Thursday, September 8, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Dissecting the Lies in Obama's $447 Billion "Shock-and-Awe" Reelection Ploy; Dead-on-Arrival in Congress? Alternative Proposal Will Not Cost a Dime

Posted: 08 Sep 2011 10:08 PM PDT

President Obama's rumored $300 stimulus program ballooned to $447 billion upon unveiling. For a full text of the speech, please see President Obama's jobs address

Amusingly, the plan is overweight tax cuts in an attempt to get Republican buy-ins.

Let's dissect portions of Obama's speech, lie by lie.

Obama: I am sending this Congress a plan that you should pass right away. It's called the American Jobs Act. There should be nothing controversial about this piece of legislation.

Mish: That is lie #1. There shouldn't be anything controversial about the proposal, but there is. Obama's proposal is primarily an election stunt as opposed to a genuine effort to produce jobs.

Obama: Everything in here is the kind of proposal that's been supported by both Democrats and Republicans – including many who sit here tonight.

Mish: That is lie number two. There is no general consensus by Democrats for tax cuts or Republicans for fiscal stimulus.

Obama: And everything in this bill will be paid for. Everything.

Mish: That is lie number 3. I will cut the president some slack and call those sentences one lie repeated rather than two lies. Obama's stimulus plan is nothing but another spend now, make cuts later "sleight-of-hand" proposal.

Obama: The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for the long-term unemployed. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services.

Mish: That is lie number 4. The primary purpose of the American Jobs Act is simple: To keep one person (namely President Obama), in his job.

Payroll tax cuts to businesses will not spur hiring. The idea is sheer lunacy. Businesses will hire only when it makes economic sense, not because of a reduction in employer social security taxes.

Obama: Pass this jobs bill, and we can put people to work rebuilding America. Everyone here knows that we have badly decaying roads and bridges all over this country. Our highways are clogged with traffic. Our skies are the most congested in the world.

Mish: Putting people to work will un-congest the skies? Is that lie number 5 or just complete silliness? High speed trains are not going to replace a significant amount of air traffic, nor will such programs be economically viable. Instead they will be a long-term drain on taxpayers. Moreover, if the president did any homework he would know China's high speed rail program is rife with fraud and shoddy workmanship, was overbudget, is falling apart, and is barely used. It was not economically viable.

Obama: The American Jobs Act will repair and modernize at least 35,000 schools. It will put people to work right now fixing roofs and windows; installing science labs and high-speed internet in classrooms all across this country.

Mish: Excuse me for asking, but didn't we pay for this already in the first stimulus plan?

Obama: And to make sure the money is properly spent and for good purposes, we're building on reforms we've already put in place. No more earmarks. No more boondoggles. No more bridges to nowhere. We're cutting the red tape that prevents some of these projects from getting started as quickly as possible. And we'll set up an independent fund to attract private dollars and issue loans based on two criteria: how badly a construction project is needed and how much good it would do for the economy.

Mish: Will it be the same geniuses who were responsible for guaranteeing $535 million a solar energy firm that is now bankrupt?

Obama: Pass this jobs bill, and thousands of teachers in every state will go back to work. These are the men and women charged with preparing our children for a world where the competition has never been tougher. But while they're adding teachers in places like South Korea, we're laying them off in droves. It's unfair to our kids. It undermines their future and ours. And it has to stop. Pass this jobs bill, and put our teachers back in the classroom where they belong.

Mish: I have a better idea. Cut union pay and benefits and even more teachers will go back to work and at no expense to taxpayers.

Obama: The agreement we passed in July will cut government spending by about $1 trillion over the next ten years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I'm asking you to increase that amount so that it covers the full cost of the American Jobs Act. And a week from Monday, I'll be releasing a more ambitious deficit plan – a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run.

Mish: Neither the president nor Congress has remotely done anything to stabilize the debt. In spite of promises, Obama will not do so a week from Monday. We will graciously call this lie number 6.

