European Union wins Nobel Prize for Peace

Surprise.  The Nobel Prize for peace has been awarded to the crisis stricken European Union.

Ironically, the award of prestige has been focused on the long historical role even when the panel of judges appear to be substantially concerned with present political conditions

Reports the New York Times 

Thorbjorn Jagland, the former Norwegian prime minister who is chairman of the panel awarding the prize, said there had been deep concern about Europe’s destiny as it faces the debt-driven woes that have placed the future of the single currency in jeopardy.

“There is a great danger,” he said in an interview in Oslo. “We see already now an increase of extremism and nationalistic attitudes. There is a real danger that Europe will start disintegrating. Therefore, we should focus again on the fundamental aims of the organization.”

Asked if the euro currency would survive, he replied: “That I don’t know. What I know is that if the euro fails, then the danger is that many other things will disintegrate as well, like the internal market and free borders. Then you will get nationalistic policies again. So it may set in motion a process which most Europeans would dislike.”

In announcing the award, Mr. Jagland described it as a signal focusing on the union’s historical role binding France and Germany together after World War II and its perceived impact in spreading reconciliation and democracy beyond the Iron Curtain that once divided Europe and on to the Balkans. “The stabilizing part played by the E.U. has helped to transform most of Europe from a continent of war to a continent of peace,” he said.

I have pointed out that increasing capital controls and rising political tensions from bailouts have led to increasing border controls. 

Nevertheless UK Independent Party’s Nigel Farage has a stirring rebuke on this. 

"You only have to open your eyes to see the increasing violence and division within the EU which is caused by the Euro project" he said.

"Spain is on the verge of a bail-out, with senior military figures warning that the Army may have to intervene in Catalonia. In Greece people are starving and abandoning their children through desperate poverty and never a week goes by that we don't see riots and protests in capital cities against the troika and the economic prison they have imposed.

"The next stage is to abandon the Nation state: the awarding of this prize to the EU brings it into disrepute."

Mr Farage added, " The last attempt in Europe to impose a new flag, currency and nationality on separate states was called Yugoslavia. The EU is repeating the same tragic mistake.

"Rather than bring peace and harmony, the EU will cause insurgency and violence."

Let me add that interventionism, inflationism, protectionism, and all other coming government or political –isms from EU politicians and the bureaucracy will signify as seeds to political and social conflicts. 

If social conflict should arise, the Nobel Prize would further erode its credibility.

EU’s Growing Border Controls Undermines the Principle of Freedom of Movement

While European politicians desperately try to keep the European Union from falling apart, through frantic rescues of insolvent sovereigns and banks, the reality is that their actions have already been gnawing at the foundations of the union: freedom of movement.

Sovereign Man’s Simon Black observes of EU’s growing border patrols:

Speaking of travel restrictions and border controls, though, European authorities seem to have no qualms about implementing them.

For the last several days, I’ve been weaving between northern Italy and Switzerland checking out great places to bank, new places to store gold, and taking in these gorgeous lake views.

Every single time I’ve crossed the border, I’ve been met by rather snarly police on both sides; they’re stopping cars, turning people’s trunks inside out, and causing major traffic problems.

A friend of mine who came up on the train from Florence to meet me for lunch in Lugano said he was stopped at the border for nearly an hour as thuggish customs agents randomly questioned train passengers and demanded to see their IDs.

So much for Europe’s 26-country ‘borderless area.’

Based on Europe’s 1985 Schengen Treaty and 1997 Amsterdam Treaty, you’re supposed to be able to drive from Tallinn, Estonia to Lisbon, Portgual without so much as slowing down at the border.

This is not dissimilar from driving between states in the US or provinces in Canada.

Yet as Europe descends into greater financial and social chaos, leaders are starting to ignore these agreements which guarantee freedom of movement across the continent.

No big surprise, electing Marxists and Neo-Nazis tends to bring that sort of change. Border controls, currency controls, wage and price controls– these are the usual tactics of desperate, insolvent governments.

As times get tougher, they tighten their grip, foolishly believing that they can decree and legislate their country back to health.

