News & Analysis
Markets Reject EU Austerity?
The IMF itself has become the problem as Europe's woes return ... Once a quorum of big names says the game is up in a debt crisis, events move fast and furiously. Portugal neared the line on Friday when Diario de Noticias cited three ex-finance ministers warning that the country might have to call in the International Monetary Fund (IMF). One spoke of a "reckless reliance on foreign debt"; another spoke of "runaway public spending". No matter that all were complicit in euro membership, the policy that incubated this crisis and now traps Portugal in its depression. Portugal was a net foreign creditor in the mid-1990s. EMU has turned it into a net foreign debtor to the tune of 109% of GDP. That is what happens when you cut interest rates suddenly from 16% to 3%. Be that as it may, the comments struck a nerve. Yields on 10-year Portuguese debt surged to 6.15%, back to May crisis levels when the EU faced its "Lehman moment" and launched a €750bn (£625bn) rescue blitz. António de Sousa, head of Portugal's bank lobby, said his members are in dire straits. Banks cannot raise funds abroad, remain "extremely fragile", and "quite simply" will have nothing more to lend unless foreign capital returns. – UK Telegraph
Dominant Social Theme: There is still a long ways to go.
Free-Market Analysis: The UK Telegraph remains a mainstream anomaly; articles by Ambrose Evans-Pritchard often do not buttress the dominant social themes that the power elite is trying to promote. On the other hand, Evans-Pritchard is no free-market monetarist. He seems to believe in paper-money and central banking and does not necessarily advocate a money metals standard. Thus, his non-thematic views on the EU and the euro provide him with a credibility that burnishes the unfortunate monetary authoritarianism that he espouses elsewhere.
Evans-Pritchard is not alone in presenting this sort of stance. Many good mainstream financial reporters take eminently sensible stances on numerous issues but then, unfortunately, cannot find it within themselves to confront the reality of central banking – that is it a money-fixing exercise that inevitably distorts the larger economy with ruinous consequences.
And yet ... having made the above points, we regularly doff our collective cap to Evans-Pritchard and those like him when they turn their ferocious intellects on targets that they are not reluctant to confront. Evans-Pritchard especially has been merciless in his analysis of the quagmire that is the European Union – and in the above article-excerpt on the IMF as well.
He correctly noted the stresses and strains that the EU is subject to financially and has been in the forefront of predicting the additional dilemmas generated by this unfortunate experiment. As far as the IMF goes, here is trenchant criticism indeed: "In any case, the IMF itself has become the problem, operating as an arm of EU ideology under Dominique Strauss-Kahn (above left). It offers no remedy since it acquiesces in the EU's ban on debt-restructuring."
Additional relevant statements come later in the article as follows: "The brutal truth is that Portugal lost competitiveness on a grand scale on joining EMU and has never been able to get it back. ... Ireland has shown what happens when you grasp the fiscal nettle, slashing public wages by 13pc – to applause from EU elites – without offsetting monetary and exchange stimulus. Irish bonds have spiked even higher to a post-EMU record 6.38pc. ... Citigroup's Willem Buiter said Ireland 'may not be able to make whole' creditors of both sovereign debt and the bank.' Dr Buiter has also said a default by Greece is a high probability event."
So there we have Evans-Pritchard's condensed perspective: Portugal, Ireland and Greece continue to struggle with the overwhelming public debt and austerity is not the solution to public debt. In fact, the fiat-money distortions that the PIGS suffer from run like fault lines throughout the entire economy; devaluations are an appropriate solution but not one that the EU contemplates. Why not? Comes the answer at the end of the article: "In fairness to EU policymakers, perhaps the problem really is so big that if they let Greece, Portugal, or Ireland restructure debt they risk instant contagion to Spain, and from there to Italy. Perhaps they really have no choice. If so, monetary union has created a monster."
Of course this gloomy assessment is offset by others. Here's an excerpt from a much more upbeat perspective by Michael Elliott, editor of Time International, which just appeared in Fortune magazine:
The truth is that the European economies are doing better than expected. Everyone knows about Germany's stellar performance this year, with an unemployment rate now lower than it was in summer 2008 (in the U.S. it is 3.5 percentage points higher), while growth in the second quarter was the best quarterly figure for 20 years.