Obama: By eliminating pages of loopholes and deductions, we can lower one of the highest corporate tax rates in the world. Our tax code shouldn't give an advantage to companies that can afford the best-connected lobbyists. It should give an advantage to companies that invest and create jobs here in America.

Mish: Hooray! The president finally put together an entire paragraph that makes sense.

Obama: And on all of our efforts to strengthen competitiveness, we need to look for ways to work side-by-side with America's businesses. That's why I've brought together a Jobs Council of leaders from different industries who are developing a wide range of new ideas to help companies grow and create jobs.

Mish: You do not need a jobs council. All you need to do is scrap Davis-bacon, kill prevailing wage laws, and pass a national right-to-work law.

Obama: I reject the idea that we have to strip away collective bargaining rights to compete in a global economy. We shouldn't be in a race to the bottom, where we try to offer the cheapest labor and the worst pollution standards. America should be in a race to the top. And I believe that's a race we can win.

Mish: While it is true we do not need to have the worst pollution standards in the world, but the president lumps all of these things together as if it is one big idea. When it comes to collective bargaining the president rejects common sense.

The US cannot afford a $447 billion boondoggle that will create zero lasting jobs, for no other purpose than to get the president reelected. If Congress has any sense, this proposal will be Dead-on-Arrival in the US house.

As an alternative, and as proposed previously in Bernanke's Waterloo; Midst of Deflationary Collapse or Brink of Inflationary Disaster? 12 Specific Recommendations here is an alternative set of stimulus proposals that will not cost a dime.

The basis for the following set of ideas is that throwing money at problems never solves a thing. We must first fix numerous structural problems immediately if there is any hope for this economy.

Twelve Specific Recommendations

  1. Banks and bondholders should take a hit. Banks are not going to lend anyway so bailing them out at the expense of taxpayers is both morally and economically stupid. End the bailouts, all of them, and prosecute fraud, the higher up the better.
  2. Implement serious bank reform now, not 9 years from now. Banks should be banks, not hedge funds. This proposal will necessitate breaking up banks. So be it.
  3. Scrap Davis-Bacon and all prevailing wage laws. Such laws drive up costs and have wreaked havoc on many cities and municipalities, now bankrupt or on the verge of bankruptcy.
  4. Pass national right-to-work laws. Once again, we need to reduce costs on businesses and local governments to spur more hiring and reduce costs.
  5. End collective bargaining rights of all public unions. The goal of unions is to provide the least service for the most money. The goal of government should be to provide the most services for the least money.
  6. Scrap ethanol policy and end all tariffs.
  7. Legalize hemp and tax it. Prison costs will go down, tax revenue will grow, and biofuel and fiber research will expand as hemp produces very soft fibers.
  8. Corporate income tax rates should be lower in the US than abroad. Current policy encourages capital flight and jobs flight via lower tax rates on profits overseas than in the united states. This penalizes businesses that work only in the US, especially small businesses that do not have an army of lawyers and lobbyists.
  9. Stop the wars and set a plan to bring home all US troops from Iraq, Afghanistan, and 140 or so other countries.The US can no longer afford to be the world's policeman.
  10. Implement Paul Ryan's Medicare voucher proposal. It is the only way so far that anyone has proposed that puts much needed consumer "skin-in-the-game" that will reduce medical costs.
  11. Legalize drug imports from Canada
  12. End the Fed and fractional reserve lending. Both have led to boom-bust cycles of ever-increasing amplitude.
Those are the kinds of things we need to do, not throw more money at problems. The latter does nothing but drive up national debt and interest on the national debt for short-term gratification.

Notice how counterproductive Fed policy is and how counterproductive Obama's policies are.

The Fed wants positive inflation but businesses have not been able to pass the costs on. Instead, companies outsource to China. Those on fixed income get hammered.

Fool's Mission

Obama wants to create jobs via stimulus measures. It's a fool's mission.

