Category: Currency

Just Shut Them Down

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The Federal Reserve has been forced to warned Deutsche Bank that it is money laundering again.

The fix for this is very simple:  Lock them out of the US, because they are not going to fix this.

This is BCCI with a German accent:

The Federal Reserve told Deutsche Bank AG in recent weeks that the lender is failing to address persistent shortcomings in its anti-money-laundering controls, according to people familiar with the matter.

The Fed’s frustration has escalated to a point that the bank could be fined, the people said.

Deutsche Bank has poured massive resources into addressing repeated shortcomings and penalties related to allowing suspect transactions. The Fed told Deutsche Bank that instead of making progress, the German lender with a large Wall Street presence is backsliding. The regulator has said that some of the anti-money-laundering control problems require immediate attention, according to the people.

………

The Fed’s harsh words contrast with the bank’s message that it has worked diligently to improve its systems and has put most of its legal troubles in the past.

The Fed’s latest warning comes four years after it classified Deutsche Bank’s U.S. operations as being in “troubled condition,” a rare rebuke for a major bank. In May 2020, it issued a fresh admonishment over the bank’s money-laundering controls.

………

Deutsche Bank is Germany’s largest lender and as a dollar clearing bank regulated by the Fed, is a major player in global financial transactions.

Shut down their dollar clearing operations.  Problem solved, and the Germans can deal with following their own “No Bailouts” advice that they foist on the rest of the Euro Zone.

Cyber Currencies’ Fatal flaw

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You can never be sure that someone won’t come after your assets via the blockchain.

When you realize that almost every square inch of the earth (Antarctica excepted) was stolen at some point, and the same applies to most assets in the modern world.

With Bitcoin and its ilk, there is no statute of limitations:

An interesting little observation by Izzy Kaminska over in the FT about a problem that Bitcoin faces. It’s a legal problem that leads to an economic one. And the problem Bitcoin faces is one that is based upon the very existence of the blockchain itself. There’s a good reason that all functioning economic systems have something akin to a market ouvert rule, or something like squatters’ rights. Note that I say something like, not exactly either of those rules. For example, if you find money in the street then you can’t and shouldn’t just keep it. But if you hand it in to the police, no one then claims if for some period of time, then it does become yours. No, you can’t just move into someone elses’ house and insist that it belongs to you. But move in for long enough (the time period varies) and no one complains or does anything and it becomes yours. You don’t get title when you buy stolen goods. But something you bought in good faith, in an open marketplace, does become yours eventually. Even if it had been stolen some point further down the ownership chain.

 The reason for these rules, and yes they vary across places and concerning different specific items, is that at some point we’ve got to give up on historic unfairnesses and or illegalities and just get on with the current allocation of scarce resources. We just don’t want to wall off something that may or may not have been stolen in, say, 1820, from being put to use today. We almost certainly would want to make sure that something stolen yesterday was returned to its rightful owner. But at some point between those two dates we’ve got to have a cut off point.

………

And that’s where Bitcoin has the problem, in that very existence of the blockchain:

The first relates to the ongoing legal recourse rights of Bitfinex victims. Even though they may have lost their right to pursue Bitfinex for compensation, they are still going to be entitled to track the funds across the blockchain to seek recourse from whomsoever receives the bitcoins in their accounts. That’s good news for victims, but mostly likely very bad news for bitcoin’s fungible state and thus its status as a medium of exchange.

Just one successful claim by a victim who tracks his funds to an identifiable third party, and the precedent is set. Any exchanges dealing with bitcoin in a legitimate capacity would from then on be inclined to do much stronger due diligence on whether the bitcoins being deposited in their system were connected to ill-gotten gains. This in turn would open the door to the black-listing of funds that can not prove they were originated honestly via legitimate earnings.

Of course, people should not steal things. And yet for a currency to work it has to be possible to take the currency at its face value. Thus it may well be that the bank robber paid you for his beer with stolen money but you got it fair and square and thus the bank doesn’t get it back as and when they find out. Another way to put this is that the crime dies with the criminal. And yet the blockchain upends all of that. Because every transaction which any one bitcoin has been involved in is traceable.

The problem with cyber currencies and the rest of the internet enabled Libertarian-Utopian is that they believe that computer code developed over a few months can somehow trump contract law and record keeping that has been developed over the past 1000+ years.

Ask yourself, what happens if you have a fruit tree with branches that cross a property line.  Who owns the fruit on those branches?

It is very complicated.

In some places, the branches, and fruit, belong to the property owner over whose property it extends.

In others, it belongs to the property owner of the location of the trunk, but  the owner of the property can prune branches over their yard and dig up roots under the yard.

In some places, it belongs to one person when it on the branch, and another when the fruit falls.

In some places, a landowner can sue for trespass for branches over their yard.

This is just a fruit tree.

Recording property transactions are far more significant, and potentially far more complex, and we saw what happened when the banks decided to create MERS to “streamline” fraud real estate transactions.

I’m an engineer, not a lawyer, dammit, * but is clear to me that the people behind these efforts have only the vaguest idea of how society works, and how long it took to get society works.

*I love it when I get to go all Dr. McCoy!

IMF Internal Report Says That the Screwed the Pooch in Greece

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An internal report reveals that IMF staff gave engaged in favoritism toward the EU and the Euro in the handling of the ongoing Greek financial crisis:

The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.

This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.

It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.

