicated along with a perhaps a bit clumsy wording in order to make the point that the organization Ms Lagarde heads is recently under fierce criticism of those members of 'emerging world' who were asked to contribute to IMF funding in order to help out European countries. Among those which are earmarked for IMF emergency funding is of course Greece.

So in order to make some points in this blog entry there will be some links to articles which give the readership more background. So far it seems that many people with no or only minor knowledge of the 'context' of Ms Lagarde's remarks seemed to have shouted 'foul play'.

So in order to understand the 'usual' tasks of the IMF it is necessary to see the big gap between European countries like Greece seeking help also from the IMF and those countries from the African and American continent which are normally in the focus of their loans. One also have to keep in mind that the IMF is some kind of trustee for its member countries, known for its very conservative lending practice where usually all the money handed out to counties in need is repaid in full.There have been 'strong recommendations' by Ms Lagarde regarding Greece before: IMF's Lagarde urges Greece to implement fiscal program

Worry about idiocy not inflation (part 4) - Helping Greek bureaucrats not businesses

Dear reader,

the author here has to confess that he is currently restraining himself not to write several articles per day whenever another idiocy of the eurozone is brought to his attention.

One short blog entry needs to focus on the current approach of EU politicians who are obviously trying to combine their 'skills' of kicking the cans down the roads with purely financial matters such as transferring ever larger portions of money out of their own (taxpayers) coffers to Greece in order to help the hopeless budget situation over there. In order to keep a overstaffed Greek public sector afloat, while in the meantime the Greek private sector such as tourism industry has to listen to ever weaker foreign demand and has to sack many of its employees.

They (euro creators) should have asked Paul de Grauwe

         Gavyn Davies on Twitter:

"In a remarkable article written in 1998, Paul de Grauwe predicts the exact anatomy of the present euro crisis. Amazing!" (@gavyndavies May 16th 2012, 10:56 CET)

Paul de Grauwe: The euro and financial crises
(February 1998!)

"The European Commission did invite economists to present their views. It was a Darwinian process,” said Paul De Grauwe, professor of European political economy at the London School of Economics. “I was invited, but when I expressed my doubts I wasn’t invited anymore. In the end only the enthusiasts were left.”

Excerpt from NY Times 2012/05/16 

No wonder that today we experience that many problems with the common currency when its political creators ignored all economic reasoning in order to fulfill their own dreams about a common European currency. Even more so when countries such as Greece and Italy were allowed in despite reasonable doubts about their debt levels. Even more so astonishing that obviously nobody was looking more closely into the numbers provided by e.g. Italian and Greek authorities. By now we all know what happened with Greece and Professor Gustavo Piga gave evidence about Italian 'cooking the books' in BBC's Robert Peston's outstanding documentary The great Euro crash. 

Of course in this documentary there are many more politicians giving evidence from the 1990s how the Euro was created. British politicians were skeptic then and now have difficulties to hide their satisfaction not to have succumbed to the pressures from Brussels.

In general it's a pity that politicians have felt and some are still feeling superiority over economists and economic realities. A bit like those apparatchiks in former Eastern Europe ignoring economic realities until not only their economies but also political system finally imploded.

Maybe the negative experience of Mr de Grauwe in the 1990s should lead to the conclusion that well respected economists shouldn't be ignored anymore in finding solutions to fix the basic problems or design flaws of the Euro system. All those responsible for success or failure of the common currency should put economic sense before ego !

Overcoming the Euro crisis (part XXIV)

Dear reader,

after a week of more turmoil in the eurozone, where Greek 'bank jog' as Paul Krugman called it is taking place in Greece, more uncertainty is caused by obvious inability to form a new coalition government there and have new elections instead, Spanish turmoil now shifting from those indebted regions to government debt and deficit problems to its banks, the author wants to send out another reminder:

                                   (another excellent chart by Scott Barber/Reuters) 

As anyone can see, current US growth doesn't grow on trees, but is a result of uninterrupted growth of industrial production still on recovery path after the big dip of 2008/2009. Whereas the EZ is still facing further decline because of ever more 'internal problems' of not only excessive state debt, but also looming Greek Euro exit. Spanish state & bank problems and one crisis is hitting the focus of world wide attention after the other. Crisis focus changes almost on a weekly basis , and at one point even the Netherlands was in the focus of attention because of its breakdown of its cabinet and another year with a deficit far greater than the rules allowed was looming 2013 also. At least the latter crisis fire seems to have been extinguished.

