Financi ën aan de Atlantische kusten

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Obama bereid de financiële terugtocht voor, maar houdt toch ook weer
zijn kruit droog.

Daaronder de Amerikaanse gieren die op de Euro loeren.
En daar dankzij Mw. Merkel de gelegenheid voor krijgen.

Groet / Cees

Is A Lower-Than-Expected Deficit A Good Or A Bad Thing?
http://capitalgainsandgames.com/
Posted: Tue, 13 Apr 2010 10:26:28 +0000

Today's The Washington Post includes a story by David Cho about how this
year's deficit could be substantially -- $300 billion or so -- lower
than was projected when the Obama fiscal 2011 budget was released in
February.  The reduced deficit would be the result of higher revenue
because of economic growth and lower spending on the financial bailout.

The question is whether this is a good or a bad thing.

Brad DeLong says that it would be unequivocally bad given that
unemployment is so high and more needs to be done to bring it down.  But
the administration officials anonymously quoted by Cho obviously were
leaking the story because they thought the news would be very
well-received, that is, they think it's  good thing.

And the combination of the two is the tension that has existed in
Washington since the start of the Obama administration between economic
policymaking and political needs.

Brad is almost certainly correct that, from the perspective of needing
to bring down the unemployment rate from 9.7 percent, a lower deficit is
not helpful.  But by leaking this story at this point in the year
(budget numbers are not officially updated until the midsession review
is released over the summer), the White House is clearly signally
several things:

    1. Unless there's an additional economic downturn that few are
currently expecting, it's not going to propose any further stimulus efforts.
    2. The White House doesn't believe that any additional stimulus will
get through Congress this year.
    3. Stimulus and a stimulative fiscal policy are no longer topics the
White House wants to discuss.
    4. The administration believes that now is the time to begin to talk
about deficit reduction.

The interesting thing is that the White House somehow thinks that, even
if it is $300 billion less than anticipated a few months ago, a deficit
of $1.3 trillion is something it can use to demonstrate its budget
acumen. That may be true fiscally and in terms of managing the bailout,
but from a communications standpoint the headline of a more than $1
trillion deficit isn't likely to be taken as a sign of any success by
too many people.  And even if it is less than expected, a deficit of
that size is certainly going to be demagogued by the GOP.

My guess is that the lower-than-projected 2010 deficit leaked yesterday
to Cho ultimately is going to be even lower by the time the fiscal year
is over; administration's don't typically get all of what it considers
to be good news on the budget at one time or to raise expectations early
in the year only to dash them later.  This will be especially true this
year because the fiscal 2010 budget results will be reported by the
Treasury just a week or two before the November elections. When he was
Office of Management and Budget director and then White House chief of
staff, Leon Panetta was famous for always leaving some good news to be
reported at the end of the year.  Back then, Leon was talking both about
much lower than expected deficits and then steadily growing surpluses.

As I read the spending and revenue tealeaves, a deficit closer to $1.1
trillion, that is, a whopping $500 billion below what was projected
earlier in the year, is possible.  That would make it possible for the
administration to show the deficit reaching a "sustainable"  level
faster -- as in years earlier -- than is now expected.
=====================================================
Sunday, April 11, 2010
Gonzalo Lira: “Systemic Contradictions”: The Eurozone De Facto Currency
Peg, and the Death Spiral We Are Currently Witnessing
http://www.nakedcapitalism.com/
By Gonzalo Lira, a novelist and filmmaker (and economist) currently
living in Chile

Critics of free-market capitalism, especially of the Marxist persuasion,
love talking about its “systemic contradictions”. Especially European
critics—they adore using that steam-roller phrase: “systemic
contradictions”. It sounds so thrillingly lapidary, so
discussion-ending, so terminal. Nothing can escape its grasp, or the
base indignity of it. “They will fail because of Systemic
Contradictions!!”—like a cross between a nasty form of cancer, and some
unmentionable venereal disease. And of course 100% fatal.

It’s ironic that European critics of free-market capitalism love that
phrase—because it aptly describes the Europe of today, and the European
monetary union that was hailed as the way of the future.

I would argue that, with the way things are going, it’s Europeans and
their Eurozone which will soon be relegated to the dustbin of the past.
Precisely because of its “systemic contradictions”.

The end of the Eurozone will be a tragedy—and I would argue, we are
currently witnessing it.

Let’s review:

The Eurozone was born out of the Common Market, formed back in 1958, to
the west of the Iron Curtain. In 1990, the Berlin Wall collapsed, so by
1992, a reunified Germany was effectively married to France and Club
Med. The rationale was, economic union would beget political union, or
at least political peace. In 1999, the Euro was born—a common currency
for the members of the Union. Another step in European integration.

So far, so good.

However, though a series of complicated methods were used to control the
debt, deficit and inflation levels of the various Euro-economies, one
fact remained: Every country of the Euro had the same currency, while
every country kept the right to float its own debt.

And of course—as we now all know—each country’s debt was assumed to be
backed by the rest of the Union, when in point of fact, it was not.

So what does this mean?

Well, the shadow of the Euro makes it hard to realize what we are
talking about. The Euro makes it appear as if we are dealing with one
very large economy—Europe—while each member state’s fiscal problems
could be thought of much as we think of, say, Mississippi’s fiscal
problems in relation to the United States in its entirety.

 From this way of looking at the Eurozone, the natural inference is to
think of Greece as a small part of a larger, healthier whole. A part
that is going down the drains, true, but it won’t bring the larger whole
down with it.

