Category Archives: Economy and Meltdown

Greece Prints Euros To Stay Afloat, The ECB Approves, The Bundesbank Nods: No One Wants To Get Blamed For Kicking Greece Out

Wolf Richter

A lot of politicians in Germany, but also in other countries, issue zingers about a Greek exit from the Eurozone and the end of their patience. But those with decision-making power play for time. They want someone else to do the job. Suddenly Greece is out of money again. It would default on everything, from bonds held by central banks to internal obligations. On August 20. The day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And somebody would get blamed.

So who the heck had turned off the dang spigot? At first, it was the Troika—the austerity and bailout gang from the ECB, the EU, and the IMF. It was supposed to send Greece €31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, rehire laid-off workers….

The Troika got cold feet. Instead of sending the payment, it promised to send its inspectors. It would drag its feet and write reports. It would take till September—knowing that Greece wouldn’t make it past August 20. Then it let the firebrand politicians stew in their own juices.

It’s easy to blame the Troika, and it can take the heat. History searches for the person who is responsible. But the Troika doesn’t have one. It was designed that way: a combo of multi-layered, undemocratic structures. And the Troika inspectors, though despised in Greece, are career technocrats, not decision makers.

So Chancellor Angela Merkel became a substitute. Greek tabloids treated her like a Nazi heir, with Hitler mustache and all. But she’s not the decision maker in the Troika, though she is a contributor. And she—though still unwilling to water down the bailout memorandum—consistently stated that Greece should remain in the Eurozone. She doesn’t want to be blamed.

In early July, the inspectors returned to Athens to chat with the new coalition government and check on progress in implementing the agreed-upon structural reforms. Soon it seeped out that their report would paint an “awful picture” [read…. Greece Flails About, Merkel Draws A Line, German Industry & Voters Back Her: It’s Almost Over For Greece].

In late July, the inspectors returned to Athens yet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. A big faceless document on which people of different nationalities labored for months; a lot of politicians can hide behind it. Even Merkel. And the Bundestag, which gets to have a say each time the EFSF disburses bailout funds.

Alas, August 20 is the out-of-money date. September is irrelevant. Because someone else turned off the spigot. Um, the ECB. Two weeks ago, it stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed.

But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government.

Precisely what is prohibited under the treaties that govern the ECB and the Eurosystem of central banks. But voila. Out-of-money Greece now prints its own euros! The ECB approved it. The ever so vigilant Bundesbank acquiesced. No one wanted to get blamed for Greece’s default.

If Greece defaults in September, these T-bills in the hands of the Bank of Greece will remain in the Eurosystem, and all remaining Eurozone countries will get to eat the loss. €3.5 billion or more may be printed in this manner. The cost of keeping Greece in the Eurozone a few more weeks. And on Tuesday, Greece “sold” the first batch, €812.5 million of 6-month T-bills with a yield of 4.68%. Hallelujah.

“We don’t have any time to lose,” said Eurogroup President Jean-Claude Juncker. The euro must be saved “by all available means.” And clearly, his strategy is being implemented by hook or crook. Then he gave a stunning interview. At first, he was just jabbering about Greece, whose exit wouldn’t happen “before the end of autumn.” But suddenly the floodgates opened, and deeply chilling existential pessimism not only about the euro but about the future of the continent poured out. Read….. Top Euro Honcho Jean-Claude Juncker: “Europeans are dwarfs”

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Rosenberg On The Pending Trade Shock And Q4's 0% GDP Growth

It would appear that the dilemma of the world exporting more than it imports (that we initially pointed out here) is starting to come to a head in reality with a negative export trade shock. As Gluskin Sheff’s David Rosenberg notes, since the recovery began three years ago, over 70% of the real GDP growth we have seen was concentrated in export volumes and inventory investment; and recent data from the ISM (here and here) points to a dramatic slowdown in both. Compounding this weakness is the fact that the remaining growth was from Capex – which is now likely to slow given the weakening trend in corporate profits – and will more than offset any nascent turnaround in the housing sector – if that is to be believed. The consumer has all but stalled and adding up all these effects and there is a high probability of a 0% GDP growth print as early as Q4.


Macro Risks Squarely To The Downside

I think that there may be a time, before too long, when we will walk into the office to find that the US prints a negative GDP reading on the back of a negative export trade shock that does not appear to be in any forecast – let alone consensus.


