Dummies video clip on the Euromezz. Pay special attention to Italy and Spain as there is more to come in the Med area.
Yanis Varofauakis,a Greek economist featured prominently in the program, alerted me to his comments about the program on his blog. Yanis had this to say [highlight added]:
I very much fear that the viewer was, in the end, short-changed. Yet again the Euro Crisis was reported in a manner that leads the audience to the conclusion that the problem with the eurozone is that some countries accumulated too much debt and that, now, Germany has the unenviable task of bailing them out; a task that puts it in the difficult position of having to impose strict conditions before it dispenses its citizens’ hard earned money. While the program was sympathetic to the suffering Greeks, the underlying analytical message was simple: Bitter medicine must be dispensed, Germany is dispensing it (courtesy of being the only country that has the funds to bail the rest out) and, alas, Greeks and assorted southerners (plus the Irish) are unhappy about the loss of sovereignty involved (an unhappiness that is heightened by the memory of the Nazi occupation).
This analysis is precisely wrong. During my long interview with Steve Kroft (out of which came the snippets that you see in the piece) I put all my energy into offering what I consider to be the true causes and nature of the Euro Crisis; the way that eurozone was constructed, the prior flow of rivers of private (bank created money into the Periphery, the internal imbalances which have been growing in Europe, its dependence on the US deficit etc. Of these, only the statement “we are part of a currency union which was never designed to sustain such a crisis” made it. But disconnected from any explanation of what I meant, and how it pertains to the failure that is the current bailout-austerity policy mix, I suspect that the viewer had no chance of understanding my point, or using my narrative as a counterweight to those of Mr Schauble and Ms Lagarde.
CBS video below. h/t Edward Harrison.
Hudson on the “unpayable” Debt.
A common denominator runs throughout recorded history: a rising proportion of debts cannot be paid. Adam Smith remarked that no government ever had repaid its debt, and today the same can be said of the overall volume of private-sector debt. One way or another, there will be defaults – unless debts are paid in an illusory fashion, simply by adding the interest charges onto the debt balance until the sums finally grow to so fictitious a magnitude that the illusion of viability has to be dropped.
But freeing an economy from illusion may be a traumatic event. The great policy question therefore concerns just how the various types of debts won’t be paid. The choice is between forfeiting property to foreclosing creditors, or writing debts down at least to the ability to pay, and possibly all the way down to make a fresh start. Somebody must lose, and their loss will appear on the other side of the balance sheet as another party’s gain. Debtors lose when they have to forfeit their property or cut back other spending pay their debts. Creditors lose when the debts are written down or go bad.
The Spanish government has recently announced a tough package of fiscal austerity measures in its budget for 2012. But implementing these reforms will prove very difficult in what remains of the year. And with the economy already in recession, it would be very surprising if this package is sufficient to lower the deficit to the 5.3% of GDP target. On EU measures, government debt in Spain amounts to 70% of GDP, a lower level than both Germany and France. This seems to imply that Spain has plenty of room for manoeuvre. But the data flatter the government’s true financial situation – a consolidated measure of the general government finances indicates that the true level of debt is actually around 82% of GDP.
Even more worrying are the state’s ‘contingent liabilities’ in the banking sector. The banking system remains heavily exposed to the property market and the process of cleaning up the balance sheets of Spanish banks may have only just begun. Further house price declines are likely to increase loan losses on property, while asset quality across the broader loan book of the banks is likely to deteriorate as the economy contracts. The government may eventually be forced to step in with a much larger bailout of the financial sector to prevent the failure of institutions deemed too important to fail. Spain appears to be locked in a worsening debt trap, with high levels of debt in both the public and private sectors. Given the dire economic and financial situation, there is a high risk that it will eventually need to seek assistance from the Troika (EU/IMF) programmes.
US taxpayers in April 2011 sent $140 billion to the US Treasury. While I have no idea how much taxes will be paid this April, I am pretty sure that billions of dollars in stocks still will be sold to pay taxes. That should keep pressure on stock prices the rest of this week, everything else being equal.
The biggest story today is that the financial markets were shocked, shocked that Friday’s jobs number was disappointing. After all, the Bureau of Labor Statistic had been guessing that an average of 250,000 new jobs were created each month, after seasonal adjustments, from December to February. Over that same time frame there appeared to be an improving trend in weekly new unemployment claims.
What I am most shocked about is that almost everyone on Wall Street seems to believe that the Bureau of Labor Statistics initial estimate of new jobs and unemployment claims are as accurate as if they were generated by a ticket taker counting admissions. The Wall Street Journal, the New York Times, the talking heads on CNBC, other than Rick Santuli, all did not voice any reservations what so ever about the quality of the BLS number. Not one report stated that the initial BLS job number often gets revised dramatically up and down before getting finalized years later when the income tax returns are totaled up. (Full reading here).
The market was hoping for a calm Easter holidays. Instead the markets have put in some rather bearish action over the past week, with the Spanish situation getting an increased focus. The Trader has been rather bearish in the Spanish economy and markets. Latest is some vague rumors hitting the markets with regards to Spain leaving the Euro. This is probably premature at this level, but the tone regarding the Spanish mess is getting more aggressive by the day. Some headlines from the Spanish press today ;
As we have said many times before; “Espana, everything under the sun”.
On Friday, the Department of Labor reported that March non-farm payrolls increased by 120,000, falling well short of consensus expectations in excess of 200,000. For our part, we continue to expect a deterioration in observable economic variables, with weakness that emerges gradually and then accelerates toward mid-year. On the payroll front, our present expectation is that April job creation will deteriorate toward zero or negative levels.
Immediately after the payroll number was released, CNBC shot out a news story titled “Disappointing Jobs Report Revives Talk of Fed Easing.” Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it – perhaps following a market plunge of 25% or more – but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can’t stand to see Wall Street throw a tantrum without reaching for a lollipop.
If the Fed indeed steps in with an additional round of QE, a few distinctions may be helpful. First,regardless of Fed actions, and even in the past few years, the market has invariably suffered significant losses following the emergence of the “overvalued, overbought, overbullish, rising-yields” syndrome that we presently observe. In contrast, the main window where it has not paid to “fight the Fed,” so to speak, has been the period coming off of oversold lows. That’s primarily the window where financials, cyclicals, materials, and garbage stocks with highly leveraged balance sheets have outperformed. Regardless of the fact that QE has had no durable economic benefits (more on that below), and does little but to repeatedly lay fresh wallpaper over the rotting edifice that is the global banking system, the main effect of QE has been to provide temporary support for the most speculative corners of the financial market after they have been pummeled.