The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way European Union insiders used the fund to rescue their own rich currency union and banking system.

………

In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff,” it said.

The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen.

………

This pro-EMU bias continued to corrupt their thinking for years. “The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro-area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said.

………

In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed.

The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.

………

The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report.

“If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said.

So, even with institutions in the tank for the Euro, the currency continues to fail.

I still say that the solution is to get the Germans out of the Euro, sooner, rather than later.

They Are Taking the Genocidal Maniac and Slave Owner off the Front of the $20 Bill

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And replacing him with abolitionist Harriet Tubman: (I love the irony)

Black abolitionist leader Harriet Tubman will appear on the front of the $20 bill, relocating the slaveholding former president Andrew Jackson to its rear, and founding father Alexander Hamilton will remain on the face of the $10 bill.

Now is time to start a campaign to get Jackson the architect of the Trail of Tears, completely off the $20 bill.

The man was ineluctably evil, and should not be celebrated.

Elections is Weird

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Somehow, after completely failing to deliver on its promises, and folding like a bunch of overcooked broccoli, Syriza still managed to emerge from the latest Greek elections the conclusive winner:

Alexis Tsipras will be sworn in as Greece’s prime minister later on Monday and his new government formally announced on Tuesday, Greek media said, after the leftist Syriza leader romped to an unexpectedly convincing election victory.

The result on Sunday was a personal triumph for the 41-year-old, who gambled on the snap poll last month to see off a revolt by party radicals over his U-turn on accepting more tough austerity measures in exchange for Greece’s third international bailout.

The premier-elect will now make renegotiating the terms of Greece’s debt mountain a top priority. He will attempt to build a broad consensus among the parties he defeated so as to strengthen his hand in talks with the country’s eurozone creditors, a senior Syriza source told Reuters.

………

Following a campaign that for weeks looked too close to call, Syriza won 35.5% of the vote – a fraction less than its previous total – against 28.1% for the centre-right opposition, New Democracy, giving the leftist party 145 seats in the 300-seat parliament.

………

Tsipras said he would renew his coalition with the small nationalist Independent Greeks party to give him the 151-seat majority he needs in parliament. The new government’s programme will be dictated by the punishing terms of Greece’s latest €86bn rescue package, which demands a radical overhaul of the country’s ailing economy and far-reaching changes to tax, welfare and pension systems. The cash-for-reforms deal is subject to quarterly reviews, with the first due next month.

I am thoroughly flummoxed by these results.

My guess as to the meaning of all this is that, “The whippings will continue until morale improves.”

This Is All F%$#Ed up and Sh%$

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After many years of complaints by the US that China should let its currency float according to market forces, the Bank of China has broadened the range that it will allow the Yuan to float, having the effect of devaluing the currency:

As China contends with an economic slowdown and a stock market slump, the authorities on Tuesday sharply devalued the country’s currency, the renminbi, a move that could raise geopolitical tensions and weigh on growth elsewhere.

The central bank set the official value of the renminbi nearly 2 percent weaker against the dollar. The devaluation is the largest since China’s modern exchange-rate system was introduced at the start of 1994.

………

China’s devaluation represents a difficult dilemma for the Obama administration. The United States Treasury has tried to use quiet diplomacy in recent years to encourage China to free up its currency policies, while blocking efforts in Congress to punish China for major intervention in currency markets over the past decade to slow the rise of the renminbi. Many in Congress have long accused China of unfairly building up its manufacturing sector at the expense of American jobs by undervaluing the renminbi, and the Chinese devaluation could fan those criticisms.

In a seeming nod to such concerns, the central bank said that it would begin to use the market closing, not the previous morning’s official setting, to calculate the renminbi’s official daily fixing against the dollar. But China’s economic weakness now means that further opening up of the currency to market forces could mean a weaker renminbi, not a stronger one. That, in turn, would make Chinese goods even more competitive in the United States and Europe.

China’s central bank “has finally thrown in the towel on supporting the renminbi,” said Eswar S. Prasad, a professor of economics at Cornell University. At the same time, he added, easing its grip on the currency’s value “has blunted criticism by combining the currency devaluation with a more market-determined exchange rate.” The United States and institutions such as the International Monetary Fund have called on China to be more hands-off in managing the renminbi.

Obviously there is irony here, but this is real news.

To quote Joe Biden, “This is a big F%$#ing deal.”

This is the last best effort by Chinese economists to try to keep the economy moving.

I don’t know where this is going, but it is not going to be pretty.

What a Surprise: Poles are Worrying about a New German Conquest

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In response to the largely German driven takeover of Greece, Polish support for joining the Euro has fallen off a cliff:

Once, it was an exclusive club that nearly all of Europe aspired to join. Now, in the wake of Greece’s latest financial crisis and the hard-line response from many of the Continent’s powers, becoming a partner in the European common currency seems less and less appealing to many of the countries lined up for their chance.

From Poland to the Czech Republic to Hungary and points farther south and east, joining the euro is increasingly seen as rife with risks and costs — including a substantial surrender of sovereignty — that outweigh the benefits. And while many of the countries that have not yet adopted the single currency had doubts before the Greek crisis flared, the heavy penalties incurred by Athens to stay in the eurozone have made the trade-offs even clearer and the political leanings against membership more pronounced.