In the early 4th century AD after decades of economic turmoil and social strife within the Roman Empire, Diocletian issued his infamous Edictum De Pretiis Rerum Venalium, or Edict on Prices.

In addition to setting a fixed ceiling on over 1,000 products, services, and wages, Diocletian also commanded the death penalty for currency and commodity speculators who he blamed for inflation (as opposed to the steady debasement of the currency).

Obviously very little has changed.

Capital controls usually follow; these amount to the direct confiscation of wealth by a government from its citizens.

Often capital controls take the form of legal requirements which prevent people from moving money abroad, holding foreign currencies, or buying precious metals.

Just yesterday, in fact, Argentina’s central bank formally banned people from buying US dollars– forcing them to hold rapidly depreciating pesos and watch their savings inflate away.

At some point, people finally reach their breaking points and spill out into the streets to be beaten by the police. This is when we see social controls implemented– turning off mobile and Internet infrastructure, curfews, etc.

These tactics have been all too common over the last 18-months.

And finally, if things get really bad, border controls are implemented as a way to prevent a flood of people from leaving. After all, the government needs as many milk cows as it can get.

Here is an example of principles sacrificed at the altar for politics

Yet such self contradictory policies are signs of the growing desperation by the political elites and can be seen as the proverbial writing on the wall for the EU: the ballooning social controls via various despotic measures are likely inflame regional animosity (nationalism) that leads to the breakdown of division of labor and rouse civil strife that amplifies the risks of war.

Through politics, noble intentions backfire.

Economic Integration is a Function of Economic Freedom, not Planned Chaos

Cato’s Marian Tupy rightly points out that the much touted benefits from European Union’s integration has been overrated.

The European politicians love to talk about the “huge” benefits of membership in the European Union. It is certainly true that the “single” market between the EU member states has brought tangible benefits, but those have been declining in importance as technological change made access to services and capital cheaper and easier, and trade liberalization progressed world-wide.

Moreover, as the Brussels-based EU bureaucracy expanded, economic liberalization gave way to regulation that helped to strangle European growth (see the graph below). Consider the latest absurdity to emerge from Brussels—a poultry regulation, which aimed to increase the comfort of the egg-laying chickens, but resulted in a drastic cut in egg production and a 100% increase in the price of eggs.

The EU bureaucracy may not appreciate the problem of unintended consequences, but ordinary Europeans are beginning to realize that the EU no longer is what it used to be—a byword for prosperity and stability. In the Czech Republic, for example, a record number of citizens do not trust the EU (63 percent) and the EU Parliament (70 percent). If the EU elite persist in killing jobs and growth, it may bring about the ultimate unintended consequence—the break up of the EU.

The EU represents a political economic entity premised on incorrigible self-contradiction.

On the one hand, the purported mission has been to economically integrate EU’s diverse national economies. On the other hand, the direction of politics has been to centralize the system. Yet political centralization and economic decentralization are fundamentally incompatible.

Professor Ludwig von Mises called this Planned Chaos.

The market economy safeguards peaceful economic co-operation because it does not use force upon the economic plans of the citizens. If one master plan is to be substituted for the plans of each citizen, endless fighting must emerge.

And this is why the ongoing EU debt and welfare crisis has been symptomatic of the friction from the clashing forces of centralization and decentralization. The result of which has been underperformance. [The declining growth in EU, in spite of the 12 year old union, is mostly a result of capital consumption from the EU's welfare state and from various distortive regulations exemplified by the above.]

In reality, EU’s economic integration serves merely a cover for covert plans to establish political fantasyland. Eventually the path towards centralization will lead to unnecessary violence and the self-implosion of an unsustainable and unviable political system

If people in Brussels hold economic integration as their primary goal, then all they should do is voluntarily drop their political ambitions and allow the individual market economies in Europe to flourish with little or no political baggage attached.

But of course, this would mean that EU bureaucrats would be out of jobs and vested interest groups would lose their politically endowed privileges.

So this is not going to happen until the cumulative effects of “planned chaos” becomes totally unwieldy. Yet they seem headed in that direction.

Germany Wants New EU Constitution: Lebensraum Merkel Version?

