Spain and The Owl Of Minerva
The Trader has written extensively over the past year about the Spanish Economy. The politicians are still behind the curve, not doing the proper adjustments. People on the other hand, are suffering as the high unemployment still makes the misery high. At least one thing is true, prces of properties have come off , and buyers from countries with “hard currencies” are the relative winners, as the sun and the sea is still the same. Some more insight on the Spanish economy, by Edward Hugh.
Last week was the fifth anniversary of the outbreak of the global financial crisis. Not uncoincidentally it was also the fifth anniversary of continually rising unemployment in Spain , since it was in early summer 2007 that seasonally adjusted Spanish unemployment embarked on its steady upward path. And after it started climbing, naturally it hasn’t stopped since. Indeed we seem to have at least another year of growing unemployment before us, maybe more.
Spending Problem? Paul Ryan is the Spending Problem
Guest post by Azizonomics.
Paul Ryan talks like a small government conservative:
Too much government inevitably leads to bad government. When government grows too much and extends beyond its limits, it usually does things poorly.
And the WSJ is pumping up Ryan as an antidote to the growth of government:
Ryan represents the GOP’s new generation of reformers. More than any other politician, the House Budget Chairman has defined those stakes well as a generational choice about the role of government and whether America will once again become a growth economy or sink into interest-group dominated decline.
But Ryan himself has been responsible for a lot of that government growth. He loyally voted for all the big government programs George W. Bush ensconced into law — Medicare Part D, often described as the largest expansion of the welfare state since Lyndon Johnson’s Great Society; the Department of Homeland Security and the TSA; the wars in Iraq and Afghanistan; the PATRIOT Act and the NDAA; the TARP bailout of Wall Street; the bailout of General Motors. So long as it was debt-fuelled spending authorised by a Republican (and during the Bush years, there was an awful lot of debt-fuelled spending authorised by Republicans) Ryan was out voting for it.
Currency Positioning and Outlook
Guest post by Marc Chandler of Marctomarket.The Bubble and Beyond
Michael Hudson’s latst book is a must read. Here is an excerpt.
This summary of my economic theory traces how industrial capitalism has turned into finance capitalism. The finance, insurance and real estate (FIRE) sector has emerged to create “balance sheet wealth” not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. This rentier overhead is overpowering the economy’s ability to produce a large enough surplus to carry its debts. As in a radioactive decay process, we are passing through a short-lived and unstable phase of “casino capitalism,” which now threatens to settle into leaden austerity and debt deflation.
This situation confronts society with a choice either to write down debts to a level that can be paid (or indeed, to write them off altogether with a Clean Slate), or to permit creditors to foreclose, concentrating property in their own hands (including whatever assets are in the public domain to be privatized) and imposing a combination of financial and fiscal austerity on the population. This scenario will produce a shrinking debt-ridden and tax-ridden economy.
Fuzzy Wuzzy was a Bear
I read report after report that pointed out the Bear Case. The Demise of Europe, Hard Landing in China, and Fiscal Cliff dominated the analysis, roughly in that order.
I agree with a lot of the Bear case. I can see it. I can argue it, heck, since much of it is focused on the bond market, I think I could argue it better than most. The problem with the bear case isn’t that it isn’t compelling, just that it hasn’t worked.
So what is wrong with the Bear Case?
For one, the bear case, in many instances is done with as much “fluff” as cheerleading bull arguments.
If Spain rolls 1 billion of debt, no new debt was created. Sometimes, the “debt on debt” argument is devolving into a rant. If a country can replace 4% average coupon debt with 2% average coupon, that is useful. It decreases current deficit. It reduces how much money has to be borrowed to pay interest. I’m not convinced this will happen, and I am concerned that the focus is on the short end, but average coupon does matter, access to cheap debt to roll old debt does matter. So this is one area where the bears are potentially too pessimistic.
Where the Money Lives
Weekend reading on taxes and politicians, by Vanity Fair.
