Friday, November 25, 2011

Is Europe About to Unravel?

From The Financial Times

Rates in Italy continue to skyrocket. Today, Italy had to pay over 8% to successfully complete an auction of 2 year notes. There is a ton of refinancing due in early 2012. Do not think Italy can afford to pay 7-8% for their money. What could happen? Default, with a lot of Italian, French and Belgian banks suffering unmanageable losses on their holdings of Italian bonds.

The fix was supposed to be the European Central Bank finally stepping in and becoming a visible, credible buyer of last resort for Eurozone sovereign bonds. Analysts thought the ECB and Germany were playing sly, seeking to force out Papandreou in Greece and Berlusconi in Italy. Turns out it was more than that. These two have been replaced by unelected technocrats (Monti in Italy and Papademos in Greece), but neither the ECB nor Germany have budged on the lender of last resort issue.

Yesterday, Merkel, Sarkozy and Monti met, and Merkel reiterated her firm opposition to "printing money" in any form (either by issuing Eurobonds or by supporting existing sovereign debt to ensure yields are held down). She told the world what the "true solution" was: a much higher level of European integration with automatic and severe penalties for any country that cannot keep their economic house in order. Sarkozy, who had initially pressed for much more aggressive ECB action, relented, and supported Merkel. There's an EU meeting coming up in early December. She wants to present a roadmap to heads of state then.

Will the 17 Eurozone countries sign up for such a program, surrendering significant sovereignty in financial areas to a central bureaucracy, assumed to be under German control? I don't think so. And because all of this will require treaty changes, which mean public referendums in some countries (remember that Merkel and Sarkozy went all out to sabotage a proposed referendum recently in Greece), we are talking one to three years to get this done, even if all heads of state wanted to proceed, which I doubt will happen. So far, Merkel has said no Eurobonds, until the Master Plan is agreed to.

Merkel's Master Plan is a disaster. It's all fiscal consolidation and central (German) control, with no sense of understanding that not every country can have the same labor competitiveness as Germany, or that Germany should be thankful for the periphery countries who have been buying much of their exports, instead of beating them into the ground in the name of austerity and good discipline.

It's a bad brew. I don't think Merkel will sell this plan. And I don't think markets will wait much longer.

Markets in December will be interesting.

Totally Cool

Thursday, November 24, 2011

Structures of Oppression Are Falling

I wake up most mornings with a smile on my face, giving thanks. It is often not a specific statement of "Thank you God for..." or "I am thankful for..." It's rather a feeling of quiet joy. Not a big rush. Not exultation. But quiet, subdued.

I have learned not to push my feelings around, or try to overly manage them. But I do ask "Why am I happy today? What is the source of this quiet joy I feel?" My answer will often depend on what I am gazing at. We have a lovely backyard, that is now going through its normal rituals of fall colors, in preparation for winter. There's an oak leaf hydrangea just out the living room window, with its leaves turned wine-colored red for its late fall display. And there's a lovely fruit tree, still all aglow and dressed in yellow. I will notice these, perhaps, and say to myself, "Ah, that's why I am happy. Because I am alive and can see and be together with this lovely tree."

But there is something else, a consistent thread that fills my heart with joy. I think the oppressive structures around the world are falling. Humanity is on the move to greater dignity, fairness and respect. The Arab Spring. The possible breakup of the Eurozone. Occupy Wall Street. The Ohio referendum overturning Governor Kasich's anti-collective bargaining law. The effort just underway in Wisconsin to recall Governor Walker.

The insistence on equity, mutual respect, a level playing field, a chance for a good life - this energy is showing up collectively in different forms and in different places. Many will question my assembling a very disparate group and placing them under one metaphoric umbrella. But look through each area: isn't this about individuals, groups and countries standing up for themselves and insisting on being treated fairly?

This may be hard to see in Europe right now; but the reason the Eurozone will surely fail in its present form is that it represents one group of nations dictating to another. The Eurozone is an oppressive structure and for that reason, among others, it will not endure.

What about Occupy Wall Street? At heart, this is a movement springing out of a deep sense that America's economic and political game has become rigged, that the well to do get the economic breaks, and that our Democracy is no longer democratic. Everyone in the movement knows that true democracy is possible, where all people are respected and all voices are heard. They know an important truth, that if they ever are going to birth this "open space democratic system" into the world, they need to know, in their bones, how it works and what it feels like. That is why they are not so focused on specific demands of the larger system.