But this is a false inference. It’s an easy logic trap to fall into,
because the Euro as a currency papers-over the differences within the
Eurozone. The Euro makes the Eurozone look like one big happy family,
but with a black sheep named “Greece” that has to be sorted out.

However, this is not the case. The Eurozone and the European monetary
union is actually several different economies at vastly different levels
of development, which so happen to have a common currency—but they have
nothing else in common. Because—unlike in the US—in the Eurozone, each
member state can issue its own debt. Therefore, each member state can
borrow its way to equality of wealth, instead of earning it.

Looked at this way, it becomes obvious that the Euro isn’t a common
currency—rather, it is a very complex fixed rate exchange system.

In other words, a currency peg.

So instead of thinking of the Euro as €, common to all Eurozone
countries, it would be smarter to think of the Euro as GR-€, or FR-€, or
IT-€, or SP-€, and so on—a different Euro for each member economy, all
of which happen to be fixed at a one-to-one parity.

Now it becomes obvious what we’re looking at—when we look at Europe
today, what we’re really seeing is Latin America circa 1980.

Thinkit: A bunch of countries in Latin America fixed their exchange
rates to the US dollar; at different times and for vastly different
reasons, but for the present discussion those issues don’t matter.

At first, this dollar-peg worked like a charm. The Latin American
countries found themselves with a false sense of prosperity, bought and
paid for with cheap dollar-denominated debt—until the inevitable crash
of ’82. (In Argentina, it happened again in 2001—those gauchos never learn.)

The dollar didn’t suffer because of the fixed exchange rates—it was all
the poor saps south of the border who suffered, and greatly at that.
Latin American debt suddenly had no buyers, and all the previous debt
had to be paid off. With no incoming dollars, that dollar-denominated
debt broke the Latin American economies.

If we look at Europe with Latin American lenses, we realize that the
Eurozone is in exactly the same position—it’s a bunch of over-indebted
countries with their currency pegged to, of all the economies of the
world, Germany. Because the role of the US dollar in this fixed-exchange
rate system is today being played by the German Euro—the GR-€. And it’s
the deflation of the GR-€ which is absolutely killing the Eurozone.

Going back to the Latin American example, at least those countries had
the option of ending their dollar-peg and floating their currencies,
once their debt levels broke them.

But the Eurozone members can’t do that! Or rather, they can break
away—but they won’t break away, until it’s too late and the damage has
been done. Various European-wide subsidies and programs and
wealth-redistribution schemes—otherwise known as bribes—will keep the
countries all tied up for a while. For quite a while, in fact, human
nature being what it is, and hope always being the last thing to die.

Each day the fixed exchange rate continues, though, is one day closer to
complete Eurozone collapse—which will be a tragedy. Because European
prosperity insures European peace, from the Urals to the Irish Sea.

But by the time they all realize that the GR-€ is destroying their
economies—much like the dollar-peg in ’82 trashed the Latin American
economies—it will be too late. The European Union will be wrecked, much
as Latin America was wrecked in ’82. And that crisis ushered in all
sorts of foolish craziness in many many places.

God Alone knows what will happen once the Eurozone is wrecked.

We are currently watching this wreckage—we just don’t realize it. Greece
is not an aberration—it’s not even the canary in the coal mine: It’s the
beginning. The GR-€ is wreaking havoc on all the other countries of the
Eurozone, starting of course with the weakest, Greece. But it won’t end
there—far from it. The GR-€ will take out, in no particular order,
Portugal, Italy, Spain, until it eventually hits France.

Then it’s over for the Eurozone. Because once France decides to break
away, there’s no more Eurozone—and possibly, no more political stability.

The single most important reason for the collapse of the Eurozone is
that each member state was allowed to issue its own debt. This ability,
coupled with the fixed-exchange rate otherwise known as the Euro, is the
core “systemic contradictions” of the Eurozone.

Right now, we are watching the Eurozone in its death spiral. And I’m
afraid that all the talk of IMF bailouts of Greece and whatnot aren’t
addressing the key problem: Sovereign European debt.

If somehow, all European debt could be centralized, then maybe the
Eurozone would survive. But if the Europeans lack the political will to
sort out Greece now, then such collectivization of European-wide
sovereign debt is impossible.

So that mean, the Eurozone death spiral is inevitable. And we are now
watching it unfold.

ADDENDUM:

Today, Sunday, April 11, it’s just been announced that Europe has
prepared a €30 billion ($40 billion) bailout of Greece.

Good for the Europeans—crisis in Greece apparently averted.

However—will the Europeans bail out Italy, Spain and Portugal, when
their time comes? And if they do, how much will they shell out? Because
€30 billion won’t be enough for any of those three—try €35 billion for
Portugal, €50 billion for Italy, and €75 billion for Spain. At least.

I’m just wonderin’ . . .

ADDENDUM D’OH! (as Homer Simpson would call it)

Reuters is reporting that a “senior [Greek] official” said that, over
the next three years, Greece will need an additional €40 billion—this
is, on top of the €30 billion that were pledged today by Europe and
additional €10 by the IMF.

In other words, THIS YEAR’S bailout for Greece is €40 billion, while
2011 and 2012, they’ll need an ADDITIONAL €40 billion.

That is, €80 billion ($108 billion) to tide Greece over until 2012—just
Greece. Nobody else. €80 billion to salvage an economy whose nominal GDP
for 2009 (according to Wikipedia) was €250 billion.

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