LyrArc Article Gist
The simple fact that countries like Greece and Portugal cannot adjust their exchange rates under the existing euro currency arrangement remains a critical problem says Krugman. Krugman points out that till 2007 Greece's budget deficit was no higher than America's as ashare of GDP than the deficits America ran in the 1980's, and Spain actually ran a surplus. The global financial crisis changed all that as inflows of capital dried up, revenues plunged and deficits jumped. Now membership in the euro area becomes a sort of trap in that Greek costs which rose quickly in the boom years now need to come down in relation to German costs, and the only feasible way of doing that would be to devalue the Greek currency, now impossible under the euro currency arrangement. The euro currency he says is in serious danger unless forceful action is taken to avoid a chain reaction that starts with a Greek default.

LyrArc Article Gist
European banks hold $147 billion of Portugal's assets and $117 billion of Greece's assets. The banking systems of Euopean lending countries are heavily exposed in the event of a sovereign default which is why it is in the self interest of Germany and France to come up with an aid package that restores confidence in financial markets, to avoid a direct hit to their banking system. Because of the ineptitude of Europe's decisionmakers, especially Chancellor Angela Merkel, private investors will not play the role in helping roll over Greek debt at tolerable interest rates that they could have played. With the now larger aid package of $160 billon there are still concerns from other angles. One is that debts of Greece will continue to grow- hence the three year aid plan. Analysis by the Economist suggests that the Greek government debt would rise to 149% of GDP by 2014 even with an aggressive budget deficit reduction of 12 percentage points (excluding interest costs). This assumes an interest cost of 5% in the aid package. In an average year Greece needs to refinance 40 billon euros of its debt and $70 billon is needed to cover cumulative budget deficits till 2014, hence the need for the IMF to step in and the nervousness in financial markets. ...

LyrArc Article Gist
NYT's Landon Thomas gives this exceptional report on how Deutsche Bank changed from a lender to the German auto industry and safe banking practices to enter the derivatives business and other opaque financial products that led to taking on huge risks. Deutsche Bank has agreed on Dec. 22, 2016 to settle with the U.S. Justice Department paying a fine of $7.2 billion for practices relating to faulty mortgage securities. This report says the problems started in 1995 with Deutsche Bank's leadership hiring Edson Mitchell of Merrill Lynch to promote the investment banking business at Deutsche Bank. Mitchell hired two derivatives traders Broeksmit and Anshu Jain. Mr. Mitchell died in plane crash in 2000 when he was 47 years age, Mr. Broeksmit committed suicide in 2014, 58 years in age, Mr. Anshu Jain, 53 years old, is the only surviving person of the three. Under Mr. Jain Deutsche Bank assumed more and more risk, and was involved in complex and opaque financial products leading to the toxic mortgage crisis, and manipulation of the lending rate for London banks.  It also lent $300 million to Donald Trump's businesses. Most of the profits generated from this venture have evaporated, with analysts estimating $15 billion in fines and penalties owed of the $20 billion that these ventures generated. Not counting the serious damage to the bank's reputation in Germany and the U.S. This report points out the role played by the CEO from 2002 to 2012 of Deutsche Bank, Josef Ackermann, in encouraging these ventures converting the bank from its original loan as a contintental lender to business to a bank selling opaque financial products for most of its profits. Landon Thomas also describes the events and days leading up to the suicide by Broeksmit, including a visit to a psychiatrist and Broeksmit's facing enormous stress about the investigations underway in Germany and the U.S. looking into the opaque financial products and practices of Deutsche Bank. This is also a cautionary tale about what happened in banking from the late 1990's leading to the collapse in 2008, leading to the problems of today- the need to rescue the economy in 2008-2009 and the low rate world that ensued damaging the savings of ordinary people, the infrastructure that was never built, the parallel crisis of the hollowing out in manufacturing as a false prosperity boomed in banking and finance. In a sense it is also a story of everyday lives that were damaged in the high flying boardrooms of finance in New York, London and Frankfurt. The revolving door between regulators and the banks made it harder to monitor and control banking risk letting this story unfold over decades, damaging the credibility of governments and the established political parties without clear alternatives from outside; as the dominance of Wall Street executives in the new outsider Trump administration shows.  ...

LyrArc Article Gist
Europe's 750 billon euros plan to defend the euro currency, including 60 billion of EU backed bonds, a $440 billion euro fund guaranteed by euro-zone countries, and upto 250 billion euros of IMF money. The plan buys time for the troubled economies of Portugal, Spain and other EU countries, but does not address the fiscal and structural flaws that are endangering the European single currency experiment. The "no bail-out" clause and the stability and growth pact proved worthless in implementation. Sanctions for a country with growing problem of deficits did not work and had soon lost credibility, with the financial markets themselves recognizing the serious problems of some deficit countries only when things had spun out of control. Some other forms of sanctions will have to be figured out and mechanisms of dealing with financial panic such as sovereign debt restructuring need to be put in place. The German emphasis on too sharp budget cuts may have the danger of pushing deficit countries into deflation as well as creating strong popular unrest. ...

