Is Greece Falling into a Failed State?

According to the mainstream media and establishment experts, Greeks supposedly loathed austerity. They wanted “growth”, which is a euphemism for continued unsustainable government spending. If true, then this means that Greeks wanted free lunch.

But many Greeks may have come to realize that there is NO such thing as a free lunch. They needed to pay taxes in return for political entitlements.

Yet Greeks have been balking at doing so.

From Reuters.com/GreeceReporter.com

With anxiety mounting that Greece might vote for anti-austerity parties in the June 17 elections and be forced to leave the Eurozone of 17 countries using the euro as a currency, more Greeks – already legendary tax evaders – have stopped paying taxes. A senior Finance Ministry official on May 23 said that tax revenues have fallen 10 percent while two tax officials who declined to be named told Reuters that May revenues fell by 15-30 percent in tax offices away from the major cities and relative wealth centers of Athens and Thessaloniki.

So Greeks have been refusing to pay taxes. The left hand does not know what the right hand is doing. That’s if the establishment’s assertion is true. Greeks cannot have it both ways.

Yet Greeks realize that if they cannot pay, then they would have to default on their debts.

But the establishment says that the only way to salvation is through devaluation that can only be actualized from an exit. So their prescription: Default by devaluation.

So this ‘exit’ prospect gives further jitters not just to the average Greeks, but to foreign businesses based on Greece, as well. Foreign businesses have been apprehensive about having inadequate laws to cover or protect them once Greece decides to exit.

From the New York Times,

What can companies do when the legally impossible becomes reasonably probable?

Under European Union law, Greece cannot leave the euro. That is the theory. But in practice, any protection the law offers investors could be difficult to enforce, according to lawyers trying to protect their corporate clients against the upheaval sure to follow if Greece were to default on its debts and adopt a new currency.

So their advice is blunt: Remove cash and other liquid assets from Greece and prepare to take a short-term hit on any other investments…

But, apart from trying to ensure that debts are paid promptly and therefore in euros, legal options for companies are limited. Contracts covered by Greek law, particularly for services delivered in Greece, provide little protection against the currency’s being redenominated and devalued — a development regarded as unlikely until recently.

“Greece would, through its laws, be able to amend contracts governed by Greek law or to be performed within the territory of Greece,” Mr. Clark said. “It is the governing law and the place of performance of the contract that is most important.”

International contracts, which might be covered by British, German or Swiss law, would be more likely to be honored in the designated currency, though in some cases the wording of the legal document may be vague.

And even if the law is on their side, companies would find that to extract payment from a Greek company, they would need a judge in Greece to enforce a ruling from a foreign court.

When the average Greeks doesn’t want to pay taxes, and when foreign businesses are either closing shop or transferring elsewhere, then this means that there will be insufficient tax revenues for the current government to finance her survival.

This also means that parasites have severely impaired the hosts, which may mean the prospective extinction of the parasitical relationship.

From FT/IBNLive.in

Greece's public finances could collapse as early as next month, leaving salaries and pensions unpaid unless a stable government emerges from the June 17 election, according to Lucas Papademos, the technocrat prime minister who left office after this month's inconclusive vote.

Mr Papademos warned that conditions were deteriorating faster than expected with cash flow likely to turn negative in early June amid a sharp fall in tax revenues and a loosening of spending controls during two back-to-back election campaigns.

Mounting anxiety that Greece is headed for further political instability and a possible exit from the euro has prompted many Greeks to postpone making tax payments, and has also accelerated outflows of deposits from local banks.

Athens bankers estimate that more than €3bn of cash withdrawn since the May 6 election has been stashed in safe-deposit boxes and under mattresses in case the country is forced to readopt the drachma.

Austerity becomes a NATURAL process as economic reality has been reasserting itself. This exposes the promises of a "state based elixir" as monumental delusion.

The prescription of devaluation has been provoking a bank runs and has been blowing up right ON the faces of establishment experts calling for devaluation.

This brings us to where the Greece might be headed for.