The qualms about partnership in the currency raise further questions about the ability of the European Union to maintain momentum toward its long-held and oft-stated goal of ever-closer union. More than any other policy, the single currency was intended to bind the members economically and politically while reducing the chances of conflict, and the decline in enthusiasm for the union has tracked a more general reassessment of European integration.

The doubts are now playing out primarily in the countries that most recently joined the European Union, primarily in Central and Eastern Europe. Lithuania became the 19th and newest adopter of the euro in January.

………

With such political attitudes hardening, the prospect of Poland’s or any other country’s adopting the euro anytime soon appears quite remote, said Sebastian Plociennik, an analyst for the Polish Institute of International Affairs who focuses on European integration and economic issues.

This is not a surprise.

The EU was all about preventing another horrific war in Europe, particularly another attempt by Germany to conquer Europe.

So now, other nations which bound by treaty to join the Euro at an indeterminate time are thinking that the proper time is, “When hell freezes over.”

This has set back EU integration, and Euro adoption by decades.

How the Germans Have Yet Again F%$#ed Up a Signature Foreign Policy Initiative

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First, the hash tag: #ThisIsACoup , which is trending on Twitter.

Rather unsurprising, given that now that Greece has capitulated to the insane and sadistic demands of the Troika, but there is still no deal because the so-called hawks still want another pound of flesh:

Greece’s final attempt to avoid being kicked out of the euro by securing a new three-year bailout worth up to €80bn ran into a wall of resistance from the eurozone’s fiscal hawks on Saturday.

Finland rejected any more funding for the country and Germany called for Greece to be turfed out of the currency bloc for at least five years.

All of this means that not only will Greece have to leave the Euro, but it means that there will be poverty, epidemics, and starvation that has not been seen on the European continent since the end of World War II.

It also means that Greece will be exiting the Euro Zone, because all of its banks will be shuttered in the next few days.

This could have turned out better, but it now appears that the current Greek government has made no plans at all for the eventuality of leaving the Euro:

Here are just a few of their concerns – focused in particular on the idea, put forward by the German Finance Minister Wolfgang Schaeuble, that there perhaps could and should be a temporary exit of Greece from the euro.

So the first rather chilling thing I’ve learned, from well-placed bankers, is there have been no conversations between the Bank of Greece, the government or regulators and Greece’s commercial banks about the technicalities of leaving the euro and adopting a new currency.

(emphasis mine)

The “hawks”, in particular the Germans, and most particularly Wolfgang Schäuble, are eager to make an example of Greece, thinking that this will cow the other members of the Euro Zone will see what happens to the Greek people and fall into Germany’s hegemonic line.

I think that this is a gross miscalcculation.

Any nation in the Euro zone that is seeing what is being done to Greece has to be drawing contingency plans for a rapid flight from the monetary union.

The lesson of this disaster is that a plan be that can be implemented in a few days must be ready to go, and I expect  that plans are being drawn up in Italy, Spain, Portugal, and Ireland.

If any of these countries has their ducks in a row, then in the event of a Euro exit, it means that this action will in fairly short order be followed by economic growth.

Once this happens, it is likely that the others will follow, seeing that an exit can be managed gracefully.

If either Italy or Spain leaves, the Euro would soar, because the effects of Germany’s predatory export state on the currency would be less diluted, which would likely make countries like France, the Netherlands, and Belgium (particularly with the possibility of an ethnic split between Flemish and Walloon) look for the exit as their exports become prohibitively expensive.

Assuming the gradual dissolution of the Euro, or as I like to think of it, the New Reichsmark, Germany sees its currency become much stronger, and its export driven economy looks a less successful.

I expect this to happen for two reasons:

First, because I do not see how the Euro can survive in the face of the German insistence on economics as a morality play.

Second, it is clear that the creation of the Euro, and its management over the past decade have been a major foreign policy initiative by the Germans, and all of the “bold” German foreign policy initiatives since reunification (there were none prior to reunification) have been a disaster, with Germany’s premature recognition of Slovenia, hastening the brakup of Yugoslavia, which prevented a negotiated separation, and guaranteed a bloody civil war being only the first of such disasters.

The Euro was structured by the Germans for the benefit of Germany, and the rest of the people of Europe are reaping a bitter harvest as a result.

If True, Then the Germans Are up to Their Old Tricks, but One Must Consider the Source

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Somehow or Other, this got deleted from my blog, and so I am reposting:

Andrew Ross Sorkin (of all people) teases an interesting tidbit out of Timothy Geithners self-serving and factually challenged memoir, Stress Test: Reflections on Financial Crises, specifically that in discussions with German FM Wolfgang Schäuble, Angela Merkel’s go to guy on finance had as his goal maximizing pain for the Greeks with the hope that they would be compelled to leave the Euro:

In July 2012, Timothy F. Geithner, the United States Treasury secretary at the time, traveled to Sylt, an island off Germany in the North Sea.

 Mr. Geithner was there for a meeting with Wolfgang Schäuble, Germany’s finance minister, who would spend his summers at his vacation home on the tiny island.

 The topic was Greece.

 In the home’s library, the two men spoke about Greece’s prospects and begun discussing ways for the European Union to keep the country in the eurozone.

 To Mr. Geithner’s dismay, however, Mr. Schäuble took the conversation in a different direction.

 “He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy,” Mr. Geithner later recounted in his memoir, “Stress Test: Reflections on Financial Crises.” “The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks,” he says in the memoir.

 “At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union,” Mr. Geithner wrote. “The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.”