Prevailing wages drive up the costs, few are hired, and the cost-per-job (created or saved) is staggering. Money never goes very far because the US overpays every step of the way.

Stimulus plans that do not fix the structural problems are as productive as pissing in the wind. Then when the stimulus dies, which it is guaranteed to do, a mountain of debt remains.

Instead, my 12-point recommendation list will fix numerous structural problems, create lasting jobs, and reduce the deficit. What more can you ask?

Well one more thing: campaign finance reform is needed to stop the vote-buying of unions and corporations alike.

With that, I wish to reiterate "The primary purpose of the 447 billion dollar American Jobs Act is simple: To keep one person (namely President Obama), in his job."

If it works, it will be the most costly price paid per job created-or-saved in history (in more ways than one).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Greece Out of Money by October 17; Greek Banks Refuse to Fund Government T-Bills; Greece Freezes All Disbursements Other than Wages and Pensions

Posted: 08 Sep 2011 05:57 PM PDT

Inquiring minds have watched Greek 1-Year bond yields approach 100%. 2-year Greek bonds yield 55% (assuming interest and principal is paid - but it will not be).

Greece will be out of money no later than October 17 unless it gets the next trance of money as noted in Prospect of empty coffers looms large.
The government is facing the possibility of not being able to pay wages and salaries in October if its international creditors do not approve the pending 8-billion-euro sixth installment immediately.

The country's foreign lenders have made disbursement conditional on the government's adoption of new measures that will target the collection of at least 1.7 billion euros. Without the sixth tranche, the public purse will be 1.5 billion euros short on October 17.

The prospect of a freeze in payments appeared even more serious on Thursday, after Greek commercial banks failed to cover the sum of 300 million euros of supplementary, noncompetitive bids for Tuesday's auction of T-bills, providing only 155 million. The shortfall is interpreted as a clear message by banks to the government that they are unwilling to fund future issues of T-bills.

The gravity of the situation is indicated by the fact that the government has frozen all disbursements apart from salaries and pensions.
Greece and the EU better get a plan in place to deal with the consequences of default as well as a Greek return to the drachma, its previous currency.

I suspect the currency will be given a new name.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Japan Finance Minister says Japan Ready for "Bold Action" on Currency; Barrick Gold Yield Correction

Posted: 08 Sep 2011 04:18 PM PDT

Following the move by the Swiss National Bank to devalue its currency, Japan's Finance Minister Will Tell G-7 Japan Ready to Take 'Bold' Action on Currency
Japanese Finance Minister Jun Azumi said he will tell his Group of Seven counterparts that his country remains prepared to take "bold" action in currency markets when necessary. He spoke to reporters today in Marseille, France.
Competitive Currency Debasement Hits Next Level

The announcement by Azumi suggests currency wars are about to hit the next level.

Perhaps he was likely emboldened by Swiss central bank actions as noted in Switzerland to "Buy Foreign Currency in Unlimited Quantities", Sets Euro Peg 1.20; Extreme Mid-Day Currency Volatility; Gold is Safe Haven, Not Francs

$HUI Revisited

Earlier today in Gold, U.S. Dollar Higher; $HUI New All-Time High, Still Cheap to Price of Gold I inadvertently listed an incorrect yield of .49% for Barrick Gold.

Here is the correct comparison. The original post modified).

The $HUI is at a new all-time high but miners are cheap compared to the price of gold and also cheap relative to earnings of major miners such as Barrick Gold (ABX)



Barrick pays a dividend of 49 cents .90%.

For comparison purposes 3-year U.S. treasuries yield .33% and 5-year treasuries .87%.

Barrick could easily double its dividend and if it did so, Barrick would yield close to the 10-Year treasuries, currently 1.98%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Germany 10-Year Bonds at Record Low Yield; Gold, U.S. Dollar Higher; $HUI New All-Time High, Still Cheap to Price of Gold

Posted: 08 Sep 2011 11:30 AM PDT

Today the ECB held the Eurozone interest rate at 1.5% while softening its stance on inflation. At a press conference following the rate cut decision, ECB president Jean-Claude Trichet stated the obvious: "risks have intensified". Trichet also admonished Greece saying "it would be an enormous mistake for Greece not to cut its deficit".