The new Deutsche bank boss calls Greece as a "failed state".

From Irish Times,

The incoming co-chief executive officer of Deutsche Bank today described Greece as a "corrupt" and "failed" state.

"Greece is the only country, I feel, where we can say 'it's a failed state,' it is a corrupt state, corrupt as far as its political leadership is concerned, and obviously other people had to be willing to support this," Juergen Fitschen, who takes up his post next week, said in a speech at a conference in Berlin.

Failed states, are characterized according to Wikipedia.org by

• loss of control of its territory, or of the monopoly on the legitimate use of physical force therein,
• erosion of legitimate authority to make collective decisions,
• an inability to provide public services, and
• an inability to interact with other states as a full member of the international community.

Often a failed state is characterized by social, political, and/or economic failure.

In reality “failed states” are mainly products of unsustainable parasitical relationships, whether in Somalia, Chad or Sudan as rated by US think tank Fund for Peace and Foreign Policy.

But this does not necessarily mean social, political and economic failure as commercial operations exists. Otherwise logic says that these nations will have been uninhabited or deserted either through diaspora or death. But this has clearly not been the case.

Ironically, the US Central Intelligence Agency even admits that the number one “failed state” Somalia as having a “healthy informal economy”.

Thus the “inability to provide public services” does not represent reality. The difference is that mainstream cannot swallow or fathom such ideas. And the global political establishment has been repeatedly attempting for “failed states” to go mainstream through foreign interventions.

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.

This validates anew the great Ludwig von Mises who presciently warned more than half a century ago that

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

And like Dr. Marc Faber, the collapse of the current Greece form of government should be bullish for Greeks over the long term (whether through exit or as part of the EU), as Greeks will be compelled to live within the laws of economics through greater economic freedom, and eschew feeding on political parasites.

Germany’s Competitive Advantage over Spain: Freer Labor Markets

When politics is involved, common sense is eschewed.

The vicious propaganda against “austerity” aims to paint the government as the only solution to the crisis, where the so-called “growth” can only be attained through additional government spending funded by more debt. Unfortunately, these politically confused people have forgotten that today’s crisis has been caused by the same factors which they have been prescribing: debt. In short, their answer to the problem of debt is to acquire more debt.

The same with clamors for crisis plagued nations to “exit” the Eurozone in order to devalue the currency. Inflating away standards of living, it is held, will miraculously solve the social problems caused by too much government interventionism that has led to inordinate debt loads.

Professor John Cochrane of the Chicago School nicely chaffs at statist overtures,

The supposed benefit of euro exit and swift devaluation is the belief that people will be fooled that the 10 Drachmas are not a "cut" like the 5 euros would be. Good luck with that.

Little has been given thought to what’s happening on the ground, particularly achieving genuine competitiveness by allowing entrepreneurs to prosper.

At the Mises Institute, Ms Carolina Carmenes and Professor Howden lucidly explains why Germany has been far more competitive than Spain, specifically in the labor markets .

Spain’s labor costs have been cheaper than Germany, yet the Germans get the jobs. Writes Ms. Carmenes and Prof Howden (bold emphasis added)

Spanish employment is now hovering around 23 percent, with over 50 percent of youths jobless. Only around 6 percent of Germans are without work, almost the lowest level in the country since reunification. This divide solidifies Spain's position among the worst-performing economies of the continent, and Germany's vaunted position as among the best.

Yet such a situation might seem paradoxical. One could, for example, look at the wage rates of the respective workers and find that low-cost Spaniards are much more affordable. Profit-maximizing businesses should be expanding their facilities to take advantage of the opportunity the Spanish crisis has provided and eschew higher-cost German labor.

While fixating on nominal labor costs might provide a compelling case for a bright Spanish future, delving into the details provides some darker figures.