 Fast-forward three years. What Mr. Schäuble articulated that summer afternoon to Mr. Geithner is finally taking shape.

 ………

 A crucial decision made over the weekend had largely gone unremarked upon but is telling. The European Central Bank decided to halt an expansion of its emergency lending facility to Greek banks. That facility could have allowed the banks to continue operating without as much panic and helped avoid some of the capital controls by providing additional liquidity.

 ………

 By closing the cash spigot, the E.C.B. managed to instill additional fear and panic into the day-to-day lives of the Greek people, ahead of the vote on the referendum.

 That panic could cut two ways. The Greeks could look at the lines around the banks as a warning of what’s about to come, which would undoubtedly be worse in the short term, and vote in favor of the latest bailout agreement.

 Of course, they could also view the lines as further evidence of their subjugation to the eurozone and the continued austerity they would experience under the bailout, pushing them to vote against it.

 The E.C.B.’s decision also has another important purpose outside of Greece: It might be a warning to countries like Spain and Italy, should they ever consider following Greece out of the eurozone — if that comes to pass.

 It may seem counterintuitive, but rather than make a Greece exit easy and seamless to avoid dislocations in financial markets, the E.C.B. has the perverse incentive to make it messy and difficult to deter others.

 None of this is to suggest that the E.C.B. is the source of Greece’s problems. They were largely self-inflicted. Regardless of whether you think that the creation of the euro was a terrible mistake, Europe has severely mishandled the situation in Greece.

 “The economics behind the program that the ‘troika’ (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25 percent decline in the country’s G.D.P.,” Joseph Stiglitz, an economist and professor at Columbia University, wrote on Monday. “I can think of no depression, ever, that has been so deliberate.”

 In his book, Mr. Geithner reflected on his conversations with European leaders about the measures they sought to take. “The desire to impose losses on reckless borrowers and lenders is completely understandable, but it is terribly counterproductive in a financial crisis,” Mr. Geithner said.

 At one point, he told Mr. Schäuble: “You know you sound a bit like Herbert Hoover in the 1930s. You need to be thinking about growth.”

(emphasis mine)
If this report is true, and note that I do not consider Geithner’s memoir to be much more than an exercise in self-hagiography, then much of the pain of the that Greece has experienced over the past 6 years has largely been an exercise in sadism for its own sake by the Germans.

If there is a flaw at the heart of the European Union, it is Germany hegemony, which allows them to enforce their chauvinism on the other members.

Óχι!*

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Not only did the no vote win the referendum vote on further austerity for Greece, it absolutely crushed:

Greek voters gave their government a desperately needed victory Sunday in its showdown with European creditors as the country decisively rejected a bailout proposal that officials here had scorned as “blackmail.”

 With nearly all of the votes counted, “no” had won a landslide 61 percent — a bigger figure than nearly anyone had predicted. The result sent thousands of government supporters streaming into central Athens’s Syntagma Square to wave blue-and-white Greek flags, dance to traditional folk songs, and revel in their collective defiance of dire European warnings.

 But even as they celebrated, an angry reaction from European officials suggested that Greece’s profound economic struggles may be only beginning. With Greek banks on the verge of in­solvency, analysts immediately raised the odds that Greece will be ejected from the euro zone. Government opponents despaired that the country may have taken a dark turn.

 ………

 Several top European officials suggested that there would be no new leeway for Greece, and that in fact the vote had made a deal less likely.

 Germany’s deputy chancellor, Sigmar Gabriel, said Greece had “destroyed the last bridges across which Europe and Greece could have moved toward a compromise.”

 “Tsipras and his government are leading the Greek people onto a path of bitter sacrifice and hopelessness,” he told the Berlin daily Der Tagesspiegel.

 Julia Klöckner, deputy chairwoman of Germany’s ruling party, tweeted: “The E.U. is not a make-a-wish club in which a single member sets the rules and the others pay the bill.”

Nice words from the Krauts, but it is also a bald faced and pernicious lie, as the latest IMF report has revealed that the Troika has been negotiating in bad faith:

On July 2, the IMF released its analysis of whether Greek debt was sustainable or not. The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.

The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith. For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.

As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations.

As an international organization responsible for global financial stability, it is the IMF’s role to explain clearly and honestly the economic parameters of a bailout negotiation. The Greeks, many said, benefited from low interest rates and repayments stretched out over many years. Therefore, no debt relief was needed. But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.

………

The creditors’ serial errors are well documented, including by the staff of the IMF. Continuing deliberately to suppress past errors is an act of bad faith but continuing to repeat those errors in making future projections of the Greek debt burden is a willful abuse of the trust that the international community has placed in an organization set up to serve the best interests of all nations. If the IMF’s latest numbers are properly reconstructed, the Greek debt burden is much greater than portrayed—and the policy measures proposed to reduce that burden will make matters worse.

………

Here is how this principle applies today to Greece. Recall that prices in Greece have been falling for about two years now. Since debt repayment obligations do not change when businesses sell at lower prices or when wages fall, businesses and households struggle to repay their debt in that deflationary environment. Investment and consumption are held back, the government receives less revenue, making its debt repayment harder. If fiscal austerity is imposed in such a deflationary setting, prices and wages are forced down faster, making debt repayment even harder. This is Fisher’s debt-deflation cycle. Greece is in a debt-deflation cycle. It is the medical equivalent of a trauma patient: the blood flow does not stop on its own and, in such a condition, austerity is like asking the patient to run around the block to demonstrate good faith.