The emergence of Occupy gives me faith that our oppressive political and economic structure will be changed, transformed. And I understand that this change may come at great cost, that a good part of our financial system must be brought to its knees, must face destruction before transformation will be possible. This happened in the 1930s'. It has not yet happened with our current crisis. But I think it will. If not all at once, in good part. This is not utopian; it is another step in our country's growth to a more perfect union.

The Arab Spring? An obvious upwelling of the human spirit in many parts of the Middle East, where all this seemed, until recently, unlikely, if not impossible. Listen to me. Give me a voice. I want to be a part of the political conversation. Autocrats and oppressive economic elites cannot design the system to favor only their own interests. Not any more.

Will all of this come to a predictably happy outcome? Surely not. The forces of oppression are hugely powerful, and elites do not give up power or let go of the structures used for control, easily. What has happened that sources the transformation is that everyday folks now know that the dominance of the oppressing elite is not inevitable. It is not written in the stars. It is not destiny, or because God wills it. The situation can be changed. The oppressive structure can be overturned.

Will we get some Islamist states out of the Arab Spring? Will countries that leave the Euro face huge economic problems? Will there be some violence and dereliction in the Occupy movement? Yes to all these questions.

And Spirit is moving. And that gives me joy.

"What I Do Is Me, For That I Came."

From Naked


Gerard Manley Hopkins

As kingfishers catch fire, dragonflies dráw fláme;
As tumbled over rim in roundy wells
Stones ring; like each tucked string tells, each hung bell's
Bow swung finds tongue to fling out broad its name;
Each mortal thing does one thing and the same:
Deals out that being indoors each one dwells;
Selves - goes itself; myself it speak and spells,
Crying Whát I do is me: for that I came.

Í say móre: the just man justices;
Kéeps grace: thát keeps all his goings graces;
Acts in God's eye what in God's eye he is -
Chríst - for Christ plays in ten thousand places,
Lovely in limbs, and lovely in eyes not his
To the Father through the features of men's faces.

Wednesday, November 23, 2011

The European Morality Tale

We are told repeatedly that the problem in Europe is that the Mediterranean South (Greece, Italy, Ireland, Portugal and Spain) have been undisciplined, lazy profligates. When the liquidity cum solvency problems blew out into the open, first in Greece, then in Ireland and Portugal, there seemed to be a clear morality tale: Europe's South needs to cut out all the fat, dramatically reduce the size of government, and enter a period of fiscal austerity in order to "get their houses in order".

It turns out this interpretation, which has driven all Troika (ECB, IMF, and EU) and German/French policy input is badly flawed. It is correct for Greece. It is incorrect for the other four. Take a look at these charts, looking at three variables in three different charts: Net Government Lending (i.e., Deficits), total government debt as a percent of GDP, and the current account balance:

You can see that Spain and Ireland had lower debt levels than Germany; Portugal was essentially the same as Germany; and only Italy was significantly higher, starting in 1999 when the Euro began, at 110% and coming down in 2007 (just before the Crash) to just over 100%.

Monday, November 21, 2011

The Misery Index

Jeffrey Sachs, author and liberal pundit, has developed a Misery Index (believe Sachs is following in the footsteps of others). This adds up a country's budget deficit, its unemployment rate, and its current account deficit. He then adds Tax receipts and Government Outlays (as a percent of GDP), suggesting this is a good way to compare countries on some key measures. Take a look:

The chart points up some very interesting stuff:

1. Northern Europe is a whole lot less "miserable" than we are. But so is Japan and Canada.

2. The GIIPS countries are truly "miserable", except for Italy (before their bonds blew up).

3. Looking at these numbers, it's not at all apparent why Italy is the "undisciplined, profligate, Mediterranean" country, whereas France is disciplined and well run: Italy has a lower budget deficit ratio, a better Misery Index, collects almost as much in taxes (% of GDP) and spends considerably less compared to France. And except for the Current Account category, Italy doesn't compare too badly with Germany.

4. Who can possibly say the US is overtaxed? We have the lowest Tax (percentage of GDP) of any country on the list. The only large country close to us is Japan.

5. As for spending, we are also at the bottom of the list. Only Canada, Japan, and Luxembourg spend at our low levels.

What utter hogwash we are fed every day in our economic/political conversations!

Sunday, November 20, 2011

Where is Heaven?

From Andrew Sullivan at The Dish on Daily Beast

Sunday Morning

Complacencies of the peignoir, and late
Coffee and oranges in a sunny chair,
And the green freedom of a cockatoo
Upon a rug mingle to dissipate
The holy hush of ancient sacrifice.
She dreams a little, and she feels the dark
Encroachment of that old catastrophe,
As a calm darkens among water-lights.
The pungent oranges and bright, green wings
Seem things in some procession of the dead,
Winding across wide water, without sound.
The day is like wide water, without sound,
Stilled for the passing of her dreaming feet
Over the seas, to silent Palestine,
Dominion of the blood and sepulchre.