Once again the German-Spain comparison shows of the myth of cheap labor

Little thought has also been given to the impact of minimum wage and excessive labor regulations which stifles investment and therefore adds to the pressures of unemployment

Again Ms. Carmenes and Prof Howden (bold emphasis added)

One of the main differences between Germany's and Spain's labor markets is their minimum-wage rates. A Spanish minimum-wage worker can expect to earn about €633 per month. Germany on the other hand enforces no across-the-board minimum wage except in isolated professions — construction workers, roofers, and electricians, as examples.

German employees are free to negotiate their salaries with their employers, without any price-fixing intervention by the government in the form of wage control. (This is not to imply that the German labor market is completely unhampered — jobs are cartelized by industry each with its own wage controls. While this cartelization is not perfect, it does at least recognize that a one-size-fits-all minimum-wage policy is not optimal for the whole country.)

As an example of the German approach to wages, consider the case of a construction worker. In eastern Germany this worker would make a minimum wage of around €9 per hour. His counterpart in western Germany would earn considerably more — almost €11 an hour. This difference allows for productivity differences to be priced separately or local supply-and-demand conditions to influence wages. Working for five days at eight hours a day would yield this German worker anywhere from €360 to €440.

It is obvious that the German weekly wage is almost as high as the monthly Spanish one. What is less obvious is why Germans do not move their facilities to lower-cost Spain.

As the old saying goes, "the more expensive you are to fire, the more expensive you are to hire." If a Spanish company decides to lay off an employee, the severance payment for most labor contracts (a finiquito in Spanish) will amount to 32 days for each year the employee has worked with the company. Although this process is not simple in Germany either, there is no legal severance requirement that companies must pay to redundant workers. The sole requirement is for ample notice to be given, sometimes up to six months in advance. If a Spanish company hires a worker who does not work out as intended, a substantial cost will be incurred in the future to offload the employee. Employers know this, and when hiring workers they exercise caution accordingly, lest this unfortunate and unplanned-for future materialize.

These factors make the perceived or expected cost of labor at times higher in Spain than in Germany, despite the actual monetary cost being lower in euro terms. This effect has been especially pronounced since the adoption of the common currency over a decade ago. As we can see below, the average cost of German labor is largely unmoved since 2000, while Spanish labor has increased about 25 percent over the same period.

When hiring a worker, the nominal wage is only half the story. The employer also needs to know how productive that worker will be. Even after we factor for the extra costs on Spanish labor, a German worker could be more costly. A firm would still choose to hire that worker if his or her productivity was greater.

As we can see in the two figures below, over the last decade a large divergence has emerged between the two countries. While German productivity has more or less kept pace with its small increases in wage rates, the Spanish story is remarkably different. Productivity has lagged, meaning that on a real basis Spanish laborers are much more costly today than they were just 10 years ago.

Of course, boom bust policies have also contributed to such imbalances. The EU integration which had the ECB inflating the system essentially pushed Spanish wages levels up substantially, thereby overvaluing Spanish labor relative to productivity and relative to the Germans and to other European nations…

In his book The Tragedy of the Euro, Philipp Bagus mentions a similar phenomenon. Bagus points to the combination of (1) the rising labor costs that result from eurozone inflation and (2) divergent productivity rates between the countries as a source of imbalance. Indeed, inflation has been one driver of rising (and destabilizing) wages in the periphery of Europe, and especially in Spain. Others include, as we have noted here, minimum wages, regulatory burdens, and severance packages that increase the potential cost of labor.

In either case the effect is the same: wage rates do not necessarily reflect the labor itself, but rather the regulation surrounding it. In Spain, this translates to noncompetitive wages. It is important to remember, though, that this does not imply that the labor itself is necessarily uncompetitive — it is price dependent after all.

Every good has its price, even labor. When prices are hindered from fluctuating to clear markets, imbalances occur. In labor markets those imbalances are unemployed people. Policies such as a one-size-fits-all minimum wage and high mandated severance packages keep the price of Spanish labor above what it needs to be to clear the market.

Until something is done to ease these policies, Spanish labor will remain uncompetitively priced. Until Spanish labor costs can be repriced competitively, Spain's masses will need to endure stifling levels of unemployment.

