In Greece, Sales of Select Expired Goods Now Legal

In Greece, food shortages signified by food price escalation has prompted authorities to allow the sale of select “expired” foods.

From Voz Populi (translated via Google, hat tip zero hedge)

Greece will allow the sale of expired food at a price lower than the original, in a move that the government has not been able to justify but consumer groups have interpreted as evidence of their inability to stop the escalating cost of commodities. A ministerial decree just reviving an old regulation that authorizes supermarkets and grocery stores to sell food once the expiration date, Efe reported. "This regulation has existed for many years. And it is something that is allowed in the rest Europe. All I did was point out that these products must be sold at low prices. do not understand what is causing so much noise, "said Yorgos Moraitakis Efe, advisor to the Ministry of Development, Competition and Merchant Marine. The regulations exclude meat and dairy from the list of perishables that can be sold and sets a ceiling dates you can continue marketing.Thus, foods in which the expiration date is indicated by the day and the month, may continue on the shelf for another week. In the event that the "best before" only month and year point, the sale may be extended for one month, and in the event that the date indicated year alone, the sale date may be extended by one quarter.Though Moraitakis Efe declined to specify the reasons for this decision and merely noted that the legislation already existed, consumer groups and even government agencies have criticized the measure. "Virtually admit their inability to control prices," Efe reported Tsiafutis Victor Consumers Association 'Quality of Life', one of the oldest in Greece. 

Food Inflation 

In the Greece of the crisis, the wage and pension cuts and rising unemployment, food prices and commodities has not stopped rising.Between August 2011 and August 2012, the price of sugar shot up 15%, the eggs, 6.8% for butter by 3.2% and that of coffee, 5.9%, according to data from the Statistics Authority. "It is an immoral act," criticized Tsiafutis. "Instead of taking initiatives to control prices, allow the sale of food past the expiration date." Moreover, from the National Food Agency gets even concerned that the measure serves to something. "It is doubtful that these foods are to be sold at low prices, because the price control mechanisms have failed," said Yannis Mijas, president of this organization linked to the government. Indeed, the measure of how much states must be the initial price reduction, which is at the discretion of the merchant.To Mijas, selling expired food is also a moral dilemma, to divide consumers into two groups: those who can afford basic food and those who, because of poverty, "are forced to resort to dubious quality food."

Two observations from the above,

One, current events in Greece shows not of deflation but of stagflation.

Two, the result of inflationism has been bring about lower quality and or a deflation in value of goods and services that puts the consumers to higher risks. The above is an example of one of the immoral outcomes of inflationism

US Companies Prepare for Greece Exit

More evidence of the financial market-real world detachment.

Seen from the financial markets, Euro’s problems seem headed for a silver lining. But from the ground, events seems turning for the worst.

US companies are reportedly preparing for a “Greece exit”

From the New York Times,

Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.

Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency.

No one knows just how broad the shock waves from a Greek exit would be, but big American banks and consulting firms have also been doing a brisk business advising their corporate clients on how to prepare for a splintering of the euro zone.

That is a striking contrast to the assurances from European politicians that the crisis is manageable and that the currency union can be held together. On Thursday, the European Central Bank will consider measures that would ease pressure on Europe’s cash-starved countries.

Public’s opinion has been shifting rapidly. Again from the same article… (bold emphasis mine)

In a survey this summer, the firm found that 80 percent of clients polled expected Greece to leave the euro zone, and a fifth of those expected more countries to follow.

“Fifteen months ago when we started looking at this, we said it was unthinkable,” said Heiner Leisten, a partner with the Boston Consulting Group in Cologne, Germany, who heads up its global insurance practice. “It’s not impossible or unthinkable now.”

Mr. Leisten’s firm, as well as PricewaterhouseCoopers, has already considered the timing of a Greek withdrawal — for example, the news might hit on a Friday night, when global markets are closed.

A bank holiday could quickly follow, with the stock market and most local financial institutions shutting down, while new capital controls make it hard to move money in and out of the country.

“We’ve had conversations with several dozen companies and we’re doing work for a number of these,” said Peter Frank, who advises corporate treasurers as a principal at Pricewaterhouse. “Almost all of that has come in over the transom in the last 90 days.”

From the hindsight everything looks easy to explain, but as I have been saying events can be so fluid, where moves can be swift and dramatic.

I’d say that an exit will mark the climax of the bear market of Greece equity markets.

The Athens General Exchange index has fallen by nearly 90% since 2007. (chart from Bloomberg)

Greece will likely devalue (inflate) intensively. These should put a floor and perhaps reverse the bear market trend. But rising stocks doesn’t necessarily translate to an economic recovery, instead they can be symptoms of severe inflation or even hyperinflation.

Taxing Greeks: Separating Reality from Fiction

This terse article gives us a glimpse of the mechanics of how wealthy Greeks has successfully been able to avoid paying taxes

From the Wall Street Journal Blog,

That Greeks have a penchant for evading taxes isn’t exactly news — when tax collectors started comparing swimming-pool ownership with incomes, wealthy Greeks camouflaged their pools. And because hidden income is hidden, figuring the size of the tax dodge is difficult.

Armed with data from one of Greece’s ten largest banks, economists Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura recently set themselves to the task. The banks, with tens of thousands of customers across the country, provided loan and credit-card application and performance data. That not only gave the economists access to self-reported incomes, but also allowed them to infer the banks’ estimates of true incomes — which are likely closer to the mark.

The economists’ conservatively estimate that in 2009 some €28 billion in income went unreported. Taxed at 40%, that equates to €11.2 billion — nearly a third of Greece’s budget deficit.

Why hasn’t Greece done more to stop tax evasion? The economists were also able to identify the top tax-evading occupations — doctors and engineers ranked highest — and found they were heavily represented in Parliament.

It’s always easy to portray the solution to fiscal problems, through statistical estimates, as merely one of enforcement procedures of tax policies.

Unfortunately, such simple minded approach escapes the premises of people’s reactions to repressive social policies and to the parasitical relationships which underpins their political institutions.

As for some of the professional Greek elites, as noted above, their tax shields may have been derived through their participation in the political hierarchy.

