Mish's Global Economic Trend Analysis

Irish PM Dissolves Government; Spanish Banks Face Debt Challenge; Greece May "Shut-Down"; Meaning of "Guarantee"; Should Ireland Ditch the Euro?
Large Companies Hiring, Small Companies Not; Federal Hiring Strong, States Cutting Back; Proposed Solutions; Bright Side of Fed Policies
Incredibly Humorous Video of N.J. Governor Chris Christie and the President of the Teachers Union regarding "Death Prayers"
Geithner Politicizes the Fed, Warns Congress to Not do the Same; Idiocies and Ironies; Economist James Galbraith Unfit to Teach

Irish PM Dissolves Government; Spanish Banks Face Debt Challenge; Greece May "Shut-Down"; Meaning of "Guarantee"; Should Ireland Ditch the Euro?

Posted: 22 Nov 2010 05:42 PM PST

Things continue to simmer in Europe with problems appearing on multiple fronts in Ireland, Spain, Portugal, and Greece.

Here are a few of highlights: Irish Prime Minister Brian Cowen announced he would step down once a series of fiscal packages and budgets were in place next month; Portugal Struggles to Meet Deficit Goal; High Frequency Economics Ltd. says Greece May 'Shut Down' on Cash Shortage.

After a look at a few articles I take a look at suggestions for Ireland to abandon the Euro, and a critical look at the meaning of "guarantee".

Irish Leader to Dissolve Government After Budget Passes

The New York Times reports, Irish Leader to Dissolve Government After Budget Passes.

Prime Minister Brian Cowen said late Monday that he would step down once a series of fiscal packages and budgets were in place next month, acceding to the demands of the opposition and its coalition partner, and injecting the threat of political instability into a financial crisis that already has markets on edge.

Earlier in the day, the minority Green Party declared that the public had lost faith in the government after its acceptance of a $100 billion rescue package over the weekend and that it would pull out of the government. It called for elections early next year, when a second round of austerity measures, forced on Ireland as a condition of the bailout, will be put before voters who have already suffered through three years of recession.

Ireland faces a stark choice between accepting cutbacks in popular middle class social programs or rejecting them and jeopardizing the rescue package, which would invite default. Most analysts expect that Mr. Cowen, whatever the condition of his coalition, will be able to pass the budget — even though it will have put into law such severe measures as a decrease in the minimum wage (one of the highest in Europe) and changes to the country's generous child benefits.

The always churning Dublin rumor mill is now in overdrive, with speculation mounting that a back bench revolt might be brewing as Fianna Fail ministers contemplate the possibility of going into a new election with a new party leader.

The 2011 budget is to be presented before the Irish parliament on Dec. 7. It will call for six billion euros in savings and will be the first major hurdle that the government must clear to prove to the European Commission and the international Monetary Fund that this recession-battered country can come together and pass brutally painful budgets.

European Banks Drop As Contagion Concerns Spread

Bloomberg reports European Banks Drop on Concern of Ireland Contagion

European banking stocks fell, led by Bank of Ireland Plc and Banco Santander SA, on concern that countries including Portugal and Spain may need external help to fix their finances.

Bank of Ireland, the country's largest lender, plunged 19 percent to 39 cents in Dublin trading. Santander, Spain's biggest, dropped 4 percent to 8.19 euros in Madrid. The 53- member Bloomberg Europe Banks and Financial Services index fell 2 percent.

Credit Default Swaps Soar as Portugal Struggles to Meet Deficit Goal

Yields spreads in Portugal have declined seven consecutive days although Credit Defaults Swaps suggest a different picture as Portugal Says Will Do Everything to Meet Deficit Goal

Portugal will do all it can to meet its target of cutting the budget deficit to 4.6 percent of gross domestic product next year, Finance Minister Fernando Teixeira dos Santos said after Ireland became the second euro country to seek a rescue.