Look at the pattern of ISM export orders:

  • April: 59.0
  • May: 53.5
  • June: 47.5
  • July: 46.5

That is called a pattern. And this is a level that coincided with the prior two recession. As the chart below vividly illustrates, there is a significant 81% correlation between annual growth in total US exports and the ISM new orders index (with a four month lag). So either the market has already priced this in or it is going to end up coming as a very big surprise. We are already seeing the lagged effects of the spreading and deepening European recession hit Asian trade-flows: Korean exports sagged 4.1% in July after a 3.7% slide in June and are down 9% on a YoY basis. Industrial production there edged lower by 0.4% as well last month – I like to look at Korea since it is a real global ‘play’ on the economic cycle.


There is likely going to be another surprise, which is inventory destocking. How do I know that? Because the share of ISM industries polled in July reported that customer inventories were excessively high soared to 33% in July from 11% a year ago (because this metric is not seasonally adjusted it can only be assessed year-on-year), the highest ever for any July in the historical database.


Add to that what is happening to order books – the share of the manufacturers reporting expanded orders sank to 17% in July from 50% a year ago and again – the worst July showing on record.


The food price situation is another major wild card, especially since whatever relief we enjoyed from lower gasoline prices is now behind us. At a 14% share of the consumer spending pie, only shelter is more important than food. And when you go back to the last food cost surge, in the first quarter of 2011 when the grocery bill soared at a punishing 10% annual rate, real GDP growth slowed to a 0.0% annual rate that quarter, which arguably was the big surprise of the year (up until the dent downgrade, that is).


In the final analysis, since the ‘recovery’ began three years ago, over 70% of real GDP growth we have seen was concentrated in these two areas: export volumes and inventory investment. The rest was in capex which is now likely to slow along with the weakening trend in corporate profits, more than offsetting the nascent turnaround in the housing sector. Also keep in mind that the consumer has stalled.

Tally all these effects up and you are looking at the prospects of 0% growth as early as Q4.

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Guest Post: Another Example Of Why Central Planning Is A Bad Idea

Submitted by Simon Black from Sovereign Man

Another Example Of Why Central Planning Is A Bad Idea

I’ve noticed something strange over the past few weeks, maybe you have too. It seems that every ‘contrarian’ website out there has joined together to collectively bash the Olympics and anyone who tunes in to watch.

This seems nuts. Nobody should feel guilty for wanting to see athletes in peak condition push the boundaries of human performance. I certainly don’t feel guilty about it. In fact I came to the UK several days ago specifically to catch some of the Olympics live.

Unfortunately it turned out to be much more difficult than I had expected.

As it turns out, the British government has centrally planned Olympic ticket issuance in a way that’s so remarkably inefficient it would make Karl Marx look like Steve Jobs.

There’s only one way to buy London Olympic tickets– through the ’official’ office that’s controlled by the government. They’ve even solidified their monopoly by making it a CRIMINAL OFFENSE for individuals to resell Olympic tickets.

The concierge at my hotel, an affable Italian named Paulo, explained to me that the police even came around to warn (i.e. threaten) him against helping hotel guests find tickets.

Paulo directed me to the government’s official website so I could buy tickets the legal way. I quickly found out how Byzantine it is– there are all sorts of ridiculous hoops to jump through; if you’re a resident of the UK, you follow one procedure. If you’re a resident of the EU, you follow another. If you’re a resident of other countries, you follow yet another.

Then after creating an online profile and giving them all sorts of personal information, they’ll actually MAIL (i.e. snail mail) the physical tickets to the address you give them in your profile… and only to the address of your legal residency. It doesn’t matter if you’re traveling.

The alternative is that you could spend a couple of hours going to one of the ticket offices, all of which seem to have been strategically chosen for being in the most inconvenient locations possible.

Even if you can get through that maze, they’ve really screwed up their inventory management. Nobody seems to have any idea what tickets are available at any given time. An event may be ‘sold out’ at 10am, then have hundreds of seats available by noon.

The government’s central planning of Olympic ticketing has been a complete failure, perhaps best evidenced by the THOUSANDS of empty seats at many of the events.

  Another example of why central planning is a bad idea...

Annoyed beyond belief, I asked the concierge at my hotel if there were any alternatives. He said, ‘maybe’, told me to write down my phone number, and wait.