Sometimes I ponder upon the possibility that today’s crisis has been engineered to impose ulterior goals. In the resonant words of former White House Chief of Staff Rahm Emmanuel,

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

This I think may apply to the European Union

The Reuters reports,

Germany wants to reignite a debate over creating an EU constitution to strengthen the bloc's ability to fight off financial troubles and counter-balance the rising influence of emerging economies, Germany's foreign minister said on Friday.

Guido Westerwelle said the bloc's Lisbon treaty, drafted after Dutch and French voters rejected a proposed constitution in 2005, was not enough to keep European decision-making structures effective.

"We have to open a new chapter in European politics," Westerwelle told reporters on the sidelines of a meeting of EU foreign ministers in Copenhagen. "We need more efficient decision structures."

The German minister presented the idea to his counterparts at the Copenhagen meeting, during which they also discussed plans to run foreign policy more cheaply. He said discussions on the issue of a new constitution should continue in Berlin.

The desire and the insistence to centralize the EU translates to an implied expansion of Germany’s political power over the region. Since the EU crisis unfolded, it has dawned on me that the path towards a fiscal policy union seems like a variant of one of Adolf Hitler’s major goals—Lebensraum (living space) for the German people.

But instead of forcible (military based) annexations, the Germans have leveraged the acquisition of political power through stealth ‘expansionist policies’ such as bailouts and the attendant ‘proposed’ changes in EU’s political and regulatory framework as the above.

Yet in a world where forces of decentralization has been snowballing, these surreptitious designs are likely to meet the same fate as with the Hitler version.

Integrating the EU, should not be coursed through centralization but through economic freedom and sound money. With economic freedom, the relevance of geographical political borders diminishes.

Socialism on its Way Out in Europe?

That’s what the Economist claims, (bold highlights mine)

TEN years ago almost half of the 27 countries that now make up the European Union, including Germany, Britain and Italy, were ruled by left-wing governments. Today, following the defeat of the ruling Socialists in Portugal's general election on June 5th, the left is in charge of just five: Spain, Greece, Austria, Slovenia and Cyprus. In Spain, by far the largest of these, polls suggest the Socialists will be removed from office at an election that must be held by next March. There are many theories for the left's weakness in Europe. One is simply that left-wing parties struggle when times are hard. Our chart shows the number of left-wing governments in the EU-27 countries over the past couple of decades against the annual GDP growth rate in the region. The growth figure is shown with a two-year lag, the hypothesis being that economic changes take time to have political effects. So the five left-wing governments this year are shown against the growth (or, in this case, contraction) figures for 2009.

Well if this true then this should be good news. This only goes to show that socialism has been and will always be a failed economic development model.

Although I think Europe's socialism has merely been replaced by crony capitalism or state capitalism as evidenced by the string of bailouts which is not exactly a good or promising development.

Besides, I’d add two more factors to what seems as fueling a structural decline of socialist leaderships: one is globalization and two is the internet. More people interacting with each other across the globe impels for the growth of forces of decentralization which goes against the rigid vertical structure of industrial era based governments.

Anyway, the next crisis will blow up both the balance sheets of the politically favored banking system and that of the governments’ (and this includes Central Banks). This will likely push political developments away from socialism, unless governments successfully enforce mass protectionism circa 1930s by shutting down the web and trade.

My guess is that people around the world are beginning to appreciate economic and political freedom more than what has been depicted by the mainstream.

Was The Greece Bailout, A Bailout of The Euro System?

Here are two great charts depicting why European policymakers opted for bailout route for Greece.

Albeit the perspective from these charts strictly focuses on the financial system and not the political facets.

To aptly quote the analyst interviewed by the New York Times, "This is not a bailout of Greece...This is a bailout of the euro system.”
Europe's banking system has been deeply interconnected....

Again the New York Times, ``For all the handwringing, the reality is that the Germans, the French and the rest of Europe have little choice. In the decade since the introduction of the euro, the economies on the continent have become increasingly interwoven. With cross-border banking and borrowing, many countries on the periphery of Europe owe vast sums to one another, as well as to richer neighbors like Germany and France." (bold emphasis added)

where the amount of exposure has been substantial.