Elsewhere Italian yields are up slightly and gold and the US dollar remain positively correlated.

Germany 10-Year Bonds at Record Low Yield

Bloomberg reports German 10-Year Yields Fall to Record Low After ECB; Italian Bonds Decline
German 10-year bund yields fell to a record low after European Central Bank President Jean-Claude Trichet said "downside risks" to the economy have intensified and inflation concerns had eased.

Italian bonds declined after the nation's Senate approved a revised 54 billion-euro ($75.6 billion) austerity plan as the government seeks to convince investors it's serious about cutting its deficit. French bonds gained as the ECB cut its euro-area economic growth forecasts for this year and next. The euro-region's economy faces "particularly high uncertainty," Trichet said at a press conference in Frankfurt after the ECB kept its benchmark interest rate at 1.5 percent.

Ten-year bund yields fell to a record 1.823 percent as Trichet spoke. Two-year notes dropped three basis points to 0.46 percent. They declined to an all-time low 0.417 percent Sept. 6.
Gold, U.S. Dollar Higher

Gold continues to react to events in Europe rather than the U.S. dollar or events in the United States.

The US dollar Index is 76.525, up 0.579 (+0.76%). Meanwhile gold is up $40.0 (+2.20%) to 1,854.9.

$HUI - Gold Mining Index



$HUI Gold Ratio



The $HUI is at a new all-time high but miners are cheap compared to the price of gold and also cheap relative to earnings of major miners such as Barrick Gold (ABX)



Barrick pays a dividend of 49 cents .90%.

For comparison purposes 3-year U.S. treasuries yield .33% and 5-year treasuries .87%.

Barrick could easily double its dividend and if it did so, Barrick would yield close to the 10-Year treasuries, currently 1.98%.

Correction:


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending"

Posted: 08 Sep 2011 11:03 AM PDT

It does not take a genius to understand why consumer spending is weak.

  1. Unemployment rate is 9%
  2. Real wages are falling
  3. Income advances go to the wealthy
  4. Middle class is shrinking
  5. Jobs hard to find
  6. Approval ratings of Congress and Obama at record lows
  7. Consumers have high debt ratios
  8. Home prices are still falling
  9. Homeowners are trapped in their homes, unable to refinance
  10. Boomers need to save for retirement

However, those simple facts are far too complicated for a PhD like Fed chairman Ben Bernanke to figure out.

Please consider Bernanke puzzled by weak consumer spending
Federal Reserve Chairman Ben Bernanke says he is surprised by how cautious consumers have been in the two years since the recession officially ended. But the Fed chief offered no hints of any steps the Fed would take to boost the weak economy.

Bernanke says a number of factors are keeping consumers from spending more, including high unemployment, a temporary spike in energy prices, falling home prices and high debt burdens.

Bernanke said the Fed will consider range of policy options at its next meeting later this month without offering any clues to what it might do. His comments were familiar to ones he gave last month in Jackson Hole, Wyo.
Note that Bernanke even cited some of the 10 factors I mentioned, yet he is still surprised. What a dunce.

Is it any wonder his policies are so counterproductive when he cannot figure out simple things the average person can see clearly?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mortgage Rates at Record Lows: 30-Year at 4.12%, 15-Year at 3.33%; Home Resales Worst in 14 Years

Posted: 08 Sep 2011 09:20 AM PDT

U.S. 30-year mortgage rates are at record lows but it does not matter. Too few want to buy and many cannot refinance because they are underwater.
Fixed mortgage rates fell this week to the lowest levels in six decades. But few Americans can take advantage of the rates to refinance or buy a home.