The IMF’s latest numbers bear out this diagnosis. In November 2012, the IMF tentatively concluded that Greek debt was borderline sustainable if it would undertake austerity to reduce its debt burden and structural reforms to spur growth. The primary surplus (the budget surplus without interest payments) was to rise from -1½ percent in 2012 to 4½ by 2016—an extraordinary additional austerity on top of the extraordinary austerity that had already been undertaken since 2010. The Greek government actually delivered on the austerity through 2014, bringing the primary budget in balance, as per the proposed timeline.

But look what happened along the way—and this is the debt deflation cycle. In 2012, prices were expected to be broadly stable over the coming years. Instead, prices fell by over 5 percent just in 2013 and 2014. True, it is important for Greek wages and prices to eventually fall. But because of the Irving Fisher theorem, when prices fall, the debt burden increases. To reduce the debt burden, Fisher says, not only must austerity stop, but the economy must be “reflated.” He emphasizes that it was President Franklin D. Roosevelt’s policy of reflation that ultimately stopped the Great Depression. In an analogy similar to the trauma patient, Fisher says that when tipped beyond a point, the boat continues to tilt further until it has capsized. In a deflationary economy, the bankruptcies and distress can go on in a vicious spiral for years.

………

We may not like the conclusion, but it is quite simple. Greece has not grown and prices have fallen because that was to be expected when persistent austerity is laid on top of an unsustainable debt. The debt-deflation spiral always outpaces the returns from structural reforms. As certainly as these things can be predicted, on the path set out by the creditors, the stakes will continue to be escalated: the debt-to-GDP ratio will continue to rise, the calls for more austerity will grow, and, as the pattern repeats, more debt relief will needed.

The IMF report is very specific, it says that Greece needs billions in debt forgiveness or the debt will remain unsustainable: (See also here)

The International Monetary Fund, a big Greek creditor, conceded a point on Thursday that the Athens government has long been making: Without some reduction in the country’s staggering debt load, Greece has little hope of a sustained economic recovery.

 It was a significant acknowledgment, and an indication that if or when bailout negotiations resume, Greece might win some relief from its debt of 300 billion euros, or about $330 billion. It just might not be relief granted to the leftist government of Prime Minister Alexis Tsipras.

It should be noted that the EU bureaucracy aggressively tried to suppress this report:

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece’s debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday.

 The document released in Washington on Thursday said Greece’s public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers.

 It also said Greece will need at least 50 billion euros in additional aid over the next three years to keep itself afloat.

 Publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.

This may be the reason for the lopsided vote: Any Greek voter who understood these dynamics could help but conclude that the Troika have no interest in Greece beyond making an example of the country.

My guess is that Germany, with the acquiescence of the EU bureaucracy, will attempt to expel Greece from the Euro Zone, since the alternative is to rip the mask off their attempt at regime change, but Greece could tie this up in legal proceedings for months, if not years:

“The Greek government will make use of all our legal rights,” proclaimed the finance minister, Yanis Varoufakis, according to The Daily Telegraph.

We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable.

But, can a hypothetical Grexit decision adopted by the EU institutions be legally challenged?

………

So, what decision would Greece be challenging? It would be a decision adopted by the EU institutions and the Eurogroup finance ministers to force a Greek exit of the eurozone due to its default on fulfilling the obligations attached to its participation in the monetary union (criteria laid down in Article 140.1 of the Treaty of the Function of the European Union) and the conditions attached to Greece’s bailout program.

Greece would then still be an EU member state but it will have to revert to the drachma or adopt a new currency. Nevertheless, as mentioned, there is no explicit legal basis for such a decision. One can argue that the failure to fulfil the eurozone commitments would amount to a serious violation of the founding treaties, and that it is possible to adopt the decision based on the principles embodied in the treaties. But the fact is that the treaties would need to be amended in order to provide for this.

I would note that throughout all of this, someone is spreading a rumor that the Greek government is working on a program of depositor bail-ins, where depositor accounts would be raided to pay off the EU lenders, as happened in Cyprus.  (My money is that these rumors are coming from Brussels)

One hopes that the confluence of all these events will result in something other than the moral and economic bankruptcy that we have seen from the EU, IMF, and Germany, but I doubt it.

*Greek for no.

Óχι* Euro?

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So Greece has now officially defaulted on its IMF loan:

Greece has officially missed its payment to the IMF.

Though this is not technically considered a “default” — the IMF now considers Greece “in arrears” — Greece has now officially not paid the 1.6 billion euros (or about $1.8 billion) it owed the IMF by Tuesday.

IMF managing director Christine Lagarde, however, said in June that she would consider Greece in default if it did not pay.

 This is the largest missed payment ever owed to the IMF.

Greece is now no longer in a bailout program for the first time since 2010.

 In a statement, the IMF confirmed that Greece missed the payment due on Tuesday and added that Greece requested an extension of its repayment, which the IMF’s executive board will consider “in due course.”

 Greek banks and the Athens stock exchange remain closed through this week ahead of a July 5 referendum to vote on the latest bailout proposal from Greece’s creditors.

This is a big deal, but I do not think that the Greek government was left with a choice.

It has become increasingly clear that the goal of the Troika has been regime change ever since Syriza won the last election, primarily because they are a bunch of moralistic† idiots, who do not realize that the alternative to Syriza is not a return to the center-left and center-right parties, but rather the rise of the fascist Golden Dawn party”.