Open letter to German opposition leader Sigmar Gabriel (SPD) - german

Sehr geehrter Herr Gabriel,

zunächst einmal möchte der Autor hier Sie ganz ernsthaft als neues Mitglied der weltweiten Twitter Gemeinde willkommen heißen, und seine Wertschätzung dafür zum Ausdruck bringen, daß Sie es offenbar vorziehen selber zu schreiben, statt ein Schreibbüro dafür zu engagieren.

Der Grund warum der Autor hier ausgerechnet Ihnen einen offenen Brief schreibt, ist allerdings nicht ihr wie gesagt begrüßenswertes Engagement auf Twitter, sondern ist im Zusammenhang mit der (inzwischen berühmten) Rede Helmut Schmidts bei Ihrem Parteitag im Dezember zu sehen.

Der Autor pflegt große Wertschätzung für Ihren Altkanzler zu haben aus 3 historischen Gründen und eben wegen einer, aus vielleicht noch historisch zu werdenden, Weitsicht. Die drei historischen Gründe sind ganz klar:

1.) Sein Einsatz bei der Flutkatastrophe 1962 in Hamburg, wo er sich vor allem dadurch auszeichnete, daß er sich über Regeln hinweg setzte, und sich zunächst einmal um die Rettung von Menschenleben kümmerte. Die geniale Idee dabei auf "Kontakte" zur NATO Rückgriff zu nehmen ist dabei nur ein genialer und wesentlicher Teil seines Verdienstes. 

2.) Die Durchsetzung des NATO-Doppelbeschlußes entgegen dem damals vorherrschenden Zeitgeistes und des Populismus z.T. basierend auf Steuerung aus dem "Osten". Angesichts protestestierender Menschenmassen dennoch das letztlich historisch gesehen richtige getan zu haben, ist ebenfalls sehr lobenswert.

3.) Seine klare, und harte Haltung gegenüber dem damals auf seiner Spitze beruhenden Linksextremismus bzw. genauer RAF Mörder, wo ebenfalls harte und menschlich höchst belastende Entscheidungen zu treffen waren. Er auch da bewiesen, daß er im Sinne einer größeren Sache, auch entgegen kurzfristig vorteilhaft erscheinender Umstände Härte und Weitsicht gezeigt zu haben, die ihn auch sicherlich so manchen politischen Anhang aus seinem "Lager" gekostet hat.

German Bundesbank accepts higher inflation in Germany

Dear reader,

the author is shocked !

Not so much about the latest 'statement of capitulation' of the Bundesbank, but about the lack of media attention it got so far !

Bundesbank rechnet mit überdurchschnittlicher Inflation in Deutschland

"Die Deutsche Bundesbank rechnet damit, dass Deutschland mit überdurchschnittlichen Inflationsraten zum Abbau der Leistungsbilanzungleichgewichte im Euroraum beitragen wird. Der Leiter der volkswirtschaftlichen Abteilung, Jens Ulbrich, sagte bei einer Anhörung im Finanzausschuss des Bundestags, "reguläre marktliche Anpassungsprozesse" würden dazu führen, dass sich die Wettbewerbsfähigkeit der Peripherieländer gegenüber Deutschland verbessern werde"

"German Bundesbank awaits that Germany with higher than average inflationrates will contribute to the depletion of current account deficits within the eurozone. The chief of the economic department , Jens Ulbrich¹, said during a hearing of the finance committee of the Bundestag, "regular market accommodation processes" would lead to an improvement of the competitiveness of peripheral countries contra Germany. "

"Deutschland dürfte in diesem Szenario künftig in der EWU eher überdurchschnittliche Inflationsraten aufweisen, wobei die Geldpolitik dafür zu sorgen hat, dass die Inflation im Aggregat der EWU dem Stabilitätsziel entspricht und die Inflationserwartungen fest verankert bleiben", fügte er hinzu."

"Germany would possibly show some above average inflation rates in the EMU in that scenario, where the monetary policy has to see that inflation in the aggregate of the EMU meets the stability goal and the inflation expectations will remain tightly anchored", he added.   