The only solution to the current crisis is to allow economic freedom to prevail. Of course, this means less power for the politicians and their allies which is why they won't resort to this. Their remedies will naturally be worst than the disease.

EU Debt Crisis: Why Eurobonds Won’t Work

A new bailout mechanism has been proposed for the Eurozone.

From the Associated Press,

Germany has again made clear its opposition to French proposals for jointly-issued bonds from the 17-nation eurozone as a way to create economic growth and ease the region's financial crisis.

At Saturday's G-8 summit, German Chancellor Angela Merkel — under urging from U.S. President Barack Obama and French President Francois Hollande — signed up to a statement that called for mixing painful cutbacks with growth-promoting measures to deal with a crisis that threatens the global economy.

The leaders warned that budget deficits have to come down. But they also acknowledged that an approach that's based mostly on austerity and longer-term reforms can't help countries out of recessions this year or next.

How exactly to encourage growth has become a controversial topic among European leaders, who will meet Wednesday in Brussels to try to find common ground.

France's Hollande has pushed for issuing debt backed by financially strong countries like Germany to finance growth in weaker countries like Greece or Portugal as one solution to the problem. Germany, however, has long and firmly resisted the idea of introducing eurobonds, arguing they would lessen pressure for heavily indebted countries to get their finances in order. They would also likely raise borrowing costs for countries in better shape, such as Germany.

Eurobonds would be "a prescription at the wrong time with the wrong side-effects," Steffen Kampeter, a deputy finance minister, told Deutschlandfunk radio.

"We have always said that as a first step we need solidity in European finances, and that is the fiscal compact," a budget-discipline pact that Merkel championed and Hollande has criticized, he said.

Germany's tough stance against the idea of eurobonds came as France's new finance minister met his German counterpart for the first time on Monday.

The talk about “growth-promoting measures” is patently silly. Such political rhetoric represents newspeak, meant to delude the public from reality.

This crisis exists because the EU governments has commandeered significant share of their resources to political activities (welfare state, bailouts, transfers, bureaucracy and etc.) which represents consumption.

Since governments thrive on taxes, whom are like parasites living off from a host, government activities have NOT been established for production, which means they DO NOT promote growth.

It is COMMERCE that gives the productive economic growth.

Yet these governments are hesitant to make the required reforms to make resources available for productive commercial activities through entrepreneurship, and to make their economies competitive (e.g. labor reforms).

The reality is that each and every government expenditure comes at the expense of private commercial activities. Consumption comes at the expense of production. So there is no general economic growth. There will be growth only for crony industries and companies and on the budgets of these political masters.

The proposed Eurobond is another example of the prevailing bailout mentality. This represents another redistribution of resources from Germans and other productive EU nations to the spendthrift crisis plagued PIGS. So bad behavior will be rewarded, which is likely to encourage more bad behavior.

And that’s why there has been vocal resistance on the overtures for a bailout through a common bond by Germany, whom will bear most of the burden.

Analyst Michael Sedacca at the Minyanville nicely explains the why the mechanism won’t work…

One of the biggest reasons why a eurobond will never work is Germany. It is by far the largest guarantor for anything jointly issued in the eurozone. For the European Financial Stability Facility (or EFSF), they currently guarantee 29.06% (on a GDP weighted basis), which is by far the biggest majority. If, for example, Spain were to “step out” because they needed to take money from the facility, their share jumps to 34%.

Next, the on-the-run 10-year note from the EFSF (rated AA+) carries a coupon of 3.5% and implied yield-to-maturity (or YTM) of 2.86%. For the German 10-year note, it is 1.75% and implied YTM of 1.44% -- essentially, double what they have to pay for their own debt by being tied to the rest of the eurozone. However, they aren't directly affected by these payments because Germany and the other eurozone countries are paying with capital to backstop the new issues and make the interest payments. So there's no direct change of money flow at the German Treasury; there is just a faster depletion of whatever capital is at the EFSF.