Why should she give her bounty to the dead?
What is divinity if it can come
Only in silent shadows and in dreams?
Shall she not find in comforts of the sun,
In pungent fruit and bright, green wings, or else
In any balm or beauty of the earth,
Things to be cherished like the thought of heaven?
Divinity must live within herself:
Passions of rain, or moods in falling snow;
Grievings in loneliness, or unsubdued
Elations when the forest blooms; gusty
Emotions on wet roads on autumn nights;
All pleasures and all pains, remembering
The bough of summer and the winter branch.
These are the measures destined for her soul.

A Sweet and Motley Crew

Diaster Almost Upon Us?

From a Goldman Sachs report on Zero Hedge

The charts above show serious stress in the Eurozone: Overnight rates are moving up steeply; the ECB is having to be an aggressive buyer, and still sovereign bond yields in Italy and Spain are at dangerous levels; and banks have more money sitting in the ECB than they had there during the 2008-9 crisis.

Here's what The New York Times said on Friday:

"Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral."

Will the ECB step up aggressively? New head Mario Draghi yesterday warned European heads of state not to count on the ECB to bail them out, and that they had to hurry up and put the agreed upon funding facility in place (the European Financial Stability Facility). Nevertheless, when the financial structure begins to shudder, I believe the ECB will step up.

Will it be enough? Short term, perhaps. Longer term, I don't think so, as long as everyone (the ECB, the IMF, the EU, Germany and France) stay on the austerity page. The austerity approach/model is deeply flawed. I believe the fierce insistence on cutting government budgets in order to reduce deficits will not work. Europe, and in particular, those countries being forced into austerity (Greece, Ireland, Portugal, Italy, Spain, and soon, France) will see their budget deficits increase, as withdrawing government spending from the economy lowers GDP, reduces tax revenues, and increases welfare transfer payments (automatic stabilizers).

At some point, like an overworked, overheated engine, something will blow. And then we will have quite a mess, and, I will add, a completely avoidable mess!

And this will not just clobber Europe. It will give us a roundhouse right as well.

Saturday, November 19, 2011

Upward Mobility in America

  Pew Economic Mobility Project has just published another in their series of studies on upward mobility in the US. This is titled Cross-National Research on Intergenerational Transmission of Advantage. It was done in conjunction with The Russell Sage Foundation and the Sutton Trust, and the full results will be published next Spring.

The chart above demonstrates the main finding:

          "In the United States, there is a stronger link between parental education and children's economic, educational and socio-emotional outcomes than in any country investigated." (See top line study results)

Cognitive means IQ and other test scores. Economic means income and labor market position. Educational is grades and final attainment. Physical is health and birth weight. And socio-emotional is mental health and childhood behavior. So what this says is:

Who we are and who we become is directly related to who are parents are in terms of education, and presumably income. If our parents are well off/well educated, the odds are better for us that we will be intelligent, well off, well educated, healthy and happy. And this is more true in the US than any other country studied.

Here's another Pew Study, this time with the Brookings Institute Economic Mobility: Is the American Dream Alive and Well?


Whither Goest Thou?

From Naked Capitalism

Friday, November 18, 2011

Utterly Transcendent

Which Came First?

From Naked Capitalism

More Images from Occupy Wall Street

On Brooklyn Bridge

The "Bat Projector" Showing on the Verizon Building

In Foley Park, before marching to Brooklyn Bridge

Europe on the Brink

Italian 10 Year Bond Prices from Zero Hedge

This chart shows 16 small green ovals showing where the European Central Bank (ECB) intervened in the Italian debt market over the last two weeks, driving bond prices up. There are two larger rectangles showing periods where the ECB was not a buyer, and prices fell off a cliff.

The European issue has come down to this: Will the ECB declare itself to be a committed buyer of European sovereign bonds to ensure yields stay at affordable levels (say 5%), or not. Today, the Central Bank were heavy buyers, focusing on Italian and French debt, and here's what happened ( all charts from Zero Hedge):

The chart shows the trend in yields for the list of bond issues. As you can see, today the ECB drove down Italian and French yields, but left Spain pretty much on its own. If the ECB would commit to this sort of buying at all times, whenever needed, the sovereign bond attacks would end. But will they do it?