(German language excerpts all from article of Märkische Allgemeine) 

Those words by German Bundesbank perfectly fit in the context described here earlier on this blog, where German finance minister Wolfgang Schäuble has crossed lines before and now thinks as Paul Krugman and others do and see this as the only viable solution to hold the currency union together, or better preventing massive current account deficits to blow up the whole construction. The author doesn't know for sure, but it might played a role that professor Sinn and others made it clear, that there was more risk to Germany, its finances and its economy as well as to whole European future, when this goes totally wrong. 

That subject is so huge it is rather strange that so far no journalists jumped on the story and asked Mr Schäuble and all others most certainly involved in the decision making process what exact 'game plan' they have in mind and what exactly made them rethink their previous heavily defended position.

It might have also played a role that it was forecasted that Mr Sarkozy would no longer be in office shortly and that Chancellor Merkel faces the choice of cooperating with the other major European power or get isolated and possible exit the Euro instead of Greeks as it was suggested not that long ago by Mr Panicos Demetriades.
So Germany is facing now very very difficult choices, which might have been already made, but not fully comprehended by the German public by now. (And international financial press seems also to repeat the rather slow process of fully understanding the implications like back then in December when Mario Draghi was announcing his unprecedented steps (LTRO) later described as 'big Bertha' instead of the bazooka demanded before by those who couldn't detect neither a bazooka nor a 'big Bertha') 

update/ related article(s): 
May 13th Der Fluch der Inflation/The curse of inflation (FAZ)
May 9th   Rolle der Geldpolitik: Jens Weidmann - Zentralbanken sind keine Krisenlöser
Apr 29th  Bundesbank and German government about to fight real estate bubble 

¹ A former close ally of former Bundesbank helm Axel Weber.

Worry about idiocy not inflation (part II) German austerity myth

Dear reader,

first of all the author wants to apologize for part II being about German austerity myth instead of about some topics announced in part I. But as always something the author reads/hears/watches that inspires him to write some comments about it. And since the whole crisis situation is constantly on his mind anyway, many of the articles are just lacking being written, but certain topics have been on his mind for a long time.

Nowadays just after the election of Francois Hollande there is even more talk of austerity vs growth and it was already planned to collect more articles fitting in the one or the other category, which would eventually be part of a new factual blog entry on this blog's main website. So there will be another purely factual entry later, but first the author is feeling obliged to make a few remarks about the so called 'austerity'. Something that many German orthodox, self declared defenders of proper European budget keeping praise. This dogma is repeated all over again since weeks, months now and to be honest it is astonishing that so far not one journalist had asked the all important question IF Germany had undergone strict 'austerity'. Or did they not in fact practice 'tax & spend' and that to an extend that many German taxpayers, individuals as businesses alike, are constantly moaning about their declining incomes after taxes and duties. Did nobody dare to ask questions about the tax hike in 2007 where Chancellor Merkel and her finance minister Steinbrück did raise VAT from 16% to 19% ? The biggest increase in the history of the federal republic of Germany, going back till the end of the 1940s ! (chart 1991-2008 by FAZ)Was nobody asking questions about ever higher levels of tax revenues, steadily rising levels of state income, now reaching record levels never recorded before ? Even after a short dip during Germany's mini recession after the Lehman event in 2008, it is now producing ever new proud headlines of 'new records' and 'steadily rising tax revenues until 2020'.

Worry about idiocy not inflation (part I) Introduction

1st part: Introduction

Dear reader,

this entry will start a series of smaller pieces in order to prove the thesis that European citizens are less in danger of falling pray to inflation than to higher taxation, wrong judgment by economists & politicians and as a result risking their personal financial well being or even losing their life savings/investments in one decisive blow or during the next few years. Or even worse, risking losing their life as it is happening in Greece and Italy right now.

First of all the author here would like to explain why he chooses for publishing smaller pieces and make it a serial, instead.  Since starting to blog last year it turned out to be much more time consuming than previously thought, and one important lesson of the ongoing Euro crisis is that constantly new developments must be considered, and so updates of blog entries are imperative to give a full picture. On the other hand it is almost impossible to explain everything at once, unless it is intended to write a book about the subject of European demise after introduction of the single currency and especially since 2008. And as pointed out before, such a book would be totally outdated once it hits the shelves.

German FinMin Schaeuble listened to Paul Krugman

Dear reader,

reading the latest remarks by Mr Schäuble concerning the ongoing wage negotiations in German metal sector could give such an impression. (Although politics shouldn't get involved in those negotiations! <autonomy of unions and management) As many times before it was brought to the author's attention by a fellow user of Twitter; this time professor @ewaldeng deserves credit for it.