In theory, if a eurobond were to go through, Germany would be on the hook for a hefty chunk of this base interest rate change. It gets even worse if you shorten the maturity; the current two-year German bond has a coupon of 0.25% (YTM of 0.05%) and the EFSF note is at 1%. Assuming these bonds would be weighted by GDP, on interest payments alone, Germany would be paying four times what they have to pay for their own debt.

And as I pointed out before, political redistributions through centralization of the EU will intensify political frictions

Mr Sedacca adds,

The biggest change, however, is the ceding of sovereignty. If all of the countries agree to tie themselves to the mast of the euro, the fighting and mudslinging will get even worse than it already is. As it is, when signing up for the bailout of Greece, Finland required additional collateral in order to cover their potential losses. They knew they could potentially be lending into a hole.

Of course all talk about Eurobond may actually be a cover for what is truly intended: massive money printing by the ECB

Mr. Sedacca seem to share my outlook

All of that being said, I think we will see the European Central Bank lending directly to the European Stability Mechanism to buy bad assets directly off banks' balance sheets before we see a eurobond. That will likely be met with a positive reception from the market.

At the end of the day all these kicking of the proverbial can down the road means the worsening of the crisis which is likely to set stage for massive inflation and of the ballooning prospects of the disintegration of the European Union.

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

Are Greeks turning Pro-Austerity?

Recent polls seem to suggest that Greeks may after all, still want handouts from their Germans hosts, as pro-austerity votes seem to be gaining ground.

From the Independent

Less than a day after taking office, Greece's new caretaker government was faced with yet another credit downgrade as Fitch that warned Athens of a "probable" exit from the eurozone if pro-bailout parties failed to win new elections due on 17 June.

And it appears that Greeks might be taking this message on board. A new poll yesterday indicated that politicians backing austerity – a necessary condition of the rescue package – would secure up to a 167-seat majority in the new Parliament with the conservative New Democracy party maintaining its lead over Syriza, a left-wing party whose leader has vowed to stop the country's painful public sector cuts.

The poll, conducted for Alpha TV, predicts New Democracy would gain up 123 seats in the 300-member legislative assembly, leaving left-wing Syriza with 66 seats and Socialists Pasok 41. The findings will calm nervous European leaders and financial markets that panicked after an anti-austerity sentiment prevailed in the hung parliament after the 6 May election.

However, as the country embarks on the new campaign some newspapers were left doubtful over the accuracy of the poll. "Elevator polls" read the headline of centre-left daily Ethnos. Political leaders are only just starting to forge alliances with smaller parties in the hope of forming a coalition.

This is yet too early to say. Nevertheless caught between the choice of financial isolation on the one hand, and as beneficiary of conditional redistribution as member of the European Union, on the other hand, the shift in sentiment seems plausible. And it could be that the pro-austerity camp may yet prevail.

As caveat, “austerity” remains a vaguely defined concept today, as the term has been grotesquely mangled by neoliberals.

More on the Phony Fiscal Austerity

I have been repeatedly pointing out that what statists call as “austerity” has actually been a canard or terminological or semantical sleight of hand.

Many have been saying the same thing too…

The austerity spin in Britain from the Telegraph

Tullett Prebon, a bond trader, said that “public expenditures have hardly been reduced at all” and that claims of a “big cut in public spending is bare-faced deception”.

Figures highlighted by the firm show that public spending actually rose during 2010-11 and fell by just 1.5 percent last year.

Government spending is more than £22 billion higher than it was in 2008 when the financial crisis erupted.

The majority of extra money required by ministers to fill the black hole in the finances caused by the recession is being raised from extra taxes rather than cuts in Government spending.

Dr Tim Morgan, the global head of research at Tullett Prebon, said: “It’s high time that this mendacity was exposed for what it is. Government has done very little about its spending, has appropriated three-quarters of all gains in economic output for its own use, has carried on piling up debt – and has tried to pass all this off as 'responsible austerity’.

“The motivation for government spin is obvious enough. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package have proved politically unpalatable.”

Dr Morgan warned that it seemed “improbable” that the bond markets would “continue to fall for this spin-job” and would “sooner rather than later” call the Government to account.