To quote the Economist, ``Estimates by The Economist put the total euro-area exposure of foreign banks to Greek sovereign debt at €76 billion, with over 71% held by France and Germany. Estimates for Portugal, which may also be vulnerable to a default, are €32 billion. Little wonder that investors are taking flight."

The argument that Europe have little choice rests on the fundamental premise of the operating platform of the Euro system.

As Gavekal's Charles Gave argues, ``Indeed, the balance sheets of European banks and insurance companies are heavily distorted by past investments made in the debt of technically bankrupt governments. For the past 15 years, banks and insurance companies all over Europe have been lured into believing that the Greek risk was equivalent to the German risk, or the Spanish risk similar to that of the Dutch, etc. As a result, the capital of too many financial institutions was invested in very dubious paper.

``Moreover, in the countries which have "enjoyed" a massive real estate bubble (Spain, Ireland...) because of the distortions in the cost of money introduced by the Euro, the banks are now loaded with real estate loans of very questionable value. To add insult to injury, regulatory powers all over Europe have literally forced banks and insurance companies into buying the bonds issued by European governments ("risk free" they were told, and zero reserve requirements!) while forcing them to sell good quality equity positions established over decades. So whether one looks at balance sheets, reserves, loan books or future sources of income, it is hard to avoid the conclusion that European financials are in a pickle. This is a true and very unfortunate consequence of the Euro." (all bold highlights mine)

In gist, the problem is with de facto monetary system, which I don't think is limited to the Euro but to the concurrent paper money standard.

When regulators compel or require the financial system to buy government debts as part of the 'risk free' reserves, this essentially signifies as subsidies to government expenditures which consequently induces more spending, regardless of the necessity.

Said differently, government debt is considered "risk free", because it is backed the barrel of the gun via taxation. However, taxation can only finance part of these expenditures because they depend on the performance of the entities that operate on the real economy.

So in order to continually fund burgeoning government expenditures, central banks encourage deficit financing by inflating the system. And inflating the system engenders a feedback mechanism that leads to an unsustainable Ponzi financing system combined with intractable government spending. The charts above simply illustrates this dynamic.

And as the Greek crisis has shown, reality eventually dawns on the fictitious world where spending equals prosperity and where 'risk free' isn't what it had seemed.

And this is further proof that the cartelized system from which the central banking operates on exist to serve political goals. Fiat paper money system is highly political.

Mr. Gave, a prominent Euro bear, argues here that the disintegration of the Euro will be bullish for markets and the global economy as the political "Roman Empire" wisdom from which lays as the foundation to the EU's concept of "centralized super-government" will pave way for freer markets.

But I don't believe that the political elite in the Eurozone will easily succumb to free market forces knowing that free markets would emasculate their privileges. Perhaps, not until economic reality totally overwhelms the fantasyworld.

I see this as happening farther down the road.

So yes, the bailout translates to a rescue of the Euro system.

Update: Addendum: Greece's bailout will need to have the commitments of the financiers ratified by their respective governments (parliaments).

Divergence, Momentum And China's Historical Patterns

``As a general rule, the public believes economic conditions are not as good as they really are. It sees a world going from bad to worse; the economy faces a long list of grim challenges, leaving little room for hope. We can call this the pessimistic bias, a tendency to overestimate the severity of economic problems and underestimate the economy’s performance in the recent past, the present, and the future.” Bryan Caplan The 4 Boneheaded Biases of Stupid Voters

A short discourse on the present market activities and momentum.

One odd development is that while Europe has belabored on Greece’s credit standings, where her CDS premium has run amuck, Europe’s stock markets appears to have diverged from Asia. Europe appears to have suffered lesser degree of losses, this week, in spite of the fears of a protracted crisis which risks a contagion.

In other words, in Europe the credit markets and equity markets appear to have decoupled. Yes I know, experts will assert that credit markets are smarter than the equity market counterpart. But past performance may not guarantee future outcome. Aside, market risks appear to have shifted to Asia. That’s based on this week’s activities.