The average rate for the 30-year fixed mortgage fell to 4.12 percent, down from 4.22 percent, Freddie Mac said Thursday. It's the lowest level on records dating back to 1971. Freddie Mac said the last time rates were cheaper was 1951, when most long-term home loans lasted just 20 or 25 years.

The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to 3.33 percent from 3.39 percent. That's the lowest on records dating to 1991 and likely the lowest ever, according to economists.

Over the past year, the average rate on the 30-year fixed mortgage has been below 5 percent for all but two weeks. That compares with five years ago, when the average 30-year fixed rate was near 6.5 percent.

Yet sales of new homes are on pace to finish the year as the lowest on records dating back a half-century. The pace of re-sales is shaping up to be the worst in 14 years.

Many Americans are in no position to buy. High unemployment, scant wage gains and large debt loads have kept them away.

Others can't qualify for the lowest rates. Banks are insisting on higher credit scores and 20 percent down payments for first-time buyers. Many repeat buyers have too little equity invested in their homes to meet loan requirements.

Roughly 40 percent of U.S. households have the necessary credit scores above 700 to get a prime mortgage rate, according to an Associated Press analysis of Fair Isaac Corp., or FICO, data.

A bigger issue is just half of Americans say they'll ever be able to save enough money for any type of down payment, let alone one as high as 20 percent, according to a survey by the National Foundation for Credit Counseling.

Nearly a third of homeowners have nearly zero equity or are underwater in their mortgage, according to the real estate research firm CoreLogic. That leaves then unable to refinance because of lender-imposed limits and the cost of extra fees.
These findings should not be surprising. I discussed the setup in Five Rules to Remember When Dealing with Real Estate Agents; Why are New Home Sales So Low? How Big is the Pool of Eligible Home Buyers?
How Big is the Pool of Eligible Home Buyers?

Here is a set of questions that will explain what is happening now.

How many people ....
  1. Don't have a house?
  2. Want a house?
  3. Can afford a house, upkeep, and property taxes?
  4. Have a needed cash cushion in the bank?
  5. Have a decent down payment for a house?
  6. Have a salary that can support interest and principal payments even at these low rates?
  7. Are not scared s*less about the loss of a job, assuming they do want a house and meet the rest of the conditions?
Someone needs to meet all of those conditions before they will buy a new house. How many is that?

I just happen to have the answer.

New Home Sales at 1963 Levels

The Los Angeles Times reports New home sales drop to six-month low
Sales of newly built homes fell in July to the lowest level in six months, as the nation's housing market continues to struggle.

Newly constructed single-family homes sold at a seasonally adjusted annual rate of 298,000, putting the industry on a pace to post the lowest annual sales since the Commerce Department began keeping data in 1963.
Is the eligible buyers' pool getting bigger or smaller?

The trend says smaller, in spite of falling interest rates and falling prices. Many items on my 7 point list are more important than interest rates, notably 1, 2, 3, 5, and 7.

That is the psychology of the situation and I see little reason for it to change until the labor market changes first.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Europe Out of Time; Differences Impossible to Untangle; Merkel's Mind is Fried; Eurozone Breakup Inevitable; "Let the Euro Die"

Posted: 08 Sep 2011 02:19 AM PDT

One of the many interesting aspects of the Eurozone crisis is how many key political and central bank leaders fail see (or at least admit) that Europe is out of time.

Even more peculiar are statements by ECB president Jean-Claude Trichet who finally does realize time is of the essence, yet Trichet "solution" is a set of measures that must be passed by all 17 nations when those nations cannot agree on EFSF funding, on Eurobonds, on collateral for Greece, or even on whether a fiscal union or transfer union must take place.

In some instances the differences boil down to big country vs. small country concerns. In other instances it is Southern "club-med" states vs. Northern states. Some countries refuse to give up sovereignty, while others welcome giving up sovereignty.

It does not help matters when German chancellor Angela Merkel seems to change her mind on something every other week.