Within a few minutes, my phone started ringing off the hook with calls from ticket brokers; since the government made it illegal for these guys to sell tickets, they’ve been pushed into dodgy underground boiler rooms for the past two weeks as if they’re Prohibition-era bootleggers trying to move a shipment of hooch.

Negotiating ticket prices with these guys, I couldn’t believe we were talking about a sporting event… it seemed more like an arms deal. One guy asked me three times if I was a cop, and another refused to give me his phone number when I said I needed to call him back.

Totally crazy. The government has managed to monopolize an entire industry and screw it up with Soviet-level inefficiency… then make it a criminal offense for the private sector to fix it.

 Another example of why central planning is a bad idea...

This is typical of how a government operates. They take a very cavalier attitude because they don’t care about results, they only care about maintaining control. As a result, they run their operations based on the premise that people really have no choice.

With regard to Olympic ticketing, this is mostly true. My choice was either to go through the system legitimately (albeit painfully), deal with some dodgy backroom ticket broker at three times the price, or just watch it on television.

In our regular lives, though, we do have a choice. A single government need not have a monopoly over our lives.

As human beings, we are fundamentally free. We can choose where we live, where our money lives, where we pay taxes (and how much we pay), where to structure our companies, where to hire our employees, which regulations to adhere to, etc.

You can hold your savings in one country, store gold in another, own property in another, have legal tax residency in another, live in another, have a business in another, etc. This is what I call planting multiple flags… essentially using the system against itself.

And it is, by far, one of the most effective ways to take your freedom back and end your home government’s monopoly over your life.

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Guest Post: QE Forever And Ever?

Submitted by Pater Tanebrarum of Acting Man blog,

The Extraordinary Becomes Normal

The lunatics are running the asylum. This is the only conclusion one can come to when considering the nonchalance with which what was once considered an extraordinary policy with a firm ‘exit’ in mind is now propagated as a perfectly normal ‘tool’ to be employed at the drop of a hat.

We refer of course to so-called ‘quantitative easing’ (QE), which really is a euphemism for money printing – even if not necessarily all of the central bank credit created ends up as part of the money supply. In fact, the experience of the Bank of Japan and the Bank of England with ‘QE’ was and is that it simply increases excess reserves and depresses already low interest rates a little further. Such excess reserves may be regarded as the tinder for an inflationary expansion of the money supply, but as long as no new credit is pyramided atop them, they may as well not exist.


However, the Fed has been quite successful in boosting the money supply with the two iterations of ‘QE’ it has implemented thus far, in spite of both private sector lenders and private sector borrowers not prepared to add to the existing debt pile. We believe this is due to two factors: for one thing, the Fed also buys securities from non-banks. This not only increases bank reserves, it also increases deposit money directly. For another thing, commercial banks seem eager to increase their holdings of treasury bonds and are thus helping to finance a government that seems perfectly willing to engage in deficit spending on an astronomical scale. The banks have not only replaced the bonds they sold to the Fed during ‘QE’, they have expanded their holdings of treasury securities at an unprecedented pace.

For a rigorous explanation of the mechanics of ‘QE’, we refer readers to an earlier article on the topic which discusses them in detail: ‘QE Explained‘ (we have written this as a reference article, as we thought at the time that many of the explanations that were forwarded elsewhere were not satisfactory).



Treasury and agency (GSE) securities held by commercial banks. Since agency bonds are these days issued by state-owned entities under ‘conservatorship’ they are effectively liabilities of the US treasury – perhaps not de iure, but de facto. Big expansions of bank holdings of treasuries usually tend to go hand in hand with recessionary periods and heavy deficit spending by the government – click chart for better resolution.



By contrast, the commercial banks have cut back on their holdings of ‘other securities’ since the 2008 ‘GFC’. The last time this happened was after the property bust of the late 1980’s and the S&L crisis that followed in its wake – click chart for better resolution.



We have little doubt that if the Fed were to start ‘QE3’, it would once again succeed in boosting the rate of money supply growth. We also have little doubt that ‘QE’ will be tried again, even if the timing remains uncertain. One reason to expect more of the same is that in recent months, a slowdown in US true money supply growth has taken place. Not as rapid a slowdown as we thought we would see when ‘QE2’ ended, but that can probably be ascribed to dollars fleeing the euro area. A recent example is provided by Royal Dutch Shell’s decision to remove its money from euro area banks and deposit it with US banks instead.