Thursday, November 17, 2011

OWS - Today in New York

Foley Square, New York, 5:30pm, Thursday, November 17

In Chicago, it is almost 5pm; so it's 6pm in New York. 10,000 people are in Foley Square in New York as I write this. They are expected to move towards the Brooklyn Bridge sometime this evening, and connect with at least one other group. The police are waiting at the bridge; they are all around the protesters and have been all day. Quite a bit of exceptionally well-documented rough stuff as people were arrested and put in the paddy wagon.

On Fox News last night, Bill O'Reilly declared the movement dead. After all, he told us, it's only made up of the homeless, the drug addicted, and other dysfunctional people. "There were good people to start with," O'Reilly said, "But they've all gone."

Popular support for the Occupy movement has dropped into the high 30s' from the mid 40s'. Obama and other Democrats are being warned of the "Occupy minefields", if they voice support for the movement. America doesn't like troublemakers, who upset the public spaces with no clear agenda, no leadership, no organization. Just another group in the endless list of freeloaders who want something for nothing.

It surprises me some, and disappoints me a lot that Fox and others have no real listening for what is going on. Worse...they have no curiosity about it. Why does the prejudgement always seem to come first? How can they possibly understand if this is something important, or just passing spite, if they don't engage the protesters honestly? Why don't they seem to care? The simple answer is that they are threatened; but I am not so sure. I simply do not think they can see or hear or understand anyone who has deep questions about America, her economic system and her distribution of wealth and power.

Winter will not end this. Folks may not sleep outdoors all winter in every city, or they might. Neither outcome would surprise me. Neither outcome is determinative of the movement's power. People listening deeply to each other about what would be a more just and more beautiful America...people who have experienced the utter magic of shared dreaming about things that matter deeply...these people are awakening, and they are waking up with others, together, in shared and beloved community.

Have you ever felt that energy, that life force, that sheer beauty and magnificence? If you have, then you know this is the fire that once lighted, cannot be put out. Understand...I make no political prediction. But I state as fact that everyone who has seriously engaged in the Occupy conversation, to the point where they have experienced some sense of "Aha", or some rush of joy, or some brief glimpse of the transcendent, knows they will never be the same again.

And dreams are much more powerful when they build from the bottom up.

I am reminded of Jesus and the Samaritan woman at the well, a story told only in John. Jesus tells her that the water he will give her will cause her never to thirst again, that it will be like a "spring inside, welling up to eternal life" (by which I understand, opening up inside the individual to kingdom consciousness). Once this water has been recognized, nothing can ever be the same.

That's what I believe is happening. Perhaps not for everyone. And yes, there are bad eggs and a violent fringe. And why wouldn't the homeless wander into camp for free meals? But for those who drink deeply of this special water, nothing will ever be exactly the same as it was.


the raid on zuccotti park from Casey Neistat on Vimeo.

The Face of God

From Yves Smith at Naked Capitalism

"The enormous, invulnerable beauty of things is
the face of God.
To live gladly in its presence,
To die without grief or fear,
Knowing it survives us."

Robinson Jeffers, "Not Man Apart"

Tuesday, November 15, 2011

Eviction and Return: Zuccotti Park

From The Huffington Post

Mayor Bloomberg, without warning or advance notice, sent in the police at 1 am last night and evicted the protesters from Zuccotti Park. Riot gear. Lots of baton work, pepper spray and mace. Up to 200 arrests. Journalists were barred from the scene, and those that tried to enter the Park were also arrested.

In the early morning, the Occupy Wall Street group got a TRO telling New York to let the protesters back into the park, with their gear and their tents. At 5pm, the ruling was overturned: no encampment will be allowed. OWS lawyers say they will appeal.

Meanwhile protesters have been let back into the Park without their tents or bicycle generators. I spent some time watching a live feed from the Park. The protesters seem exuberant. One comment from a young woman: "We have been beaten, maced, pepper sprayed and arrested. And we are jubilant. We are more together than ever."

Do you really think the snow will stop this movement?

Europe on the Edge

Tyler Durden at Zero Hedge blog thinks Europe is on the edge. The above chart is from Friday. Today yields pushed up further: Italy stayed above the dreaded 7% yield line and Spain flirted with it. Belgium and even France are seeing their spreads over German bunds opening up in potentially alarming ways.

Meanwhile the European Central Bank continues to make noises that they will not be the lender of last resort, following their fierce instructions from Germany. They come into the market and quiet things down for a bit; but they will not declare a yield target that they will defend, nor a specific bond purchase target (like the Fed did with Quantitative Easing).

If the ECB remains equivocal, we will have a European credit crisis, which will spread to the US. Our equities today seemed mostly unperturbed, ticking up slightly. Do investors really think we are decoupled from Europe?