This is why Greek PM Alexis Tsipras felt compelled to call a referendum.

The demands of the Troika have always been about a number of things, none of which have anything to do with the well being of the Greek people:

  • Protecting their own domestic banks from thrie exposureto Greek Debt.
  • Reinforcing German hegemony of the Euro Zone. (Berlin only on this one)
  • Making a public example of Greece as a warning to others.
  • Preventing other “leftist” (social democrat by the standards of the 1960s) parties, particularly Die Linke (The Left) in Germany, from coming to power.
  • Discrediting the modern social safety net.

It should be noted that I do not see any way to a happy ending here:

………

But a former deputy governor of Cyprus’s central bank, Spyros Stavrinakis, has warned that reopening the banks will be hard.

Stavrinakis lived through the 2013 Cyprus crisis, in which capital controls were imposed for almost two years.

He says:

Once you impose capital controls, you immediately send a message that there is something wrong with the banking sector.

It is very difficult to phase down and unwind capital controls, once they are imposed, Stavrinakis adds.

………

Most things in the European Union are designed to actively obfuscate reality. These are called deposit insurance schemes but that is a legal lie. In the United States the FDIC is Federal (its right in the name). The EU imposes a requirement that each country “insure” their deposits but it provides no financing for this. The last data I saw (which I can only verify from 3 years ago) is that the Greek deposit insurance fund has a paltry 3 billion dollars in it. In short there is no current backstop for Greek depositors. This is why they are talking about implementing a European wide deposit insurance union but that isn’t supposed to come until next year at the earliest and who knows if that will really happen and to what extent it will be universal among current Eurozone members. relevant links below.

………

Three-and-a-half billion euros. That is roughly how much cash Greece’s banks need to get through the week if each adult takes out the €60 ($67) they are allowed each day. It isn’t much for Greeks to live on, but it may be more than the banks have.

Also, in the realm of the absurd, there is a  crowdfunding project for the Greek Bailout Fund on  Indiegogo, with about €¾ million raised, out of the €1.6 billion needed raised so far.

The German insistence on Versailles Treaty economics, when juxtaposed with the Greek tradition financial profligacy and corruption, has produced a truly toxic mix, which will probably break up the Euro Zone, if not the whole European Union.

*Greek for no.
†The word for “debt” in German is “Schuld”. This is also the word for “guilt” or “blame”, which explains why the Germans are so fond of Sado-Monitarism. The Germans see this as a morality play, and the last time that Germans tried to enforce a morality on the rest of Europe, it was pretty unfortunate.

The Problem with the EU in a Few Sentences

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I strongly suggests that you read Katharina Pistor’s essay on how the EU is betraying its ultimate goal, a unified and peaceful Europe, in their dealings with Greece in her OP/ED, The Problem With a Small Europe:

News headlines notwithstanding, the fundamental challenge facing Europe today extends far beyond Greece. The real question is what kind of European Union Greece’s creditors want: a “small” one, comprising only the countries that are prepared to live by their exacting standards, or a “big” one that heeds the Treaty of Rome’s call for “ever-closer union.”

………

European integration was built on the ideal of a united Europe working together to uphold peace, generate prosperity, and advance democracy. At first, cooperation centered on the creation of a common market, with European technocrats, led by the European Commission’s then-president, Jacques Delors, pushing for a common currency, despite deep structural differences. The assumption was that political integration would follow.

That did not happen. Indeed, the approach was tantamount to putting the cart before the horse – with serious consequences, exemplified in the eurozone’s enduring crisis. Yet the technocrats are back, now advocating a fiscal union to support the monetary union, with political union nowhere in sight.

Perhaps European leaders still believe that the needed political integration will eventually occur. But, even in the unlikely event that it does, a political union that emerges from desperation to save the common currency will be very different from one built purposefully, as the Treaty of Rome envisioned, based on shared values and goals. And, in the meantime, a fiscal union without a political union is an anti-democratic nightmare.

………

In this context, it is perhaps understandable that the creditor countries are increasingly promoting a “small” EU that includes only those that are willing and able to meet their high standards. But, while this might make for a stronger euro – and even a stronger EU – it would carry a huge cost, as it would effectively force members to abandon their democratic ideals. Meanwhile, the excluded countries would be forced to engage in competitive currency devaluations and other beggar-thy-neighbor policies. The dream of shared prosperity in Europe would be dead.

This outcome is not inevitable. A common currency is a means to an end, not an end in itself. If European monetary union is not leading toward the desired end, it – not the goal of ever-closer union – should be altered. And, in fact, most Europeans favor a different means, based on greater flexibility for domestic preferences and a bottom-up approach toward further integration. In such an environment, Greece might not only survive, but thrive.

I would note that the founders of the Euro currency said that their goal was to create a uniform standard of living across Europe.

It appears that they may get their goal, but it will be lowering living standards of more prosperous nations, not raising up their less fortunate neighbor.

Not surprising when one understands that Robert Mundell, the “father of the Euro”, is also considered by many to be the “Father of Reaganomics.”

Impoverishing ordinary people is a feature for people like Mundell, not a bug.

Whiny Bitch of the Day: France

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France has its panties in a bunch because Belgium has produced a €2.50 coin commemorating Napoleon’s defeat at Waterloo:

Perhaps befitting a battle that ended French hegemony in Europe, Paris, it seems, has been outflanked once again.