To put numbers on this, over the past quarter growth in ‘narrow’ money TMS-1 has slowed to 5.9% annualized and growth in the ‘broad’ money measure TMS-2 has slowed to 6.6% annualized. This may strike many people as plenty of inflation, but consider that the year-on-year growth of these two money supply measures stood at 11.9% and 13.4% respectively as of June 30 (even the year-on-year growth rates, although still hefty, represent a marked slowdown from the peak).

An economy that has become addicted to constant injections of new money is likely to falter very quickly once the money supply growth rate slows down. Although it is not knowable in advance what rate of money supply expansion is the new threshold for upsetting the economic apple-cart, it is probably higher than it used to be during the credit expansion of the pre-GFC boom period.

At the time, the year-on-year growth of TMS-2 slowed to low single digits (slightly above 2%) before an economic crisis struck – see the chart below.

What this chart also shows is that ‘QE2’ was preceded by a quick slowdown in money supply growth after the conclusion of ‘QE1’. At the time, the ECRI WLI fell to territory that indicated an imminent relapse into recession was likely. The Fed quickly resumed its printing duties.



The year-on-year growth rates of TMS-1, TMS-2 and M2, via Michael Pollaro – a slowdown is underway ever since the Fed’s ‘QE2’ program ended, but has been mitigated by money fleeing the euro area – click chart for better resolution.



Fed credit outstanding and the 12 month change in Fed credit – as can be seen, the Fed is no longer actively inflating – click chart for better resolution.



‘Open-Ended QE’

On Tuesday, Boston Fed president Eric Rosengren, a noted ‘dove’, made waves by arguing in favor of an open-ended asset purchase program by the Fed, a kind of QE of undetermined size and without an expiration date, only limited by the attainment of certain macro-economic goals. This method is to be preferred to a ‘fixed limit’ QE operation according to Rosengren, as it would end the ‘market’s fixation with when the program will end’.

Rosengren has no vote at the FOMC this year, but he is still regarded as an influential member (he is slated to rotate into a voting slot next year). In fact, all the ‘doves’ should be considered influential considering who helms the Fed’s governing board in Washington, namely Ben Bernanke and Janet Yellen (we have briefly discussed Mrs. Yellen’s views yesterday).

Rosengren also argued that the Fed should not shy away from more easing just because it is an election year – a sign that the political implications of Fed action this year have been a topic of discussion at the central bank. His remark on that particular point is not without irony as can be seen below:

As reported by Bloomberg:


Federal Reserve Bank of Boston President Eric Rosengren said the central bank should pursue an “open-ended” quantitative easing program of “substantial magnitude” to boost growth and hiring amid a global slowdown.

The Fed should set its guidance based on the economic outcomes it seeks and focus on buying more mortgage-backed securities, Rosengren said today in a CNBC interview. Without new stimulus, the jobless rate would rise to 8.4 percent at the end of this year and economic growth wouldn’t exceed its 1.75 percent average in the first half of the year, he said.

“What I would argue for actually is to have it open-ended, that we focus on economic outcomes,” Rosengren said. “It would be setting a quantity that you’re going to continue to buy until you get the economic outcomes that you want.”


“We’ve found that the economy has not grown as fast as we’d hoped and as a result I think it is an appropriate time to take stronger action,” Rosengren said. “A nonpartisan Federal Reserve should not be worried about the political cycle, it should be worried about the business cycle.”


(emphasis added)

This latter remark is ironic because the Fed’s actions are the root cause of the business cycle – its suppression of interest rates after the bursting of the tech mania in 2000 was what set the stage for the housing boom and its aftermath.

What makes it all the more astonishing to hear Rosengren articulate this latest idea of ‘monetary inflation without limit’ is that it is so utterly bare of introspection regarding what has happened up to the current juncture.

It seems to us that it should be glaringly obvious that when the Fed boosted money growth last time around to help battle a recession, it set in motion the very boom that has cost us so dearly. And now the ‘dovish’ faction wants to continue doing it all over again, only on a much bigger scale?

Apart from his sole focus on short term outcomes, an important point that seems not be considered by Rosengren is the question of what should happen if the ‘open-ended’ QE policy were to fail to achieve its stated goals. He seems to assume that it will succeed in lowering unemployment and creating ‘economic growth’ as a matter of course. No other outcome is apparently conceivable. However, the effects of monetary easing on the economy are circumscribed by the state of the pool of real funding.

