Saturday, March 30, 2013

The Next Step in Europe's Implosion

Rome wasn't built in a day and the Eurozone will not collapse in a day.  But, the Eurozone will collapse.  It's just a matter of time.

Consider the stronger countries in the Eurozone -- Germany and France.  Both economies are now contracting.   Meanwhile their debt levels, acknowledged and unacknowledged, have exploded to new levels.   Both countries are now in the situation that faced Greece four years ago.  So, how is their future going to be any different that what is now taking place in Cyprus, Greece, Spain and Italy?

The ECB ministers are a group of political hacks who know little or nothing about economics (something they share with the Obama advising team).   Their idea of improving the economic plight of the Eurozone is to increase the level of debt, continue to implicitly guarantee profligate spending and bureaucratic regulations, and plunge the Eurozone into the economic dark ages.

GDP is falling, debt is rising, unemployment is rising, and recriminations are flying.  The Eurozone is coming apart at the seams.   Civil society has broken down in Greece and is in the process of breaking down in parts of Spain and Italy.  Cyprus is entering a dark period.  Nothing good lies ahead for the Eurozone.

So, what happens next?

Deposits will begin to seep out of the Eurozone -- most notably from Spanish and Italian banks -- but from other Eurozone countries as well.  After all, the ECB bureaucracy has changed the rules.  Deposits are now legitimate targets for the bureaucrats.  It wasn't the ECB that decided not to confiscate insured depositors in Cyprus, it was the Cypriot parliament who refused to ratify the ECB and IMF policy of confiscating insured depositors.  The confiscation of government insured deposits is now a legitimate policy weapon in the Eurozone, overturning a long past history of FDIC-like guarantees in the Eurozone.  Nothing is sacred to the bureaucrats.

The genie cannot be put back in the bottle.  The European banking sector cannot recover from this bureaucratic policy blunder.  Deposits in the Eurozone can never be considered secure, even in circumstances where the bank that houses them is secure.  The government can confiscate deposits wherever they may be.  This is now a legitimate Eurozone policy weapon.  It is also an IMF (read USA) policy tool as well.  Even US FDIC-guaranteed deposits may be fair game to the bureaucrats when US debt woes become a front page crisis.  An eventuality that must come in time.

Saturday, March 23, 2013

Little Cyprus

So how big is Cyprus?  800,000 people with a GDP of about 18 billion Euros -- less than 10 percent of the size and wealth of the State of Virginia.  So, how can Cyprus rock the Eurozone?

Easy.  Let politics substitute for economics and anything can happen.

The grand Euro scheme of bailing out country after country is rapidly running up against reality. The sacrifices that the bailers require are politically unacceptable to the bailees.

Austerity traded for more debt -- this is the bailout scheme devised by politicians.  This scheme is an effort to change reality and it won't work.

The reality is that Cyprus banking is history.  Who, in his right mind, would willingly leave their money in a Cypriot bank after the events of the past week?  It doesn't really matter what solution is imposed, the Cypriot financial community will not recover.

Meanwhile, institutions with deposits in Italian and Spanish banks now face a new reality, hitherto not contemplated.  The European Central Bank and the IMF have this week endorsed a new policy tool for dealing with debtor nations -- confiscation of bank deposits.  Who would have thought?  But now the thinking begins.   Should I or shouldn't I move my cash deposits from Italian and Spanish banks for the safer confines of London or New York or Geneva or Singapore?  No doubt such thoughts are now extant in the minds of all institutional investors across the globe.

When economics no longer guides economies and the politicians take over, this is the outcome -- collapsing GDP, rising debt levels, and growing political anarchy.   We are just at the early stages of the coming demise of Europe.

Tuesday, March 5, 2013

Schwartz's Quandary

Today's NYTimes features an interesting article by Nelson D. Schwartz headlined "Recovery in US is Lifting Profits, But Not Adding Jobs."  Surprise, Surprise!

The main tool for solving unemployment by the White House is to figure ways to make employees more expensive.  Businesses aren't dumb.  If you make a factor of production much more expensive, businesses will use less of it.  Machines aren't more expensive; outsourcing is not more expensive, but hiring American workers is much, much more expensive thanks to Obamacare and numerous "worker protection" rules, laws and regulations.

So, what to do?  Obama now suggests raising the minimum wage from $ 7.25 to $ 9.00 -- almost a 25 percent hike in the minimum wage.  That is in keeping with the philosophy of making employees more expensive.

The war on workers and the war on the middle class by this White House continues unabated.  Schwartz is puzzled by the "golden age for corporate profits" unaccompanied by meaningful increase in the demand for workers.  But why is there any surprise.  This is the predictable result of White House economic policy.

Sunday, March 3, 2013

Three Cheers for Christina Romer

It has been somewhat of a puzzle that Obama's economists haven't rebelled at his Administration's assault on the US economy.   Economics is, after all, economics.  Finally!

In today's NYTimes, Christina Romer, former head of Obama's Council of Economic Advisors, questions the necessity of the minimum wage.  She not only wonders openly about increasing the minimum wage, but questions the very idea of minimum wage legislation.

Romer is right that the minimum wage is not the way to go.  While she doesn't go far enough to oppose the minimum wage outright, it is hard to see her op-ed piece as anything but a plea for sanity and clear opposition to Obama's recent call for a minimum wage increse.