I still think the ECB will eventually decide to be a committed buyer. But we may take some hits before this happens. And they might decide to stay out, in which case a mess is certain, in my books.

Immigrants and Assimilation

Yesterday's Wall Street Journal carried a very encouraging report on how our immigrant population is doing in terms of "fitting in", or assimilation: "Immigrants are Still Fitting In" by Miriam Jordan.

Jordan ( and the chart above) are previewing  a new report by University of Southern California demographers Dowell Myers and John Pitkin. Key findings:

          * the US scores well above European countries on an assimilation success index, but below Portugal and Canada (who have smaller numbers and lower ratios of immigrant population)
          * progress happens over time with education, home ownership, English language capacity, and naturalization
          * 80% of all immigrants, including 70+% of Hispanics (including illegals) are living out of poverty

We are a country of immigrants - currently 40 million immigrants live in the US, having arrived in the 1990s', including those entering illegally. This is an enormous source of strength and new vitality for America. Our ability to attract newcomers and the country's remarkable capacity to effect their assimilation over time into our mainstream, is an enormous and unparalleled strength we possess for the long future.

Yes we need to be a country of laws and stop/greatly reduce illegal immigration. But we must never forget that we are all immigrants; and that to this day, the "new blood" transfuses our spirit and gives us new life.

Monday, November 14, 2011

Touching Diplomacy

U.S. Secretary of State Hillary Clinton hongis with Maori elder Lewis Moeau during the Maori welcome (Powhiri) on her arrival at Parliament in Wellington, New Zealand / Reuters

Bet you didn't know we have just uncomplicated a 25 year spat with New Zealand. Hillary gets the credit. I just love the above picture! We have been blessed by an extraordinary, tireless and gifted Secretary of State.

Read the article on the greatest diplomatic spat you've never heard of here.

Sunday, November 13, 2011

Dawn of a New Era?

From this mornings New York Times in the Sunday Review, a very powerful op-ed by Jeffrey Sachs. Here's the lead:

"OCCUPY WALL STREET and its allied movements around the country are more than a walk in the park. They are most likely the start of a new era in America. Historians have noted that American politics moves in long swings. We are at the end of the 30-year Reagan era, a period that has culminated in soaring income for the top 1 percent and crushing unemployment or income stagnation for much of the rest. The overarching challenge of the coming years is to restore prosperity and power for the 99 percent."

Could this be possible? It is way too early to say for sure, but I think so. Think about it. Try to move back from your first reaction, and the frustration many feel because the protests seem so amorphous, and without apparent direction. If you can, take in and hold the question in the soft part of your mind, where things move gently and are not seen to be so black and white.

If there were to be a Dawn of a New Era, what might it look like? Why not a great many groups, meeting in small numbers, some in communities, sitting down together to talk about and experience what might be possible if the 1% didn't rig the show, if each and every person were truly valued, if politics were seen and believed to be supporting the 99%, not to exclude the 1%, but where the playing field is truly level?

It could look a lot like Occupy Wall Street.

Think about it.

Saturday, November 12, 2011

Whither Europe?

It's possible that we will have somewhat of a lull in the Euromess. Greece has sworn in a new Prime Minister, Lucas Papademos, a technocrat dedicated to implementing Greece's deal with the Troika (IMF, ECB and EU). Silvio Berlusconi has just now resigned in Italy, after the Parliament's passage of austerity reform measures, in favor of Mario Monti, a non-partisan economist and former European Commission member. Markets perked up Friday, and Italian 10 year bonds fell just under 6.5%, down almost a full point from the day before.

But the big news is that, with the deal in Italy, the ECB is buying again, and intends to continue buying heavily, as needed to bring the Italian BTP yields under 6%. With pressure off Italy, Spanish yields should lighten as well, though Spain has not been under as much market attack as Italy. Presumably, Greece will get their next tranche as well, in time to pay their mid-December bond bills.

It appears the ECB has successfully played a very edgy game, waiting until Berlusconi had agreed to resign and the austerity deal had been approved, before moving into the market. Effective blackmail, I guess. But dangerous, and not a great way to treat your partners.

As long as the ECB is ready and willing to buy sovereign debt in quantities large enough to keep yields manageable, the liquidity crisis goes on hold. The ECB has said repeatedly that it would not serve as lender of last resort; and Germany has been adamant that it not do so. But as the Italian bond yields ran away last week, they decided they had no choice other than to buy, and buy big. But they will not admit that this is what they are doing and will do. They will not give the market a clear statement that they will protect Italian and Spanish yields. But they will do it. The seasoned observers always said they would.