Mainstream economists seem to forget that they are dealing with real people, who by nature will look after their interests by adapting to the realities of the evolving political economic environment.

And it is for this reason why top-down or centralized policies inherently fails.

Understanding Political Terminologies 2: Social Justice, Greece, Austerity and Insurance

Political language have been deliberately mangled to suit and promote the interests of political agents and their followers. I have given a few examples earlier.

More examples:

1. SOCIAL JUSTICE

Once again here is the brilliant Thomas Sowell on “Social Justice”

If there were a Hall of Fame for political rhetoric, the phrase "social justice" would deserve a prominent place there. It has the prime virtue of political catchwords: It means many different things to many different people.

In other words, if you are a politician, you can get lots of people, with different concrete ideas, to agree with you when you come out boldly for the vague generality of "social justice."

Justice Oliver Wendell Holmes said that a good catchword can stop thought for 50 years. The phrase "social justice" has stopped many people from thinking, for at least a century -- and counting.

If someone told you that Country A had more "social justice" than Country B, and you had all the statistics in the world available to you, how would you go about determining whether Country A or Country B had more "social justice"? In short, what does the phrase mean in practice -- if it has any concrete meaning?

In political and ideological discussions, the issue is usually whether there is some social injustice. Even if we can agree that there is some injustice, what makes it social?

Surely most of us are repelled by the thought that some people are born into dire poverty, while others are born into extravagant luxury -- each through no fault of their own and no virtue of their own. If this is an injustice, does that make it social?

The baby born into dire poverty might belong to a family in Bangladesh, and the one born to extravagant luxury might belong to a family in America. Whose fault is this disparity or injustice? Is there some specific society that caused this? Or is it just one of those things in the world that we wish was very different?

If it is an injustice, it is unjust from some cosmic perspective, an unjust fate, rather than necessarily an unjust policy, institution or society.

Investing guru Doug Casey also shares more verbal twisting (Greece and Austerity)…

2. GREECE

it's not "Greece" we're talking about, but the Greek government. It's the Greek government that's made the laws that got people used to pensions for retirement at age 55. It's the Greek government that's built up a giant and highly paid bureaucracy that just sits around when it's not actively gumming up the economy. It's the Greek government that's saddled the country with onerous taxes and regulations that make most business more trouble than it's worth. It's the Greek government that borrowed billions that the citizens are arguably responsible for. It's the Greek government that's set the legal and moral tone for the pickle the place is in.

3. AUSTERITY

the term "austerity" is used very loosely by the talking heads on TV. It sounds bad, even though it just means living within one's means… or, for Europeans, not too insanely above them. But who knows what's actually included or excluded from what the EU leaders think of as austerity? Take the Greek pension funds, for example: exactly how are they funded? I'd expect that private companies make payments to a state fund, as Americans do via the Social Security program. I suspect there's no money in the coffers; it's all been frittered on high living and socialist boondoggles. Tough luck for pensioners. Maybe they can convince the Chinese to give them money to keep living high off the hog…

4. I would add INSURANCE as camouflage for the Welfare State

From Murray N. Rothbard,

The answer is the very existence of health-care insurance, which was established or subsidized or promoted by the government to help ease the previous burden of medical care. Medicare, Blue Cross, etc., are also very peculiar forms of "insurance."

If your house burns down and you have fire insurance, you receive (if you can pry the money loose from your friendly insurance company) a compensating fixed money benefit. For this privilege, you pay in advance a fixed annual premium. Only in our system of medical insurance, does the government or Blue Cross pay, not a fixed sum, but whatever the doctor or hospital chooses to charge.

In economic terms, this means that the demand curve for physicians and hospitals can rise without limit. In short, in a form grotesquely different from Say's Law, the suppliers can literally create their own demand through unlimited third-party payments to pick up the tab. If demand curves rise virtually without limit, so too do the prices of the service.

In order to stanch the flow of taxes or subsidies, in recent years the government and other third party insurers have felt obliged to restrict somewhat the flow of goodies: by increasing deductibles, or by putting caps on Medicare payments. All this has been met by howls of anguish from medical customers who have come to think of unlimited third-party payments as some sort of divine right, and from physicians and hospitals who charge the government with "socialistic price controls" — for trying to stem its own largesse to the health-care industry!

In addition to artificial raising of the demand curve, there is another deep flaw in the medical insurance concept. Theft is theft, and fire is fire, so that fire or theft insurance is fairly clear-cut the only problem being the "moral hazard" of insurees succumbing to the temptation of burning down their own unprofitable store or apartment house, or staging a fake theft, in order to collect the insurance.

In the world of politics,lies, distortions and equivocations are the norm.

Don't fall for them

Quote of the Day: A Greek Reprieve

The tragedy of Greece, and much of the rest of Europe, is that it overborrowed during the euro's first decade to finance a higher standard of living than it could afford. Now the debtors have to adjust.

The best way to do so is with supply-side reforms in taxes, pensions and labor markets that will lure investment and make Europe's economies more competitive. They need austerity for government but growth for the private economy. Without that, the Greek reprieve will be merely another opportunity lost.

That’s from the Editorial of the Wall Street Journal

Shelve the Greece Moment; Greeks are Pro-Austerity After All

We had been repeatedly told (if not lied to) by media and neoliberals that Greeks has been anti-bailout.

The election nears conclusion and the results run opposite to what has been bruited.

From Bloomberg,

New Democracy won 130 seats in the 300-seat parliament, according to Interior Ministry projections with almost 90 percent of the vote counted. Pasok, which has alternated in power with New Democracy over the past four decades, won 33 seats, enough to forge a coalition that backs the creditors’ austerity demands.

Syriza Demands

Syriza matched its second-place ranking of last month by stepping up demands to abandon the fiscal-tightening program.

Alexis Tsipras, the head of eight-year-old Syriza, had vowed to keep Greece in the euro while winning concessions on the rescue terms from European leaders including German Chancellor Angela Merkel. He said New Democracy and Pasok, which united last year to back further fiscal tightening by a caretaker government, had “lowered the Greek flag and surrendered it to Angela Merkel.”

