Friday, December 30, 2011

What's behind the Euro Crisis?

What’s Behind the Euro Crisis and How Will It End?

While the pronouncement of the “euro crisis” has become a main topic in the newsrooms and while a plethora of pundits hasn’t got tired of predicting the end of the common European currency, the facts tell a different story. By the end of 2011 the euro was quoted higher than its long-term average since its inception and the official inflation rate of the euro zone has been kept under two percent. The average debt burden of the countries that make up the euro-zone is less than that of the United States or Japan. What is, then, the problem with the euro? Why doesn’t a day go by without a headline that says that the euro is doomed and that it would be only a matter of time until the European Monetary Union and the European Union, too, would blow apart?

Will the euro survive?

The Economist Asks

Will the euro survive 2012 intact?

MOST people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen. But so far, they do not seem prepared to pay the price. Will the euro survive 2012 intact?
Current total votes: 7836
62% voted for Yes and 38% voted for No
Voting opened on Dec 26th 2011

Thursday, December 29, 2011

Italy escapes catastrophe - ten-year bond auction went well

Bear market for gold?

Soros Sees Gold Prices on Brink of Bear Market

Gold is poised to complete its 11th consecutive annual gain, the longest winning streak in at least nine decades, on the brink of a bear market.
George Soros, the billionaire who two years ago called it the “ultimate asset bubble,” cut 99 percent of his holdings in the first quarter, Securities and Exchange Commission data show. Hedge fund managers John Paulson, Paul Touradji and Eric Mindich also sold bullion this year. While speculators in New York futures are the least bullish (.MMGCNET) in 31 months, the median estimate in a Bloomberg survey of 44 traders and analysts is for prices to rally as much as 40 percent to $2,140 an ounce in 2012.
The divergence of views is widening after prices declined 19 percent from a record close of $1,900.23 on Sept. 5, or 1 percentage point away from a bear market. As some investors retreated to cash amid a $10 trillion slump in global equity values since May, others bought more metal, taking holdings in exchange-traded products to an all-time high two weeks ago. Bullion’s 7.6 percent gain in 2011 means it’s on track to beat stocks, bonds and the dollar for a second straight year.
Comment: The big, big rally for gold is still lacking. It will be only after the mega run that the bubble will burst. Now is the time to get in again with tranquility.

The great bailout

Fed Loan Disclosures

Trillion-Dollar Secret

Bloomberg's series "Trillion-Dollar Secret" exposed details of the Federal Reserve's rescue of the financial system during the 2007 to 2009 crisis. The data, which the Fed guarded until Congress and a court order forced their disclosure, revealed a banking industry in trouble so deep it needed loans of up to $1.2 trillion on a single day. The numbers surprised U.S. lawmakers, who told Bloomberg they were unaware of the scope of the bailout even as they crafted laws aimed at preventing the need for another one.

Italian bond sales

Italy Sells 7 Billion Euros of Bonds as Yields Fall

Italy auctioned 7.02 billion euros ($9 billion) of bonds, falling short of the target, as borrowing costs declined in its final debt sale of the year.
The Treasury in Rome sold 2.5 billion euros of securities due in 2014, less than the 3 billion euro maximum for the sale, to yield 5.62 percent, down from 7.89 percent at the previous sale on Nov. 29. The Treasury priced 2.5 billion euros of its 5 percent 2022 bond to yield 6.98 percent, compared with 7.56 percent on Nov. 29. Italy also sold about 2 billion euros of bonds due 2021 and a floating-rate security due 2018.

Wednesday, December 28, 2011

The euro roller coaster of interest rate divergence and convergence


ECB balance sheet soars to $ 3.55 trillion

ECB Balance Sheet Increases to a Record $3.55 Trillion on Loans to Banks

The European Central Bank’s balance sheet soared to a record 2.73 trillion euros ($3.55 trillion) after it lent financial institutions more money last week to keep credit flowing to the economy during the debt crisis.
Lending to euro-area banks jumped 214 billion euros to 879 billion euros in the week ended Dec. 23, the Frankfurt-based ECB said in a statement today. The balance sheet increased by 239 billion euros in the week and was 553 billion euros higher than three months ago.
Comment:  FED and ECB decided to inflate together. How will they ever be able to stop the avalanche of inflation once it begins rolling?