 After it objected to a decision in March by Belgium to introduce a new 2 euro coin to commemorate the 200th anniversary of Napoleon’s defeat at Waterloo, the Belgians retreated, scrapping 180,000 coins they had already minted.

 But victory for France is proving elusive.

 This week, Belgium decided to circumvent French resistance by invoking a little-known European Union rule that allows countries to issue euro coins of their choice, provided they are in an irregular denomination.

 That led to the unveiling of a €2.50 coin — a first in Belgium — and 70,000 of them have now been minted. The coins, which can only be spent inside Belgium, display a monument of a lion atop a cone-shaped hill on the site of France’s humiliation, as well as lines indicating where troops were positioned when forces led by Britain and Prussia defeated Napoleon in the countryside near Brussels.

 Johan Van Overtveldt, the Belgian finance minister, insisted on Monday that the new coins were not meant to provoke Gallic anger.

 “The goal is not to revive old quarrels in a modern Europe — and there are more important things to sort out,” he was quoted as saying by Agence France-Presse. “But there’s been no battle in recent history as important as Waterloo, or indeed one that captures the imagination in the same way.”

 ………

 In Britain, where the 19th-century poet laureate Robert Southey called the Battle of Waterloo “the greatest deliverance that civilized society has experienced” since Charles Martel repelled an Islamic conquest of Europe in 732, the new €2.50 coin aroused similar adulation.

 “Well done Belgium beat the French at their own game of finding ways around EU rules, the English should take note!!” Michael Dunn, from Stratford-upon-Avon, wrote on Twitter.

 Others were less impressed. On Facebook, Manuel Di Pietrantonio suggested that the value of the dispute was about €2.50.

I agree with Mr. Di Pietrantonio.  It’s a tempest in a teapot, and it is the French who are making it so.

Commemorating its 200th anniversary is completely appropriate.

Waterloo is a very big deal:  Not only did it end the career of Napoleon, but it was the triumph of the General Staff over the lone general, which served to transform war.

I so want to get one and try to spend it in Paris.

This is So Unsurprising

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So, the other shoe has dropped on the former speaker, and we learn that Denny Hastert sexually abused a student:

J. Dennis Hastert stumbled into political power amid a Republican sex scandal in 1998 that unexpectedly elevated the husky Illinoisan to a position just two heartbeats away from the presidency.

He became the longest-serving Republican House speaker in U.S. history, but remained so proud of his days as a small-town high school teacher and wrestling coach that he relished the Capitol Hill nickname “Coach.”

But this week those once-idolized small-town roots caught up with the 73-year-old Hastert, who in recent years has worked behind the scenes as a Washington power broker.
Former House Speaker Dennis Hastert indicted

Federal prosecutors have announced bank-related charges against former U.S. House Speaker Dennis Hastert.

On Friday, federal law enforcement officials said Hastert had paid $1.7 million over the last four years to conceal sexual abuse against a former male student he knew during his days as a teacher in Yorkville, Ill., where Hastert worked until 1981.

A top federal law enforcement official, who would not be identified speaking about the ongoing federal case, said investigators also spoke with a second man who raised similar allegations that corroborated what the former student said. The second person was not being paid by Hastert, the official said.

The disclosures followed Thursday’s federal indictment against Hastert on charges of lying to the FBI about the reasons for large cash withdrawals he is accused of making to buy the man’s silence.

Currently, the age of consent in Illinois 17, but it is 18 if the person is in a position of authority, for example, being a teacher and coach. (Link)

This law appears to me to be something relatively recent, the whole “position of authority” thing really started in the 1990s, and I know that the age of consent in the 1920s was 16, so it is entirely likely that this did not constitute statutory rape.

Still, it is remarkable that the best Republicans could find for Speaker after Gingrich and Livingston had been driven from office at least in part for adultery.

I’m hoping that Larry Flynt offers another bounty on wandering Republican penises running for President..

We Already Knew that Hastert was Corrupt

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What you will notice in passing is that Hasterd made his money in real estate investments by earmarking money for a massive highway project that ran past his real estate investments, which jacked up the price of the land. (Prior Link)

Now though, we have allegations that Denny Hastert tried to evade the money laundering statutes and then lied to the FBI:

J. Dennis Hastert, the longest-serving Republican speaker in the history of the U.S. House, was indicted Thursday by a federal grand jury on charges that he violated banking laws in a bid to pay $3.5 million to an unnamed person to cover up “past misconduct.”

Hastert, who has been a high-paid lobbyist in Washington since his 2007 retirement from Congress, schemed to mask more than $950,000 in withdrawals from various ac­counts in violation of federal banking laws that require the disclosure of large cash transactions, according to a seven-page indictment delivered by a grand jury in Chicago.

The indictment did not spell out the exact nature of the “prior misconduct” by Hastert, but it noted that before entering state and federal politics in 1981, Has­tert served for more than a decade as a teacher and wrestling coach at Yorkville High School in Illinois.

In 2010, confronted about the “prior misconduct,” the former speaker agreed to pay $3.5 million to the person “to compensate for and conceal his prior misconduct against Individual A,” prosecutors alleged.

That person, whose identity was shielded by prosecutors, has known Hastert most of his or her life, growing up in Yorkville, the city next to Hastert’s home town of Plano, in the exurbs west of Chicago. Prosecutors said the actions “occurred years earlier” than the 2010 meeting that sparked the payments.