It goes without saying that money printing cannot create a single molecule of real wealth. If it could, then Zimbabwe wouldn’t be a basket case, but a Utopia of riches. However, money printing does have both short and long term effects. In the short term, it can divert resources into bubble activities – all those economic activities that would not be considered profitable in the absence of monetary pumping. These activities of course create demand for factors of production, including labor, and tend to prettify the ‘economic data’ for a while – just as the housing bubble was widely regarded as an example of smooth ‘non-inflationary’ economic growth until it burst.

As it were,  monetary pumping can not always be expected to produce even such short term improvements in the vaunted ‘data’. If the economy’s pool of real funding is stagnating or shrinking, there will simply be no wealth available that can be diverted into bubble activities. All currently existing economic activity is already funded – and it is important to realize that what funds it is not ‘money’, but real goods. Money is merely the medium of exchange that enables both economic calculation and the smooth functioning of the market.

To describe with a simple example what we mean, consider a very primitive island economy. Say that there are three fishermen who want to build a new boat to improve their productivity and hence increase their wealth. Building the boat takes time, during which they can no longer catch fish. They must therefore have enough food stored to see them through the boat building period – otherwise they will simply begin to starve and never be able to finish the project. If they hire additional helpers and pay them with money, then these helpers will also require food, shelter and so forth during the time it takes to build the boat. Unless someone else produces food in sufficient quantity to sell it to them, or they have a big enough store available, the project will come to grief. In other words, an adequate pool of real funding is a sine qua non if such an investment project is to succeed. It would obviously not help at all if these men increased the size of the money supply. 

It is not different in a modern complex market economy – all economic activities require real funding in the end. The allocation of these inputs will only be rational when money is sound – any interference with the money supply and interest rates by a central planning agency will by necessity falsify prices and paint a false picture of the savings and consumption schedules of consumers and the size of the pool of real savings available for investment purposes.

It will therefore set bubble activities into motion – activities that fail to generate wealth, because they only appear to be profitable. If no wealth can be diverted into such activities because the pool of real funding is exhausted, then all that will happen is that additional money will raise prices, but it won’t be possible to conjure even a short term mirage of an improving economy.

Of course the market economy is highly flexible and new wealth is created all the time, in spite of all the obstacles the economy faces. It is conceivable though that a point in time will come when the Fed pumps and there is no longer an effect that would fit its conception of economic recovery.

We must infer from Rosengren’s idea of implementing open-ended QE until  certain benchmarks in terms of unemployment and ‘growth’ are achieved, that in case they remain elusive, extraordinary rates of money printing would simply continue until the underlying monetary system breaks down.

Perhaps he should be cheered on to shorten the waiting time.



Boston Fed president Eric Rosengren: in favor of money printing without a fixed limit.

(Photo credit: Wendy Maeda)

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And You Thought Q2 Earnings Were Bad?

In a world of slow stagnating growth, foreign exchange variations can have a dramatic impact on top and bottom lines – especially in a market where hedges are flummoxed by government-influenced gap-after-gap and mismatch. As Goldman notes the headwinds of FX into Q2 are acute and have been painful for multi-nationals – with several high-profile companies missing and or adjusting down forecasts due to the rise of the US dollar. In spite of all the focus on Q2 earnings, we remind investors that Q3 and Q4 will also see significant currency headwinds – an impact we (and Goldman) believes is far from priced in for many companies in the market – a total top-line drag of over 5% YoY.

The year-over-year impact of FX rates has become a drag on growth for the typical multinational in 2012

YOY changes assuming current spot rates of 1.23 USD/EUR, 1.56 USD/GBP and JPY/USD 78.60 hold through the rest of the year


Via Goldman Sachs:

  • Our model estimates that FX boosted the top line of a typical multi-national company by nearly 2.5% in 2011, but that the yoy changes should result in close to a 2.6% headwind this year – a total expected yoy drag of more than 5%.
  • We emphasize the continuation of the FX drag as we enter 3Q, where we model relative 7% yoy deterioration due to FX, based on current spot rates.
  • During the on-going 2Q reporting season several multi-national companies have cited FX as a considerable headwind.

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