Mish's Global Economic Trend Analysis

European ERM 1992 Replay: Same Problems, Same Issues, Same Countries, Only the Politicians Differ; Irony of the Maastricht Treaty
Will Cameron Sell UK Down the River for Worthless Promises? German Finance Minister Says UK will Join the Euro, Financial Transaction Tax Needed; Two-Speed Europe and the Clutches of France
House Won't Sell? No Problem, Simply Raise the Price by 78%; It's Different in Bizarro World
China's Vice Premier Sees "Chronic Global Recession"; Why this Astonishing Admission?

European ERM 1992 Replay: Same Problems, Same Issues, Same Countries, Only the Politicians Differ; Irony of the Maastricht Treaty

Posted: 20 Nov 2011 08:50 PM PST

Tonight I received a thoughtful email from reader Rick Cameron who made some observations and notes way back in 1992 and recently went back to review those notes.

His notes are regarding the European ERM, the Exchange Rate Mechanism, that was supposed to reduce exchange rate variability and achieve monetary stability in Europe.

Before I list the thoughts of Cameron, here is some background information on the ERM and the countries involves:

The UK entered the ERM in 1990 but in 1992 Britain exited the ERM after the pound sterling came under pressure from George Soros, dubbing Soros as "the man who broke the Bank of England".

In 1993 the currency band had to be expanded 15% to accommodate speculation against the French franc and other currencies.

Wikepedia notes the ERM came to be known as an "Eternal Recession Mechanism" after Britain fell into recession during the early 1990s.

European ERM 1992 Replay

With that backdrop, please consider this Email from Cameron.

Hello Mish

I am a student of history, and I was an active investor in 1992. I have recently gone back and looked at my notes and the charts and the media comments about the UK and the European Exchange Rate Mechanism.

The parallels between the UK in 1992 and Germany in 2011 are striking.

Under the ERM, the (financially) stronger countries would be responsible for the weaker ones. Then the Berlin wall fell, the Eastern European countries tanked, and the UK was on the hook to support them.

There was lots of pressure on John Majors not to continue that policy and to leave the ERM. Political dithering followed, complete with bold speeches by both Brits and the Europeans about unity. The Brits held their ground in the face of enormous pressure on the pound, culminating with a $28B currency buyback in mid-September.

Students of history know what happened next: The Brits finally threw in the towel, left the ERM, and the pound tanked from $1.95 to 1.70 from September 19th to September 26th, then to $1.50 by November. George Soros made $2 billion.

Every article I read today about the ECB, the Germans, and the euro, resembles closely some similar article I have about the Bank of England, the British government, the ERM, and the eventual fall of the pound.

To me, it seems like an inevitable march down the same road - same players, same dithering, same posturing, same lack of attention to any of the real problems, same case of refusing to deal with any of the real issues - and sadly, the issues in 1992 were EXACTLY THE SAME as they are today.

Are the financially strong Northern European countries going to support the weaker Eastern and Southern European countries? Everyone in Europe loves the idea - until they have to write checks with their own money. Then it all come unglued, every time.

Finally, we need to not forget that the guy who stubbornly held onto the concept of the Brits supporting the ERM, no matter the cost and pain to the British taxpayers was none other than John Majors, who at the time was working on the Maastricht Treaty.

To quote Peter, Paul, and Mary "when will they ever learn?"

Have a good day

Rick Cameron

Same Issues, Same Players

Yes indeed. We have exactly the same issues and same players. Note that the UK is still on the outside looking in, with the rest of Europe clamoring to get the UK in.

The smart play would be for Cameron to stay on the outside, looking out as noted in Will Cameron Sell UK Down the River for Worthless Promises? Two-Speed Europe and the Clutches of France

Since 1992, there has been an obvious change in political leadership. However, the politicians involved all still seek the same proverbial free lunch.

Irony of the Maastricht Treaty

The irony of the Maastricht Treaty is that it did temporarily bring about the currency stability everyone wanted. However, that currency stability came at the expense of something far worse - inherent interest rate instability (coupled with heightened fiscal instability).

It just took some time to play out.

Now, instead of attempting to defend untenable currency targets, the ECB, the Eurocrats, and the IMF all have their hands full attempting to maintain untenable interest rate targets. With yields soaring in Greece, Spain, Italy, Ireland, Portugal, and Belgium in relation to Germany, the Troika has failed.