Tuesday, December 27, 2011

What's behind the euro-crisis - how will it end?


Antony P. Mueller
What’s behind euro crisis and how will it end?

While the pronouncement of the “euro crises” has become a main topic in the newsrooms and while a plethora of pundits hasn’t got tired of predicting the end of the common European currency, the facts tell a different story. By the end of 2011 the euro was quoted higher than its long-term average since its inception and the official inflation rate of the euro zone has been kept under two percent. The average debt burden of the countries that make up the euro-zone is less than that of the United States or Japan. What is, then, the problem with the euro? Why doesn’t a day go by without a headline that says that the euro is doomed and that it would be only a matter of time until the European Monetary Union and the European Union, too, would blow apart?
The origin of the mess
When the financial crisis broke out in the United States in 2008 no commentator showed up to blame the US dollar as the cause of the housing and financial market crisis and to state that the use of a common currency for a large and highly diverse economy such as that of the United States was the root of the problem. Besides blaming the regulatory framework as being either too strict or too lose, it was mainly the monetary policy that was identified as the origin of the current financial crisis. A monetary policy of extremely low interest rates and ample liquidity put in place by the US central bank since the late 1980s had produced an inflated financial sector.  The appetite of investors and lenders for high yield risky investments had gotten bigger over the decades in as much as the US central bank had acted in a way that hardened the conviction among financial market operators that there would be a reliable bailout guarantee for the financial system as implicitly pledged by the American central bank.  
In Europe, moral hazard was on the rise when planning for a common European currency was put in place in the second half of the 1990s. With the introduction of a common European currency came the belief that because a country such as Greece would use the same currency as Germany or the Netherlands its sovereign debt would be of equal standing. Consequently, it did not take long until bond investors would drive down interest rates of countries such as Greece, Portugal, Spain and Italy to the levels of Germany and the Netherlands. As it was the case in the US where financial market operators acted under the delusion of absence of risk during the housing bubble, in Europe it was sovereign debt of the euro-zone members that was held to be risk-free.
In retrospect one can state that the period which some economist identified as the “Great Moderation” was in fact closer to being the time of the “Great Delusion”. Not much different than the politicians in the US who acted as cheerleaders for the mortgage binge in the housing market, governments in Europe were enticed to borrow up to the hilt firstly because interest rates were much lower after they joined the euro-zone and secondly because borrowing was so easy given the willingness of bankers and investors to lend as much as they could in the belief that the investment in bonds of the members of the euro-zone of the Southern periphery would be lucrative and safe.

