Schäuble’s Gathering Storm

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

ATHENS – Europe’s crisis is poised to enter its most dangerous phase. After forcing Greece to accept another “extend-and-pretend” bailout agreement, fresh battle lines are being drawn. And, with the refugee influx exposing the damage caused by divergent economic prospects and sky-high youth unemployment in Europe’s periphery, the ramifications are ominous, as recent statements by three European politicians – Italian Prime Minister Matteo Renzi, French Economy Minister Emmanuel Macron, and German Finance Minister Wolfgang Schäuble – have made clear.

Renzi has come close to demolishing, at least rhetorically, the fiscal rules that Germany has defended for so long. In a remarkable act of defiance, he threatened that if the European Commission rejected Italy’s national budget, he would re-submit it without change.

This was not the first time Renzi had alienated Germany’s leaders. And it was no accident that his statement followed a months-long effort by his own finance minister, Pier Carlo Padoan, to demonstrate Italy’s commitment to the eurozone’s German-backed “rules.” Renzi understands that adherence to German-inspired parsimony is leading Italy’s economy and public finances into deeper stagnation, accompanied by further deterioration of the debt-to-GDP ratio. A consummate politician, Renzi knows that this is a short path to electoral disaster.

Macron is very different from Renzi in both style and substance. A banker-turned-politician, he is President François Hollande’s only minister who combines a serious understanding of France’s and Europe’s macroeconomic challenges with a reputation in Germany as a reformer and skillful interlocutor. So when he speaks of an impending religious war in Europe, between the Calvinist German-dominated northeast and the largely Catholic periphery, it is time to take notice.

Schäuble’s recent statements about the European economy’s current trajectory similarly highlight Europe’s cul-de-sac. For years, Schäuble has played a long game to realize his vision of the optimal architecture Europe can achieve within the political and cultural constraints that he takes as given. Continue reading

Decline of the dollar – the consequences

Submitted by Alasdair Macleod – FinanceAndEconomics.org

There are signs that the US dollar, instead of consolidating the sharp rise that peaked last March, might be reversing its previously rising trend.

Certainly, a weakening dollar fits with the Federal Reserve Board deferring attempts to raise interest rates from the zero bound, and reflects the growing chatter that negative rates cannot be ruled out. It should also interest us that there is evidence the Americans are beginning to take the threats to the dollars’ hegemonic status seriously, and this is no longer just seen as a speculative possibility.

Secretary Kerry made this point for us in connection with another context, responding to a suggestion that he should renegotiate the Iran deal: “That is a recipe very quickly, my friends, businesspeople here, for the American dollar to cease to be the reserve currency of the world – which is already bubbling out there.” So lucid was he on this subject that we can confidently assume that the dollar’s status being undermined is being taken seriously at the highest levels of government.

And it should be. China is determined to free her trade from the dollar, and we can only guess at the scale of her ambitions. More might be revealed later this month when she publishes her thirteenth five-year plan. What we do know is that she has already overtaken America as the world’s manufacturer, and despite the ups and downs of credit cycles, will dominate international trade even more in years to come.

To appreciate the importance of this change for the international currency scene, we should look back to when the dollar originally acquired the role as everyone’s foreign currency of choice. It was not, as most people think, the Bretton Woods Agreement that gave it this status, it validated it. You need to go back to the 1882 and 1900 Acts under which the US Treasury issued gold certificates requiring it as issuer to give “to the bearer on demand dollars in gold coin”.

At that time, Britain and her dominions dominated world trade, but Britain’s was essentially a free-trade zone based on sterling closed-loop. America began to dominate the rest of the world’s foreign trade, so it was only a matter of time before countries issuing their own fiat currencies accepted dollar reserves in the belief they were the equivalent of owning gold.