To alleviate interest rate concerns and fiscal instability caused by the Maastricht Treaty, politicians now openly discuss breaking up the Eurozone, which of course will immediately kick off a full-blown currency crisis in various countries.

Interest Rates on Government Bonds Go Full Circle

click on chart for sharper image

Chart from Spiegel Online

When the currency crisis happens and the Eurozone breaks up as is inevitable, Europe will have gone full circle on both interest rates and currencies, with politicians chasing their tail every step of the way.

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

Will Cameron Sell UK Down the River for Worthless Promises? German Finance Minister Says UK will Join the Euro, Financial Transaction Tax Needed; Two-Speed Europe and the Clutches of France

Posted: 20 Nov 2011 10:25 AM PST

The UK had been expected to have a voter referendum on proposed EU treaty changes. The EU of course does not want voter referendums or anything that look remotely democratic as we have seen by actions in Greece and Italy.

Deal or No Deal?

The problem for the EU is all 27 nations have to agree to treaty changes or it's no deal. A political work-around is in progress (as always). And Merkel will allegedly give up on the Financial Transaction Tax idea if only Cameron will sign on the bottom line.

Piss Poor Deal

It's a piss poor deal and Cameron should know it. Once the EU gets what they want, Sarkozy and Merkel and others will be back at it, demanding once again the financial transaction tax and God only knows what else.

Secret Plans to Derail Referendum

The Telegraph notes Germany's secret plans to derail a British referendum on the EU

Germany has drawn up secret plans to prevent a British referendum on the overhaul of the European Union amid concerns it could derail the eurozone rescue package, leaked documents obtained by The Daily Telegraph disclose.

Angela Merkel, the German chancellor, is today expected to tell David Cameron that Britain does not need a referendum on EU treaty changes, despite demands from senior Conservatives for more powers to be repatriated to Britain.

The leaked memo, written by the German foreign office, discloses radical plans for an intrusive new European body that will be able to take over the economies of beleaguered eurozone countries.

It discloses that the EU's largest economy is also preparing for other European countries, which are too large to be bailed out, to default on their debts — effectively going bankrupt. It will prompt fears that German plans to deal with the eurozone crisis involve an erosion of national sovereignty that could pave the way for a European "super state" with its own tax and spending plans set in Brussels.

Britain would be relegated to a new outer group of EU members who are not in the single currency. Mr Cameron will today travel to Brussels and Berlin for tense negotiations with Mrs Merkel amid growing disagreement between the leaders over how to deal with the eurozone.

The six-page German foreign ministry paper sets out plans for the creation of a European Monetary Fund with a transfer of sovereignty away from member states.

The fund will have the power to take ailing countries into receivership and run their economies. Even more controversially, the document, entitled The future of the EU: required integration policy improvements for the creation of a Stability Union, declares that the treaty changes are a first stage "in which the EU will develop into a political union". "The debate on the way towards a political union must begin as soon as the course toward stability union is charted," it concludes.

The negotiating document also explicitly examines ways to limit treaty changes to speed up the reforms. It indicates that Mrs Merkel will tell Mr Cameron to rule out a popular EU vote in Britain.

"Limiting the effect of the treaty changes to the eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK)," read the paper.

Open Europe, a think tank, last night called for Mr Cameron to demand something in return from Mrs Merkel for her "far-reaching plan", which requires the unanimous consent of all 27 EU countries, giving Britain a veto.

"It would be the first step towards a vision of 'political union' that would have major consequences for the future of the entire EU, and therefore the UK's place within it," said Stephen Booth, the think tank's research director.

"Merkel is daring Cameron to call her bluff, but if the UK is serious about taking a leadership role in shaping the EU, Cameron will have to take a stand sooner rather than later."

Bill Cash, chairman of the Commons European scrutiny committee, accused the Coalition of standing by in "no–man's land" while Germany shaped the EU to suit its own interests.

"We are going to get nothing significant in return for agreeing to this," he said.

Mr Cameron is today also expected to pressurise Mrs Merkel into lifting German opposition to the use of the European Central Bank to rescue the euro.