For all Mitt Romney’s touting of his business record, when it comes to his own money the Republican nominee is remarkably shy about disclosing numbers and investments. Nicholas Shaxson delves into the murky world of offshore finance, revealing loopholes that allow the very wealthy to skirt tax laws, and investigating just how much of Romney’s fortune (with $30 million in Bain Capital funds in the Cayman Islands alone?) looks pretty strange for a presidential candidate.
Aperson who worked for Mitt Romney at the consulting firm Bain and Co. in 1977 remembers him with mixed feelings. “Mitt was … a really wonderful boss,” the former employee says. “He was nice, he was fair, he was logical, he said what he wanted … he was really encouraging.” But Bain and Co., the person recalls, pushed employees to find out secret revenue and sales data on its clients’ competitors.
Paul Ryan’s Budget
Guest poist by Azizonomics.
So Romney has picked Paul Ryan for Vice President; a man with a remarkably similar “deficit-reduction” strategy to that of George Osborne here in the UK, where unemployment and budget deficits have soared, and GDP remains well off its peak.
If Ryan or his Democratic rivals really understood the budget deficit, they would understand that its huge size is a result coming primarily out of a depression brought on by excessive total debt:
As debt soared from the 80s to the 90s, tax revenues soared as the economy boomed on borrowed money. But as the debt continued to grow relative to income, the costs of the debt mountain meant that income that might once have been invested in businesses and consumption went toward debt service instead. And so once we hit the point at which debt repayment exceeded new debt acquisition, we were flung into a depression. This has had a relatively severe impact on growth; since the deleveraging hit in 2008, GDP growth fell considerably from its long-term trend (nominal potential GDP):
Hard landing in China
Although “we” are all focusing on Europe and Spain mainly, China is slowing down irrespective of what they tell you. From The Telegraph.
“Severe deflation pressures are rippling across the country,” said Alistair Thornton and Xianfeng Ren from IHS Global Insight. “Deflation, not inflation, is the greatest short-term threat to the Chinese economy.”
“The hard landing has happened,” said Charles Dumas from Lombard Street Research. “We don’t believe official data. We think GDP slowed to a 1pc rate in the second quarter.”
A blizzard of weak data has caught policy-makers off guard, though shares rallied in Shanghai on hopes for monetary loosening fromChina’s central bank after consumer price inflation (CPI) fell to 1.8pc.
New property starts fell 27pc in July. Industrial output growth fell to 9.2pc for a year ago but has been flat over recent months.
“This was the moment when stimulus was supposed to bite. It didn’t,” said Global Insight. Critics say Beijing let the property boom go too far and then hit the brakes too hard last year. Monetary tightening led to a contraction in real M1 money. The delayed effects kicked in this year just as Europe fell back into recession and the US slowed abruptly. (full article here).
What about a German Referendum?
It is all (still) about Europe, although investors are getting tired of the “old” story. When will Spain stop imploding, what about Greece, will the core be immune?
All the above questions and a few more are keeping Merkel busy. The question is, should Germany hold a referendum? From Spiegel.
Chancellor Angela Merkel wants Europe to move toward an ever closer union in a bid to solve the euro crisis. But she is already pushing at the limits of what is possible under the constitution. The debate about holding a referendum on transferring power to Brussels is gathering momentum in Germany.
Indeed, the chancellor is in a tricky position at the moment, as she fails to get the euro crisis under control. Of course, the Economist’s notion of a secret plan to break up the euro zone is purely fictitious. But it fits into the current debate, where more and more politicians from Germany’s coalition government are talking about radical steps to solve the euro crisis.
Market volatility – Siesta time
With the markets having traded like when pushing a cork into the water, it always come back up, many investors are now once again feeling the security of low volatility.
It was only a year ago when the world was imploding and the VIX traded at 40+. A few points on the lazy VIX, by Doug Short.
Let’s review the recent volatility, or absence thereof) in the S&P 500. The first chart below features an overlay of the index and the CBOE Volatility Index (VIX) since 2007. The current levels of this index are well below the 20 level, a traditional traditionally associated with increased market risk. A recent WSJ article summarizes the usual interpretation of this indicator.
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