But there are some bright spots in Europe's peripheral economies too. Consider Ireland. Given troubled banks, a debt downgrade, and high unemployment -- the July rate of 13.7% was the worst since 1994 -- you might think there was no good news there. But Barry O'Leary, chief executive of IDA Ireland, the nation's investment agency, says that there has been a significant "repricing of the economy" since the Great Recession bit. In 2009, Irish public sector pay was cut as an austerity measure, and O'Leary says private sector salaries have followed suit, with reductions of 10% to 15%. The IDA is now once again seeing investors who want to develop manufacturing capabilities in Ireland, the sort of labor-intensive operations that had lately seemed destined to always go Asia's way.
... And so has this truth: Europe remains the world's most populous area of widely distributed prosperity, long life, and good health. They're doing something right over there. Long may the dogs not bark!
Here are two mainstream media views, then, with markedly different conclusions. On the one hand is the Telegraph presenting the point of view that the bond market itself is rejecting the EU solution, which has amounted to Draconian domestic public sector budget cuts for affected countries plus the creation of a loan pool to ensure that weakened countries do not default. On the other hand is Fortune, presenting the point of view that the internal balance sheets of countries like Ireland have benefited from the EU's actions and are happier than one might expect.
How are we to parse the differences between these two points of view? We can state definitively that a regional monetary union (the EU) that has not carried forth an internal audit for perhaps half a decade or more and has taken to regulating such obscure matters as whether British farmers can sell eggs by the dozen (they cannot) is not an entity that will support "prosperity, long life and good health" in the long run. In fact, we would argue that these admirable qualities were generated not by the EU but by individual countries themselves. That the EU has inherited this state of affairs is indisputable; let us see how long it takes for the Brussels' bureaucracy to ruin it.
As to the larger issue of whether austerity and a "trillion dollar" loan pool have effectively recast the current sovereign debt problem – well, we are skeptical. Our skepticism is not "knee jerk" (though we find the entire EU "experiment" to be despicable) but has to do with the relationship of managed economies to the free market. As a free-market publication, the Bell is of course apt to reach this conclusion. The EU basically bribed the elite of the PIGS into joining the union. It poured money into these countries, allowed the elites to basically pocket the funds in return for support of a "United States of Europe" and is now leveling pan-European austerity programs in an attempt to sustain the EU scheme.
Conclusion: As we have pointed out many times, austerity in a fiat-money environment is a punitive affair. In a free-market, a person might have to take a dive into icy water from a few feet up to accomplish "austerity." In a fiat-market economy, one is forced to climb to the highest platform before diving in. The result can be painful indeed, especially for the unprepared. And purely from a monetary-policy standpoint, we are not sanguine about European solutions. The EU itself a product of massive sociopolitical and economic manipulation. That manipulation has ended in tears and potential sovereign defaults. The solution? Embark on yet another EU manipulation! (Austerity, etc.) How long can such strategies remain viable? Do trees grow to the sky?
Posted by Dogster on 10/04/10 11:42 PM
My latest and best:
Click to view link
Posted by AmanfromMars on 09/23/10 07:58 AM
(*Remember "Celtic Tigers"? Now we have "PIIGS". Markets make opinions. Dont let anyone ever tell you otherwise.)" .... Posted by ScuzzaMan on 9/23/2010 3:55:17 AM.
ScuzzaMan, whenever the markets and systems are rigged for spivs, ... and more than Vince Cable knows a nest of such paper tiger vipers when he speaks of them .... is there always a glitch which turns into a vulnerability which morphs into an exploit which delivers a crash and metadata meltdown and triple A AIR&dD Attack from Astute Allied Alien Sources and Forces?