LyrArc Article Gist
Boone and Johnson point to the problems facing Portugal as being worse than that faced by Argentina when it defaulted on its debt in 2001. Portugal they say spent too much in recent years with the help of Euro-money letting debt rise to 78% of GDP compared to Greece's 114% of GDP and Argentina's 62% of GDP at default. The lack of the option for a necessary devaluation under the euro currency makes the situation worse. At this point the situation is simply being postponed as the European Central Bank will continue to let the governments issue bonds, which European commercial banks buy and deposit at the ECB as collateral for fresh printed money.

LyrArc Article Gist
The Portuguese government asked the European Union for bailout loans. The aid the EU is providing to Portugal comes with conditions- asking Portugal to make additional austerity cuts even as new elections loom. The aid is essentially more loans at high interest rates, even if the rates are lower than the steep rates in financial markets for a country with a collapsing credit rating. There is serious concern about whether this formula applied by the EU is going to work because at this rate it may take a decade or more for Portugal to pay off all the loans. The major problem is that with severe spending cuts- a country that lacks competitiveness and cannot devalue its currency because of being the euro zone- it is that much harder to generate growth. Simon Tilford, chief economist for the Center for European Reform in London, says the EU leaders have failed to come to grips with the core of the problem for Ireland, Greece and now Portugal- which is how to restore the finances to some sustainability, and how this could ever be achieved by a policy of deeper and deeper spending cuts. Tilford points out that the other more fundamental problem EU leaders are not tackling, is that the problem is deep down the large amount of Portuguese, Irish and Greek debt held by German, French, British, Spanish and Dutch banks. If these countries default the governments of these countries would have to recapitalize their banks at the expense of the taxpayers of Germany, France, Britain, Netherlands. Political leaders of these countries want to avoid confronting angry taxpayers and lose political support. Germany has called for a bondholder haircut, something that banking interests do not support. Tilford says Portugal is not getting a bailout, because for a bailout there would need to be a default by Portugal. What it is getting along with Ireland and Greece, are loans at high interest rates, and an EU plan that simply stifles the ability to pay back accumulated debt, leaving the situation in limbo for some future resolution....

LyrArc Article Gist
Mario Monti, the new prime minister of Italy, is taking on one of Italy's toughest problems, a pervasive culture of tax evasion. The loss to the economy is not measured ony in terms of the loss of money to the Treasury, which one estimate puts at $340 billion a year. This burdens companies and the manufacturing sector with higher taxes and reduces investment in new plants, research and development, capital equipment, which would increase jobs. By encouraging this culture of tax evasion Berlusconi undercut and jeopardized his own plans to bring new economic growth to Italy. Berlusconi prevented allegations of false accounting against his companies by passing a law through parliament that made reduced penalties for false accounting. In Italy one saying goes that "only fools pay." In a country of 60 millon people only 394,000 people earn an income of more than $135,000 a year. "Evasion totale," referred to in newspapers in Italy is about total evasion by some owners of large property. One effort in parliament is to introduce legislation that would require the use of debit or credit cards, electronic transfer or other similiar methods of payment for amounts above a certain amount- with one of the amounts proposed being 100 euros. A recent poll by Demopolis showed that 73% of Italians polled want to see strong action to prevent tax evasion. This is also a strong reason why Monti, Draghi at the ECB, Bundesbank officials at Germany's central bank, and German chancellor Merkel, do not see the ECB's large scale buying of eurobonds by essentially printing money as a solution to eurozone debt problems- it puts off taking the neccessary and essential steps for reviving eurozone economies....

LyrArc Article Gist
Economists are calling this a "wage-less" recovery in the U.S. With unemployment at 8.8%, wage pressures are weak. Average hourly earnings were flat in March 2011. The annualized growth of average hourly earnings for the last 5 months is 1%, according to Gluskin Sheff chief economist Rosenberg. After accounting for higher inflation, real wages are actually falling.

LyrArc Article Gist
Lt. Gen. Frederick "Ben" Hodges is the U.S. Army Commander in Europe. He describes the threats facing the U.S. in an interview with Sohrab Ahmari of the WSJ. Hodges says Russians are preparing for a conflict five or six years down the road, and should have capabilities built up in 2 to 3 years. The U.S. military remains stretched with 9 of 10 division headquarters committed to some requirement, and new crises popping up unpredictably, such as Islamic State and Ukraine in 2014- a situation not faced even at the height of the engagement in Afghanistan and Iraq. The budget sequestration cuts continue to limit the army's capabilities just when additional resources are needed. Hodges calls for depth in resources as the only way for the army to be there to counteract bad actors in Europe or the Middle East, or some other place. With further budget cuts the army will have to drop down to 420,000 personnel from 500,000 today, just when the number of crisis areas are increasing, hurting preparedness and modernization....