Does this end it? No - I don't think so.

Thursday, November 10, 2011

Time for a Scapegoat?

Not a real cover, though the current issue of Economist has a similar one. Scapegoats always seem necessary when things start to fall apart; but Berlusconi is part cause (along with many others) and part symptom or emblem of the deeper problems.

So how bad is it? Are we over the edge, teetering just on the edge, or lumbering towards it? And if the last, can the train's momentum be stopped?

My take: we are lumbering towards the edge and our momentum might be stopped, but probably won't be. A full-out commitment from the European Central Bank (ECB) to act as the lender of last resort for all Eurozone sovereigns would settle the bond markets. The ECB could announce that it will target a 5% rate on Italian 10 year debt, and within a few days, that is where the rate will settle.

The ECB (like the US Fed, or the Bank of England) is the issuer of its own fiat currency. It can issue as much as it likes, in bills or in bonds. Anyone committed to doing business (and paying taxes) in Euros will accept this currency, and there is no limit to how much of this currency the ECB can print. The Germans know this, but they also know that this currency issuing/money printing can lead to hyperinflation, as happened to the Weimar Republic, and they fiercely oppose the ECB doing this. As a result, the ECB probably will not step up and claim a role as lender of last resort.

If not, then what? Most likely a partial breakup of the Eurozone, with Greece, Italy, Ireland, Portugal and possibly Spain leaving. The mess will be huge. Any number of banks will go under, which will spread the contagion across to the US. How fast? 3-6 months.

Not a pretty picture.

Somebody Needs To Listen

Monday, November 7, 2011

Crafting a Progressive Message

The following are questions and responses taken from a recent Democracy Corps poll (hat tip The Democratic Strategist):

"The big banks got bailed out but the middle class got left behind. Our economy works for Wall Street CEOs but not for the middle class. America isn't supposed to only work for the top one percent."

Agree: 75% Disagree: 20%

"Our economy is upside down. The majority of America is in a recession, but Wall Street is doing better than ever. Regular people work harder and harder for less and less while Wall Street CEOs enjoy bigger bonuses than ever. If American's economy isn't working for the 99 percent, it's not working"

Agree: 81% Disagree: 15%

"The promise of the American Dream is that if you work hard and play by the rules you can make a good life for you and your family. But right now, 99 percent of Americans only see the rich getting richer and everyone else getting crushed. And they're right."

Agree: 72% Disagree: 25%

"The only way to create prosperity in America is to give our economy back to the free market, not try to destroy it. The liberal elite who are now occupying Wall Street do not understand how capitalism and business work"

Agree: 62% Disagree: 29%

"America has succeeded because of hard work and competition, not because we expect government to give us things for free. For too long, Americans have spent money they couldn't afford, driving up personal and government debt."

Agree: 85% Disagree: 11%

"The top 1 percent are the ones who create jobs in this country. They are already overburdened with job-killing regulations and high corporate taxes. We need to create a climate that encourages business, not one that gives in to protestors."

Agree: 61% Disagree: 32%

The first three questions and answers seem to support a Progressive position. The second three sound Conservative. What gives?

Whither Italy?

From Zero Hedge

Italian 10 year yields have moved above 6%, the theoretical "breakpoint" at which a country's debt is thought to be unsustainable. When Greece, Ireland and Portugal crossed this 6% mark, they were forced to seek support from the Troika (IMF, ECB and EU). Will this happen to Italy, or is this just a blip up over 6% for their bonds, waiting for the end game on Berlusconi to play out (he is still refusing to resign)? Tomorrow he faces a vote on the debt program and we will see if he has the votes.

Italy is too big for the Troika to bail out, using the same mechanism they employed for Greece, Portugal, and Ireland. If Italian yields don't drop below 6% on their own, when the Berlusconi melodrama has played out, the ECB will have to step in as a regular, continuing buyer of BTPs' (Italian bonds - Buono del Tesoro Polenniale). The ECB, under new leader Mario Draghi, desperately wants to avoid this. He argues that such debt monetization is specifically prohibited under the Maastricht Treat. Angela Merkel and the Bundesbank are equally ferocious in opposing such a move: the German High Court says it would violate the German Constitution and right now, Merkel must get a full vote of the Bundestag before committing further funds to new bailout money.

But it's the only way if Italy needs help.

Are we approaching crunch time??

Sunday, November 6, 2011

Income Equality and Spirit

This is an extraordinary 16 minute TED video with Richard Wilkinson, author (with his partner Kate Pickett) of The Spirit Level: Why Equality Makes Societies Stronger, released in April of 2011.