The yield premium that investors demand to hold Portugal's 10-year bonds instead of German bunds narrowed to 404 basis points today, on track for a seventh straight daily decline, after a euro-era record of 484 basis points on Nov. 11. Portugal carried out its last bond sale of the year on Nov. 10 and faces its next redemption in April.

"The Irish bailout announced over the weekend will likely provide some relief to peripheral bonds, but this could be short-lived, with Portugal likely to soon return under the markets' spotlight, as the government is finding it hard to meet its fiscal targets," said Luigi Speranza, an economist at BNP Paribas SA in London.

Credit-default swaps tied to Portuguese debt jumped 29.5 basis points to a one-week high of 447 basis points, the biggest increase since Sept. 27, according to data provider CMA.

Portuguese Prime Minister Jose Socrates on Nov. 24 will face the country's first joint general strike in 22 years as the two biggest labor organizations protest the austerity measures.

I concur with the assessment of Luigi Speranza who thinks any rally in bond spreads relative to Germany will be short-lived.

"Credit Negative Development" in Spain

Moody's says Spain Banks Face Debt Challenge as ECB Cuts Cash.

Spanish banks may struggle to refinance covered bonds as the European Central Bank's plan to reduce liquidity supports forces lenders to tap debt markets at record-high yield spreads, Moody's Investors Service said.

The higher cost of refinancing is a "credit negative development" for covered bond issuers, "especially if the ECB pulls back its support," Moody's analyst Tomas Rodriguez-Vigil Junco wrote in a report today. Spanish lenders have about 70 billion euros ($96 billion) of covered bonds coming due in the next two years, the analysts wrote.

Spanish Banks rated below A1, the fifth-highest investment grade, face the biggest refinancing burden because they account for about 50 percent of the total mortgage covered bonds due next year, the Moody's analysts wrote.

Potential "Shut-Down" in Greece

Bloomberg reports Greece May 'Shut Down' on Cash Shortage.

Parts of Greece's government may be forced to "shut down" as early as next week if the country isn't able to cover a revenue shortfall after its European Union partners delayed its next tranche of aid money, High Frequency Economics Ltd. said.

"With a big tax revenue shortfall, cash requirements are surely greater than the 6.5 billion euros ($8.95 billion) Athens was meant to receive next week," Carl B. Weinberg, chief economist at Valhalla, New York-based High Frequency wrote in a note to clients today.

"Unless the government gets funds soon after Nov. 30, it will run out of cash," Weinberg said. "If so, the government will have to shut down, at least in part."

Ireland should 'do an Argentina'

Dean Baker writing for the Guardian says Ireland should 'do an Argentina'

Ireland is currently experiencing a 14.1% unemployment rate. As a result of bailout conditions that will require more cuts in government spending and tax increases, the unemployment rate is almost certain to go higher. The Irish people are likely to wonder what their economy would look like if they had not been rescued.

The pain being inflicted on Ireland by the ECB/IMF is completely unnecessary. If the ECB committed itself to make loans available to Ireland at low interest rates, a mechanism entirely within its power, then Ireland would have no serious budget problem. Its huge projected deficits stem primarily from the combination of high interest costs on its debt, and the result of operating at levels of economic output that are well below full employment – both outcomes that can be pinned largely on the ECB.

It is worth remembering that Ireland's government was a model of fiscal probity prior to the economic meltdown. It had run large budget surpluses for the 5 years prior to the onset of the crisis. Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The economic wizards at the ECB and the IMF either couldn't see the bubble or didn't think it was worth mentioning.

The decision to make Ireland's workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country's bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

This should be a huge warning flag for progressives and, in fact, anyone who believes in democracy. If the ECB puts conditions on a rescue package, it will be very difficult for an elected government in Ireland to reverse these conditions. In other words, the issues that Ireland's voters will be able to decide are likely to be trivial in importance relative to the conditions that will be imposed by the ECB.

The other point that should be kept in mind is that even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt.