The austerity blarney in Europe as exposed by Cato’s Juan Carlos Hidalgo (emphasis added)

Source: Source: European Commission, Economic and Financial Affairs.

Spending has declined to approximately its 2007 level in nominal terms, while in real terms it actually continues to go up. (I look at spending in real terms because that’s what Ryan Avent at The Economist said we should look at in a reply to Veronique de Rugy’s initial graph on austerity in Europe. Note that, as in my previous posts on Britain and France, I’m using the GDP deflator to calculate spending in real terms). If we look at spending in real terms, there haven’t been any spending cuts in Greece. On the other hand, Tyler Cowen observes that “in the short run it is supposedly nominal which matters (that said, gdp and population [and inflation] are not skyrocketing in these countries for the most part).” Let’s look at nominal then. Since 2000, public spending rose in Greece at an annual rate of 7.8% until 2009. Then it declined by 8.3% in 2010 and a further 4.1% in 2011. This is certainly a cut in spending, but far from brutal.

Some argue that we shouldn’t look at spending levels when talking about austerity, but rather at spending as a share of the economy. In that sense, government spending in Greece went up from 47.1% of GDP in 2000 to 53.8% in 2009 and it has come down to 50.3% in 2011—approximately its 2008 level. However, I don’t buy the argument. Does it mean that the government has to spend an ever increasing share of the GDP in order to keep the economy afloat? Is half of the economy not enough when it comes to government spending?

What about Zakaria’s argument of the crippling effect of firing government workers on growth? Last January, The Economist looked at the situation in Greece and noted that “Of the 470,000 who have lost their jobs since 2008, not one came from the public sector. The civil service has had a 13.5% pay cut and some reductions in benefits, but no net job losses.” As for what “austerity” means for most Greeks, the magazine added, “Since Greece’s first bail-out in May 2010, the government has imposed austerity, increasing taxes so much that people can barely manage.”

The Economist is not alone in pointing out the extent to which taxes have gone up. Even the IMF has done so. Back in November, Poul Thomsen, the IMF mission chief in Greece, said that the country “has relied too much on taxes and I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes.” Since then Greece agreed to eliminate 15,000 government jobs (2% of its public sector workforce) in exchange for a second bailout. Once again, that figure pales when compared to the number of people who have lost their jobs in the private sector.

The evidence shows that in Greece austerity has meant significant tax increases and timid spending cuts.

The real, but discreetly conveyed message, or the intended prescription of so-called pro-growth camp is for these economies to embrace even more socialism. They just can't be forthright about it.

Greeks Mount Civil Disobedience, Scorn Taxes

Raising taxes has been one of the major proposed elixir of “growth” by mainstream analysts for resolving the crisis in the Eurozone. More inflationism and more deficit spending as the other nostrums.

Unfortunately, economic reality and intentions by politicians and their institutional backers don’t seem to square. Greeks have mounted a civil disobedience campaign against paying taxes.

Here is the Financial Times (Alphaville) Blog,

The desperate cunning scheme to get Greeks to pay property taxes by bundling them with electricity bills didn’t last long. You guessed it, people stopped paying their electricity bills and now it looks like the power company – which had to be bailed out last month – has stopped even trying to collect the levy.

From Ekathimerini, the Greek daily (emphasis ours):

“Public Power Corporation (PPC) has already disengaged itself from involvement in the payment of the special property tax that had been incorporated into electricity bills.

“Well-informed sources suggest that the new bills the company is issuing do not include the property levy despite the law providing for the first installment concerning 2012.

The decision, the same sources say, appears to have the acquiescence of the Finance Ministry.

“Judging by the fact that unpaid bills in the first quarter of the year totaled some 1 billion euros, PPC believes it has become clear that households cannot afford to pay electricity bills that are burdened further by the extraordinary property tax in the current recession conditions.

The government had hoped to raise €1.7bn-€2bn from the levy in the fourth quarter of last year. But a massive unions-led civil disobedience movement against this “injustice” scuppered that and a ruling that it was illegal to disconnect people’s electricity supply for non-payment sent the collection rate even lower.