Daily Bell, Do you think Governments and nations and religions are being held to petty ransom by the controllers and issuers of counterfeit wealth invented out of thin air and masquerading as paper currency and electronic credit which can be then pimped as debt to be repaid to enslave the ignorant masses to the arrogant few, who would perversely not think that it is a crazy thing to get caught doing, and sending the military to die and kill needlessly defending, just so that paper money rules rather than special intelligence services and forces ..... with a Beta Satellite Network of Advanced InterNetworking Source?
on Thu, 09/23/2010 – 08:43
Whenever you have your markets tied to a computer program which ignores and/or protects against negatively impacting, real time floor input and sentiment, have you a rigged game which will crash catastrophically with a beautifully crafted worm/virus, which may or may not be a Stuxnet creation .... Click to view link
Forewarned is forearmed, but there is nothing you can do to prevent a correction of a corruption and perverse artificial manipulation, by smarter beings, and why would any supposed Intelligence want to try, in order to perpetuate a myth which would then be a global scam, in support of the overthrow of free market wishes with a computer program delivering false PROMISes.
There's bugs in the system and they're gremlins of colossal extraction stealing wealth wholesale from the nation.
Click to view link [/blockquote]
Posted by ScuzzaMan on 09/23/10 03:55 AM
I'd hesitate to prescribe "the" problem – unfortunately we live amongst a large set of multiplexed politico-economic problems – but one problem that the EU suffers from, and is now manifest in the straits in which the "PIIGS*" find themselves, is the problem of perverse incentives.
The Greeks riot, killing people, and are bailed out with cheaper loans than the cheap loans that got them into trouble in the first place. The Irish impose "austerity" on themselves and are now paying more to borrow than are the Greeks.
Does this constitute a perverse incentive?
It seems to, to this observer.
This problem besets many of the well-intentioned "solutions" proffered by the usual suspects to the problems caused by their previous solutions. It's an ever-decreasing circle, a down-the-drain spiral ...
(*Remember "Celtic Tigers"? Now we have "PIIGS". Markets make opinions. Dont let anyone ever tell you otherwise.)
Posted by Leonardo Pisano on 09/22/10 05:22 PM
@John Danforth and DB:
Yes, I agree and also agree with DB's comment that austerity includes raising taxes. The latter I didnt mention because govs always find an excuse to raise them: after all, the beast must be fed.
The problem with cutting back spending is that people are not likely to simply swallow. Most overspend and pay back time is ignored and push forward in time " until the day comes the man with the hammer strikes. And the reaction of government is to blame it on insufficient and greedy markets " hence, more control is needed! That means a bigger gov, more centralized control and exactly the opposite of what should be done in my view.
I am in the EU, and see the shift towards a communistic-like regime (regulatory democracy as DB calls it). Unfortunately, most people don't see it that way, or are simply happy with a "providing" gov.
Posted by AmanfromMars on 09/22/10 02:19 PM
"If we understand you correctly, (always a consideration) we've written this before, you know." ... Reply from the Daily Bell
Why are they still there then, milking and bilking systems and slave units? It suggests you are an impotent voice, wasting everyone's time here, DB. You can surely do better than that, if you wanted to. Need a hand or three or more?
Posted by AmanfromMars on 09/22/10 12:36 PM
"I understand the point that austerity is a punitive affair, more or less being a set-up where the country is suckered into borrowing and spending way too much, only to have the flow of money suddenly stopped, and punitive interest payments going to bondholders." ... Posted by John Danforth on 9/21/2010 7:34:08 AM
That set-up you have described is parasitic fractional reserve capitalism as pimped by fiat currency banking, John? And you surely knew that.
Austerity is caused whenever the money taps are turned off but that only causes the mob to realise who the real enemies of the state and United States are .... in their feather nests and ivory towers, and that makes them increasingly vulnerable to popular irregular and unconventional repercussions/personnel adjustments.
And how refreshing of the Daily Bell to declare the EU a self-serving scam to personally enrich its Imperial Executive and Republican Guard Storm Troopers.
And re Posted by Edward Ulysses Cate on 9/21/2010 3:20:17 PM, the times have changed and surely now the ditty should start ...."Times readers used to run the country, ..."