Arguably, it was from then that the US dollar gradually adopted the role of the world’s reserve currency. The muddle between on the one hand a fiat currency having a gold exchange facility, and on the other hand gold itself, was necessary for this fiction to be accepted; but accepted it was and continued to be through two world wars, until the fiction was formalised at Bretton Woods. Continue reading

Hobson’s Choice

Submitted by Doug Noland – Credit Bubble Bulletin 

More than two months have passed since the August “flash crash.” Fragilities illuminated during that bout of market turmoil still reverberate. Sure, global markets have rallied back strongly. Bullish news, analysis and sentiment have followed suit, as they do. The poor bears have again been bullied into submission, as the punchy bulls have somehow become further emboldened. The optimists are even more deeply convinced of U.S., Chinese and global resilience (the 2008 crisis “100-year flood” view). Fears of China, EM and global tumult were way overblown, they now contend. As anticipated, global officials remain in full control. All is rosy again, except for the fact that global central bankers behave as if they’re utterly terrified of something.

The way I see it, underlying system fragility has become so acute that central bankers are convinced that they must now forcefully (“shock and awe,” “beat expectations,” etc.) react to any fledgling market “risk off” dynamic. Risk aversion and de-leveraging must not gather momentum. If fragilities are not thwarted early, they could easily unfold into something difficult to control. Such an outcome would risk a break in market confidence that central banks have everything well under control – faith that is now fully embedded in the pricing and structure for tens of Trillions of securities and hundreds of Trillions of associated derivatives – everywhere. With options at this point limited, the so-called “risk management” approach dictates that central banks err on the side of using their limited armaments forcibly and preemptively.

With today’s extraordinary global backdrop in mind, I’m this week noting a few definitions of “Hobson’s Choice”:

“An apparently free choice that actually offers no alternative.” (The American Heritage Dictionary of Idioms)

“A situation in which it seems that you can choose between different things or actions, but there is really only one thing that you can take or do.” (Cambridge Idioms Dictionary)

“No choice at all, take it or leave it.” (Endangered Phrases by Steven D. Price)

There are subtleties in these definitions, just as there are subtleties in financial Bubbles. Importantly, over time Bubbles embody a degree of risk where they stealthily begin to dictate ongoing monetary accommodation. These days, global market Bubbles have reached the point where their message to central bankers is direct and unmistakable: “No choice at all, take it or leave it.” “Keep expanding monetary stimulus or it all comes crashing down – and that’s you Yellen, Draghi, Kuroda, PBOC – all of you…” Continue reading

ECB – Going Full Retard

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Done Deal: We’re Making Europe Richer by Making it Poorer, Comrades!

mario-draghi-ecbReady, aim, fire! Draghi reminds everybody that there is no limit to how much fiat weaponry and ammunition he can deploy

Photo credit: François Lenoir / Reuters

We were really surprised at the extent to which the lunacy within the ECB council has apparently expanded. Right along with the euro area’s money supply, it is evidently the fastest growing thing in Europe right now.

1-TMS-euro areaAccording to the ECB, there is “not enough inflation” in the euro area just yet. Hence, it will increase the rate of growth of this mountain of money further by monetizing even more debt – click to enlarge.

A summary from a mainstream press report:

“Eurozone stocks could be gearing up for another rally in the coming months following dovish signals from the European Central Bank.

ECB President Mario Draghi on Thursday said policymakers will decide at their December meeting whether the eurozone economy needs further easing measures. The ECB has already been buying roughly US$60 billion in bonds a month since March in an effort to prop up the 19-member eurozone economy, with plans to continue the program until at least September 2016.

The eurozone economy has modestly grown so far this year, but continues to face risks in the form of low inflation and a slowing economy in China — its second largest trading partner. Draghi last month voiced concerns about the impact China will have on eurozone exports.

[…]

The euro notably pulled back Thursday on Draghi’s comments, losing 1.6 per cent against the U.S. dollar to US$1.11. Analysts said the euro could see the kind of sharp decline it experienced prior to the launch of the ECB’s bond-buying program earlier this year.”