Tsipras signaled yesterday that Syriza won’t join a government with New Democracy and Pasok, saying his faction “will be present in all developments as the main voice of the anti-bailout vote in Greece.”

With 166 out of 300 or a 55% vote (New Democracy and Pasok) for the pro-austerity camp, reality finally trumped fiction. The victory cannot be considered as marginal in race among about 8 political parties, namely, New Democracy, Syriza, Pasok Party, Independent Greeks, Golden Dawn, Democratic Left, Communist Party and Ecologist Greens

This squares with accounts of capital flight and resistance to pay taxes (mostly in reaction fears over a Greece exit) which implied that Greeks did not want to exit the EU. This has also been consistent with earlier polls which indicated that a vast majority of Greeks wanted to remain part of the EU.

Demonstrated preference prevails over statist canard.

Only in the eyes of neoliberals and rabid inflationistas, who salivate for massive devaluation as panacea to social ills, has reality been skewed. So there is no Greece moment for now.

The Greece pro-austerity victory does not diminish the crisis. As earlier explained, Greece in or out of the EU will mean inflationism. The difference lies on who will do the inflating. What the pro-austerity victory does is to simply buy off time with the ECB functioning as the main bridge financier, but whose costs will be borne mostly by the Germans overtime. For as long as strong parasitical relationships remain in place, and without real reforms, this crisis will continue.

Greece will now form a government. The ECB should be expected to unveil another region-wide monetary rescue program and perhaps cut interest rates. One thorn has been temporarily taken out. The next is to wait for the announcement of concrete measures from major central banks not limited to the ECB.

With fears of an exit diminished, capital flight in the crisis affected EU nations will likely ease. This would have an impact on the monetary systems of many economies who functioned as shock absorbers. Volatility remains.

Greece’s real reform must be made through economic freedom, not from the illusion of having to turn economic knobs and shower money to the public from helicopters as elixir to economic woes as recommended by experts trying to get social plaudits.

What to Expect from a Greece Moment

The economist must deal with doctrines, and not with men. It is for him to critique errant doctrine; it is not his charge to uncover the personal motives behind heterodoxy. The economist must face his opponents under the fictitious assumption that they are guided by objective considerations alone. It is irrelevant whether the advocate of a false notion acts in good or bad faith; what matters is if the stated notion is true or false. It is the charge of others to reveal corruption and enlighten the public concerning the same Ludwig von Mises, Memoirs p.40

For some, today’s Greece elections serve as the defining ‘Greece moment’ of the Euro crisis. This would seem like a paradise for the advocates of drachmaisation or the return to the local currency, drachma which enables domestic governments to inflate the system.

Yet whether Greece decides to stay within, or departs from the EU, there won’t likely be significant changes in the dominant policies espoused by policymakers in addressing this crisis.

Inflationistas have been drooling for the aggressive use of monetary inflation as the easy way out of the crisis.

The difference would be that of the policy responses by global authorities as consequence of the political choice made by Greeks.

Uncertainty from the resultant political actions will establish the feedback loop between policy responses to the market’s reaction and market’s reaction to policy responses. That’s why policymakers have incessantly talking about erecting firewalls. Spain’s recent bailout has reportedly been predicated against contagion risks[1] from today’s election.

Utopian False Choice

Inflationistas give us a proposition based on a false choice/ false dilemma[2], analyst John Mauldin[3], a populist, gives a good example

Europe is down to two choices. Either allow the eurozone to break up or go for a full fiscal union with central budget controls. The latter option ultimately means eurobonds and a central taxing authority.

If only the world have been that simple where people think alike, move and act alike and economies are mechanized that can be switched on and off or modulated like temperature gauge of an air conditioning unit. Or that people’s actions can be captured in aggregate numbers.

Yet if this is true, then we won’t be having today’s crisis at all.

As the great F.A. Hayek once warned against utopian thinking[4]

it is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals—if by ‘Utopian’ we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.

The false dilemma presented to us fails to take to account the micro conditions of what plagues the EU crisis affected nations.

This vignette of the Greece government, which has been drawn by a Greek public servant and labeled as macaroni, which I earlier posted on my blog[5], has illustrative been of the anatomy of the Europe’s crisis.

The public servant Mr. Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has partly been accurate in the dissection of the origins of crisis, particularly, “More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity” and “the first government of George Papandreou in 2009 had 15 ministers, 9 vice-ministers and 21 adjunct ministers, along with 78 general or special secretaries, 1,200 counselors, 149 directorate generals and 886 directorates — this for a population of just over 11 million, or the same number of people as those living in Cuba. The resulting mesh of interdependencies for decision making has made governing Greece increasingly difficult”.

So Europe’s fundamental problems can be summarized into the following: mishmash of ambiguous, unenforceable and conflicting arbitrary rules and regulations, bloated bureaucracy, unsustainable welfare state, obscure property rights, politically restrained markets through various interventionist policies and high tax rates[6], and a public sector far larger than the private sector, which has been draining away resources from the private sector, as evidenced by Greece’s consumption economy despite relative lower nominal wages or earnings[7] compared to other developed EU nations. As a side note, the perceived or expected cost of labor has been higher in most crisis affected nations in Europe due to stringent labor regulations and bubble policies[8].

In short, Greece’s economy has survived on a parasitical relationship where unproductive sectors have essentially been draining out resources from the depleted hosts.

Devaluation, thus, will not solve the problem of SOLVENCY, PRODUCTIVITY and COMPETITIVENESS as inflation only destroys real savings and extinguishes purchasing power.

Greece’s problem has not been prompted for by rigidity in wages emanating from market forces, but from the rigidity of her incumbent POLITICAL system. Politics simply won’t allow markets to do what the market does best. And obsession to politics is the price paid through a crisis.

As previously discussed, accelerating capital flight has been spawned by the sustained barrage for the siren song of the devaluation elixir as advocated by the political order and their Keynesian protégés, most of whom ironically are residents outside these crisis affected nations.

It’s easy to make recommendations that don’t affect one’s interests or where errant endorsements don’t have a direct personal impact.