German Court OK's Bailouts, But "No Blank Check"

On Wednesday the German court ruled that bailouts were legal. However, chief judge Andreas Vosskuhle also stated "This was a very tight decision. It should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures", adding that parliament was "forbidden from setting up permanent legal mechanisms resulting in the assumption of liabilities based on the voluntary decisions of other states."

Finally, the court ruled government must get approval from parliament's budget committee before granting aid.

Those rulings went pretty much as expected but parliamentary approval of any kind is yet a further restriction and will slow things downs, even if just a bit.

Incredibly Messy Politics


The last two bullet points are from Bailout Rebellion in Germany, on ZeroHedge. Here are expanded excerpts from the original articles.

French President Nicholas Sarkozy May Be Ousted in Preliminary Voting

In French elections, the top two candidates face a runoff in the national elections. France 24 reports New poll shows far right could squeeze out Sarkozy
Marine Le Pen, leader of the anti-immigration National Front (FN), is projected to win enough votes to knock out President Nicolas Sarkozy from the second round of next year's all important 2012 presidential election, the French daily Le Parisien's revealed on Thursday.

The poll confirmed a previous Le Parisien survey conducted in early March that gave Le Pen a considerable head start over Sarkozy, and even a small edge on IMF boss Strauss-Kahn. The March survey said Le Pen would gather 24% of French votes, beating Strauss-Kahn's 23% and Sarkozy's 20%.

In Thursday's survey Strauss-Kahn climbed to 30% and Le Pen dipped down to 21%. Either way, the figures makes Le Pen a credible candidate in the 2012 race.
Those polls were conducted in April before the Strauss-Kahn affair and I have not been able to find a more recent poll.

Marine Le Pen Says "Let the Euro Die"

The results for Le Pen are very interesting because of her stance on the Euro. Via Google Translate, please consider M. Le Pen says "let the euro die".
We must "let the euro die a natural death," means of reassuring the markets and revive the economy, said the president of the Front National Le Pen Marine, interviewed this morning on France Info.

Asked about the remedies it proposes to end the economic crisis, she said that we must "first stop bailouts repeat: there was Greece, now there will be Cyprus, Italy, the Spain ... " "There are masses of savings to do," she said, particularly expenses related to immigration. "The cost of the AME (State medical assistance for undocumented) explodes, there are 20 billion euros of social fraud against which nothing is done," she added, saying that "of 60 Vitale million cards, 10 million are false, that qualify for benefits unjustified ".

The market clearly says "Time's Up", yet politicians cannot agree on one major thing, and to top it off, voters are fed-up with austerity measures, bailouts, and politicians.
Clearly Le Pen is an anti-Euro, anti-immigration candidate and that is just the kind of message that can easily catch fire in this environment.

Merkel Proposes "Two Speed Europe" in Divide and Rescue Plan

Given that 17 countries cannot agree on anything, and voters are in open revolt of current leaders, it is preposterous to believe a "Two-Speed" Europe is the answer.

Merkel discarded "Two Speed Europe" long ago, but the plan is back in play as noted in Berlin Lays Groundwork for a Two-Speed Europe
The chancellor is planning her next political policy reversal . Until very recently, she has insisted that she was firmly opposed to creating divisions within Europe. But under the pressure of the euro crisis , Merkel has recently been thinking about abandoning the concept of a unified EU -- and assigning a key role to [Belgian politician and president of the European Council] Herman Van Rompuy in the process.

A New Power Center?

Today, it is primarily Great Britain that is preventing the EU from growing closer together.

Merkel, though, has had enough -- and is now planning a two-speed Europe. It would mean tightly interlocking the countries of the euro zone, possibly by means of a separate treaty that would apply in parallel to the EU Treaty of Lisbon. This was the concept German Finance Minister Wolfgang Schäuble proposed last week to the leadership of his party, the center-right Christian Democratic Union (CDU). Merkel sees Van Rompuy, who already chairs the council of the 27 EU leaders, as the head of the new power center.