Here is what German newspaper Frankfurter Allgemeine Zeitung has on this story
Schäuble: Die Löhne können kräftig steigen

obviously based on the story by Focus:
IG Metall droht erneut mit Streiks –Schäuble für Lohnplus

"Finance minister Wolfgang Schäuble (CDU) was promoting a significant increase in wages in current wage negotiations. "It is alright, if wages currently increasing more significantly than in other EU-countries.", Schäuble said to 'Focus'. Germany has made its homework and could afford higher pay settlements better than other countries. "but we must be cautious not to exaggerate. We must keep the right balance." " (Focus excerpt)

"Außerdem komme man mit höheren Lohnabschlüssen in Deutschland den Forderungen anderer Länder entgegen. "Diese Lohnsteigerungen tragen auch zum Abbau von Ungleichgewichten innerhalb Europas bei", sagte Schäuble. " engl.: "Furthermore with higher wage settlements in Germany the country meets demands of other countries. "Those wage increases also do their part for reduction of imbalances within Europe", Schäuble said." (Die Welt excerpt)

compare this to the latest statement by Mr Krugman in German weekly "Der Spiegel" :

"Der Zustrom des Kapitals nährte einen Boom, und der führte zu Lohnerhöhungen: Während der ersten zehn Jahre nach der Einführung des Euro stiegen die Lohnstückkosten (der Lohn gemessen an der Produktivität) in Südeuropa um 35 Prozent, in Deutschland dagegen nur um 9 Prozent. In Südeuropa wurde die Industrieproduktion daher immer weniger wettbewerbsfähig, was zur Folge hatte, dass die Länder, die viel ausländisches Kapital anzogen, immer größere Außenhandelsdefizite anhäuften."

engl.:"The influx of capital was feeding a boom and this led to higher wages: During the first ten years after the introduction of the Euro the unit labor costs had risen (the wage measured against productivity) in Southern Europe some 35%, in Germany however just around 9%. In Southern Europe the industrial production has lost competitiveness, what led to the result, that those countries which attracted much foreign capital accumulated ever bigger foreign trade deficits." (Spiegel excerpt)   

So it seems that Mr Schäuble listened somehow to Mr Krugman, just as Mr Sarkozy seemed to have somehow listened to Mr Roubini, when he demanded a depreciation of the Euro against the Dollar during his reelection campaign ;-)

May 6th 2012 Paul Krugman: German Adjustment
May 6th 2012 Schäuble für klares Lohnplus

...
ROUNDUP: IG Metall droht erneut mit Streiks – Schäuble für Lohnplus - weiter lesen auf FOCUS Online: http://www.focus.de/finanzen/news/wirtschaftsticker/roundup-ig-metall-droht-erneut-mit-streiks-schaeuble-fuer-lohnplus_aid_747862.html

Banks May Have to Disclose Profits From ECB Emergency Loans

Dear reader,

since the LTRO actions of the ECB are of the author's special interest and Sandra Fiene (@EUFiene) narrowcasted this article by "Der Spiegel": Nach EZB-Hilfen: EU will Gewinne der Banken prüfen

which is most likely based on this article by Bloomberg: Banks May Have to Disclose Profits From ECB Emergency Loans

it is worth to be mentioned and commented here.

This story perfectly fits in the context of
Liquidity released, bubbles ahead, how to regain control ?
National fiscal policies to counter ECB's main dilemma
KantoosEconomics asks good questions


The demand for more transparency by the European parliament just to limit 'bankers' bonuses' seems however either to be a cover story for deceiving the public or really reflects the need for populism in order to remain 'the darling of the voter'

The latter imaginable for those MEPs depending on reelection, but since finance ministers of the eurozone as well as the ECB have an interest more for the stability of the whole financial sector and probably don't care much about what individuals of private banks get paid. And there are some banks owned or partially owned by states , where there are already strict limitations of what managers can earn. (As far as the author here knows)

On the one hand there are hundreds of Billions of Euros to get controlled and steered in the right direction and there are those potential bonuses worth only a few millions and more a concern for shareholders and boards of those banks than for the public.   

So one can only wonder about what is really behind that nevertheless interesting story. Hopefully not another attempt to boost the budget of the EU through a new tax to fill their ever growing financial needs combined with being 'the darling of the public'.