The capital flight in the crisis affected EU nations has accounted for as symptoms of savers and creditors who seek refuge out of their nations (again to preserve savings) as well as risks of a banking collapse, while debtors have practically deferred on making payments, possibly in anticipation that their debts would be best paid on a devalued currency.

Also capital controls[9] from the elevated risk of a potential exit has likely been seen as a consequential threat.

All these, including tax increases, negative interest rates, price controls, inflationism and various regulatory proscriptions, are financial repression measures undertaken by desperate governments and endorsed by their institutional apologists who seek to persecute and expropriate assets of their private sector constituents in order to sustain the privileges of the political elite.

Add to these the rising incidence of protectionism[10] which mostly emanated from developed nations, particularly the EU.

So Keynesian (and Fisherian) snake oil prescriptions has essentially backfired or produced a series of unintended consequences. Aside from capital flight, falling tax receipts (including Italy[11]) and a breakdown of trade has been intensifying the crisis[12].

Also fiscal and political union naively extends the problem of the tenuous parasitical relationship. Eventually new hosts or EU’s creditor nations as Germany, Finland, Netherland and the others will also get drained by such unproductive and unsustainable redistributive relationships.

Fund manager John Hussman makes a great analogy of mainstream’s foolish ideas which he analogizes as the “WarrenBonds”[13],

This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue "Warrenbonds." About 90% of the group would agree on the wisdom of that idea, and Warren would be criticized as a "holdout" to the success of the plan. You'd have 9 guys issuing press releases on their "general agreement" about the concept, and in his weaker moments, Buffett might even offer to "study" the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of national sovereignty, the same is true for Eurobonds.

Even if 9 broke guys accedes to give up on their sovereignty, for as long as the structural system of parasitical relationship remains, even Warren Buffett will see his resources dwindle and will go bankrupt.

In short, all sorts of proposed and implemented bailout mechanisms—banking union, Eurobonds, EU regional deposit guarantee schemes, European Stability Mechanism and or the European Financial Stability Fund (“EFSF”), Securities Markets Programme (SMP), Long Term Refinancing Operations (LTRO) and Target2—are essentially transfers of resources from productive to unproductive nations, which ensures capital consumption and the eventual demise of the Union.

Of course what exponents of inflationism via devaluation don’t see or refuses to see are that there are other practical market based options such as outright default or restructuring and ‘shock liberalization’[14] as coined by University of Chicago Professor John Cochrane, viz., liberalize economy, allow banks to fail, reduce government spending (by cutting down the bureaucracy and repealing unnecessary regulations), reduce tax rates and sell state assets or privatization.

Whatever the outcome of today’s election, the crisis will continue to linger and will most likely fester for as long as solvency, productivity and competitiveness issues will not addressed by giving the private sector a bigger hand.

Exploring the Greece Moment

A Greece vote to stay within the EU will likely have concerted efforts by the European Central Bank (ECB) to reflate the system backed by some superficial ‘austerity’ policies. This will be another attempt to delay the day of reckoning.

This will likely another incite short term upswing for the markets but eventually will wear off, as with all the rest.

In short, boom bust cycles until the grand finale: defaults either by massive inflation (which likely brings the end of the euro experiment) or by outright default (disunion may or may not happen).

A Greece vote out of the EU to may spell interim trouble for the global markets, but this would likely prompt central banks to collaborate by massively inflating the system. So volatility can swing fiercely from downside to upside and vice versa, depending on how large these actions will be.

I would make another guess. Under the conditions where global central banks steps on the proverbial pedal to the metal, the RISK ON RISK OFF environment will probably transition to a stagflationary environment[15] (slow economic growth, high unemployment but also high consumer price inflation).

Again this will be conditional or mainly dependent on the scale or degree of actions which is something cannot be foreseen. I have to admit I don’t have telephatic powers that would allow me to read the minds of central bankers.

Yet under a stagflationary setting, market’s attention may likely be focused on commodities as inflation hedges.

And that’s where I’d be.

---

[1] Bloomberg.com Euro Bloc Faces Greek Vote Giving First Spanish Test, June 11, 2012

[2] Wikipedia.org False dilemma

[3] Mauldin John MAULDIN: The 'Bang!' Moment Is Here Businessinsider.com, June 16, 2012

[4] Hayek Friedrich von Four History And Politics The Trend Of Economic Thinking p.15 libertarianismo.org

[5] See Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy, June 15, 2012

[6] Wikipedia.org Tax rates of Europe

[7] Eurostat Wages and labour costs European Commission

[8] See Germany’s Competitive Advantage over Spain: Freer Labor Markets May 25, 2012

[9] See The Coming Age of Capital Controls? June 13, 2012

[10] See More Wall of Worry: Rising Accounts of Protectionism June 15, 2012

[11] See Italy’s Pro-Growth Tax Increases Backfires, June 13, 2012

[12] See Is Greece Falling into a Failed State?, May 28, 2012

[13] Hussman John P. The Reality of the Situation, May 28, 2012 Hussmanfunds.com

[14] Cochrane John H. Euro explosion, June 15, 2012

[15] Investopedia.com Stagflation

Quote of the Day: Failed and Failing States

Professor Michael S. Rozeff at the lewrockwell.com writes,

I like to use the ammunition provided by the statists themselves (or those who take states for granted) that discredits their own statism. For example, there is the "Failed States Index".

How many states are there in the world, and how many are failures or leaning toward failure, according to the people who devised this index? They assess 177 states. Of these, 124 are in the troubled categories (ALERT and WARNING). That's 70 percent! Here we have a great experiment at one point in time. We have 177 trials of the state as a way to organize, and we have 124 failed or failing or approaching failure. Among the Moderate and Sustainable categories (non-failed states) we have such wonderful states as Greece and Spain.

If instead we look at the performance of states across time, a century or two, we find huge and endemic failures almost everywhere we look in major countries: Russia, Japan, Germany, Italy, France, China, many eastern European countries, and even the United States (if we count, for example, the civil war as evidence of a gigantic failure). The U.S. has held together by force, not law. Is that what a non-failed state is supposed to mean? Many European states have failed time and again, as several world wars and hyperinflations demonstrate. Their current financial manipulations are new evidence of their failure, as are their high rates of unemployment.

