9 July 2011

Beyond the Fringe

Yesterday's Tweets
@paulmasonnews Investment bank note (Jefferies): "is Trichet really Keyser Soze?" (I was thinking more like Europe's Andrew Mellon)
@Sysparatem @paulmasonnews Is Trichet actually living in an episode of Fringe in which he has crossed over into a similar but different universe?
@paulmasonnews @Sysparatem sadly we all are

Keyser Soze the mythical-like criminal in the film 'Unusual Suspects'
Mellon, who, as secretary of the US Treasury in the Great Depression, advised Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life.
Fringe is an American TV series that follows a FBI "Fringe Division" using unorthodox 'fringe science' and FBI investigative techniques to investigate a series of unexplained, often ghastly occurrences, which are related to mysteries surrounding a parallel universe.

The Universe of Mr Trichet and Mr Juncker 
Long live the Euro!  The Greek crisis is caused by Greeks.  “Between 1999 and 2010, wages rose by 106.6 percent, even though the economy did not grow in equal measure. The wage policy went completely out of control, while productivity was not taken into consideration,” said Mr Juncker.

(Time Series rant: Would Mr Juncker, on finding fires engines at the scenes of fire, blame fire engines for causing the fires?  A blindness - a case of Very Awful Regressions, where the ECB's insistence on a prior belief that confuses Cointegration with European integration has differenced a population to eat their own (unit) roots to make it so. A plague of RATS, or a Granger for causing the Eurozone to walk with a case of bad posteriors

Every economic ill in the world is blamed on the poor having too high wages. Mr Trichect and Mr. Juncker's fantasy that the global and EC financial crisis is the result of the poorest members of the Eurozone having too high wages is the latest addition to this. 

The Other Universe 

Imagine a place where one person earns 91,000 euros and 9 others earn 1,000 euros. Now try and tell these people that, as their average wage is 10,000 euros, they are earning too much and so they must all accept a cut in their wages. How would you expect them to react?

If the average wage must be reduced to 9,000 euros, then what are the chances that  9 out of 10 people would accept a 'wage cut' to 9,000 euros. The average wage is not what the average person receives. Greek statistics refer to a different universe.

Like most of my neighbours in Greece, the last 10 years has witnessed a decline in living standards.  Incomes, in nominal terms, from property rents and dividends rose four times as fast as wage incomes. Inflation in Greece has always been significantly higher than Germany and other Euro Zone countries. Cartels, monopolies and a weaker buying power for smaller business in wholesale markets have made it so. 

A bottle of Greek olive oil can be found cheaper in a Scottish supermarket. The basket of the typical Greek Mediterranean lifestyle, so desirable in Western European supermarkets, has become expensive for Greeks. Many items have been replaced by cheap German processed substitutes.  Fish is too expensive to buy. The typical family restaurants and cinemas that use to fill the city have long since gone. 

While many richer Greeks have found their purchases fall in price, the middle wage earners, and particular the poor, have faced very high inflation rates. The percentage of income spend on rent and food has dramatically increased. Credit cards were thrown at middle and poor consumers so they could keep up.  Greek society was reaching breaking point prior to the crisis.  Majority of Greek wage earners, particular the young who had even called themselves the 800 (euro) generation by 2008, never really got that far beyond poverty levels.  

There are public sector workers who travel vast distances as doctors or teachers to different parts of Greece as the states directs them.  Some keep their foothold in the system as permanent temporary employees, employed and fired every year.  This desperation for job security is reinforced by the awful unspoken conditions of the private sector.  The incompetent slow legal system means that many rights written in law never see the light of day BUT serves to produces data and statistics that reflect the official not the actual version of the economy. There was a corner not far away where workers would gather every morning to be picked up for work on a daily basis. Those were good times. Immigrants have even less rights.

The increasing Euro trade imbalance, the swapping of melons for imitation corn fakes, has left a large deficit and a credit bubble to support it.  German and French companies dominate the markets. The local EC institution, not far from where I live, pays the staff transported from Berlin high German wages rates and pays it Greek staff very low local rates. Feels like a colonial institution the more times I drive past it. Ironically this particular EC institution's function is supposedly to do with youth re-training and unemployment. There is also Siemens Unit not far away. Siemens was is famously involved in a scandal that allegedly brought both of the main political parties in Greece. Of course both political parties are trying to bury the scandal.  The average Greek has less money to bribe his own government with.

I will keep saying the cause of the Crisis is the design of the Eurozone – not Greece, Ireland, Italy, Portugal, Spain, rating agencies, Anglo Saxons, morals, DNA or even Canadians (blame South Park for this). 

As James K. Galbraith, in today's Deutsche Welle, writes the Euro is a flawed construction:

"Europe's structure is also suspended between two stable formations: the federated nation state and the international alliance. This in-between structure is called a confederacy, and it is something that was tried and which failed in North America on two occasions, most recently in 1865."

(For me, the EC and its struggle against the global markets is like a high speed re-run of the 17th Century French Monarchy's struggle to compete with East Indian Trading Company. One winded up as a revolution (the king over-taxed) and the other (it could re-finance) a precedent for corporate imperialism. )

James K. Galbraith continues to describe the situation as intolerable:

     "Today Greece - under a resolute government and against heavy internal protest - has met the onerous conditions imposed on it. But for what?
For loans that are immediately recycled to the European banks, adding nothing to Greece's prospects except more debt? This will not lower interest rates, restore growth, or bring success to ongoing internal reforms. It is an intolerable situation and it will not continue for long.
     Along one road there lies a future of defaults, panic, dissolution of the eurozone, and hyperinflation in the exiting countries, with a collapse of the export markets for those that remain.
     The final consequence will be large population movements - as happened from the American South. For if Europe insists on reducing its periphery to poverty, it cannot expect those affected to sit still and accept their fate."

One in five young Europeans is out of a job - a waste of Europe's most productive resource.
Source: http://www.economist.com/blogs/freeexchange/2011/07/youth-unemployment?fsrc=scn/tw/te/bl/alostgeneration

Europe is dysfunctional and inefficient when it claims to increase 'competitiveness' by reducing the ability of its youth to compete. Greece is a land of imported milk and exported honey with 42.5 (today's) percent unemployment between the age of 15 to 24, where more substantial issues loom large.

One Ring to rule them all? Who does interest rate serve?

The recent ECB decision to raise interest rates to 1.5% from 1.25% deepens the fault-line. The ECB sets the interest rate set according to its fear of inflation in the Eurozone's biggest economy and does this in complete disregard of the peripheral economies. Countries that have mountains of debt caused by an increasingly unbalanced system are now faced with increases in the cost of borrowing and costs of mortgages. It is particularly bad news for those who are a statistic in the diagram above

Image an economy as a pond and we want more fish per cubic meter. The ECB has solved this problem by draining water out of the pond. Both fish per cubic meter rises and its fear of water is reduced. The fish float to the surface accepting their fate.

This increase in the interest rate tilts the system even further and will probably result in more insulting attacks from Mr. Juncker. I suggest he try the following

So Bravo. The decision by rating agencies to downgrade PIIGs to junk has now been justified by this single brutal act of the ECB to increase the interest rate. We could blame the rating agencies, but better, still, blame Canada.  The potential political impact? The ECB may just have signed its own suicide note

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