Importantly even as most of the major European economies absorbed losses, the losses haven’t been broad based, as some nations like Norway, Denmark, Finland, Belgium and even the crisis stricken Greece (!!) managed to register modest gains. Moreover, the frenzied bullmarket momentum in some of the Baltic States and that of other parts of Eastern Europe remains streaking hot!

Greek Tragedy Or Comedy?

So the market and opinion pages have not been saying the same.

An analyst recently commented that austerity won’t be popularly embraced in Greece which risks political chaos. Perhaps. But it doesn’t mean that it shouldn’t be done. If a person ails, no matter how bitter the medicine or how inconvenient the treatment, these will have to be taken if the preference is to expect a recovery. To add, regardless of the choice inconvenience will prevail during state of ailment. But we aren’t talking of a person but of a nation state called Greece.

Hence, the issue isn’t about austerity. The issue is about austerity or reforms aimed at recovery under an independent Greece or under the wards of the European Union.

Yes, the Union may have to bend legal rules from the Stability and Growth Pact and may have to face the risks of moral hazard or a chain effect of bailouts among member nations, but as we have written, politics will govern. Politics that would encompass the preservation or the disintegration of the Union, where the direction of policies will likely buttress the former in spite of the costs of bailouts even at the risks of future dismemberment.

It’s rare to see officials to take on policies that have long term impact, as this would defy public choice economics, where actions of policymakers are most often associated with reelection goals.

Besides, austerity programs will likely undermine the socialist government of Greece, which should translate to a long term positive.

Yet a naughty part of me is toying with the idea that perhaps the Greek episode is being deliberately prolonged so as to extend the decline of the Euro against the US dollar.

In a world where everyone seems to hanker for a devalued currency, out of the prevailing mercantilist tendencies by global officialdom, a market based decline predicated on such adverse development, without intervention, could be part of the tactical operations. Could ECB’s Jean Claude Trichet be snickering behind the scenes?

Market Momentum And Will China Repeat Historical Patterns?

Many markets have broken trend channels (e.g. Euro and gold) or is situated at support levels (e.g. China’s Shanghai), this means that assuming market momentum persists without the interference from officials, then momentum suggests that for the interim, these markets could suffer from an extended malaise. Let’s be clear, no bubble bursting here.

Although, since some markets have technically been in oversold conditions, a bounce could be in the offing, perhaps by the coming week. However, the mid term momentum will likely translate to 1-2 months of consolidation (or downside) before a renewed upside.

In addition, in the US markets, as measured from the futures market, weak hands appear to dominate which further implies disappointments, according to the Danske Team ``The equity market is filled with investors who do not believe in holding equities long term, but who instead trade equities hoping mainly for a quick profit. This is reflected in e.g. the number of long speculative positions as a share of total open interest in the S&P500 futures market. Contrary to the norm, long speculative positions now account for 15% of total positions (down from 20% two weeks ago), something not seen since summer 2002. At that time the market corrected sharply, reflecting that the tech bubble had not fully deflated. Last week’s negative focus on the necessary Chinese and US tightening measures is thus probably a warning that equity investors collectively have little tolerance of disappointments, and that expectations for the global economy in 2010/11 have risen too high.”

Again this speaking from the context of market momentum in the assumption that markets will be left alone to operate by authorities.

Figure 8: BCA US Global Investors: History Rhymes?

Finally, this is an interesting set of charts on China’s markets, all of which illustrates how China’s market has endured from tightening concerns and how they responded after.

In the past two occasions 2003-4 and 2006-7, interim weakness eventually paved way for stronger markets. Today we are seeing the same phase of weakness.

According to US Global Investors, `` While the recent correction in China has been steep and swift, history suggests buying opportunities in the medium term. In early 2004 and early 2007, when tightening fears haunted investors in a policy environment similar to the current one, Chinese stocks underwent a sharp selloff for a couple of months and yet finished the year higher as investors realized the economy was not headed for a hard landing.”

In my view, in going against James Chanos, I’d say that China’s has ample room to inflate! And today’s weakness is a buying opportunity as the BCA chart suggests.

To be clear, it’s wrong to interpret a bubble to mean a peak of the cycle! Instead, Bubble is a process characterized by a boom followed by a bust.