In addition to the club of 27 nations that primarily manages the common domestic market as it has done until now, Merkel envisions a tight alliance of the 17 euro-zone members -- one which would unify their fiscal, budgetary and social policies. This would create a two-class club, raising questions like: What happens to the European Commission? Will it still be responsible for economic matters in the euro zone, or will there be a new organization? The same questions apply to the European Parliament and the European Court of Justice in Luxembourg. Would all of these institutions have to be duplicated, meaning even more bureaucracy, effort and expense?

There are no answers yet to these questions, and there is already plenty of skepticism. The European Commission is just as opposed to Merkel's plans as most members of the European Parliament and many smaller EU countries are. They also have some within Merkel's own ranks raising their eyebrows. "We will not rescue the euro by creating more and more committees and instruments," says Horst Seehofer, the chairman of the CDU's Bavarian sister party, the Christian Social Union (CSU).

That is precisely what Merkel has in mind. She can draw on a concept known as "Core Europe," which was developed in the 1990s by the then-chairman of the CDU/CSU parliamentary group, a certain Wolfgang Schäuble, who now serves under Merkel as finance minister. Both have established various measures to rescue the euro in recent months, some for the EU as a whole and others exclusively for the 17 euro-zone member states.
For starters, blaming this on the UK is absurd. The UK was smart to stay out of this mess.

The article continues ...
Giving Up Sovereignty

The scope of a joint corporate tax proposed by Merkel and Sarkozy at their meeting in mid-August is also likely to be expanded beyond the two largest member states. "This is much more broadly conceived," says a source within the German government. The two leaders envision a largely uniform tax for corporations within the euro zone.
Ireland refused to give up its tax advantages, and why should it? Indeed Ireland ought to tell the EU to stuff it right now and leave. Tax advantages are the only way Ireland has to grow out of this mess.

Part 2: A New Shadow Government for the EU
But that isn't enough for Merkel and Sarkozy. They want the 17 leaders of the euro zone countries to convene for a summit twice a year, with Van Rompuy serving as its permanent chairman.

The Belgian would also receive a bureaucratic structure for his new responsibilities, giving the Euro Group its own secretariat. According to initial ideas, the new agency would be appended to an existing European Council secretariat, so that the separation doesn't seem too obvious.

The group of finance ministers of the euro zone, which prepares the groundwork prior to meetings of heads of state and government, may also be strengthened. An idea being considered is to provide it with a full-time chairman, who would serve as a contact for Van Rompuy. Luxembourg Prime Minister Jean-Claude Juncker has taken care of the duties until now. The new chairman would be a former finance minister, making him more acceptable to a group of his peers.

While that is still in the planning stages, it has already been resolved that the working group of finance state secretaries will have a full-time chairman with his own team of employees. The body, with the cumbersome title Eurogroup Working Group, does the detail-oriented heavy lifting ahead of finance minister meetings.

In short, a kind of shadow government is currently taking shape in Brussels. But officials in Berlin have begun considering ideas which go even further. Merkel, for example, is thinking about introducing a right to file complaints before the European Court of Justice against euro-zone member states that violate the Stability Pact. Such a move would require an amendment to the Lisbon Treaty.
Merkel's Mind is Fried

Merkel's mind is clearly fried. How many years would it take to get agreement on something like that? Even two years is too long. She will be long gone.

It's time to start asking serious questions like ...

Is the Euro Worth Saving?

Regardless of what you or I may think, that question is where European voters come in. From that standpoint it does not look pretty.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say "to hell with this" and the whole mess unravels.

The current set of politicians all want to "save the Euro". But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finland voters wonder what it bought them.

Eurozone Breakup Inevitable

Merkel's half-baked proposal raises more questions than answers. The market (and voters) will not possibly wait for details of her proposal to get hashed out. If this is the best Merkel can come up with, a Eurozone breakup is inevitable.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Posted by Blogku at 11:07 PM

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