What Can't Be Paid Back, Won't

There is much more in the Guardian article regarding what went wrong in Argentina and why, and how the IMF did everything it could to sabotage Argentina. It is an interesting read well worth a look.

My only point of major disagreement is with Baker's suggestion that Ireland could drop out of the Euro. While Ireland certainly "could", such a move could also cause hyperinflation, a loss of faith in the currency.

Default is another matter. The austerity measures imposed by the IMP practically beg for default. Will the next government go along with any budget agreement Prime Minister Brian Cowen works out now?

I suspect not, nor do I think Ireland should, although they may try for a while. What can't be paid back won't. The sooner Irish citizens realize this, the better off Ireland will be.

The critical point made by Baker is "The decision to make Ireland's workers pay for the recklessness of their country's bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF."

Firepower of Stupidity

I repeat what I said in Irish Citizens Sold Down the River in "Firepower of Stupidity"

Today the Irish Government sold its citizens into debt slavery by agreeing to guarantee stupid loans made by German, British, and US banks. Those loans fueled one of the biggest property bubbles in the world. Ireland has since crashed.

Why the average Irish citizen should have to bail out foreign bondholders is beyond me, but I do note that the same happened in the US with taxpayers footing an enormous bill for Fannie Mae, Freddie Mac, and AIG.

No matter what stupid thing banks do, prime ministers and presidents are all too willing to make the average taxpayer foot the bill for the mess. That by the way, is one reason why we get into these messes in the first place.

By agreeing to take on that debt, and sticking it to the Irish taxpayers who will be forced to accept various austerity measures to pay back that debt, Irish Prime Minister Brian Cowen and Finance Minister Brian Lenihan just sold Ireland down the river.

For additional insight on how the crash affects Ireland, please see Ghost Estates and Broken Lives: the Human Cost of the Irish Crash

Ireland at Crossroads

Ireland is at a major crossroads. The fact that Irish Prime Minister Brian Cowen is willing to step down helps.

I agree that Ireland certainly needs reforms. Lowering the minimum wage will help create jobs. So will reducing benefits. Both need to happen regardless of what labour parties might think.

However the biggest job creation effort will come from Ireland telling the ECB and IMF to stuff it. There is no reason Irish citizens should have to pay back the foolish guarantees made by Brian Cowen.

Cowen will be gone soon enough, and the next PM can and should have different thoughts about the meaning of "guarantee".

German Chancellor Angela Merkel last month called for bondholders to foot more of the bill of European bailouts. I agree. It's time to hold her to her word.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Large Companies Hiring, Small Companies Not; Federal Hiring Strong, States Cutting Back; Proposed Solutions; Bright Side of Fed Policies

Posted: 22 Nov 2010 12:23 PM PST

A recent Gallup survey suggests Larger U.S. Companies Are Hiring; Smallest Are Not

Gallup finds that larger companies are hiring more workers while the smallest businesses are shedding jobs. More than 4 in 10 employees (42%) at workplaces with at least 1,000 employees reported during the week ending Nov. 14 that their company was hiring, while 22% said their employer was letting people go. At the other extreme, 9% of workers in businesses with fewer than 10 employees said their employer was hiring, and 16% said their employer was letting people go.

This Gallup question about company size is new, so it is unclear whether this pattern is a continuation of, or a change from, the past.

Hiring Also Much Higher at the Federal Government

The federal government is hiring more employees than it is letting go, while the opposite is true for state and local governments. More than 4 in 10 federal employees (42%) say their organizations are adding people and 21% say they are letting workers go. In contrast, state and local government employees report a net loss of workers.

Pitfalls, Flaws, Observations

There are huge flaws in the survey as well as a potential for additional flaws in analyzing the survey results. Nonetheless there are some important observations that can be made.

For starters, it is nice to see large corporations hiring, but there is no indication of by how much. Is the total headcount hiring 1 or hiring 2,000? Is the number up or down from last month?