70% of the world nations are considered as at the risk of becoming a ‘failed state’. That’s a great measure of political success.

Prof. Rozeff rightly points out that the today’s crisis affected EU nations have been categorized as moderate (non-failed states) which has not accurately reflect been on the failed state index (as this was based on 2011)

Yet, the increasingly dysfunctional political institutions of Greece would almost qualify her as a ‘failed state’.

As I recently wrote,

Instead, what a “failed state” means is that there is no standing government or that imposed government will mostly likely be ignored by society or what could be called “stateless society”.

I am not sure if Greece will technically become a failed state.

What is certain is that we are witnessing the accelerating collapse of a parasitical relationship anchored upon the spendthrift welfare and bureaucratic state.

Nonetheless this should be good news as Greece’s political economy would be compelled by nature to face economic realities; regardless of the outcome of today’s elections.

Oh by the way, despite all the cheering, drum beating and exaltation by media over the supposed political progress in the Philippines, the nation remains a candidate of becoming a failed state.

The Philippines has been ranked 51^st and classified as in “warning” conditions.

I’d say that the Philippines has more characteristics of a failed state: 40+% of the domestic economy are considered as informal. OFWs, whom has been labeled as heroes, are in reality symptoms government failure due to the lack of economic opportunities and depressed standards of living. Yet these combined forces which operates outside of government spectrum, has been delivering the real progress, but whose credit has been usurped by politicians and by mainstream media and institutions.

Yes, there have marginal improvements from 2010, but this could be seen on a relative perspective—perhaps more states have been performing far worst than the Philippines than the Philippines doing better.

Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy

From Bloomberg, (bold emphasis mine) [hat tip P. Ella]

Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has some well founded theories about where Greece went wrong. One long-standing habit of government that helped the country become almost unmanageable, according to Karkatsoulis, is its disdain for parliament: new rules and regulations in Greece have long been created by ministerial order and presidential decree rather than through parliamentary process.

About 70 percent of regulations were approved directly by ministers between 1975 and 2005, and just 2 percent were the result of parliamentary actions, Karkatsoulis says in this OECD presentation. Regions, prefectures and the president account for the remaining rule changes. More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity.

A profile of Karkatsoulis in Le Monde explains how the first government of George Papandreou in 2009 had 15 ministers, 9 vice-ministers and 21 adjunct ministers, along with 78 general or special secretaries, 1,200 counselors, 149 directorate generals and 886 directorates — this for a population of just over 11 million, or the same number of people as those living in Cuba. The resulting mesh of interdependencies for decision making has made governing Greece increasingly difficult.

The chart above from Mr. Karkatsoulis has been labeled as the ‘Macaroni’ chart.

This serves as a great example of how the Gordian Knot of arbitrary rules and regulations, which has been emblematic of a political economy built on an unsustainable parasitical relationship, ultimately ends up in a crisis.

Printing money via devaluation, as prescribed by the mainstream, will not solve the issue of excessive regulations, red tape and bureaucratic barnacles, as well as property rights, free markets and the rule of law.

Bloomberg Ticker lists Greece’s Drachma

Either this signifies as the proverbial writing on the wall or part of the orchestrated propaganda campaign for Greece to exit the EU

From the RT.com

Traders around the world have been staring at their Bloomberg screens, hardly believing their eyes. The electronic information platform has been showing details for possible Greek Drachma trading.

The Bloomberg helpdesk described it as "an internal function which is set up to test."

The news comes in the wake of the heated discussions over the future of the euro zone and the membership of Greece. While many experts insist that Greece should leave the Euro and default, some suggest it should remain the union and introduce a parallel currency to the Euro to repay the country’s debt.

The Head of the European Investment Bank Werner Hoyer said on Tuesday that Greece will be able to remain a member of the union. “Greece will have the opportunity to solve the huge problems that it is facing. Continuing support from the EU will contribute to this, in case, of course, the very Greeks would want that,” Hoyer said.

And a survey at the weekend showed that Greeks prefer to stick to the Euro and not revert to the old drachma.

The Greek Drachma details have now been taken down from the Bloomberg service.

It has been impressed upon the mainstream that the solution to Greece debt problems will only be through “drachmaization” (euphemism for devaluation or inflationism).

When it comes to the prospects of outright defaults there has been a mental black hole. Outright default under the EU umbrella has hardly been discussed or ever considered an option. That’s because the mainstream fervently disdains a private sector (free market) solution. Supposedly nobody wants austerity (fiscal discipline), and alternatively everybody wants free lunch (spending other people's money).

But illusions melt when confronted with reality.

The clangor from repeated media blasts from these omniscient experts, who mostly hail from outside these crisis affected nations, has only been heightening the risks of such scenario and prompting for unintended consequences.

The local citizenry from these nations have been incited to withdraw money from their banking system, consequently send these elsewhere in the region or abroad for safekeeping from the risks of devaluations. The massive bank runs, thus, shows how ridiculous and out of touch with reality these proposals are.

Yet the addiction to inflationism has just so entrenched. Whether this clamor for the devaluation elixir will become a self-fulfilling prediction or not, remains to be seen.

Nevertheless inflation is a policy that WILL NOT and CANNOT last.

Austerity in Spain?

Juan Carlos Hidalgo at the Cato Institute investigates claims that Spain has been suffering from “austerity”

Writes Mr. Hidalgo, (bold emphasis mine)

There is a wide consensus that Spain’s economic troubles are the result of an enormous housing bubble—even bigger than the one that hit the U.S.—that burst in 2008. Just the year before, Spain boasted healthy fiscal indicators: a general government budget surplus of 1.9% of GDP and a gross consolidated debt of just 36.2% of GDP. However, once the bubble burst, government revenues collapsed and stimulus spending was injected into the economy, resulting in a fiscal deficit of 11.2% in 2009 and a gross debt that has increased over 30 percentage points of GDP in just 4 years.

