Mish's Global Economic Trend Analysis

Meaningless Greek Deal Supposedly Reached; Deal Won't Hold
Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January
Why Greece Must Exit the Eurozone, How it Will Happen (and Why Portugal and Spain Will Follow); Does the Euro Act Like a Gold Standard?

Meaningless Greek Deal Supposedly Reached; Deal Won't Hold

Posted: 20 Feb 2012 07:15 PM PST

Reuters reports Deal reached on second Greek bailout package

Euro zone finance ministers struck a deal early on Tuesday for a second bailout program for Greece that will involve financing of 130 billion euros and aims to cut Greece's debts to 121 percent of GDP by 2020, EU officials said.

"The financial volume (of the Greek package) is 130 billion euros and debt-to-GDP (will be) 121 percent. Now it's down to work on the statement," one official involved in the negotiations told Reuters.

Another official confirmed that the financing would total 130 billion euros with the aim of reducing Greece's debts from around 160 percent of GDP now to 121 percent by 2020.

Deal Won't Hold

Even if true, the deal won't last. It may not even last a month. In fact, it may be nothing but a setup to convince Greeks to leave their money in banks.

Greek Debt Nightmare Laid Bare

Please consider Greek Debt Nightmare Laid Bare

A "strictly confidential" report on Greece's debt projections prepared for eurozone finance ministers reveals Athens' rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue – set to be agreed on Monday night – runs out.

The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-o

It warned that two of the new bail-out's main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

A "tailored downside scenario" in the report suggests Greek debt could fall far more slowly than hoped, to only 160 per cent of economic output by 2020 – well below the target of 120 per cent set by the International Monetary Fund. Under such a scenario, Greece would need about €245bn in bail-out aid, far more than the €170bn under the "baseline" projections eurozone ministers were using in all-night negotiations in Brussels on Monday.

The report made clear why the fight over the new Greek bail-out has been so intense. A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance to go through with the deal since they received the report.

We are supposed to believe all of that has been magically fixed?

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

Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January

Posted: 20 Feb 2012 11:18 AM PST

Looking for another reason for an artificially low unemployment rate?

Consider disability fraud, people claiming disabilities they do not have such as mental illness. Prior to the great recession 33% of applicants claimed mental illness. The number is 43% now.

There was fraud before, of course. There is even more fraud now.

Please consider Jobless disability claims soar to record $200B as of January

Standing too many months on the unemployment line is driving Americans crazy — literally — and it's costing taxpayers hundreds of billions of dollars.

With their unemployment-insurance checks running out, some of the country's long-term jobless are scrambling to fill the gap by filing claims for mental illness and other disabilities with Social Security — a surge that hobbles taxpayers and making the employment rate look healthier than it should as these people drop out of the job statistics.

As of January, the federal government was mailing out disability checks to more than 10.5 million individuals, including 2 million to spouses and children of disabled workers, at a cost of record $200 billion a year, recent research from JPMorgan Chase shows.

The sputtering economy has fueled those ranks. Around 5.3 percent of the population between the ages of 25 and 64 is currently collecting federal disability payments, a jump from 4.5 percent since the economy slid into a recession.

Mental-illness claims, in particular, are surging.

During the recent economic boom, only 33 percent of applicants were claiming mental illness, but that figure has jumped to 43 percent, says Rutledge, citing preliminary results from his latest research.

His research also shows a growing number of men, particularly older, former white-collar workers, instead of the typical blue-collar ones, are applying.

The big concern about the swelling ranks is that once people get on disability, they're unlikely to give it up and go back to work.

What's the Number?

The above article says there were 10.5 million individuals receiving disability checks. A quick check of Fed data shows there are 27.5 million Civilian Noninstitutional Population - With a Disability, 16 years and over

Unfortunately the data only goes back to mid-2008. I would like to see the pattern before the recession began.

We can see a brief recovery for a year following the end of the recession. However, since mid-2010 the number of people with disabilities has risen by 1.5 million.

All of them dropped out of the labor force and are no longer counted as unemployed.

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.

That is an amazing "achievement" to say the least.