The actual statement and Draghi’s press conference suggest that the decision to ease monetary policy further (from the current negative deposit rate combined with printing some 60 billion euro per month in addition to the ongoing expansion of fiduciary media by commercial banks) has already been taken. The time between yesterday’s meeting and the early December meeting is merely going to be used to decide which “tools” to deploy and to what extent. Quite likely this will include further cuts to the already negative 20 basis points rate on the ECB’s deposit facility, and a further expansion of QE. Continue reading

The World’s Silliest Empire

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

I couldn’t help but notice that over the past few weeks the Empire has become extremely silly—so silly that I believe it deserves the title of the World’s Silliest Empire. One could claim that it has been silly before, but recent developments seem to signal a quantum leap in its silliness level.

The first bit of extreme silliness surfaced when Gen. Lloyd J. Austin III, the head of the United States Central Command, told a Senate panel that only a very small number of Syrian fighters trained by the United States remained in the fight—perhaps as few as five. The tab for training and equipping them was $500 million. That’s $100 million per fighter, but that’s OK, because it’s all good as long as the military contractors are getting paid. Things got even sillier when it later turned out that even these few fighters got car-jacked by ISIS/al Qaeda in Syria (whatever they are currently calling themselves) and got their vehicles and weapons taken away from them.

Gen. Austin

General Austin’s previous role as as Lt. General Casey in Tim Burton’s film Mars Attacks! It was already a very silly role, but his current role is a definite career advancement, both in terms of rank and in terms of silliness level.

Lt. Gen. Casey
Mars Attacks!

The next silly moment arrived at the UN General Assembly meeting in New York, where Obama, who went on for 30 minutes instead of the allotted 15 (does Mr. Silly President know how to read a clock?) managed to use up all of this time and say absolutely nothing that made any sense to anyone.

But it was Putin’s speech that laid out the Empire’s silliness for all to see when he scolded the US for making a bloody mess of the Middle East with its ham-handed interventions. The oft-repeated quote is “Do you understand what you have done?” but that’s not quite right. The Russian «Вы хоть понимаете теперь, чего вы натворили?» can be more accurately translated as “How can you even now fail to understand what a mess you have made?” Words matter: this is not how one talks to a superpower before an assembly of the world’s leaders; this is how one scolds a stupid and wayward child. In the eyes of the whole world, this made the Empire look rather silly.

What happened next is that Russia announced the start of its bombing campaign against all manner of terrorists in Syria (and perhaps Iraq too; the Iraqi request is in Putin’s in-box). What’s notable about this bombing campaign is that it is entirely legal. The legitimate, elected government of Syria asked Russia for help; the campaign was approved by the Russian legislature. On the other hand, the bombing campaign that the US has been conducting in Syria is entirely illegal. There are exactly two ways to legally bomb the territory of another country: 1. an invitation from that country’s government and 2. a UN Security Council resolution. The US has not obtained either of them. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

China Cuts Interest Rates, Reserve Ratios to Counter Slowdown (Bloomberg)
China Interest Rate Cut Fuels Fears Over Ailing Economy (Guardian)
Why The Chinese Rate Cut Will Not Slow China’s Economic Decline (Coward)
Reactions To Rate Cut: “China Is Getting More And More Desperate” (Zero Hedge)
China Takes ‘Riskiest’ Step by Ending Deposit-Rate Controls (Bloomberg)
Draghi’s Signal Adds $190 Billion to Negative-Yield Universe (Bloomberg)
Eurozone Crosses Rubicon As Portugal’s Anti-Euro Left Banned From Power (AEP)
Italy ex-PM Monti: Ignoring Greek Referendum A Violation Of Democracy (EurActiv)
Rare Metals: The War Over the Periodic Table (Bloomberg)
$6.5 Billion in Energy Writedowns and We’re Just Getting Started (Bloomberg)
Greece’s Creditors Demand Further Reform (La Tribune)
Investment Grade Ain’t What It Used to Be in Nervous Bond Market (Bloomberg)
An All Too Visible Hand (WSJ)
EU Negotiators Break Environmental Pledges In Leaked TTIP Draft (Guardian)
Populist, Pernicious and Perilous : Germany’s Growing Hate Problem (Spiegel)
Germany To Push For Compulsory EU Quotas To Tackle Refugee Crisis (Guardian)
Worried Slovenia Might Built Fence To Cope With Migrant Crisis (Reuters)