Two-Speed Europe and the Clutches of France

The Guardian reports Cameron warned his eurozone stance risks forcing two-speed Europe

David Cameron will be warned that he risks creating an unstoppable momentum behind a "two-speed Europe", which would be dominated by France and Germany, if Britain demands too many concessions during the eurozone crisis.

In a series of meetings in Berlin and Brussels, the prime minister will be advised that Britain should table modest proposals next year when EU leaders embark on a small treaty revision to underpin the euro.

A six-page German foreign ministry paper, published by Der Spiegel this week, calls for "a ('small') convention that is precisely limited in terms of content" to present proposals "rapidly". These would then be agreed by all 27 members of the EU.

Merkel warned the prime minister at an emergency European council meeting in Brussels on 23 October that she would reluctantly have to side with France if Britain overplayed its hand in the negotiations. Nicolas Sarkozy, the French president, wants a treaty to be agreed among the 17 members of the eurozone, excluding Britain and the other nine EU members outside the single currency.

This would be seen as a major step towards the formalisation of a "two-speed Europe" in which France, Germany and the four other triple A-rated eurozone members would form an inner core. Britain and Denmark, the only two members of the EU with a legal opt-out from the euro, would form the backbone of an outer core.

One Brussels diplomat said: "There is a choice the UK has to make. Does it push Germany into the clutches of France or does it try to find an accommodation with the Germans by not going too far in its demands on repatriating powers? The Germans want to find an accommodation with the British but they must not go too far."

Got that? Cameron is supposed to accept a bad deal from Merkel, or Germany will make an even worse deal with France.

German Finance Minister Says UK will Join the Euro

Talk like this should scare the hell out of the UK citizens: Britain will have to join the euro, says Tory grandee Lord Heseltine

Britain will soon have no choice but to join the euro, Tory grandee Lord Heseltine has claimed, as tensions grow over the eurozone's slow-moving efforts to get a grip on the spreading debt crisis.

The former deputy prime minister, a long-time supporter of the single currency, said the public had "no idea" about the potential impact its collapse would have on the UK.

But he believes Franco-German determination will secure the euro's future and pave the way for Britain to sign up.

Both the Coalition and the Labour Party have ruled out adopting the euro in the foreseeable future.

Last month Prime Minister David Cameron suffered the biggest ever Conservative revolt over Europe as more than 80 Conservative MPs defied his orders and backed a referendum on Britain's membership of the European Union.

German Finance Minister Says UK will Join Euro

Please consider Britain 'will join euro before long', says German finance minister

Wolfgang Schäuble said that, despite the current crisis in the eurozone, the euro will ultimately emerge as the common currency of the entire European Union. He said he "respects" Britain's decision to keep the pound, but insisted that the survival and eventual stabilisation of the euro will convince non-members to join the currency club. "This may happen more quickly than some people in the British Isles currently believe," he added.

Mr Schäuble also said Germany will stand firm on its call for a financial transaction tax that Britain believes would badly harm the City of London.

Sir John Major, the former prime minister, warned last night that the growing integration of the eurozone nations threatens democracy in those countries. He told Al Jazeera television that richer euro members led by Germany and France will "insist on moving towards what we call fiscal union. By that I mean common control over budgets and fiscal deficits".

Sir John, who advises David Cameron on foreign policy issues, also described the banking transaction tax as "a heat-seeking missile proposed in continental Europe, aimed at the City of London".

Promises on Transaction Tax will not be Kept

The arrogant talk by Schäuble in and of itself should be enough to convince Cameron that the financial transaction tax talk will never go away and that no deal with Merkel can be trusted.

Thus, Cameron should not agree to any treaty changes except those for the explicit purpose of creating exit procedure for countries to leave the Euro.

The Eurozone is about to break up yet Merkel, Schäuble, Sarkozy and others still cling to failed ideas. Pressure on the UK is nothing but last minute sheer desperation by those attempting to bully the UK into accepting the creation of a nanny-zone super state.

The irony is both Cameron and Merkel want something that is blatantly stupid. Cameron wants the ECB to buy bonds on a massive scale, while Merkel wants the financial transaction tax and a nanny-zone super state. All three ideas are horrendous.

Should Cameron get sucked into a lousy deal (which means virtually any deal Merkel will offer), all Cameron would accomplish would be to prolong the agony.