Paul Krugman and The Economist argue that this evidence shows that, unlike Greece, Spain wasn’t fiscally profligate. However, the devil is in the details. Spain did run budget surpluses prior to the crash, but those surpluses weren’t caused by restrained government spending, but by ballooning tax revenues (thanks to a growing housing bubble). If we look at total government spending in the last decade, we can see a steady and significant rise until 2009:

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Government spending in nominal terms increased at an annual rate of 7.6% from 2000 to 2009. Ryan Avent at The Economist says that “the push for austerity began in 2010,” and thus we have to look at nominal spending after that year, when according to Avent, it fell “substantially” due to austerity measures. In reality, it went down by just 1% in 2010 and a further 3.6% in 2011. If these cuts seem “substantial” to Avent, then a yearly average increase of 7.6% for almost a decade must be staggering.

Moreover, if we look at spending in real terms, using constant euros from 2000, there hasn’t been any decrease in the level of government spending.

If we look at government spending as a share of the economy, Spain appears as fiscally prudent: Spending was 39.2% of GDP in 2000 and exactly the same figure in 2007. However, as has been noted by Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí of the Juan de Mariana Institute in a recent Cato study, “the data should be interpreted with caution, given that the GDP was growing at an artificially high rate.” The point is proven by the fact that when the economy came to a halt in 2008 (it grew by just 0.9%), government spending as a share of GDP leapt 2.3 percentage points to 41.5% in just one year. Government spending as a share of the economy remained constant during much of the 2000’s not because the government was spending too little but because GDP was growing too fast.

Moreover, once the crisis kicked in, government spending as a share of GDP reached a peak at 46.3% in 2009 (due to a combination of still more stimulus spending and a contracting economy). It later fell to 43% in 2011, still a higher share than in 2008. Government spending in Spain has indeed come down in the last two years, but not in a dramatic fashion as some people would have us to believe.

What about taxes? As has been the case in Britain, France, Italy and Greece, in the last two years the Spanish government increased taxes to tackle the soaring deficit: personal income tax rates went up in 2010 and two new brackets of 44% and 45% were introduced for higher incomes. Tax credits to self-employed workers were revoked. The VAT rate went up from 16% to 18% and excise duties on tobacco and gasoline were also raised. All these tax increases took place before the large tax hike introduced this year by the conservative government of Mariano Rajoy, which turned Spain into one of the highest taxed countries in Europe (and explained at length in this Economic Development Bulletin).

In short, austerity in Spain, described by Paul Krugman as “insane,” consists mostly of significant tax increases and timid spending cuts.

So Spain’s economy has been enduring economic strains hardly from spending cuts but mainly from HEFTY TAX INCREASES, rigid labor regulations and the welfare state.

On asphyxiating labor environment the Economist noted last February,

Spain’s labour laws, which date back to the Franco era, have condemned half the workforce to unemployment or to temporary jobs while the rest enjoy ironclad contracts and huge redundancy pay-offs. The new law blurs this insider/outsider divide and may thus get more people into stable employment. The decree comes on top of a January agreement by unions and employers to limit pay rises over the next three years. Mr de Guindos thinks most Spaniards see the need for labour reform. But its success in terms of growth may depend on unions’ choice between protecting jobs and keeping up their members’ pay.

The same statist FALSEHOODs have been thrown to Greece, where supposed “devaluation” from an “EU exit” would have posed as “elixir” to Greek economic woes.

Yet the ramifications from such absurd mainstream propaganda has been to SPUR a stampede out of the Greek banking system or systemic “bank run” or “capital flight” into safe havens as Germany and the US, as Greeks feared the loss of savings from forcible conversion of their euros to “drachmas”.

And the same tax hike prescriptions from statists has led Greeks to drastically avoid paying taxes.

In short, statist medicines have been blowing up right smack on their faces.

Yes, polls have it that 80% of Greeks want to stay in the Euro!!!

Statist imbeciles engage in deceptive phraseology to promote their political religion. As George Orwell once wrote,

In our time, political speech and writing are largely the defence of the indefensible... Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness… Such phraseology is needed if one wants to name things without calling up mental pictures of them…The inflated style itself is a kind of euphemism.

The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as ‘keeping out of politics’. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer.

False prophets, these statists, are.

Video: Dr Marc Faber Optimisitic When Greece Exits, Sees Global Recession Very Soon

Interesting insights from Dr. Marc Faber's interview with the CNBC (hat tip Zero Hedge). Below are my notes:

-Germany will issue Eurobonds. Quality of euro will diminish

-Euro is oversold, potential to rebound along with stock market for the short term

-People are focusing excessively on Euro while ignoring the rest like India and China

[my comment: very true.]

-Danger level—any outright default by any countries. Better to take losses now than to wait for the risk of “gigantic systemic failure”

-Market will be relieved if Greece exited the Eurozone. There would be some clarity. It wouldn’t be good for bank and financial shares. The markets are oversold and on exit of Greece, I think markets would rally

[my comment:

Indeed. People hardly realize that the banking system is NOT the economy as mainstream pundits would have it.

While a banking meltdown may impact business activities over the short term (like 2008), the world does NOT operate on a vacuum, people will continue to trade and resort to other means of obtaining credit, e.g. consumer financing companies filled the niche of Japan's immobilized banking system as alternative sources of credit during post-bubble bust, in 2008 trades have been conducted through barter and through bilateral financing deals, during the recent Euro crisis, in Italy the mafia has stepped up the void as a major creditor

This will especially be true, if reforms would allow for greater economic freedom, which would allow parties to fill in the void. For instance, Walmart's application for bank license was turned down from opposition by big banks, unions and etc...]

-More and more stocks are breaking down around the world. He says that this means many economies are likely to weaken. We might see “some asset deflation”

[my comment: Dr. Faber seems to be vacillating from an oversold rebound to asset deflation.]

-We could have a global recession starting sometime in the fourth quarter of this year or early 2013—100% certainty

-Hold cash US dollars and some gold.

-Although gold prices may breakdown below the low on December 29 2011 of 1,522.

[my comment: the risks seems to be tilted towards a meaningful downdraft alright, which may signal some asset deflation or even global recession, but we can't rule out the possibility that political authorities, particularly of central bankers, may confront these with even more aggressive money printing measures, which again may defer interim trends.