Compounding that lack of information, we have seasonal flaws. Many retailers are now ramping up hiring for the Christmas season. So... is the hiring temporary or permanent?

The survey does not say. Moreover it does not say why they are hiring. Is business expanding or is this a short-term need?

That aside, the survey is not useless by any means. If this expansion was getting stronger, the number of companies hiring would be going up. It is not. Worse yet, small businesses which are the lifeblood of job creation, have not participated in the hiring increase at all.

Small Businesses and Startups Key to Job Creation

For the past 3-4 years I have participated in panel discussions at the Kauffman Foundation regarding creation of small businesses. Every year I stress the same thing, yet Congress inevitably chooses a different path.

A recent Kauffman Foundation reports shows the importance of startups and small businesses in terms of overall job growth. The results may surprise you if you have not yet seen the results.

Please consider Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It.

I propose my solutions for this economic mess in the above link. Please read if you have not yet done so.

Little Improvement in Small Business Sentiment

In light of rampant overcapacity relative to demand, rising health care costs, rising commodity prices with inability to pass those costs on to consumers because of weak demand it should be no wonder small businesses are nit hiring.

Yet, the Fed's Quantitative Easing solution has done nothing but raise commodity prices, putting a further squeeze on small business.

Bernanke's policies are a disaster on small business, but hey look at the bright side: Bernanke is bailing out Wall Street and the banks, on the backs of the average Joe. Wall Street bonuses will rise again.

Sadly, that is the only "bright side" to the policies of this Fed.

For more on the plight of small businesses, please see NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Incredibly Humorous Video of N.J. Governor Chris Christie and the President of the Teachers Union regarding "Death Prayers"

Posted: 22 Nov 2010 09:25 AM PST

Governor Chris Christie continues to impress. Please check out this video in which he discusses death wishes by the head of the Bergen County Education Association.

The president of the Teachers Union offered an official apology and Christie invited her to his office to deliver that apology in person.

The video is funny from the start, but gets progressively funnier when Christie describes the meeting with the president of the Teachers' Union in his office. Play it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Geithner Politicizes the Fed, Warns Congress to Not do the Same; Idiocies and Ironies; Economist James Galbraith Unfit to Teach

Posted: 22 Nov 2010 01:55 AM PST

The hypocrisy of treasury secretary Tim Geithner would be stunning except for the fact hypocrisy from Geithner is pretty much an every day occurrence.

Geithner is blasting Congress for politicizing the Fed, while doing the same thing himself. To top it off, the Fed itself is politicizing the Fed by interfering and commenting on Fiscal policy while bitching about Congress commenting on monetary policy.

Please consider Geithner Warns Republicans Against Politicizing Fed.

U.S. Treasury Secretary Timothy F. Geithner warned Republicans against politicizing the Federal Reserve and said the Obama administration would oppose any effort to strip the central bank of its mandate to pursue full employment.

"It is very important to keep politics out of monetary policy," Geithner said in an interview airing on Bloomberg Television's "Political Capital with Al Hunt" this weekend. "You want to be very careful not to take steps that hurt our credibility."

Fed Chairman Ben S. Bernanke defended the monetary stimulus in a speech in Frankfurt today and in a meeting with U.S. senators earlier this week.

The best way to underpin the dollar and support the global recovery "is through policies that lead to a resumption of robust growth in a context of price stability in the United States," Bernanke said in his speech.

The asset purchases will be used in a way that's "measured and responsive to economic conditions," Bernanke said. Fed officials are "unwaveringly committed to price stability" and don't seek inflation higher than the level of "2 percent or a bit less" that most policy makers see as consistent with the Fed's legislative mandate, he said.

Bernanke Comments on Fiscal Policy

Flashback, October 4, 2010: MarketWatch reports Bernanke calls for tougher budget rules

In a speech delivered at the annual meeting of the Rhode Island Public Expenditure Council and devoid of comments on monetary policy, Bernanke said that fiscal rules might be a way to impose discipline, particularly if those rules are transparent, ambitious, focused on what the legislature can control directly, and are embraced by the public.