The simple fact that a country such as Greece did over-borrow and as a consequence had to face default, something which is not new at all in financial history, was profoundly misinterpreted by the major groups that were the main decision-makers in the unfolding of the Greek tragedy. When it became evident that Greece encountered difficulties at rolling over its debt, the prospect that Greece would default was vehemently negated right away as a rational option. Of course, Greece wanted to avoid default and in this aim it was joined by its lenders who obviously also did not want Greece to default and obviously so preferred a bailout as well. These two self-interested groups got prompt support by members of the highest echelons of the European Union. By this party of three the stage was set to turn the Greek drama first into a farce and then into Greek tragedy.
The proper way to resolve the Greek debt problem would have been to let Greece and its bankers make their deal and have them work out a rescheduling agreement without a direct European involvement. Yet things took their turn to disaster when politicians of the euro-zone announced that Greece must get a bailout because no euro member state should ever default. This was an absurd allegation and it did not take long until financial market operators sensed that the day had come to speculate against this false and pretentious claim.
When the sell-off of Greek bonds began and interest rates for the country began its steep rise, it became manifest that Greece would be unable to refinance its debt load that was about to fall due in 2011 and thereafter. Contagion spread to Portugal and Spain and towards the end of the year, Italian interest rates began to skyrocket as well. Severe shock waves were sent across Europe and beyond when in late 2011 even Germany and France had to struggle to refinance their public debt. The main credit rating agencies announced that the standing of the core European economies would be under review for a downgrade as it was already done for a series of smaller countries of the euro-zone.
A major factor for the crisis to spin out of control was the disorder that ruled when the crisis began. Serious doubts arose about who would effectively be in charge if a member of the euro-zone should encounter severe payment problems with the prospect of default. The straightforward rule, which was laid down in the Maastricht treaty for the European Monetary Union, namely that each country was responsible for its own debt and that there would be no bailout guarantee by the Union, was discarded without necessity and carelessly replaced by a declaration of solidarity.  
Members of the executive branch of the European Union, the European Commission, pushed ahead with the demand of assisting Greece with funds from the European Union which in essence meant that it was up to the solvent countries of the euro-zone to come up with the money. Germany, which would be the main paymaster for Greece and the other countries in need for financial aid, was not amused. The divergence among the major European decision makers provoked a loss of confidence among financial market operators concerning not only the payment ability of individual countries but also regarding the euro itself and finally the European Union as institution.

Crisis without a cause

The simple fact that a relatively small country such as Greece had payment difficulties and would be in need of rescheduling its debt transmogrified into the so-called “euro crisis”. It would not take long and the financial press and its favorite pundits would pronounce that not only the common European currency would be close to its end but the European Union as well. 
If the European authorities had declared -- in true concordance with the Maastricht Treaty -- that Greek debt is a Greek problem, no “euro crisis” would have occurred. There would have been a Greek debt crisis and bankers would have had to pay their so-called “hair cut” and the interest rates for Greece would have been considerable higher than before. Greek debt payments would have been extended to the future in a rescheduling agreement, the International Monetary Fund (IMF) would have provided an emergency loan, and some other countries, such as Germany and France would have provided extra funding. Like in so many instances before, when economies had debt problems, the IMF would have taken over the supervision of the restructuring and the implementation of an adaptation program. In other words: all of which that we have now with the European bailout would also have happened without the European bailout albeit with the major difference that on-one would speak today of the euro crises and only about a Greek debt crisis.
The interventionist hyperactivity of politicians, particularly at the top of the executive branch of the European Union who, so it appears, were following the rule of all power grabbers never to let a crisis go by without using it as an opportunity for extending dominance was surely a major factor in turning a relatively minor problem into one that threatens the stability of the global financial system and has been prone to cause mind-boggling havoc for the people of Europe if indeed the euro zone were to fall apart.