Disability Math

If one million of those disability claims are fraudulent, the civilian labor force would rise to 155,395,000 and the number of unemployed would rise to 13,758,000. The resultant unemployment rate would be reported as 8.9%, not 8.3%.

However, we need to go back further because there were certainly fraudulent claims prior to the recession. For the sake of argument, let's assume 25% of the total is fraudulent.

Unemployment Rate with 25% Fraud

25% of 27.5 million is 6,875,000.
The civilian labor force would rise to 161,270,000 from 154,395,000
The number of unemployed would rise to 19,633,000 from 12,758,000
The resultant unemployment rate would be 19633/161270 = 12.2%

Don't like that number? Let's assume a minimum of 10% fraud.

Unemployment Rate with 10% Fraud

10% of 27.5 million is 2,750,000.
The civilian labor force would rise to 157,145,000 from 154,395,000
The number of unemployed would rise to 15,508,000 from 12,758,000
The resultant unemployment rate would be 15508/157145 = 9.9%

Is there anyone who thinks disability fraud is less than 10%? If not, then the unemployment rate would be at least 9.9% assuming those in fraudulent claims started looking for work.

For more on the incredulous, artificially low unemployment rate posted by the BLS, please see ...

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

Why Greece Must Exit the Eurozone, How it Will Happen (and Why Portugal and Spain Will Follow); Does the Euro Act Like a Gold Standard?

Posted: 19 Feb 2012 11:49 PM PST

Several people have asked me about statements I have made that "Greece is in a hopeless situation until it exits the Eurozone."

Actually Greece is in a horrific condition whether or not it exits the Eurozone as the Troika literally destroyed Greece (perhaps purposely to protect French and German banks), by dragging this mess out the way they have.

A Primer on the Euro Break-Up

To understand why Greece (then Spain and Portugal and perhaps even Italy) must exit the Eurozone, one must first understand the flaws of the European Monetary Union.

In general terms, the question at hand is "what makes good and bad currency unions?" The best answer I have seen written anywhere is also in the same article that explains in depth how sovereign defaults and currency devaluations happen.

Please consider some pertinent snips from A Primer on the Euro Break-Up by Jonathan Tepper of Variant Perception.

THE NEED TO EXIT: A ONE SIZE FITS ALL MONETARY POLICY

Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.

Professor Milton Friedman, The Times, November 19, 1997

Before the euro was created, Robert Mundell wrote about what made an optimal currency area. It is a groundbreaking work that won him a Nobel Prize. He wrote that a currency area is optimal when it has:

1. Mobility of capital and labor – Money and people have to be willing and able to move from one part of the currency area to another.
2. Flexibility of wages and prices – Prices need to be able to move downwards, not just upwards.
3. Similar business cycles – Countries should experience expansions and recessions at the same time (technically this is referred to as "symmetry" of economic shocks).
4. Fiscal transfers to cushion the blows of recession to any region – If one part of the currency area is doing poorly, the central government can step in and transfer money from other regions.

Europe has almost none of these characteristics. Very bluntly, that means it is not a good currency area.

The United States is a good currency union. It has the same coins and money in Alaska as it does in Florida and the same in California as it does in Maine. If you look at economic shocks, the United States absorbs them pretty well. If someone was unemployed in southern California in the early 1990s after the end of the Cold War defense cutbacks, or in Texas in the early 1980s after the oil boom turned to bust, they could pack their bags and go to a state that is growing. That is exactly what happened.

This doesn't happen in Europe. Greeks don't pack up and move to Finland. Greeks don't speak Finnish. And if Americans had stayed in California or Texas, they would have received fiscal transfers from the central government to cushion the blow. There is no central European government that can make fiscal transfers. So the United States works because it has mobility of labor and capital, as well as fiscal shock absorbers.

The fundamental flaw of the euro is that it provides one monetary policy for the entire euro area. This has led towards wildly divergent real effective exchange rates and has produced asset bubbles. ...

Does the Euro Act Like a Gold Standard?

Here are a few more snips that caught my attention.