Nonetheless, current environment highlights the state of uncertainty we are in]

Risk ON Risk OFF is Synonym of The Boom Bust Cycle

Prices are relative: high prices may go higher, while low prices may go lower.

The accretion of price actions is what constitutes a trend. Trends can be seen in a time variant lens: intraday, day, weekly, monthly, yearly or decades.

A bullmarket is when the dominant or major trend is up, while the opposite, a bearmarket is when the major trend is down. A market in consolidation means neither the bulls nor the bears get the dominance.

Yet price trends can be seen in many ways depending on reference points. Having said so, people can make biased and deceptive claims by the manipulating the frame of the trend’s reference points to uphold their perspective.

Meanwhile inflection points extrapolate to a reversal of trends which may allude to major or minor trends.

The actions over the past two weeks may yet be seen as normal correction. That is what I hope it is. But I can’t vouch for this.

We Have Met The Enemy And He Is Us

Yet relying on hope can be a very dangerous proposition. As a popular Wall Street maxim goes, bear markets descends on a ladder of hope. While I am not saying we are in a bear market, it pays to understand that quintessentially “hope” represents the basic shortcoming of vulnerable market participants.

Managing emotional intelligence or having a street smart-commonsensical approach, or prudence is a better a part of valor is my preferred option in dealing with today’s torturous bubble plagued markets[1]. There are times that require valiance, however, I don’t see this as applicable today yet.

As an aside, in testy times as these, market participants should learn how to control their emotions or temperaments so as to prevent blaming somebody else for one’s mistakes, and learn how to take responsibility for their own actions. Self-discipline should be the elementary trait for any investors[2].

Regrets should be set aside for real actions. This means that we can opt to buy, sell or hold, depending on our risk tolerance, time orientation and perception of the conditions of the markets. People forget that holding is in itself an action, because this represents a choice—a means to an end.

And because the average person are mostly afflicted by the heuristic of loss aversion[3] or the tendency to strongly prefer avoiding losses to acquiring gain, in reality since a loss taken signifies an acknowledgement of mistakes, the pain from such admission leads to one to take on more risks that leads to more losses, than to avoiding losses.

As American financial historian, economist, author and educator Peter Bernstein wrote[4],

When the choice involves losses, we are risk-seekers, not risk averse.

Egos, hence, play a big role in shaping our trading, investing or speculative positions.

To borrow comic strip cartoon character Pogo most famous line[5]

We have met the enemy and he is us

The Essence of Risk ON Risk OFF Moments

Nevertheless current developments continue to reinforce my perspective of the markets.

1. Despite all the recent hype about local developments driving the local market, external factors has remained as the prime mover or influence in establishing Phisix price trend. This has been true since 2003. Remember, the Philippine President even piggybacked on this[6]

The good thing about market selloffs is that this has been unmasking of the delusions of greatness and its corollary, the deflation of many puffed up egos.

This also shows that there has been no decoupling

2. Global financial markets have moved in on a Risk On or Risk Off fashion.

While the degree of performances may differ, actions in the global financial markets today have shown increasingly tight correlations. The general trend direction and even the undulations of the Phisix, the US S&P 500, the European Stox 50 and the Dow Jones Asia Pacific index over past 3 years have shown increased degree of conformity.

Risk ON moments are mostly characterized by greater appetite for speculative actions as seen in the correlated upside movements of prices of corporate bonds, equities, commodities, and ex-US dollar currencies.

On the other hand, Risk OFF episodes or risk-averse moments like today, have accounted for “across the board selloffs” a flight to safety shift to the US dollar and US treasuries.

There has been little variance in price trends that merits so-called portfolio diversification. As pointed out before these have been signs of “broken”[7] or highly distorted financial markets.

Observe that whether the actions WITHIN the Philippine Stock Exchange, or among major developed and emerging market bellwethers or the other asset markets, current market trends produces the same Risk ON-Risk OFF patterns.

A dramatic upside move during the first four months only to be substantially reduced this month exhibits little evidence of conventional wisdom at work. Neither earnings can adequately explain the excessive gyrations in market fluctuations nor has contemporary economics.

Risk ON and Risk OFF, are in reality mainstream’s euphemism for boom bust cycles, which have been caused by inflationism and various forms of interventions—that has engendered outsized volatility in price actions.

Knightean Uncertainty: Greece Exit, China Slowdown and Fed’s End Program Volatility

As pointed out last week, there have been three major forces that have been instrumental in contributing to the recent distress being endured by global financial markets, particularly, the SEEN factor: Greece and the Euro crisis, the UNSEEN factors—China’s slowdown (or an ongoing bust???) and anxieties over US monetary policies.

Since risks implies of measured probability of future events while uncertainty refers to the incalculable probability of future events[8], current events suggests of GREATER uncertainty than of the average risk environment.

For the third time in 6 months, the People’s Bank of China (PBoC) last week cut reserve requirements[9], yet the Shanghai index ignored the credit easing measures and posted a significant weekly loss.

Moreover, the economic slowdown in China has hardly abated.

China’s four biggest banks reported almost zero growth of net lending over the past two weeks[10].

In addition, according to a study by made by a think tank affiliated with PRC’s state council, the estimated the debt-to-asset ratio[11] of Chinese state and private companies, as well as individuals, has reached about 105.4 percent, the highest among 20 countries.

These represent the increasing likelihood of the unwinding of China’s unsustainable bubble. For the moment China’s authorities seems to be in a quandary as they have implemented half-hearted measures which her domestic markets appear to have taken in blase.

Yet if the economy does sharply deteriorate, I would expect more forceful policies to be put in place. So far this has not been the case.

It has been no different in the Euroland where politics have posed as an obstacle to further interventions from the European Central Bank (ECB)

The risks of a Greece exit from the Eurozone seem to have been intensifying. This has been evidenced by the open acknowledgement by Mario Draghi, European Central Bank president, that Greece could leave the Euro. The ECB has even halted to provide loans to four Greek banks[12].

Lending to banks in Greece, which has been experiencing slow-mo bank runs but seem to be escalating over the last week on fears of massive devaluation from the return to the drachma[13], are presently being funded by the national central bank of Greece[14] via the Emergency Lending Assistance.