"A fiscal rule does not guarantee improved budget outcomes; after all, any rule imposed by a legislature can be revoked or circumvented by the same legislature," Bernanke said, according to a copy of prepared remarks made available in Washington.

The current pay-as-you-go rule "at its best" prevents new tax cuts and mandatory spending increases from making budget deficits worse but doesn't force Congress to reduce the deficits that are already built into current law.

Bernanke said current spending plans are "unsustainable" and pointed out the ratio of federal debt-to-national income has climbed to a level not seen since the aftermath of World War II.

Though the budget deficit should narrow over the next few years so long as the economy and financial markets continue to recover, it will swell over the medium and long term if current policy settings are maintained.

"Expectations of large and increasing deficits in the future could inhibit current household and business spending -- for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending -- and thus restrain the recovery," Bernanke said.

Hypocrisy In Action

1. It's OK for Bernanke to comment on Fiscal Policy
2. It is not OK for Congress to comment on Monetary Policy

My Position

The Fed should welcome discussion of monetary policy and Congress should welcome discussion of fiscal policy.

I happen to believe it is high time EVERYONE question the beliefs of Ben Bernanke AND the fiscal irresponsibility of Congress as well.

It is appropriate for everyone to be concerned. We need more debate, not less. Then we need action to do something about the deficit.

Bernanke Defends Position

Please consider this snip from Bernanke Defends Fed as Republican Criticism Rises

James Galbraith, an economist at the University of Texas at Austin, said the ultimate loser of a single-mandate Fed would be Congress, which would no longer be able to engage the central bank on such critical issues as growth and jobs.

"To say that you should focus on inflation and not unemployment is a little strange," said Galbraith, who helped write the Humphrey-Hawkins Full Employment Act of 1978, which enshrined the Fed's dual mandate to seek stable prices and full employment. "This is a warning shot by a couple of senators who know very well that they are not going to get a bill entertained."

Idiocies and Ironies

The irony is the Fed and Geithner are already bitching about Congress commenting on Fed policy yet James Galbraith says a under a "single-mandate Fed Congress would no longer be able to engage the central bank on such critical issues as growth and jobs."

The Fed clearly does not want to be engaged right now.

Fed's Dual Mandate Is Mission Impossible

The primary reason Galbraith is wrong is that dual mandates are sheer madness.

Here's the deal.

1. The Fed can control money supply but it will have no control over interest rates (or anything else).

2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).

That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.

Sure, the Fed can increase money supply but all those who thought it would necessarily cause prices to rise sure got it wrong.

The simple truth of the matter is the Fed can print money, but it cannot control where it goes, or even if it goes anywhere at all. Indeed the Fed can encourage but not force banks to lend, and encourage but not force consumers to borrow.

The Fed certainly cannot control jobs and in fact in a global economy it can at best, struggle to influence consumer prices.

That last statement should be obvious given Bernanke's inability to affect the CPI like he wants. Yet Galbraith not only want the Fed to promote price stability, he also wants the Fed to promote full employment (whatever the hell that means).

That Galbraith is still proud of the misguided legislation he helped write confirms he is unfit to teach.

Inflation Targeting at 2% a Year

Of course the idea that "stability" means prices rising at 2% annually is stupidity in and of itself. Does this look stable to you?

click on chart for sharper image

Bear in mind Bernanke does not consider asset bubbles, housing prices, taxes, food, or energy in his measure of "stable" prices.

Is it any wonder we have had nothing but serial bubbles from the Fed?

Kill Dual-Mandate Idiocy

I encourage Congress to kill dual-mandate idiocy.

Heck, I encourage Congress to abolish the Fed altogether. The Fed clearly cannot even get price stability right, let alone full employment AND price stability. All the Fed has done is blow serial bubble after bubble with the help and encouragement of those like James Galbraith.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Monday, November 22, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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