Enough is enough, Cameron should tell Merkel "No Deal", which of course is the polite way of saying "Go to Hell".

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

House Won't Sell? No Problem, Simply Raise the Price by 78%; It's Different in Bizarro World

Posted: 20 Nov 2011 09:10 AM PST

It's different in Vancouver says a reader in response to Vancouver Real Estate Bubble in Pictures; Presenting the $1,050,000 "Livable" House .

"Fortunate Fool" writes ...

Hello Mish

Vancouver is a different world. To truly appreciate it, let me give you an example. In a normal world, if you had bought a house in April 2004 for $6 million, how much would you put it for sale today? Hard to say right? Let say your house value increased with an inflation at 2% per year, that would be roughly $6.9 million. In the current economic situation, you would be happy to get that money back.

In Vancouver, it's different. If you bought at that price in 2004, you would put it back on the market in 2010 for... $17.9 million! A compounded return of 20% a year. But there is a problem, it turns out that you couldn't sell the property. So in that case, what would you do? You would decrease the price, right?

Wrong! Remember, you are in Vancouver, and it's different there. No, you would put the property back on the market for... $31.9 million! (a 78% increase from last year's price or an expected annual compounded rate of return of 27%).

Repeat after me. No, Vancouver is not in a bubble.

Fortunate Fool backs up his claim with this article from the Vancouver Sun: Vancouver mansion for sale: $31.9 million

A house has just gone on the market at 3390 The Crescent in Shaughnessy for $31.9 million. That may sound like a lot of money, but it isn't the highest listing price in Metro Vancouver — a house at 2190 Camelot in West Vancouver is for sale at $39.9 million. And has been, for several months.

High-end homes like this often take a while to sell, because once you get into the tens of millions, there aren't many buyers. In fact, the $31.9-million Shaughnessy home was for sale last year for $17.9 million, but didn't sell.

Property records list the owners as K. Fan Hiu and H.F. Chi, who purchased the home in April 2004 for $6 million. Ted Wang of Royal Pacific Realty said the couple have decided to downsize to an apartment.

Wang said the owners decided to raise the listing price after looking at the high prices mansions are commanding in Shaughnessy. He noted that a house he sold last year on Angus Drive for $5.7 million was recently assessed at $9 million.

It's Different in Bizarro World

The owners upped their price from $17.9 million (offered just last year) to $31.9 million, an increase of 78%, because they want to "downsize to an apartment".

This of course makes perfect sense because "It's different in Bizarro World" just as it is in Vancouver.

Inquiring minds may be interested in the "Complete History of Bizarro World" from Superman to Seinfeld to Saturday Night Live.

We can safely add Vancouver to the list.

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

China's Vice Premier Sees "Chronic Global Recession"; Why this Astonishing Admission?

Posted: 20 Nov 2011 12:11 AM PST

It's not often we hear candid talk from global leaders about the economic realities that lay ahead. This is one of those rare times.

Please consider China vice premier sees chronic global recession

A long-term global recession is certain to happen and China must focus on domestic problems, Chinese Vice Premier Wang Qishan has said.

"The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic," Wang was quoted by the official Xinhua news agency as saying at the weekend.

Wang's comments were the most bearish forecast ever by a top Chinese decision-maker about the world economy, and Beijing's worry about a worsening global environment could translate into an impetus for pro-growth policies at home.

Why this Astonishing Admission?

Regular Mish readers will not find that forecast surprising in the least. What is surprising is the high-ranking official who makes that forecast.

In a world of global economic denial about the Euro, about deficits in the US, about housing bubbles in Australia, China, and Canada, and in general denial about every economic woe the world faces, one might ask "why this astonishing admission?"

I have a 3-part answer

As China shifts from an untenable infrastructure model to a consumption model, as Europe faces a Eurozone breakup and harsh recession, as the US faces a deficit crisis (albeit halfheartedly at best), much global pain is in order.
By framing the problem as a global problem, the vice-premier gets to blame the world economy for the internal strife in China.
This is an indication that China is falling apart right here, right now, much faster than the Western world believes.

The admission by the vice-premier simply reflects the demise of China's export model in the face of a rapidly slowing global economy accompanied by a regime change in China that will be forced to shift its internal priorities.

These thoughts echo comments I have made previously in ...

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

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Mish's Global Economic Trend Analysis

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