LyrArc Article Gist
Britain's prime minister David Cameron seeks a "better deal" for Britain before the planned referendum on Britain's membership in the union. Changes Britain is seeking are: restrictions on some social welfare benefits for European migrants for 4 years, guarantees that Britain and other countries using a currency other than the euro would not suffer economic discrimination, and more powers for national parliaments to block European laws. A less tangible change is one that relates to the preamble to the Treaty of Rome, signed in 1957, the founding treaty for the bloc, which says: "Ever closer union among the peoples of Europe." This is similiar to the preample to the American Constitution: "We the people of the United States in order to form a more perfect union." The euroskeptic wing of the Conservative Party objects to this term "ever closer union," and Cameron will seek a pledge to change the wording. Yet as experts point out the phrase was put in as a result of British requests from the John Major Conservative government in response to a stronger wording from the Dutch government suggesting a federal Europe. Veteran reporters and negotiators at the Maastricht talks, say it is strange that Britain is now objecting to the words. Stephen Wall, a British historian on Britain's relations with the European Union, and a former senior official in the British government, says Margaret Thatcher and other British prime ministers did not object to this. That this issue comes up now is a result says Wall, of Britain's sense of being on the sidelines, of being on the outside to a close partnership between the French and the Germans, and as a result of being outvoted on issues Britain considers important. The president of the European parliament, Martin Schulz, says the change would require the approval of all 28 EU members, and an alternative is for a declaration that states Britain is not included in the sense of the phrase....

LyrArc Article Gist
The government of president Hollande in France added about 7 billion euros of new taxes after May 2012, and an additional 20 billion euros in the 2013 budget. Spending cuts totaled about half the tax increases. France's taxes are the highest of the major EU countries and there is concern that this may hinder the economic recovery. French businesses are cutting back on capital spending. Insee survey for April 2013 showed French manufacturing businesses planning cuts in investment of 4% for 2013. The government says spending cuts go up in 2014 to about two thirds of the deficit reduction and tax increases about 6 billion euros. France's statistics agency Insee says economic growth was 0.5% in the second quarter of 2013 compared to the prior quarter. The recovery was supported by consumer spending, with private capital investment lagging behind. This is about 1.9% growth in GDP on an annualized basis, according to J.P. Morgan.

LyrArc Article Gist
Feldstein points to the beneficial effects of a decline in the value of the euro for the trade of troubled eurozone economies with non-euro countries helping reduce the current account deficit and trade deficits.

LyrArc Article Gist
Inflation in China and rising wages are pushing up costs for American manufacturers. The pressure on China, most recently in Congress, is helping to push up the value of the yuan. This combined trend is making it attractive for some manufacturers to bring factories home to the U.S. A trend in the U.S. towards non-unionized labor and the new trend to a two-tier wage level- with lower wages for entry level workers- and the shedding of legacy health care costs, is creating a more cost competitive labor force in the U.S. This extends from older industries such as furniture and auto components to newer industries and technology. The new factories setup in the U.S. use technologies that require a smaller number of workers, in most cases less than half the number of workers that were employed earlier. This adds another element in cost efficiency, though it means fewer jobs are created with new plants.

LyrArc Article Gist
Joe Nocera compares the German insistence for tough austerity measures in Greece, Italy, Spain and Portugal, to the insistence ofthe Allies for large reparations from Germany after the First World War, which Germany was not able to pay and left it bankrupt by the late 1920's. He cites the failure of orthodox positions on financial and monetary policy to tackle complex issues such as the overvalued currencies of southern Europe, as productivity moved in opposite directions between Southern Europe and Germany. Austin Goolsbee, a former chairman of Council of Economic Advisors, makes the same point in an op-ed piece in the Journal, 11/29/2011. Nocera says this position is simiiar to the position on debt reduction for homeowners facing U.S. foreclosures with government intervention, where little action has been taken worsening the housing crisis and derailing the U.S. economy.

LyrArc Article Gist
ECB President Mario Draghi stated in his first speech to bankers and policy makers in Frankfurt that governments in Italy, Spain and other eurozone countries need to take stronger action and stop delaying. He said: "Where is the implementation of these long-standing decisions. We should not be waiting any longer." Jens Weidmann, president of the Bundesbank stated Germany's view: "The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation." The ECB continues to maintain limited purchases of Italian and Spanish bonds, leading to a small easing of bond yields, but has ruled out large scale purchases. ECB officials fear that taking the heat off politicians in Italy and other eurozone countries through large scale bond purchases will only lead to a lack of action on irresponsible fiscal policies. Meanwhile the debate in Germany continues with the mass circulation tabloid Bild saying calls for the ECB to act were "hysteria." The conservative leaning newspaper Die Welt says Merkel could still change her mind. Die Welt pointed out that Germans remember the hyperinflation of the 1920's as what can result from printing money to buy government issued bonds, but forget the period in the early 1930's under Chancellor Heinrich Bruning, another deeply troubling period, when deep austerity led to mass unemployment and a prolonged depression....

LyrArc Article Gist
There will be continued pressure on the euro which is trading at $1.26 against the dollar. There is renewed pressure from Western European bank's involvement in the economies of Eastern European countries. Austria is most affected with about 50% exposure to Eastern European countries, Italy has about 27% of total bank claims with focus on Poland and Croatia, and the Scandinavian banks are heavily involved in the Baltic countries. The Hungarian forint, the Czech koruna and the Polish zloty are all currencis in steep decline. The IMF has rescue packages for Ukraine and Hungary.