However, the memorandum of understanding with the IMF-EU signed in March demands that Athens collects a range of back taxes, such as the property tax from 2009 which was essentially never collected. So it will be interesting to see how the Troika reacts to these most recent developments.

Again, more signs of the ongoing self-liquidation process of Europe’s embrace of the Santa Claus principle.

Updated to add:

Greece banks reported a surge in deposit withdrawals last Monday, and capital flight or "buy orders received by Greek banks for German bunds" to the tune of € EUR800 million.

Also, tax revolts have also become apparent in Italy.

A recent report from the Telegraph.co.uk (hat tip: Cato's Dan Mitchell)

In the last six months there has been a wave of countrywide attacks on offices of Equitalia, the agency which handles tax collection, with the most recent on

Saturday night when a branch was hit with two petrol bombs.

Staff have also expressed fears over their personal safety with increasing numbers calling in sick and with one unidentified employee telling Italian TV: “I have told my son not to say where I work or tell anyone what I do for a living.”

In another incident last week Roberto Adinolfi a director with arms firm Finmeccanica was wounded by anarchists in Genoa. The group later said in a letter claiming responsibility that they would carry out further attacks.

Annamaria Cancellieri, the interior minister, said she was considering calling in the army in a bid to quell the rising social tensions.

“There have been several attacks on the offices of Equitalia in recent weeks. I want to remind people that attacking Equitalia is the equivalent of attacking the State,” she said in an interview with La Repubblica newspaper.

Bank of England Halts QE for Now

From Bloomberg

Bank of England officials halted stimulus expansion after seven months of bond purchases as the threat of inflation trumped concerns about an economy that’s succumbed to a double-dip recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King today held its quantitative easing target at 325 billion pounds ($524 billion), ending a second round of stimulus, a move forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left their benchmark interest rate at a record low of 0.5 percent. The pound erased its decline against the dollar.

With inflation on course to exceed Bank of England forecasts and the economy struggling to recover, policy makers have been divided on how to resolve the dilemma. Today’s decision signals price-growth worries are mounting even as the U.K. struggles with government budget cuts, high unemployment and threats from Europe’s debt crisis.

The double dip recession serves as evidence that the Bank of England’s (BoE) quantitative easing (QE) measures has failed to meet the goal of “stimulating” the economy.

Worst, the aftereffect has been a significant loss of purchasing power for the average Briton.

True, statistical consumer price inflation (CPI) has been lower compared to last year, but remains elevated relative to the 2009-10, as well as the average inflation rate from 1989 until 2010 of 2.72% [according to tradingeconomics.com, the source of most of the charts on this post].

So the recessionary environment along with elevated inflation rates…

…plus high unemployment rates represents an accrued symptom which characterized the 1970-1980s economic landscape known as stagflation (Wikipedia.org). In short, UK has been suffering from benign stagflation.

Also, since this BoE policy has been widely anticipated by the consensus, it does appear that today’s policy decision may have partly influenced the present weaknesses seen in the global commodity markets, as well as, in the world stock markets.

Of course, I have my doubts on the current stance of the BoE. I don’t think that they have totally abandoned the inflationist doctrine. I think that this has been more of a temporary lull.

That’s because if UK’s finance markets should endure more downside volatility, then this would have an adverse transmission effect to the balance sheets of UK’s banking system.

As this study from the BoE shows, since the introduction of the QE, prices of bonds and equity (via the FTSE all share) had been energized or the QE has provided pivotal support to their asset markets.

Yet BoE’s QEs have only added to the general indebtedness of the UK’s economy.

And like the Euro counterparts there has been no genuine “austerity” in the UK.

So unless there will be greater savings from the average British to finance government borrowing or foreign buyers step up the plate, then the BoE will have their hands full in trying to smooth out the management of government debt and the balance sheets of UK’s banking system overtime. Oh, essentially the same dilemma haunts the US and the Eurozone.