Reply from The Daily Bell
"And how refreshing of the Daily Bell to declare the EU a self-serving scam to personally enrich its Imperial Executive and Republican Guard Storm Troopers."
If we understand you correctly, (always a consideration) we've written this before, you know.
Posted by Gonzo on 09/22/10 04:50 AM
Some people keep repeating the mantra that devaluing is better option then austerity measures. Is this so? Austerity measures are equal to devaluing. Both measures stand for belt tightening the difference is only which portion of the population is going to tight the belt. When one currency gets devalued then the absolute purchase power is reduced, which equals to wage reduction. There is one little secret in devaluing the banks which made the majority of the bad loans and are responsible for the crises get off the hook and have to repay them back with much cheaper currency on the expense of the whole population who is going to be punished severely. Austerity is better option because the government can selectively distribute the burden and protect the poor, when devaluing affects everybody and the social cost are too high and unacceptable.
Posted by Weeble on 09/21/10 11:49 PM
"The 'village idiot' is often the one who sees the most and understands the best." Not in this case.
Then answer me this DB, why is world arranged in such a manner, with the PE on top, and the Great Unwashed below? Well, in actuality, the Great Unwashed are on top and the PE is below, so never mind.
Posted by Weeble on 09/21/10 11:30 PM
@ Bionic Mosquito
Thanks for appreciating my comments. Being an idiot is quite the high-wire act. The only safety net is me being an idiot.
Posted by Weeble on 09/21/10 10:11 PM
I resemble that remark.
Posted by Bionic Mosquito on 09/21/10 09:54 PM
"It is appalling the extent to which so many educated and, one supposes, intelligent people are still waiting to see what "solution" the government is going to come up with make their lives meaningful and secure. It is this passivity in the culture that seems so at odds with the requirements of the times."
I have found this quite true, and even worse. Educated and supposedly intelligent people believe the government a) will find a solution, and b) has the people's best interests at the heart of their plans.
When asked to explain this "faith" of a solution, there is no answer, kind of like faith in a god. When given countless examples of where government has shown exactly the opposite of the people's best interest...blank out, followed by yelling or becoming an enemy. Somehow I am the one being cynical, and they are the ones being rational. I have concluded that unless one shows some skepticism towards government, the topic is often best avoided amongst friends.
The "village idiot" is often the one who sees the most and understands the best, while at times has difficulty (on purpose, perhaps?) conveying his thoughts to the rest of us. I always appreciate your comments, even the ones I don't quite understand!
Now I am limited to my 240 or so words...a real benefit to all on this site.
Reply from The Daily Bell
"The 'village idiot' is often the one who sees the most and understands the best."
Not in this case.
Posted by Weeble on 09/21/10 08:48 PM
My goodness there is a lot of fluffing going on today; like a word porno. I am so glad I am regarded as the village idiot. No expectations of intelligence; freedom to write on the outside of the envelope, then fold it up into a V2 shape, fire it out on to the net and see when it runs out of fuel. I am nothing. But I want to be something. Please hear me out, please?
A few months ago, I bought my last batch of gold. It is now 3% higher than it was. Do I care? No. A few weeks ago it was 1% lower. Whatever it costs, it is always a good deal, as you can buy it with debt. Go figure!
Lucy wants a 60" LCD TV worth maybe $5000. I said: "well if you want that TV, then I get to go out and buy another batch of gold" (with cash, cash). She grinned. She knows I will do it, so she said nothing. She wants that TV. By the way, I initially said: "why don't you just move the chair closer?"
Now, I heard a friend say a long time ago that the Jews were always getting kicked out of the country they were living in, so they needed portable wealth. They were "into" gold anyway, so it was natural that they set up shop at the new location and purchased wisely, using gold, rather than trading in their donkeys (I asked Click to view link for a spell check, but it came up with "donkies," but I digress.) I guess Jews were pegged as the rich guys at the new spot, as they had to convert their stash of gold to the things they needed. Imagine a new guy rolls into town with a couple of bags of gold, buys a variety store, then works smart, and like a dog until he is so rich that the townsfolk think something is up, so they chase him out of town.