If you don't have time for the whole video, here are some key slides, taken by screenshot from his book:

There is no correlation between national income and a health/social problems scale. This scale is a composite measuring life expectancy, trust, obesity, mental health problems, imprisonment rates, teenage births, children's educational performance and similar measurements. We are the richest country per capita and also the country with the worst score for health and social problems. Norway with similar per capita income has a much better composite score. Portugal, the poorest country in the group, has almost as bad a score as we do.

Saturday, November 5, 2011

Housing Update

Joe Nocera had a good housing piece in the New York Times yesterday. It led me to a research report written by Laurie Goodman of Amherst Securities titled "New Ideas to Address the Glut of Foreclosed Properties".

First, the backlog, or "shadow inventory":

The first column is Non-Performing Loans, more than 12 months delinquent, plus loans in some stage of foreclosure. The second column is Real Estate Owned, or Bank Owned Homes, i.e., those that did not sell at Foreclosure Auction. The third and fourth columns show quarterly and monthly loan or home sales out of this shadow inventory. As you can see, we had a tick down in 2011Q2, but we still have 32 months inventory.

Next, we have the problem of underwater mortgages, where a mortgage is valued at moire than or the same value as the house. Goodman works out probabilities about how many of these underwater homes will foreclose, computes a total estimated "new foreclosure rate", spreads those over 6 years, compares that to the expected rate of home sales, and concludes we have a big excess supply problem. Take a look:

NPL is a Non-Performing Loan. RPL is a Re-Performing Loan (was once non-performing, is now performing). APL is an Always Performing Loan with greater or lesser Mark to Market Loan to Value. Laurie then computes probabilities for new default in each of the categories, and gives a lower bound and a reasonable estimate: up to 10.4 million more homes will move into foreclosure over her estimate of 6 years, or up to 1.7 million per year.

Friday, November 4, 2011

Greece Votes

Prime Minister Papandreou is about halfway through his speech, urging Parliament to approve the bailout agreement. The confidence vote will be taken right after he finishes. The oddsmakers say he will win the vote, but it's not a sure thing. And even if he wins, he may have to step down to allow a coalition government to take over.

Papandreou's call for a referendum Monday was a stunner, sending markets south for two days. Under fierce pressure from Merkel and Sarkozy, and deserted by his Finance Minister Venizelos, he caved on the referendum plan, bringing us to this moment and this vote.

Greece needs the 8 billion Euro next tranche of the bailout, so Parliament should say yes. Whether Papandreou survives remains to be seen. With Greek uncertainty settled for a moment, attention will turn to Italy.

Ten year Italian bond yields closed today at a Euro-era high of almost 6.4%, despite the European Central Bank(ECB) entering the market as a heavy buyer. 6.0% is the initial danger threshold; 6.5% is the level at which Greece, Ireland and Portugal came to the Troika (the European Union (EU), the IMF, and the ECB) to ask for help. The Troika does not, under current arrangements, have remotely enough firepower to fund Italy, if their sovereign debt continues under attack.

As discussed before, the ECB by itself has the firepower to stand behind all sovereign European debt. They would only have to declare their commitment to do so, and the markets would settle down. But the Germans are relentlessly committed to not letting the ECB monetize any sovereign debt, beyond "occasional" purchases on the secondary market. They do not, under any circumstance, want the ECB doing what the Fed did in the US in 2008-2010, which was to pour money and liquidity into every crack and crevice where it seemed to be needed. It worked here, without inflation; but the Germans are convinced letting the ECB do the same in Europe would be the first step on the road to ruin.

The G20 meeting ended today with nothing new in the way of commitments from the US, Japan, or China to support Europe or its EFSF fund - leaders from these countries said quite clearly: "Europe - you have the resources needed. Get your act together and solve the problem."

Greece is possibly quieting, but still edgy. Italy on the edge. No new rescue funds from the rest of the world. My forecast? Still the same: some form of train wreck within a six month time frame, but possibly much sooner. Impact for us? Some level of financial crisis, quite possibly taking down one of our big banks, most likely Bank of America. Not a pretty picture, and one that will surely impact the 2012 elections.

Wednesday, November 2, 2011

Beauty and the Sacred

"The lover of Beauty ends by finding it everywhere around him.
The vein of gold in the basest of ores.
And he takes the collector's joy
in finding
the fragmentary masterpiece that is commonly passed by."