EURO AS A MODERN DAY GOLD STANDARD: SIMILARITIES AND DIFFERENCES

In truth, the gold standard is already a barbarous relic. All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices, and employment, and are not likely, when the choice is forced on us, deliberately to sacrifice these to outworn dogma... Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age.
John Maynard Keynes, 1932, in "A Retrospective on the Classical Gold Standard, 1821-1931" and in Monetary Reform (1924), p. 172

The modern euro is like a gold standard. Obviously, the euro isn't exchangeable for gold, but it is similar in many important ways. Like the gold standard, the euro forces adjustment in real prices and wages instead of exchange rates. And much like the gold standard, it has a recessionary bias. Under a gold standard, the burden of adjustment is always placed on the weak-currency country, not on the strong countries. All the burden of the coming economic adjustment will fall on the periphery.

Under a classical gold standard, countries that experience downward pressure on the value of their currency are forced to contract their economies, which typically raises unemployment because wages don't fall fast enough to deal with reduced demand. Interestingly, the gold standard doesn't work the other way. It doesn't impose any adjustment burden on countries seeing upward market pressure on currency values. This one-way adjustment mechanism creates a deflationary bias for countries in a recession.

What modern day implications can one draw from the gold standard-like characteristics of the euro?

Barry Eichengreen, arguably one of the great experts on the gold standard and writer of the tour de force Golden Fetters, argues that sticking to the gold standard was a major factor in preventing governments from fighting the Great Depression. Sticking to the gold standard turned what could have been a minor recession following the crash of 1929 into the Great Depression. Countries that were not on the gold standard in 1929 or that quickly abandoned it escaped the Great Depression with far less drawdown of economic output.

It is odd then that Eichengreen and most economists today encourage peripheral countries to stay inside the euro as a proper policy recommendation when they would have encouraged countries in the 1930s to leave the gold standard.

Barbarous Relic - Not

Anyone quoting Keynes in a positive manner is going to elicit a negative reaction from me.

Gold is hardly a barbarous relic. Nearly all of the problems cited with a gold standard have little to do with gold per se, but everything to do with fractional reserve lending, the rampant expansion of credit, and arrogant central bank planners who think they (and not the markets), know how to set interest rates.

Russia Central Planners vs. Central Banks

By trying to prevent recessions and bail out banks every time they got into trouble, The Greenspan Fed, followed by the Bernanke Fed spawned the biggest housing and credit bubbles in the history of the world.

Can someone, anyone tell me why economists correctly railed against communist Russia central planners, yet openly praise complete fools at the Fed who think they can plan where interest rates ought to be?

Setting interest rates by central planning committee cannot be done, and the results speak for themselves. Indeed, history has proven that central bank malfeasance spawns boom-and-bust cycles of increasing amplitude over time.

It's high time we stop blaming the gold standard for problems and instead lay the blame where it squarely belongs, on fractional reserve lending, central banks, and government interference in the free markets.

Currency Controls, Bank Holidays, and PIIGS to the Slaughter

The above section constitutes my main complaint in an otherwise brilliant article, packed full of historical examples as to how sovereign defaults occur.

It's 53 pages long and well worth a read in entirety.

Ideal Breakup

The ideally, Greece, Portugal, Ireland, and Spain should all drop out of the Eurozone at once, but it's far more likely this will drag out over time. If so, Portugal is on deck, followed by Spain.

In spite of recent praise of Portugal by German Finance Minister Wolfgang Schäuble, it would be foolish for anyone to trust what he or chancellor Merkel says. Like Greece, the situation in Portugal and Spain is hopeless, just not far enough progressed yet.

Fate was sealed on February 7, with Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote.

Note carefully how the "I"s are being dotted and the "T"s crossed: Germany Draws Up Plans for Greece to Leave Euro; Athens Rehearses the Nightmare of Default; Merkel's Denial Rings Hollow

Look for Greek CDS to Trigger in March possibly with preceding bank holiday ahead of the March 20 bond due date.

The weekend of March 11-12 or 18-19 look like ideal candidates for a bank holiday and Greece exit of the Eurozone.

If you have money in Greek banks, get it out now!

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

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Monday, February 20, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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