Anyway, my posts seem to be limited to 40 lines in My Crow Soft Word, so I must wind up. (I think it is a communist plot.)
If this economy goes to hell in a handbasket, the only thing I will have that is worth anything is gold and hard assets. If I am lucky, my house, of which I own 65%, may have its mortgage "lost in space without a helmet on" and no-one comes a claimin'. But that is wishful thinking.
Anyway, if we have to travel to a better place, then Lucy will carry all the bags, and I will carry the gold . . . and the 9 mill insurance policy.
Posted by John Danforth on 09/21/10 06:43 PM
@Leonardo and DB,
Thanks for the responses. If 'austerity' means 'less public sector spending', then it is not only necessary to avert disaster, it is the only right thing to do. I understand it will be painful for those employed off other people's taxes and debt to lose their jobs, but there is no justification for continuing as things are. The correction will come one way or the other. Either government gets its boot-heel off the necks of the people, or the currency will eventually collapse.
Do you agree?
[PS: Leonardo, there is a colon in your post! I'm pretty sure it's a dash with a space before and after that gets converted to a quotation symbol. The work-around is to omit the spaces.]
Reply from The Daily Bell
Austerity in this case means raising taxes aggressively as well. Obviously we don't agree with public sector spending - but "austerity" is not what it seems. Return to a private market gold and silver standard - without a central banking mechanism - and the public sector will subside naturally.
Posted by Clayton on 09/21/10 06:30 PM
It is appalling the extent to which so many educated and, one supposes, intelligent people are still waiting to see what "solution" the government is going to come up with make their lives meaningful and secure. It is this passivity in the culture that seems so at odds with the requirements of the times. The mindset does not have that spark. There is a lot of complaining, but when I put out alternative action plans, they just drift into a fog of apathy. In the face of far greater challenges, our ancestors demonstrated remarkable vigor, independence and fortitude. Perhaps, we have been too steeped in MSG, GMO, high fructose corn sirup and aspartame.
When I am asked what we would do if in fact the State just melted away, I reply that we would do what was necessary. Asked what that would be, I can only reply that the answer would be in the facts of the moment, which I am confident we have the mental wherewithal to base sound judgements upon. Here is where having faith in oneself is essential. Here is where the fearful life is an obstacle of the first order.
We must make it a top priority to point out at every chance we can the character destroying properties of the Welfare State. It is easy to point out the hideous nature of war. But the meddlesome rescuer is a much more subtle target. I hope to have some time this Winter to begin a book on this topic.
Posted by Leonardo Pisano on 09/21/10 05:21 PM
Keys to us, my dear DB? My view, in all modesty, was definitely fueled by the many excellent articles you published, sharpened by so many astute posters, like Clayton, Lila Rajiva, John Danforth, Avenist, and all whom I forgot to mention.
And it's just a view, not necessarily the right one " but I hope it prompts further thinking among everyone who cares to read your articles and the commentary.
[PS: for some reason a colon in my text is converted into a quotation symbol]
Posted by Leonardo Pisano on 09/21/10 04:35 PM
I consider your posts as of high caliber, and it's my pleasure to share my view on this austerity dilemma. Maybe it's of help, although it's a view, not the one and only explanation.
Govs systematically overspend, and this can be continued as long as GDP shows growth. They have always the trick of a modest money inflation (say 1-2%) which erodes their debt automatically; a kind of fake GDP growth, stealing from their poor citizens.
Central banking, as DB tells us, is at the core of the problem as they manipulate this money inflation. It's a high level Ponzi scheme, in fact. At a certain point in time, people cannot spend more and the economy begins to sputter. The well-known business cycle kick in, and GDP doesn't grow but shrinks.
Now what happens to the debt? Forces are deflationary as demand has shrunk, and the debt becomes a dangerous situation because the gov gets less income from VAT and from income taxes, and at the same time their debt increases (due to the deflation).
Austerity seems necessary to reduce the debt, but it will not help because if people stop spending less VAT is received. Check the situation in Ireland at the moment where austerity doesn't match up with debt reduction, so they come in an "eternal" down spiral. That's why other call for "stimulus", not "austerity".