Marguerite Yourcenar, Memoirs of Hadrian

My wife and I did some backyard landscaping in our new home this summer. We put in new trees, bushes and plants. And a dry stone creek bed. When our granddaughter Kendall came to visit for her Granny's surprise 70th Birthday get-together, she disappeared for a bit. She was in the back, by the border fence, playing with the stones. We didn't even see what she had made, until after the party. What we found was her little altar, a place of beauty, of safety, of the sacred. It's all around us. Let's try really hard to notice, as Kendall does.

Is the Storm About to Break?

The European flag, next to Greece. The Parthenon in the distance. Storm clouds overhead. A mysteriously powerful image.

Greek Prime Minister Papandreou has said Greece will have a referendum, probably in mid-December, asking the Greek people "Do we want to be part of the European Union or not?" European leaders are angry. As this is written, the Prime Minister is having dinner and being grilled by Merkel, Sarkozy and the Troika (EC, IMF, ECB). They reportedly will tell the Greek leader that he will not get his next 8 Billion euro bailout tranche, if he proceeds with the referendum. And if there is no second tranche, Greece will default in mid-December - or so we are told. Will Papandreou cave in? Will some compromise emerge? It's not yet remotely clear.

My wild guess: Papandreou will hold firm. The referendum will be moved to early December. And the Teutonic Lords of the Eurozone will commit to sending the money as soon as a Yes vote is clear. So if the Greek vote is Yes - no default, at least not immediately. If Greece says No, hard default, and a wild December market ride.

Will Greeks vote Yes? About 70% of the country supports the EU. A similar percentage opposes the austerity deal. Phrasing the referendum question around staying part of Europe is smart. It might pass. But it is not a slam dunk.

Markets moved up today, both in Europe and the US, buoyed, in part, by the modest increase in US private employment. But Italian debt is still soft, with 10 year yields above the 6% break point, and the ECB is having to buy aggressively just to keep a semblance of good Italian bond pricing, to the unhappiness of the Germans. Today the European Financial Stability Facility canceled a 3 billion Euro bond sale for lack of interest, and the EFSF its theoretically a AAA credit. None of this bodes well for the Euro.

My real takeout: Papandreou should tell the Overlords to shove it, that he will abide by his people's decision, that it is high time that they were given a chance to weigh in, and that he will do whatever he can to support Greece, if they decide democratically to leave the Euro. Too much abusive behavior and treatment by Sarkozy and Merkel, and their iron-fisted approach really does not offer a clear path to a bright future for Greece.

Tuesday, November 1, 2011

Our Shared Economic Storyline is Wrong

Here's what I believe both political parties agree to, our shared economic storyline:

The US is in the middle of a debt crisis caused by large government deficits (2008-2011). It is imperative that these deficits be eliminated, although there is disagreement on timing. Democrats say we should fund deficits a bit longer to reduce unemployment, then move to balance the budget. Republicans do not think government spending can create jobs, so they want a balanced budget immediately.

But balance the budget we must, whether we do it sooner or later. If we don't, there are a continuum of negative outcomes that both parties agree on - higher inflation, higher interest rates, bond market rejection of US bonds, leading to either hyperinflation or sovereign default, all the while watching a debasement of our currency.

In other words, we are broke. The US credit card is maxed out. And just like a private household, we have to stop borrowing, lower our debt levels, and bring spending into line with revenues. Any further increase in debt will either lead to outright default or runaway inflation. In any case, if we really cared about our kids and grandkids, we wouldn't be burdening them with all this debt.

This is the shared narrative. Democrats want to spend some more on jobs, then combine tax increases with spending cuts to balance the budget. Republicans do not want to spend more money on stimulus (it didn't/doesn't work) and they oppose any tax hikes. They want to achieve balance through cuts alone. Republicans want to enshrine the commitment to budget balance through a constitutional amendment. Democrats oppose this - not because they don't want balanced budgets, but because they feel such a requirement would unnecessarily tie government's hands - which, of course, is exactly what Republicans want.

No one in the political arena - no Republican or Democratic party leaders have questioned the underlying narrative. Deficits are a problem. We have to fix the problem before we go broke. Households go into bankruptcy. The US would suffer sovereign default. And what happens then? No one knows; but it won't be good.

The problem is that this storyline is wrong. I will certainly not convince anyone in a single blog, or even in a series of posts. What I hope to do is to raise a small element of doubt in your mind. I will bring forward evidence in future posts from a variety of modern economists, most of whom are part of what is called Modern Monetary Theory. I will give links and references. I hope you will go and look. What you may find, as I have, is that there is a very solid, credible school of economic thought that presents a picture completely different from our shared storyline. For example:

The Frontrunner

And this ad comes from a Republican: