In Japan things have gone from Grim to Grimmer. The Markit/JMMA Japan Manufacturing PMI™ shows Japanese manufacturing sector contracts at sharpest rate in 19 months.
Key points:
Output and new orders both continue to decline Capital goods producers register sharpest falls in production and sales Inventories and employment cut amid subdued economic outlook
Summary:
Operating conditions in the Japanese manufacturing sector continued to worsen in November. The deterioration was driven by falls in output, new orders and employment as the economic climate remained difficult. Amid an uncertain outlook, manufacturers also cut inventory levels and lowered purchasing activity.
Investment goods producers also recorded the steepest fall in staffing levels during November. With the consumer and intermediate market groups also registering reductions in employment, a net fall in total manufacturing payroll numbers was recorded for the second month in succession.
Reduced sales and a subdued economic outlook were reported to have led to the reduction in staffing levels in the latest survey period. Similar factors led to declines in inventories and purchasing activity over the month. The fall in stocks of raw materials and semi-manufactured goods was the steepest in over a year-and-a-half, while input buying was pared to the steepest degree since April 2011.
As my friend John Mauldin suggests, Japan is a bug in search of a windshield. I highly doubt Japan can make it to 2022 or even 2017 before it runs into serious issues.
Actually, Japan has extremely serious issues already, it's just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.
Global imbalances are mounting. I suspect within the next couple of years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency war with all its trading partners to force down the value of the yen.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
The European Central Bank was right to refuse access to documents on the economic situation in Greece to a journalist in 2010, because disclosure would have undermined the public interest, the General Court of the European Union ruled.
"Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece," the court ruled on Thursday.
The European Court has thus established an important legal principle. If you claim to act in the public interest, you can break the law. And the definition of the public interest is of course, a political one.
Unfortunately, that is quite an accurate assessment. The ruling can be appealed the the European Court of Justice within the next two months, but I do not have high hopes for a different result.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Peter Schiff was on Capital Account with Lauren Lyster on Tuesday. For that show, he was asked, and he agreed to debate me on hyperinflation. Thus, I semi-expected to be on the show as well.
I even received email confirmation from the Capital Account producer last Sunday Friday.
The headline of the email was "Peter Schiff is Good".
The body of the email was "I let Schiff's people know that you were the guy he will be debating and they were cool with it so we are definitely on for next Tuesday at 12:30pm your time."
Minus Mish (which I will gladly explain below), here is the Schiff interview with Lauren Lyster.
Lauren challenged Schiff with "Whatever happened to hyperinflation?"
I heard an amusing response from Schiff as follows "I still say that hyperinflation is a worst case scenario. I never say we are going to have it for sure."
The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don't get out of the US dollar are going to be completely broke and that is obvious. Look at what Ben Bernanke did. Interest rates are zero. Money is free.
Bernanke is going to run up printing presses as fast as he can. This is pure inflation Latin American style. This is hyperinflation; this is Zimbabwe; this is the identical monetary policy of the Weimar Republic.
I am just as convinced that people who have their money in US dollars are going to be just as broke as people who have their money with Madoff.
I do not know how much time you have. With the dollar dropping 5% a week at this point, could it snap back? But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? and another 10%? At some point a year from now the dollar could be dropping 5% a day.
The inflation rate in Zimbabwe is over 100 million percent a year.
Unfortunately that audio display of nonsensical hype has been removed. Conveniently perhaps?
Now, in a massive display of revisionist history, Schiff claims that hyperinflation is a "worst case scenario".
In a further amusing turn of events, Schiff further backs down from his previous hyperinflation stance telling Lauren Lyster:
"At some point the specter of hyperinflation is so enormous, and the dangers so apparent that will change. But before we get to that point w will have very very high inflation. Much, much higher than we had in the 1970s. If inflation is 30% a year or 40% a year, technically is it hyperinflation? Probably not."
Really? When?
Semi-Expectations
Before offering further comments on the prospect of 30-40% annual inflation, let's back up to the opening paragraph where I stated "I semi-expected to be on the show as well."
Actually, I fully expected Schiff to wimp out, and I even told the producer in a phone conversation, in advance, that the debate would never happen.
"But he Schiff's people agreed to it", said the producer. "It will never happen" said I, and it didn't. [Correction note, this was a phone conversation. I recalled "Schiff" but made the change to "Schiff's people" by request.]
You see, I have been through this multiple times before.
Schiff once told Max Keiser that he would debate anyone. Max asked me if I would debate Schiff. I replied "of course, but Schiff will not debate me." When Max said Shiff agreed, I said "set it up then".
As with Capital Account, once Schiff found out who he was debating, he backed out.
The reason I told Max that I was certain Schiff would back out is that I went through the exact same setup with a CNN radio affiliate.
Charles Goyette Fundraiser
When Peter Schiff was running for Senate, best selling author and radio talk show host Charles Goyette (who happens to like both of us), tried to patch things up between Schiff and I.
Goyette agreed to moderate a discussion between us, and I told Schiff that I was willing to stress the things I agreed with him about (and there are a few). I even told Schiff we could record the session and if Schiff did not like the results we would not play it.
I did not grant myself the same "no play" opportunity.
Yet, Schiff would not even agree to that. And a fundraiser Goyette planned for Schiff never happened.
That's one hell of a grudge folks. Since then I put up with numerous email challenges such as "Are you afraid to debate Peter Schiff?"
I draw the line with this documented wimp-out by Schiff coupled with his blatant revisionist history.
Agreements With Schiff
I have two major agreements with Schiff.
We both like gold and silver.
We both agree with the need for small government.
I was willing to stress those points in a three-way conversation with Goyette and Schiff but that never happened.
Right now, with the 10-year treasury yield at 1.62% I see no value in treasuries. Schiff would surely agree with that position (going much further of course, to outright loathing of US treasuries).
Like Schiff, I also think the US will indeed have a day of reckoning. However, I think the Yen, the British Pound, and the Euro are all likely to have a day of reckoning first.
Being too US dollar focused (to the point of outright hatred of the US dollar), has been a major Schiff downfall. So has been his love of China (which I will also gladly debate Schiff about anytime he wants).
Sad State of Affairs
This whole saga has been a sad state of affairs. And topping off the list is having to read Paul Krugman blast Schiff in his post on Thursday Varieties of Error
Some readers may recall the “Peter Schiff was right” campaign of 2009, a sort of public-relations blitz claiming that Schiff, an Austrian-oriented commentator, had foreseen everything correctly. It wasn’t really true even then; still, Schiff became a fixture of right-wing TV shows, constantly warning about how expansionary monetary and fiscal policies were about to produce hyperinflation.
Well, Cullen Roche catches a TV host actually putting Schiff on the spot, pointing out that he’s been predicting that hyperinflation since 2008, so where is it?
Good question. And I’d like to pursue the question a bit more, not just or even mainly about Schiff, but more broadly about the role of predictions — including wrong predictions — in economics. ...
I certainly have no problems with Krugman blasting Peter Schiff, because quite frankly Schiff deserves it.
Peter Schiff was wrong about massive inflation in 2008 and in my opinion, Schiff still is wrong today.
So why does Schiff refuse to debate me? He gave Capital Account an excuse something along the lines of not wanting to give me any credibility by debating me.
The ultimate irony is that Schiff needs credibility, not me.
I believe the most likely reason he will not debate me is he is afraid of debating anyone sufficiently able to challenge his ideas. It's easy when you can stand up and preach. It's much tougher facing someone who does not bow down at your feet.
Pragmatic Capitalism
Krugman linked to an article on Pragmatic Capitalism by Cullen Roche. So, let's take a look at Roche's article What About That Hyperinflation?
Regular readers know I am a big fan of getting called out on things. Not because I like to be wrong or making other people look silly, but because I sincerely enjoy the constructive criticism. Over the years I’ve been wrong about plenty of things. That’s totally normal in this business. When you write as much stuff as I do about things as hard to understand as the monetary system then you’re bound to get tripped up. It’s one incredibly long learning curve we’re all walking on here and I doubt anyone ever gets to the end of it. The world of money and finance is one big complex puzzle and I enjoy working with readers and other people trying to solve that puzzle. Anyone who tells you they’ve solved it is probably lying or misleading.
Anyhow, there’s a real power in being wrong. The quote “there are no mistakes, only lessons” is completely true if you actually live your life that way. I like to say “it’s in being wrong that we learn to be right”. So when I see people being called out for their mistakes (in a respectable and mature way) I think that should generally be applauded because it provides the platform for learning and improvement.
So I loved it tonight on RT when Lauren Lyster asked Peter Schiff “what about the hyperinflation…you’ve been predicting since 2008?” I’ve had a lot of fun over the years at the expense of the people who called for hyperinflation in 2008 (Schiff certainly wasn’t the only one), but I’ve only done that because it provides a great lesson for many others. Obviously, Schiff is sticking to his guns, but that’s not the point here. The point is to seriously consider why was Schiff wrong and why I have been right? Was I working from a superior understanding of the monetary system? Or have I just been lucky? You need to decide that for yourself, but you need to really explore those questions and truly consider both approaches and why one seems to have worked out far better than the other.
In regards to hyperinflation I do not think Krugman, Roche, or I were lucky. Rather, I think hyperinflationists in general made four major errors.
Four Major Errors
Schiff and many others simply fail to understand the role of credit in a credit-based economy.
Many of those calling for hyperinflation were too US-dollar focused.
There are numerous currency problems elsewhere that should have been easily seen.
There is an absurd faith in China (of all places) even though money supply growth in China has far exceeded money supply growth in the US.
I could actually go on with numerous other flaws in many hyperinflationist's calls but they are now so obvious that even Peter Schiff has felt a need to resort to revisionist history to duck them.
Austrian Point of View
The problem I have with Krugman's pounding of Schiff is the lumping by Krugman of Austrians as if there was one Austrian point of view. There's not. I have been harping for years about those four points above, as well as numerous other reasons hyperinflation is highly unlikely.
Yet, we have to suffer from another "I told you so" kind of post from Krugman even though some of us Austrians have been in agreement with Krugman all along that "hyperinflation is nonsense".
Krugman concludes his article with "But as far as I can tell, very, very few people have been willing to let the evidence speak."
I agree, and the final irony is that I can say the same about Krugman.
Why can't Krugman look at Japan and see the US is heading down the same path, except that Japan will have its currency crisis first. What happens after that is uncharted territory.
After all, Schiff is right that the path the US is on is not remotely sustainable. I think even Krugman would agree. It's just that Schiff's timing, endgame, and sequence of events between now and "eventually" are horrendously off.
Side Note on Comment System
Many people have been unable to login and leave comments. I believe the problem has been rectified.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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It is a deep stretch of the imagination to twist arms and appeal to "patriotic duty" in an effort to coerce someone to do something they really do not want to, then call the action "voluntary".
It is yet another thing to claim something is voluntary yet tell them it is "required". The latter has happened (again), when it comes to Greek debt.
Yiannis Stournaras made clear the country’s four largest banks, which together hold about €17bn of government bonds, would be required to sell their entire holdings even though the buyback is billed as “voluntary”.
It was the “patriotic duty” of Greek bankers to ensure the success of the buyback, due to be launched next week by the country’s debt management agency with up to €14bn of additional European funding, Mr Stournaras said on Wednesday.
Yet Athens bankers appeared reluctant to be forced into a sale that would weaken their balance sheets and discourage local investors from participating in rights issues expected early next year as part of a €24bn recapitalisation of the sector.
“The banks stand to lose some €4bn by having to sell their bonds at around 33 cents on the euro,” said one Athens banker.
About half the €62bn of bonds issued in a partial restructuring of Greek debt last February are held Greek banks, pension funds, state entities and individual investors.
The debt management agency is set to announce details next week of the buyback scheme, which would be completed by December 12, the day before eurozone finance ministers are due to give the green light for disbursing the Greek aid payment.
"Voluntarily Forced"
Whereas Greek banks may be "voluntarily forced" (as if such a ludicrous idea even exists) into steep losses, anyone else holding such debt sure will not be.
Once again this whole notion of "voluntary" rests on arbitrary decisions as to what will trigger credit default swaps.
Greek efforts to ease indebtedness by repurchasing its own bonds at less than their face value depend on investors accepting below-market prices rather than holding out for an improved offer.
Balancing Act
The new bonds have collective action clauses, which in a second restructuring would allow a preset majority -- typically at least 66 percent -- to force holdouts to take part, according to Gabriel Sterne, an economist at Exotix Ltd. in London. Still, enforcing the CACs risks triggering credit-default swaps and being put into default by the ratings firms to deal with a rump of bondholders, he said.
“Would it be worth the fight with the hedge funds?” he said. “I just don’t think they would want to go there yet again.”
“If the buyback price is forced up too high, it will be unpalatable to Greece and the European authorities, and the buyback will fail,” Sterne said. “The incentive not to participate is likely to be strong. The average value of the bonds for those that do not participate could rise sharply if there is very high participation.”
Sterne, a former IMF official, estimates that the strip might go as high as 50 cents on the euro assuming there is broad participation, compared with 24 cents if the buyback fails.
Bondholders probably will call the finance ministers’ bluff, said Peter Tchir, the founder of New York-based TF Market Advisors.
“Now that the Eurogroup has made a condition out of the bond repurchase, it is almost the obligation of the bondholders to hold their feet to the fire,” he said. “I can’t see bondholders accepting last week’s prices without trying for more.”
CACs and the Balancing Act
Got that? No one wants to trigger Collective-Action-Clauses thereby "forcing participation" because it would trigger CDS contracts. Yet participation must be high enough so the Troika can pretend the results help Greece.
Given the incentive to not participate in the offer is huge, Greek banks were told their participation in the voluntary offer was required.
Thus, we see these preposterous games yet again as to what is "voluntary" and what isn't. Moreover, forcing Greek banks to take more losses means they will again need to raise capital (a perpetual state of affairs for Greek banks).
Of course any sensible person realizes none of this will actually help Greece. Instead, it will enable huge pretending games go on a bit longer, perhaps long enough to get German Chancellor Merkel reelected, which seems to be the real issue in play, not the well-being of Greece.
Side Note on Comment System
Many people have been unable to login and leave comments. I believe the problem has been rectified.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
The ECRI is sticking with its "US is already in recession" call based on four coincident indicators. Very few agree, but for what it's worth (perhaps nothing) I am one of those in agreement.
Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI’s leading indexes, we concluded that, if it didn’t start in the first quarter of 2012, it was very likely to begin by mid-year.
But we also made it clear at the time that you wouldn’t know whether or not we were wrong until the end of 2012. And so it’s interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.
So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.
If you look at the size of the simultaneous declines in industrial production and personal income since July, that combination has never occurred outside a recessionary context in over half a century – but it’s occurred in every recession. This leads us to conclude that we are most likely already in a recession that began around mid-2012.
Now, please remember that, following our recession call, central banks really ramped up their efforts, and have literally been pumping more money into the economy than at any time in the history of humanity – and this is the upshot. No wonder the Fed is now all in.
So how come hardly anybody recognizes the recession? Perhaps it’s because of real-time data showing positive growth in GDP and jobs, and the lack of a recent salient shock.
Revisionist History
Some of that is revisionist history, notably the idea that in September 2011, the ECRI gave itself until December of 2012 to be proven correct. Rather, the ECRI kept changing dates waiting for data to match its call.
I have no problems with errors. I do have problems with revisionist history.
ECRI revisionist history wipes away an error in the other direction in 2007, claiming to predict a recession it clearly did not predict.
The revisionist history in regards to "no misses" is plain to see. The ECRI totally blew the call in 2007 and early 2008. That is not the galling part. Calls are easy to miss. The galling part is the ECRI's revisionist history related to the blown call.
The ECRI's integrity will remain in question as long as it continues to perpetuate the myth of a perfect record. The simple fact of the matter is no one has a perfect track record at calling recessions, interest rates, the stock market or anything else.
Please consider the following image snip. Highlighting is mine.
One month later the US was in recession, and in galling revisionist history the ECRI later referred to that highlight in yellow as "predicting" a recession, even though on Friday, January 25, 2008 ECRI Says There Is A Window of Opportunity for the US Economy
The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI’s Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession. ....
This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.
Achuthan Winging It or Sticking to His Model?
Clearly the ECRI failed to predict the 2007 recession on time. I am now wondering "Did the 2007 miss influence an ECRI to jump the gun in the opposite direction this time?"
That line of questioning has me further wondering if Achuthan has been winging it based on coincident indicators and his personal opinion of what is likely, instead of simply following his own model (with a track record of claims based on leading indicators, not coincident ones).
Regardless, the ECRI claim to have never missed a recession is inaccurate twice (2007 and 2011) even if the ECRI has the call correct now.
Revisionist history aside, I do believe Lakshman Achuthan has the call correct. Today's GDP revision higher does little to change that belief. Contrary to popular belief, recessions frequently start with positive GDP typically revised lower much later.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Unemployment has risen sharply again in October. According to statistics released Wednesday, November 27 by employment center and the Ministry of Labour, the number of applicants for employment who had no activity during the month (Class A) increased by 46,500 people, including DOM. In September, he had jumped nearly 47 000 people. Worse, counting the unemployed reduced activity (category B and C), the increase reached 73,600 people!
Such explosion had not been seen since March 2009. With 4,870,800 people registered at employment center, the number of job seekers Class A, B and C reached a level never seen before, as far back as statistics. For those in category A, the level was not as high for fourteen years, in May 1998. Since the accession of François Hollande at the Elysee Palace, very bad numbers keep on coming: nearly 230,000 people have registered at employment center and since May.
In detail, it is over 50 years old who suffer most from the increase in October, with nearly 2% increase in a month for this category. Rising long-term unemployment is still very high, with nearly 11.5% of registered job seekers concerned about one year.
French Unemployment vs. US Unemployment
Those outside France need a bit of perspective on various classes of unemployment cited above. This is my understanding, pieced together from two different sources.
Class A: Jobless people that have had no activity at all during the past month.
Class B: Jobless people having worked less than 78 hours during the past month ("short reduced activity")
Class C: Jobless people having worked more than 78 hours during the past month ("long reduced activity").
Class D: Looking for a job, but currently sick, or in internship, or in state-sponsored "professional development" courses, etc
Class E: Those in state-sponsored low-pay "community service" jobs
The official unemployment rate only comes out quarterly.
Reader Andrea offers these comments ...
For the sake of clarity, the official unemployement rate is given by the National Institut of Statistics (INSEE) each three months, not the ministry of labor class A-E activity. The distinction is similar to the weekly unemployment stats in the US vs. the official monthly unemployment and jobs report. Moreover, and also similar to the US, many jobless people are not counted as unemployed because they have not been actively searching for a job.
Hollande Threatens to Nationalize Steel Plants Over Layoffs
French President Francois Hollande has met the owner of steel giant Arcelor Mittal, after saying he would discuss nationalising one of its plants.
Arcelor Mittal - which employs some 20,000 people across France - announced in October that it intended to shut down the Florange plant's already inactive furnaces, saying they were uncompetitive in such difficult trading times.
The company gave the government 60 days in which to find a buyer for the furnaces, a deadline which expires on Saturday.
The move provoked an angry reaction from the French government, which accused Arcelor Mittal of breaking a 2006 commitment to keep the blast furnaces running - a claim denied by the steel giant - and criticised the firm for refusing to sell off the site as a whole.
France's minister for industrial recovery, Arnaud Montebourg, accused the steelmaker on Monday of "lying" and "disrespecting" the country. He has since retracted a remark that Arcelor Mittal was no longer welcome in France.
France's minister of industrial insanity, Arnaud Montebourg (sometimes referred to as 'Mountebank' in these pages, for obvious reasons) once again proves that the leopard cannot change its spots. After wrangling incessantly with Arcelor-Mittal over its decision to close two long idled and evidently loss-making steel furnaces, he has now decided to openly declare war against the company.
Here is a brief summary of the economic facts of life for the hyperactive minister:
There is vast overcapacity for steel in the world. In China alone, some 200 million tons of production capacity appear to be the fruit of malinvested capital due to China's real estate and infrastructure bubble that has resulted from an unhealthy credit boom. This means that in China alone 200 million tons of production are likely loss making at present and will eventually have to be idled and/or liquidated.
It makes no sense to keep loss-making capacity going in Europe as well. That will only further misdirect scarce resources that are more urgently required elsewhere.
The very last thing the market economy needs in order to function smoothly is a 'minister of industrial renewal' (Montebourg's official job description), or any other type of 'economy minister'. The very best thing such ministers could do to help the economy would be to resign immediately.
Property Rights Thrown Under the Bus
Montebourg makes it sound as though Arcelor-Mittal, a private company, were deputized to the French government to help it fulfill whatever political aims it pursues – as though the government could simply draft private companies to aid it in attaining its socialist goals.
This case is going to have repercussions that go far beyond the fate of the loss-making furnaces and Mittal's continued presence in France. By threatening the company with nationalization if it doesn't comply with the government's wishes, Montebourg is signaling that his government has absolutely no respect for property rights.
If Mittal closes the two furnaces (which as noted above have been idled for many months already), then the people employed there will lose their jobs which is of course unfortunate. However, this is a typical case of the road to hell being paved with good intentions: by threatening the expropriation of Mittal, Montebourg ultimately risks far more jobs than merely those at the two furnaces.
There is a lesson that Mr. Montebourg has yet to absorb: No government can dispense with the laws of economics by decree. It might as well attempt to order the sun not to shine or issue an edict that gravity be abolished.
Expect Unemployment to Soar
Those looking for reasons French unemployment is going to soar, need only read Pater Tenebrarum's sterling rebuttal of France's plans to nationalize Mittal to save steel jobs when the world is awash in cheap steel.
What company wants to hire workers when they will be unable to fire them later if need be?
Industry Minister Arnaud Montebourg is also planning legislation that would force companies to sell plants they want to get rid of at market prices to avoid closures and job losses.
Four Things, All of Them Bad
Mass layoffs will occur before the law passes.
Companies will move any jobs they can overseas.
Ongoing, if it's difficult to fire people, companies will not hire them in the first place.
Corporate profits will collapse along with the stock market should the need to fire people arise.
The proposal to force companies to sell plants rather than fire workers as outlined by Industry Minister Arnaud Montebourg and Labour Minister Michel Sapin is nothing short of economic insanity.
Europe Going Downhill Fast
Many people doubted Hollande would be foolish enough to carry out his job threats. They were wrong. In addition, Hollande massively hiked various taxes and also seeks a financial transaction tax.
No one should at all be surprised to learn in early November that France suffered the sharpest fall in service sector business activity for a year. For details, please see Dreadful Economic Data in Germany, Italy, Spain, France.
Things are going downhill fast in all of Europe and the bottom is nowhere near in sight.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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In Indebted Dragon, Professor Lynette Ong from the University of Toronto discusses how the Chinese economy relies on land as collateral to borrow money while paying the interest on the loans by selling and leasing the land.
Ong notes this makes China susceptible to two problems: a real estate bubble and political instability stemming from displaced farmers whose land has been taken from them.
The subtitle to Ong's article is "The Risky Strategy Behind China's Construction Economy".
I suggest "Ponzi Scheme" is a more apt description than "Risky Strategy". Let's take a closer look.
For four decades, the Chinese economy has grown by between seven and ten percent each year. It is the envy of the world, despite its relatively sluggish recent performance. Visitors to Beijing, Shanghai, and other major Chinese cities are quickly awed by impressive skyscrapers, glittering shopping malls, new highways, and high-speed rail lines, all of which leave the impression that China is a developed economy -- or at least well on its way to becoming one. Even in some smaller cities in inland provinces, government buildings make those in Washington and Brussels appear meager. In an area of Anhui Province that is officially designated an "impoverished county," the government office block looks exactly like the White House, only newer and whiter.
Underwriting the impressive facade, however, is an incredibly risky strategy. Governments borrow money using land as collateral and repay the interest on their loans using funds they earn from selling or leasing the same land. All this means that the Chinese economy depends on a buoyant real estate market to keep grinding. If housing and land prices fall dramatically, a fiscal or banking crisis would likely soon follow. Meanwhile, local officials' hunger for land has displaced millions of farmers, leading to 120,000 land-related protests each year.
RISKY BUSINESS
The recklessness can be traced to two things: First, local Chinese officials are evaluated for promotions and other rewards based on how well the economy they manage performs. Construction and real estate activities are among the most straightforward ways to stimulate growth. White-elephant construction projects thus offer eager officials a perfect opportunity to impress their political superiors, even if massive developments do not necessarily make any economic sense. Take, for example, the city of Ordos in Inner Mongolia: Its elaborate urban infrastructure and its sea of new flats and office blocks are nearly all unoccupied, making it China's largest ghost city.
SHOW XI THE MONEY
On the surface, banks' balance sheets have remained healthy despite these debts, since banks tend to roll over or "ever green" loans by issuing new loans to help borrowers "repay" old ones. In addition, local governments have been able to make their interest payments using their land as collateral.
Classic Ponzi Behavior
Perpetually rolling over an ever-growing number of loans to pay off prior loans is classic Ponzi behavior.
SOEs and Overstated GDP
Ong concludes with ...
"Given slower growth rates and falling real estate prices this year, the frequency of land expropriation is slowing down. But the truth remains that much of urbanization in China is a state-driven phenomenon, using resources drawn from the financial sector.
Although the central government recognizes the seriousness of the problem, it seems to lack any real resolve to tackle the issue head on. Muddling through seems to be so much easier. So until a major slowdown in the economy happens, the Chinese real estate market will continue on its current course."
The first two sentences are undoubtedly true. State-Owned-Enterprises (SOEs) are a huge drain on the real Chinese economy while making GDP look far better than it really is.
Unlike Ong, I see no realistic way China can "muddle through" for much longer given the bubble is busting in China right now, but that is my only objection to a very well written article.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
As costs of college soars (with thanks to absurd union salaries and benefits, as well as absurd administrator salaries and benefits), those attending college have increasing trouble paying back loans.
The proportion of U.S. student loan balances that are in delinquency — that is, unpaid for 90 days or more — surpassed that of credit-card balances in the third quarter for the first time, according to the Federal Reserve Bank of New York. [no link provided]
Of the $956 billion in student-loan debt outstanding as of September, 11 percent was delinquent — up from less than 9 percent in the second quarter, and higher than the 10.5 percent of credit-card debt, which was delinquent in the third quarter. By comparison, delinquency rates on mortgages, home-equity lines of credit and auto loans stood at 5.9 percent, 4.9 percent, and 4.3 percent respectively as of September.
Since the NY Fed’s data began in 2003, the share of student debt which is delinquent has nearly doubled, from a starting level of 6.13 percent, while credit-card delinquency has steadily drifted lower since peaking at 13.74 percent in mid-2010 in the wake of the financial crisis.
Moreover, the actual rate of student loan delinquency is far higher than the official tally suggests. According to the New York Fed [no link provided], “these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle.”
In other words, the real delinquency rate for loans in the current repayment cycle is “roughly twice as high,” per the Fed — which would put it north of 20 percent.
37.5% of Graduates Work in Jobs Requiring No Degree
The average college student who graduated in 2011 had $26,600 in student loans
Two-thirds of last year’s college graduates had student loan debt
37.8 percent of recent graduates are working in jobs that do not require a college degree
State budget cuts, which have led to large tuition increases, fewer grants, and an increasing need for college students and their families to borrow money to finance their education
96 percent of graduates from four-year, for-profit colleges took out student loans, borrowing 45 percent more than graduates of other types of colleges.
Cohn mentioned the word "study" fourteen times without once providing a link to the study, or even mentioning the name of the study. I suspect this is some kind of record, just not one anyone should be proud of.
Such semi-plagiarism is quite frankly inexcusable.
Who is to Blame?
I receive emails from readers all the time blaming the problem on point number four above, state budget cuts.
Nonsense.
Taxpayers are overburdened too much already. States have cut back on the percentage of money to education out of sheer necessity as education costs have risen far faster than anything else including health care and energy.
Inflation Comparison - Select Components Since 1978
Inflation Comparison - Current CPI Components Since 2000
The above charts are from Doug Short at Advisor Perspectives. Doug creates excellent charts every month on various CPI components. Rather than reinvent the wheel, I asked Doug for a set of custom charts.
Specifically, I had asked Doug to go back to 1971 for both charts.
Unfortunately, data for components in the first chart only goes back to 1978, and in the second chart not even that far.
The reason I asked for a starting year of 1971 is that's when I started college.
Tuition at the University of Illinois in Fall of 1971 was $250 a semester for engineers (My degree is in civil engineering). Current University of Illinois Tuition is $8,278 per semester for Illinois residents, $15,349 for non-residents.
Note that tuition difference: $250 in 1971 vs. $8,278 today.
Note Areas of Highest and Lowest Price Inflation
The least government interference is in apparel and recreation. The most government interference in the free market is education and health care.
Education is rife with "no child left behind" madness, free tuition for veterans, and for-profit school scams that flourish only because student loans cannot be discharged in bankruptcy.
Pray tell what good is a degree in English, history, PE, or political science other than teaching English, history, PE, or political science? And how many of those teaching jobs are even available?
Yet colleges churn out thousands of graduates, year after year, with perfectly useless degrees. Debt Slaves
President Obama promotes education as the answer to the unemployment problem. Other presidents have done the same thing. However, throwing money at the problem has done nothing but raise the cost of education for everyone, leaving many graduates debt-slaves for life, with totally useless degrees.
Whenever government sticks its nose into solutions, costs escalate. We saw it in housing, with hundreds of affordable home programs artificially increasing demand, and with Bush's "Ownership Society" artificially increasing demand, etc., etc. We see the same thing now in health care.
Expect such problem to grow until they blow sky high, which appears to be right at hand.
Mish's Six Point Education Proposal?
Increase competition by certifying more online schools
Make student debt dischargeable in bankruptcy
Abolish the student loan program
Abolish Pell Grants
Get rid of unions driving up costs
End all support for for-profit colleges
I assure you that if those actions were taken cost of college education would crash. But no one really wants that, any more than they want affordable housing.
Politicians gain far too much in campaign contributions from unions, from for-profit schools, and from banks wanting to make kids debt-slaves, to really address the problem.
Legislators would rather pretend they want to do something rather than actually doing something because it suits their purpose (getting reelected). Unfortunately, millions of students will pay the price as debt-slaves for life.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
"Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More
Our estimates of prospective stock market return/risk, on a blended horizon from 2-weeks to 18-months, remains among the most negative that we’ve observed in a century of market data.
On the valuation front, Wall Street has been lulled into complacency by record profit margins born of extreme fiscal deficits and depressed savings rates. Profits as a share of GDP are presently about 70% above their historical norm, and profit margins have historically been highly sensitive to cyclical fluctuations. So the seemingly benign ratio of “price to forward operating earnings” is benign only because those forward operating earnings are far out of line with what could reasonably expected on a sustained long-term basis.
On the basis of smooth fundamentals such as revenues, book values, dividends and cyclically-adjusted earnings, the S&P 500 is somewhere between 40-70% above pre-bubble valuation norms, depending on the measure. That’s about the same point they reached at the beginning of the 1965-1982 secular bear period, as well as the 1987 peak. Stocks are far less overvalued than they were in the late-1990’s, but it is worth noting that nearly 14 years of poor market returns have resulted simply from the retreat from those bubble valuations to the current rich valuations. If presently rich valuations were to retreat again to undervalued levels that have accompanied the start of secular bull markets (see 1982 for example), stocks would produce yet another extended period of dismal returns. That prospect certainly isn’t the reason for our present defensiveness, but it’s worth understanding the dynamic that has produced the pattern of market returns we’ve observed over time.
At present, the return of the S&P 500 over the past decade – though below average – has actually overshot what would have been expected in 2002. This reflects the fact that valuations today are still well above their norms. Unless we assume that valuations will remain rich forever, this doesn’t portend well for returns going forward.
We remain convinced that stocks are richly valued here. A fairly run-of-the-mill normalization of valuations in the course of the present market cycle would imply bear market losses of about one-third of the market’s value, without even establishing significant undervaluation. Then again, there’s no assurance that valuations will normalize, or that stocks will experience a bear market here. Maybe Wall Street is correct that profit margins will remain forever elevated and The New Global Economy™ will never again witness “normal” valuations on these measures at all. There’s no shortage of analysts who effectively embrace that view by focusing only on forward-operating earnings.
Not Different This Time
Hussman's message has been the same for quite some time. I am in the same camp.
For now, the market has other ideas. Yet, to bet on a sustained market advance, one has to believe "It's different this time".
I do not believe it will be different this time, although (and as we have seen), market valuations can remain in the stratosphere for lengthy periods of time. However, in such instances the market will eventually take back excess gains as it did in 2000-2001 and again in 2008 through the first quarter of 2009.
What If?
Hussman wrote "If presently rich valuations were to retreat again to undervalued levels that have accompanied the start of secular bull markets, stocks would produce yet another extended period of dismal returns."
I've thought about this quite a bit over the past year, and I fail to see a way the stock market does not return to low valuations seen at the end of previous long-term bear markets. Demographics, debt levels, and reversion-to-mean tendencies simply will not support the rosy scenarios of growth most advisors assume.
If so, that means a 10-year P/E at or below 10, possibly for a number of years. The impact for boomers and on pension plans will be stunningly negative.
No Hiding Places
Up to this point, the real loss from stocks could have been compensated by one's allocation to bonds. However, from this point forward, with the 10-year treasury yield at 1.65% and pension plan assumptions at 8%, it's highly likely both stocks and bonds will be a drag on a 50/50 portfolio's real return, and especially on expected (needed) rates-of-return.
This reversion-to-the-mean, slow-growth dynamic, as it unfolds, seems likely to usher in the final exodus from "investing" by the boomers. It will also leave a scar on those in their 20's and 30's today, which will keep them out of the markets for some time.
Need For Patience
I honestly believe the only investors, even professionals, who will make it through this exodus intact will be those who are able to hold some real assets and cash, and have the patience to wait, with the 'patience' part being the most critical.
There will be plenty of opportunities to buy into the stock market for cyclical rallies, but most investors who try to trade will end up losing money because few have the patience to wait for good opportunities, while others will throw in the towel at precisely the wrong times.
That's life in a secular bear market, and few understand bear market dynamics. Fewer still actually realize how stacked the odds are against a sustained advance and why that is precisely so.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
John Hussman is one of the speakers at my "Wine Country" Economic Conference on April 5, 2013. Click on Image to Learn More
President Obama says there is a "skills gap". A quick search says that many misguided souls believe the president. For example Forbes writer Rich Karlgaard says The Skills Gap Exists.
Karlgaard believes the "gap is sure to grow as the population ages and industries from health care to manufacturing are altered by technology. Outsourcing to China won’t be the answer, either. Its population is aging the fastest of all the major economies."
Needham, citing a report by Deloitte says "job creation in the United States is hampered by a lack of highly skilled and adaptable workers whose talents don't match current job openings".
Eighty percent of the manufacturing companies in the United States say they cannot find enough workers with the proper skills to fill open positions at their facilities. That's the number President Barack Obama cited, as he announced the Military-to-Civilian Skills Certification Program, in June 2012.
"If you can maintain the most advanced weapons in the world, if you're an electrician on a Navy ship, well, you can manufacture the next generation of advanced technology in our factories like this one," Obama said, speaking from the floor of a Honeywell plant in Minnesota.
But the problem is that veterans have had trouble getting hired, as Obama said, "simply because they don't have the civilian licenses or certifications that a lot of companies require."
Skills Don't Pay the Bills
The above columnists express widely believed economic hooey.
In contrast, Adam Davidson, in his New York Times column, Skills Don’t Pay the Bills, precisely summarizes the problem in four deep thoughts.
Deep Thoughts
There is no skills gap.
Who will operate a highly sophisticated machine for $10 an hour?
Not a lot of people.
As a result, there is going to be a skills gap.
Davidson visited the engineering technology program at Queensborough Community College in New York City led by instructor Joseph Goldenberg whose manufacturing classroom consisted of "nothing but computers".
With that introduction, inquiring minds tune in a bit closer to some snips from Davidson.
Nearly six million factory jobs, almost a third of the entire manufacturing industry, have disappeared since 2000. And while many of these jobs were lost to competition with low-wage countries, even more vanished because of computer-driven machinery that can do the work of 10, or in some cases, 100 workers. Those jobs are not coming back, but many believe that the industry’s future (and, to some extent, the future of the American economy) lies in training a new generation for highly skilled manufacturing jobs — the ones that require people who know how to run the computer that runs the machine.
Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code. It also requires a worker with the ability to figure out what’s going on when the machine isn’t working properly. And aspiring workers often need to spend a considerable amount of time and money taking classes like Goldenberg’s to even be considered. Every one of Goldenberg’s students, he says, will probably have a job for as long as he or she wants one.
And yet, even as classes like Goldenberg’s are filled to capacity all over America, hundreds of thousands of U.S. factories are starving for skilled workers. Throughout the campaign, President Obama lamented the so-called skills gap and referenced a study claiming that nearly 80 percent of manufacturers have jobs they can’t fill. Mitt Romney made similar claims. The National Association of Manufacturers estimates that there are roughly 600,000 jobs available for whoever has the right set of advanced skills.
The secret behind this skills gap is that it’s not a skills gap at all. I spoke to several other factory managers who also confessed that they had a hard time recruiting in-demand workers for $10-an-hour jobs. “It’s hard not to break out laughing,” says Mark Price, a labor economist at the Keystone Research Center, referring to manufacturers complaining about the shortage of skilled workers. “If there’s a skill shortage, there has to be rises in wages,” he says. “It’s basic economics.” After all, according to supply and demand, a shortage of workers with valuable skills should push wages up. Yet according to the Bureau of Labor Statistics, the number of skilled jobs has fallen and so have their wages.
Goldenberg, who has taught for more than 20 years, is already seeing it up close. Few of his top students want to work in factories for current wages.
It’s easy to understand every perspective in this drama. Manufacturers, who face increasing competition from low-wage countries, feel they can’t afford to pay higher wages. Potential workers choose more promising career paths. “It’s individually rational,” says Howard Wial, an economist at the Brookings Institution who specializes in manufacturing employment.
Situation in a Nutshell
Companies cannot afford to pay so much that they lose money.
Companies would rather invest in technology and robots to reduce the need for labor, than to pay workers more money
A shift manager at McDonald's can make $14 an hour, comparable to what manufacturing jobs pay
Union wages and benefits are a major problem
High Cost of Education
The problem is actually quite a bit deeper. Given the preposterously high cost of education in the US, students graduate from college with an expectation they need to make more than they can to pay off student debt.
The same holds true (and even more so) for those going back to school as well as those attending for profit colleges such as the University of Phoenix.
Keynesian and Monetarist clowns conclude that wages are not high enough. The masses lament for "living wages".
The problem is not that wages are too low, but rather costs are too high. Ben Bernanke, president Obama, union sympathizers and other misguided fools seek to drive wages up.
The results are what any rational person should expect: loss of jobs to Asia, loss of jobs to technology, prices rising faster than wages, and overall debt soaring to the moon.
Reflections on Affordable Housing, Education, Medicine
There are hundreds of "affordable housing" programs. Every damn one of them drove costs higher by artificially creating demand right up until the pool of greater fools ran out. Then, as soon as housing crashed, government and the Fed made a concerted effort to drive back up prices.
In effect, no one really wanted affordable housing. Rather they all wanted "affordable housing slush funds".
The same holds true for education and health care.
Why is the Middle Class Shrinking?
The simple fact of the matter is there is absolutely nothing wrong with falling prices. Indeed the average guy on the street would welcome falling prices. The Fed, however, says no.
The first result of Fed policy (coupled of course with Fractional Reserve Lending) is rising prices of essential goods and services coupled with falling real wages.
The second result of Fed policy was a real estate and financial asset crash.
The third result of Fed policy is reduced demand for credit (which constitutes deflation in my book).
Since the Fed never learns, we have seen reckless rounds of QE following reckless rounds of QE hoping to stimulate jobs and lending. Yet, people actually wonder "Why the middle class is shrinking"
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
"Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More
As robots keep replacing human workers in manufacturing and now retail and food servicing, fears have arisen that artificial general intelligence (AGI) machines will threaten mankind when "intelligence escapes the constraints of biology" and machines can design and create their own offspring.
Boffins at Cambridge University want to set up a new centre to determine what humankind will do when ultra-intelligent machines like the Terminator or HAL pose "extinction-level" risks to our species.
A philosopher, a scientist and a software engineer are proposing the creation of a Centre for the Study of Existential Risk (CSER) to analyse the ultimate risks to the future of mankind - including bio- and nanotech, extreme climate change, nuclear war and artificial intelligence.
Apart from the frequent portrayal of evil - or just misguidedly deadly - AI in science fiction, actual real scientists have also theorised that super-intelligent machines could be a danger to the human race.
Jaan Tallinn, the former software engineer who was one of the founders of Skype, has campaigned for serious discussion of the ethical and safety aspects of artificial general intelligence (AGI).
Tallinn has said that he sometimes feels he is more likely to die from an AI accident than from cancer or heart disease, CSER co-founder and philosopher Huw Price said.
Humankind's progress is now marked less by evolutionary processes and more by technological progress, which allows people to live longer, accomplish tasks more quickly and destroy more or less at will.
Both Price and Tallinn said they believe the rising curve of computing complexity will eventually lead to AGI, and that the critical turning point after that will come when the AGI is able to write the computer programs and create the tech to develop its own offspring.
"We need to take seriously the possibility that there might be a ‘Pandora’s box’ moment with AGI that, if missed, could be disastrous. With so much at stake, we need to do a better job of understanding the risks of potentially catastrophic technologies.” said Price.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Progress on the alleged fiscal cliff has been non-existent. Obama wants tax hikes on the wealthy, Republicans want to close loopholes.
With little possibility of a breakthrough on the fiscal cliff until the "last minute", inquiring minds are likely wondering what the term "last minute" precisely means.
President Barack Obama called House Speaker John Boehner and Senate Majority Leader Harry Reid over the weekend to discuss the fiscal cliff, as staff-level negotiations have moved slowly and produced no visible signs of progress on how to avoid the tax increases and spending cuts due take effect in January.
A broader group of negotiators that includes Senate Minority Leader Mitch McConnell (R., Ky.) and House Democratic Leader Nancy Pelosi of California, had been expected to reconvene this week, but that is now unlikely.
With each passing day, the government moves closer to the fiscal cliff, the combination of $500 billion in tax increases and spending cuts that begin in January and that economists have said could tip the country back into a recession.
One veteran Democratic aide said he wasn't surprised major concessions hadn't been made, given that real deal making usually happens at the last minute, which he put at "two weeks away."
Expect Definition to Change
Two weeks away would be December 10, which I suggest is far too early to be considered "last minute".
Green is Senate in Session. Orange is House in Session. The green hashed bars are TBD "to be determined".
Note the Congressional calendar does not include Saturday or Sunday.
Schedule Not Finalized
Out of curiosity, I called the office of the House majority leader Eric Cantor and was told the Congressional schedule for December will not be finalized until Friday, November 30.
Thus, we will not know the semi-final definition of "last minute" until then, but right now the preliminary estimate is no sooner than Friday, December 14.
Bear in mind, should December 14 (or whatever day Congress adjourns for the year) come and go without a Fiscal Cliff deal, assume that "last minute" will be redefined to mid-January 2013 when leaders of both parties will be anxious to roll back some of the tax hikes, referring to the rollbacks as "tax cuts".
Reflections on Our Hard-Working Congressional Representatives
While waiting for the final definition of "last minute", inquiring minds just might want to take a look at other months in the Congressional Calendar to see how frequently our representatives are at work for us.
Here are some sample months to consider.
Shock and Awe
Some people are probably shocked by this. I was not only shocked but appalled.
Indeed, my very first reaction was "My God! Look at how horrendously overworked our representatives are!"
No doubt, many of you had the exact same initial reaction.
That strenuous schedule coupled with hard work explains many things, such as why we have 73,608 pages of tax code piling up month after month, year after year.
click on chart for sharper image
US Congress: The Most Productive Workers on the Planet
The results speak for themselves: US Congress collectively has the most productive workers on the planet.
These horribly-overworked souls are so dedicated to churning out mind-numbing pages of legislation that any clear-thinking individual should be able to quickly spot the need to reduce the number of hours Congress is in session.
Thus, I propose Congress be in session no more than three days per month. Should that fail to dramatically reduce total the number of pages of Congressional bills, I further propose limiting Congressional sessions to alternating months.
If this sounds backwards, you just are not thinking clearly.
Everyone knows nothing gets done until the "last minute" anyway, and this clever proposal will massively increase the percentage of time worked at the "last minute" while also reducing the sheer volume of pages of legislation produced, hopefully to a readable number.
Perhaps members of Congress would even find the time to personally read the bills they sponsor.
So please call your representatives and tell them you support "Mish's Proposal to Reduce Congressional Sessions" but only after they reduce the number of pages in the tax code to 15.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
"Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More
Euro-zone finance ministers, the European Central Bank and the International Monetary Fund reached a deal early Tuesday in Brussels that is expected to see them release more financial aid to Greece.
The euro-zone finance ministers, known collectively as the Eurogroup, said in a statement that a worse macroeconomic situation and delays in implementing assistance have resulted in a weaker outlook for Greek government finances.
The Eurogroup members said that the “necessary elements are now in place” for member states to approve a European Financial Stability Facility (EFSF) disbursement to Greece of 43.7 billion euros ($56.8 billion), with the formal go-ahead expected by Dec. 13.
Greece’s debt targets were also tweaked, with government debt now targeted to fall to 124% of gross domestic product by 2020, and to substantially less than 110% of GDP by 2022.
Eurogroup members said in a statement they are prepared to consider various measures to support Greece, including:
Lowering interest rates on the Greek Loan Facility by 100 basis points
Cutting guarantee costs for Greece’s EFSF loans by 10 basis points
Possibly deferring interest payments on EFSF loans by 10 years.
The Eurogroup said that the measures will not affect the creditworthiness of the EFSF, the euro bloc’s bailout fund.
Deal? What Deal?
How the hell can there be a deal when the news clearly states the Eurogroup is prepared to consider various measures?
What kind of deal is that?
Why Does it Even Matter?
Let's assume for the moment that all of what the EU has considered actually happens. You still have to be nuts to think this makes the situation stable.
Supposedly "government debt is now targeted to fall to 124% of gross domestic product by 2020". This will be just another missed target in a long series of missed targets, not that 124% is remotely sustainable in the first place.
Yawn
The market seems to have had enough of these games. The euro barely moved on the non-news.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Münchau: The singular importance of the budget negotiations, and of British prime minister David Cameron’s insistence on an EU budget freeze, lies in what they reveal about the future of the EU itself. A frozen budget means that the EU is stuck with what it does. Forget the Agenda 2020, or any other pretence at growth-enhancing policies.
What the fraught budget negotiations tell us is that the process of European integration – at the level of the EU – is largely completed. In that sense it matters little whether the UK, for example, stays inside or not. In formally leaving the EU, there would be no need for the UK to give up on any existing rights, including the right to take up work and residence in the EU and, of course access to the single market – whatever that is worth. The terms of a withdrawal from the EU are freely negotiable. Even now, it does not feel that different, apart from the temperature, whether you are in Britain inside the EU, or in Norway outside the EU.
Mish: From the point of view of the EU, Münchau is largely correct. The EU can blunder along in its creation of an economic nannyzone with or without the UK, but not with or without Germany.
However, from the point of view of the UK, it would be better for the the UK to leave. The UK does not need inane EU agricultural subsidies, inane financial regulations, inane work rules, or this endless bickering over rules and budgets that the EU nannyzone requires of member states.
Münchau: Today’s EU has two important functions left. Some readers may find my list shockingly short. The first is that it provides the institutions and legal framework for the eurozone to muddle through to a solution of its crisis. I am not saying that the eurozone will necessarily achieve that goal. There is a non-trivial probability that it will not.
The banking union could be a first step towards a single market for finance at eurozone level. Ultimately, I would also expect a single market for labour and for services, all at eurozone level. If there is a fiscal union, its budget will end up not only bigger than the EU’s, but also different in composition – to fulfil the purpose of macroeconomic stabilisation.
Mish: I advise betting on the "non-trivial probability" things do not work out as Münchau sees. Ironically, the more "success" the EU has on achieving one-size fits none "nannyrules" for everything under the sun, the lower the overall growth in the region because the bureaucracy, financial taxes, agricultural rules, etc., are generally headed in the wrong direction.
Münchau:The EU’s second important function is to serve as a waiting room for member states who are not yet in the eurozone, but are willing to enter it at some point in the future.
In the end, it does not matter whether the outs leave the EU formally, linger compliantly on the fringes or whether the eurozone leaves them. A messy divorce of some sort will take place, at some point, possibly still quite a few years away. It could take numerous forms. A formal separation is only one of several possibilities. But it is not sustainable for a group of permanent outsiders to enjoy permanent co-decision rights, even though the EU is endlessly patient when it comes to accepting transitional arrangements. The reality is that there is no sustainable biosphere that is outside the eurozone, but inside the EU.
Mish: There is a big difference between the UK sitting on the fence and the Czech Republic, Denmark, or Sweden sitting on the fence. The difference is the UK's size and ability to make waves.
However, let's assume Münchau is correct, that "there is no sustainable biosphere that is outside the eurozone, but inside the EU".
Given there is very little chance of the UK joining the eurozone, the sooner the UK leaves the EU, the better. Since that is what Münchau implies (assuming he agrees the UK will not join the eurozone), we are largely in agreement.
Münchau: By insisting on an EU budget freeze, Mr Cameron is ultimately doing the eurozone a favour. By undermining the EU, he provides further incentives for the eurozone to grasp its collective interest. I support him.
Mish: Not quite. Cameron sits like a wimp on a fence unable to do what needs to be done, nor will he even put the matter to a vote.
Italy’s prime minister has publicly urged David Cameron to call a decisive referendum on “the fundamental question” of whether Britain should remain in the EU.
In comments that will complicate the British prime minister’s efforts to fend off Eurosceptic demands for an “in-out” vote, Mario Monti argued that an unambiguous plebiscite was the best way to address “the British problem” and prevent an exit.
He added: “Above all, one day Britain must – I spoke with David Cameron about this last week – Britain must ask their electorate, not whether they agree or disagree on the latest change . . . but pose the fundamental question: do you want to remain in the European Union?”
Opinion polls suggest a majority of Britons want to leave the EU. A ComRes survey for the Independent newspaper, released on Tuesday, showed 54 per cent wanted Britain to exit and maintain close trading links.
While Mr Cameron has indicated he favours a referendum on a new “settlement” between Britain and an increasingly integrated eurozone, he makes it clear he wants the UK to retain its membership. He has refused to yield to pressure from his own Conservative party to hold an in-out vote.
The prospect of reopening Tory splits on Europe haunts Mr Cameron; the two previous Conservative premiers – Margaret Thatcher and John Major – were both brought down by party infighting over Europe.
Michael Fabricant, a Conservative vice-chairman, on Monday called on Mr Cameron to offer a referendum non-aggression pact at the next election with the Eurosceptic UK Independence party. He warned the Conservatives could otherwise lose 20-40 seats.
But Mr Cameron rejected the idea, saying there would be “no pacts” with Ukip, which secured its best-ever parliamentary by-election result last week. Nigel Farage, Ukip leader, said he could not do a deal with the Tories while Mr Cameron was in post.
Meanwhile, Mr Cameron said on Monday that a deal on the EU’s long-term budget was “still doable” in spite of a breakdown of talks in Brussels last Friday. Britain sided with other EU paymasters – including Germany, Sweden, the Netherlands and Finland – in calling for cuts to proposed spending.
Wimping Along
Cameron has not yet figured out there will only be positive ramifications to jettisoning the nannycrats instead of attempting to influence them.
Compromise is silly with so many major differences including the overall budget, financial transaction taxes, agricultural subsidies, tariffs in general, and work rules.
Cameron raised the EU's bluff and Merkel promptly folded.
The problem is the UK would be far better off by having a straight up or down vote on the EU by British citizens (which I am sure would be rejected), and sadly that outcome was avoided.
Instead, Cameron has decided to plod along instead of doing what needs to be done: having a national referendum on UK membership in the EU.
Cameron's Self-Serving Policies
Cameron will not do what polls suggest or even what his own party wants. Why? Like most politicians, Cameron is acting in his own self-interests hoping to offend the fewest number of people.
The risk is Labor wins the next election anyway, making an exit impossible.
Worse yet, the next prime minister could conceivably sell the UK down the river by agreeing to implement financial transaction taxes and imposing other nannycrat idiocies.
What Cameron really needs to do is not only call for a referendum, but also encourage people to vote to kiss the nannycrats goodbye.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Click on the tab "I quattro poli". It shows a polynomial regression of the four major political parties.
Just for your info, a short translation of the legenda: Centro-Sinistra is the Center-Left coalition, Centro-Destra is the Center-Right coalition, Centro is of course Center (actually it is the coalition more supportive of Monti and actually seeking to have him for a second term as PM), and M5S is the usual acronym for Movimento 5 Stelle (Five Star Movement).
As you can see, Center-Left is for the moment the clear winner and M5S has now overcome Center-Right. I still think that a stall in Senate is likely anyway (which in some way could favor Monti for a second term as PM).
The other remarkable thing is that the people declaring today that they will not vote is as higher than 40% (some polls give it close to 50%).
This weekend the primary elections of Center-left took place: Pierluigi Bersani and Matteo Renzi scored first and second and a second round will be needed to choose between the 2, as nobody reached 50% in the first round. Bersani is the current secretary of the party and Matteo Renzi is the mayor of Florence and a kind of young outsider.
Best regards,
AC
Top Four Parties
Polling data appears to be from mid-October, not June as shown on the slidebar.
A deadlock in parliament following the next election may mean re-appointment of Mario Monti but the surge for the Five Star Movement is encouraging.
Commit to stay in charge for no longer than 2 terms
Commit to take a minimum salary and give the rest back to the community
Post a public platform on the internet
Be willing to hold a public debate on the platform
Beppe Grillo's personal position, not a mandate for the Five Star Movement is "Get out of the Euro and default on debt".
From Andrea in the above link ...
Five Star Movement candidates have been able to get almost everywhere between 10 and 20% of votes, sometimes even more, all without a single minute of TV advertising or a single advertising page on newspapers.
The movement has simply spread via the internet, social networks and public meetings around the country. The message sent by their success is clearly: we are fed up with this corrupted, inefficient and incompetent political class.
The most important thing for the future months is the last stance Beppe Grillo has decided to take just before elections: get out of the Euro and default on debt. This position has been strongly criticized the rest of the political class and mainstream media, but the fact that Beppe Grillo has been breaking this “Taboo” and that there was a strong reaction by political and media environments, has finally opened the debate in Italy and has certainly made people to start seriously think about it, despite the fact that Italy so far had no financial help from the EU or IMF.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