While there have been estimates as to the degree of exposures by major banks of several nations on Greece, particularly €155 billion for Germany and France[15], no one can really assess on the psychological impact that would translate to financial losses that may occur once official ties have been disconnected. Even Singapore has reportedly been exposed with “a stunning 60%-plus of GDP tied up in European bank claims” according to Zero Hedge[16].

Add to this undeclared the derivatives exposure on Greek securities at an estimated $90 billion[17], the losses from a full blown contagion can reach trillions to the global banking system.

Thus, the probability looms large that that major central banks would use this as an excuse to justify massive inflationism to protect their respective banking systems.

Again the problem that prevents the ECB from further inflating today has been the uncertain status from the politics of Greece. Since nobody in Greece seems to be in charge, the ECB doesn’t know whom to strike a deal with yet. And perhaps in an attempt to influence Greek politics, as stated above, the ECB has partially cut off funding to some Greece banks.

So this should be another evidence of the interruptions of the money spigots.

But the issue here will be the scale of interventions once the process of the Greece exit is set on motion. This will practically be a race between the market and central bank interventions.

And this is why I believe the markets could be exposed to excessively huge volatility during this May to June window, mostly likely with volatility going in both directions, but having more of a downside bias, until the forcefulness of interventions would be enough to temporarily provide patches to malinvestments from becoming evident.

And perhaps in the realization of the risks from financial isolation and the benefits of conditional redistribution from their German hosts, the good news is that the pro-austerity or the pro-bailout camp appears to be gaining ground.

Recent polls seem to suggest that pro-bailouts as having a slight edge[18] or are in dead heat[19] with former favorites, the anti-austerity camp.

The term austerity has been deliberately contorted by the neoliberals. In reality there has been NO real[20] austerity[21] in the Eurozone as government spending (whether nominal, real or debt to gdp) has hardly been reduced. What has been happening has been more of tax increases with little reforms on the labor market or on the regulatory front to make these economies competitive[22][23].

Finally, compounded by external developments, US markets are likewise being buffeted by the uncertainty towards the Fed’s monetary policies where each time the FED ended their easing measures, downside volatility follows.

This was the case for QE 1 and QE 2, and apparently with the closing of OPERATION TWIST this June, US markets have become volatile again.

And as the US markets has recently sagged, the Federal Market Open Committee (FOMC) once again has signaled that they are open to more credit easing measures using the Euro crisis and the US government budget and or debt-ceiling issues[24] as pretext.

The so-called Bush Tax cuts which is set to expire at the end of the year, will translate to a broad increase in tax rates for all[25], will also be a part of the economic issue. Tax increases in a fragile economy heightens a risk of a downturn, and this will likely be met with more easing policies.

Bottomline: The major issues driving the markets has been about the feedback loop between the markets and inflationism (bubble cycles).

Lethargic prices of financial assets have accounted for as symptoms of the artificiality of price levels set by the governments and major central banks through credit easing programs and zero bound interest rates meant to protect the banking system that has been integral to the current political structures which includes the welfare-warfare state and central banking.

In short, falling markets are simply signs of pricked bubbles.

Outside additional support from central banks, asset prices have been weakening, supported by some episodes of debt liquidations, particularly in the Eurozone and in China.

Currently the PBoC, ECB or the FED appear to be constrained or reluctant to pursue with further aggressive interventions for one reason or another. As previously noted, the BoE has officially put to a halt their QE[26].

It could be that they may be waiting for more downside volatility, which should provide them political cover for such action. Also the unresolved political problems of Greece have been an impediment.

So yes, today’s markets have still principally been driven by the ON and OFF steroids or inflationism from central bankers and will continue to do so until markets or politics forces them to cease.

---

[1] See Applying Emotional Intelligence to the Boom Bust Cycle, August 21, 2011

[2] See Self-Discipline and Understanding Market Drivers as Key to Risk Management, April 2, 2012

[3] Wikipedia.org Loss aversion

[4] Bernstein Peter Against The Gods, The Remarkable Story of Risks, p. 273 John Wiley & Sons

[5] Wikipedia.org "We have met the enemy and he is us." Pogo (comic strip)

[6] See The Message Behind the Phisix Record High May 7, 2012

[7] See “Pump and Dump” Policies Pumps Up Miniature and Grand Bubbles April 30, 2012

[8] See The Fallacies of Inflating Away Debt August 9, 2009

[9] See China Cuts Reserve Requirement May 14, 2012

[10] Businessweek.com/Bloomberg.com Loan Growth Stalled at China’s Biggest Banks, News Says May 15, 2012

[11] Bloomberg.com Chinese Company Debt Is At ‘Alarming Levels,’ Xinhua Says May 17, 2012

[12] See Hot: ECB Holds Loans to Select Greek Banks, ECB’s Draghi Talks Greece Exit May 17, 2012

[13] MSNBC.com Greeks withdraw $894 million in a day: Is this beginning of a run on banks?, May 16, 2012

[14] Brussel’s Blog The slow-motion run on Greece’s banks Financial Times, May 17, 2012

[15] See Greece Exit Estimated Price Tag: €155bn for Germany and France, Possible Trillions for Contagion May 17, 2012

[16] Zero Hedge Why Stability Stalwart Singapore Should Be Seriously Scared If The Feta Is Truly Accompli, May 18, 2012

[17] Zero Hedge, Alasdair Macleod: All Roads In Europe Lead To Gold, May 19, 2012

[18] See Are Greeks turning Pro-Austerity? May 19, 2012

[19] Reuters India Greek election race tightens into dead heat May 20, 2012

[20] See More on the Phony Fiscal Austerity, May 16, 2012

[21] See In Pictures: The Eurozone’s “Austerity” Programs, May 8, 2012

[22] See Choking Labor Regulations: French Edition, May 14, 2012

[23] See Greeks Mount Civil Disobedience, Scorn Taxes, May 16, 2012

[24] Bloomberg.com Several on FOMC Said Easing May Be Needed on Faltering, May 17, 2012

[25] See What to Expect when the Bush Tax Cuts Expire May 19, 2012

[26] See Bank of England Halts QE for Now, May 10, 2012