Transformation of the euro-zone

All the while when politicians and governments were arguing and disagreeing in dispute an avalanche of self-declared experts on European matters showed up to offer one dark scenario after the other. A dedicated consumer of financial news soon would have gained the conviction that the Maya prediction of the end of the world in 2012 was nothing compared to the end of the euro and the European Union. Yet while sinister ink was spilled, the exchange rate of the euro held up well and economic growth did not falter in the main economies of the euro-zone. Germany, which represents the largest European economy, experienced the year 2011 as one with steady growth, low interest rates, and a declining unemployment rate. While the pundits were struggling to outcompete each other putting forth one worst case after the next, reality took a different path.
Different from the scenario in which Greece would have settled its debt problem without a deep involvement of the European Union, the actual path now that was taken has transformed the Eurozone into a genuine fiscal union. Did the authorities get what they wanted? Can one truly exclude the hypothesis that maybe it was the intention of some decision-makers at the top echelon of the European Union to take the Greek debt troubles as an opportunity to push the Eurozone forward towards a fiscal union? Anyway, as a consequence of the Greek debt debacle, chief additional European financial institutions were established which for the time to come will band the members of the Eurozone closer together at the cost of leaving some other members of the European Union such as particularly the United Kingdom in isolation.
On May 9, 2010, the 27 members of the European Union set up the “European Financial Stability Facility” (EFSF) as a vehicle to provide financial assistance to member states. The EFSF is allowed to borrow up to 440 billion while the “European Financial Stabilisation Mechanism” (EFSM) as an emergency program may raise up to 60 billion euros which are guaranteed by the budget of the European Union. A veritable fiscal union was practically created on December 9, 2011, when the member states of the European Union, with the exception of the United Kingdom, agreed upon strict limits for government spending and borrowing in including mechanisms of sanction in the case on non-compliance. On December 20, 2011, the European Central Bank (ECB) took its dubious prognosis an imminent liquidity crisis as the pretext to assume the role as a genuine Lender-of-the-Last-Resort for the euro-zone when it offered 489.2 billion euros for the banking sector of the euro-zone as the first of a two part operation to augment liquidity and to animate banks to buy bonds of the troubled euro-zone countries.
With the new institutions and the action of the ECB a profound transformation of the European Union has taken place. With the EFSF and the EFSM financial stability has moved from being a national concern into the authority of the European Union. With the fiscal pact, member countries of the European Union (other than the UK) have given up their sovereignty over their national budgets. Finally, making the round complete, the ECB has taken over comprehensive authority to act as the eurozone’s Lender-of-the-Last-Resort.
The crisis has not weakened the position of the common European currency but fortified its institutional framework.


As much as the euro crisis became more severe, it also became clear that there is no reasonable alternative to a common currency in Europe. A return to national currencies would not resolve the basic problem that modern economies face. The root of the trouble is not the currency per se but a financial system based on fractional reserve banking, which, in combination with the modern warfare-welfare state drives towards an unremitting expansion of state activity and debt burdens.
Yet the true nature of the current crisis is not that of a currency, be it the euro or the dollar, but the currency crisis is the symptom of fundamental problems of the structure of modern democracy and its monetary system. The fiscal pact is an attempt to stand against the tide of debt expansion. It is hard to see how the goal could be reached. As long as we continue to maintain a monetary system of fractional reserve banking in combination with state money and a welfare-warfare state, the pattern of perilous booms and busts will not vanish.
Antony Mueller
Cash and Currencies - The Continental Economics Institute Currency Review
December 2011

Monday, December 26, 2011

Lies, damned lies, history

Obama Is An Awful Economic Historian
Brian Domitrovic
Last week in Kansas, President Obama laid out his vision of economic history. In example after example drawn from the last hundred years, he showed that interventions on the part of the federal government in the form of taxes and regulations have proven to bring the free-market system to its optimal best. Restraint on taxes and regulations, in contrast, has conduced to economic underperformance and inequality.
Let’s let the president speak for himself. Here were some of the claims in Kansas:
[T]oday, we are a richer nation and a stronger democracy because of what [Teddy Roosevelt] fought for in his last campaign [of 1912]: [including] political reform and a progressive income tax.
Now, just as there was in Teddy Roosevelt’s time, there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune….If we just cut more regulations and cut more taxes – especially for the wealthy – our economy will grow stronger….
Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government….And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ’50s and ’60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.
With these words, the president hung himself by his own rope. He is wrong on every count.

Japan and China conclude currency pact

Chinese currency on the rise

SHANGHAI | Mon Dec 26, 2011 7:46am EST
SHANGHAI (Reuters) - The yuan closed up against the dollar on Monday after hitting an all-time high in intraday trading, guided by a stronger mid-point by the People's Bank of China, and looks set for an over-4-percent appreciation for 2011, traders said.
Comment: Still a long way to go.

Saturday, December 24, 2011

True money supply

Series: True Money Supply 

The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply. The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed. For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak (2000). The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.
Comment: Throw in a dose of monetarism and what you'll get is hyperinflation. 

Happy Christmas

The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously?
Comment:  2012 will be an interesting year, I guess, very much like the Chinese curse says.