But in this scenario the Ponzi scheme is just inflated further (imho) and the inevitable bang will just be bigger. In fact, govs are positioned between a rock and a hard place. So, it's just a matter when, not if, the system totally collapses.
Gold and Silver are the remedy the world needs, as this is real money and any match to the gold standard will limit the Ponzi scheme spiral. Eventually the world will go back to this " but I am afraid I will not live long enough to see it happening.
As DB answered, people are more and more dependent for their living on large structures that take away their freedom and push them into apathy, at least for the short term. Revolutionary forces will develop " my guess is 2015/16 " with WWIII a not unrealistic possibility.
The EU will see a lot of social unrest as a reaction on their instability of the money, lost of trust in the EUR, and cultural differences will play up. Note that some dominant social themes are set up already to prepare for this (e.g., Peak Oil " peak is "expected" in 2015.
Also, the authority over the Panama canal will no longer be USA by then. The Shia/Sunni time bomb may very well escalate " and this is where the oil is, providing the excuse for military aggression in the Middle East. But I am drifting off.....
Reply from The Daily Bell
Wow, we'll just hand you and Danforth the keys ...
Posted by Edward Ulysses Cate on 09/21/10 03:20 PM
In searching to find out who owns the Telegraph, I came across this ditty, and just sharing it for a quiet chuckle.
Times readers run the country,
Telegraph readers think they run the country,
Guardian readers wish they ran the country,
Mirror readers would run the country
-- if the Times readers didn't run it already,
Mail readers don't know who runs the country,
Express readers don't care who runs the country,
and Sun readers don't give a damn who runs the country
as long as her measurements exceed 38-24-36.
This, and who owns these newspapers, is found here.
Click to view link
Reply from The Daily Bell
Thanks for the ditty and links. Great site!
See BBC article below ...
Click to view link
Telegraph empire in tycoons' grip
Lord Black resigned when irregularities came to light
Billionaire twins David and Frederick Barclay have bought a controlling stake in Conrad Black's media empire.
The Barclays have agreed terms to buy Lord Black's 78% stake in Hollinger, which owns titles including Britain's Sunday and Daily Telegraph.
They have now made a takeover offer for the whole of Hollinger.
Lord Black - ousted as Hollinger chairman amid allegations, which he denies, of financial irregularities - said his papers would be in "caring hands".
Posted by William3 on 09/21/10 02:28 PM
"Many good mainstream financial reporters take eminently sensible stances on numerous issues but then, unfortunately, cannot find it within themselves to confront the reality of central banking ' that is it a money-fixing exercise that inevitably distorts the larger economy with ruinous consequences."
This seems the key statement of your article. There's that Hegelian tactic again of showing two points of view, each with some essence of truth. In this case the message is, in effect, "the EU is still an experiment, but wise folks are studying the best course of action."
Of course, the fundamental lynch-pin of Elite control -- central banks -- is never discussed. Seems this is a recurring theme in your articles -- Elite patterns are stubborn things, aren't they?
Reply from The Daily Bell
There are dominant social themes and sub dominant ones. The justification of reasons why a handful of people can print money at will, along with the meme of the necessary government, the inevitable war and the "fairness" of state justice are all massively important themes. Many of the rest are sub themes, thought we often don't identify them as such.
Posted by Barry Schatz on 09/21/10 10:59 AM
The last line might have been something like this twist of a well-known phrase: Do PIIGS fly?
Posted by Lila Rajiva on 09/21/10 09:11 AM
Thanks for taking on the formidable Ambrose Evans-Pritchard...who is so right most of the time, and then, suddenly, so wrong. It cannot be simply happenstance. It is co-option.
Public "austerity" might be fake and one-sided, but in the mid and long term it will be better than more CB stimulus.
The population has been bought off.
It cannot but be good for it to be weaned, even abruptly, from its dependency.
Sacrifice is necessary " not for the sake of the economy (to h*** with the economy) " but for our own sakes. We sacrifice dependency to gain self-reliance and a free conscience.