The investigation began in 2013, by the FBI and the Internal Revenue Service, which cited “possible structuring of currency transactions to avoid the reporting requirements.”

First thing to be noted here, if law enforcement (particularly the FBI) wants to have an innocuous discussion with here, tell them no.

  • They know what they are looking for, and you don’t.
  • They have a legal right to lie to you.
  • Even the most innocuous misstatement can be characterized by law enforcement and prosecutors as a felony.
  • If they can show inaccuracies in your statements, even honest ones, they can use this to impeach later testimony.

Politely let them know that you are asserting your constitutional rights, and will not talk without a lawyer.

It is important to specifically mention your constitutional rights.  Recent courses by the perfidious Roberts Court have allowed a person’s silence against them in court unless they specifically invoke the 5th amendment.

The second thing to be noted is that the prosecutors are being remarkably circuitous about the nature of  Hastert’s “Prior misconduct” against “Individual A.”

I’m not sure whether the prosecutor is giving Hastert a pass because he was House Speaker, or if the US Attorney will use that as a lever to get a guilty plea

The indictment provides some tantalizing clues though:

  • Hastert and this person have known each other for most of Individual A’s life, which implies that they are significantly younger than Hastert.
  • Individual is a resident of Yorkville, Illinois.
  • Before politics, Hastert was a teacher and coach at a school in Yorkville.

My guess is that he sexually abused a student when he was a teacher, but it’s just a guess, based on the amount of the blackmail and the above facts.

The interesting thing here is that it is likely, though not certain (Republicans are a perverted bunch), that whatever you and I imagine is far worse than the reality of the situation.

In any case, it’s nice to see Tom Delay’s sock puppet going down.

Those Sanctions are Working out Just Ducky

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It looks like the Russians are managing lower oil prices and US and EU sanctions reasonably well:

It’s been fascinating to watch the Russian economy adjust to sharply lower oil prices. With a little help from the central bank, the country’s recession might not be as bad as previously thought.

After an initial period in which the ruble plummeted and inflation surged — with food prices up 15.4 percent from a year earlier in December — the Russian central bank’s response is turning things around. A sharp increase in short-term interest rates, currently at 14 percent, has stabilized the ruble and might even be getting consumer prices under control.

The episode has taken a toll on Russian living standards. In the first quarter of 2015, inflation-adjusted incomes were down 1.4 percent from a year earlier. Retail sales dropped 6.7 percent — and individual stores, such as the M Video electronics chain, reported even steeper declines. Imports were particularly hard hit, thanks to the impaired buying power of the ruble: In January and February, they were down 37.9 percent from a year earlier. The government’s finances haven’t fared well, either. Standard & Poor’s predicted Friday that Russia’s fiscal deficit will rise to 4.4 percent this year, higher than the 3.7 percent the government predicts.

Still, there are signs that a cheaper ruble might be helping some Russian producers compete with imports. True, industrial production was down 14.6 percent in the first quarter from a year earlier, with the garment industry — which depends heavily on imported inputs — taking the steepest plunge. Yet Russian food production was up 3.5 percent, suggesting that import substitution might not be just President Vladimir Putin’s pipe dream.

Those sanctions are working so well.

It’s gotten to the point that the Russian Central Bank governor has suggested that they will be lowering interest rates to keep the Ruble from appreciating to much.

One important thing to note here is that Russia has some advantages over other sanctions targets, specifically a captive market for natural gas in Europe, and a central bank that has dealt with these problems very competently.

I would argue that much of the reason that the bank has handled this so well is because of their relative lack of independence from the Russian government.

Because they have not been allowed to indulge in free market navel-gazing they have responded aggressively to Russia’s crisis.

Good Move by Syriza

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With an increase in poverty, and hunger, and lack of basic medical care, the Greek Parliament has thumbed its nose at the Troika, and has passed a new anti-poverty law:

The Greek parliament has approved a package of social measures, despite warnings from the European Commission against “proceeding unilaterally”.

In parliament, the Greek Prime Minister Alexis Tsipras defended what he called a “humanitarian crisis” law.

The law – the first to be introduced since Mr Tsipras’s party won elections in January – offers food stamps and free electricity to the very poorest.

The total amount of assistance is worth about €200m ($213m; £144m).

It is the kind of anti-austerity measure that Mr Tsipras had promised before his election victory in January.

In a 30-minute speech he defended the legislation, which he described as the first bill in five years to be drawn up in Athens, rather than ordered by EU technocrats.

Soured relations

He also criticised a leaked letter from an EU official, which had advised Greece to consult with its international creditors before proceeding with the legislation.

“If they’re doing it to frighten us, the answer is: we will not be frightened,” Mr Tsipras told parliament. “What else can one say to those who have the audacity to say that dealing with a humanitarian crisis is a ‘unilateral action’?”

The new law, and Mr Tsipras’s defiant speech, come ahead of an expected meeting with Angela Merkel and Francois Hollande on the sidelines of an EU summit in Brussels this week.

This is a good thing.

With over 40% of the Greek population below the poverty line, it’s clear that there is a humanitarian crisis in Greece, and what the Troika, and the rest of the EU, don’t get is that if they manage to crush Syriza, the alternative is not the usual suspects, Pasok and ND, who have mismanaged the countries for decades, but the Fascist right wing Golden Dawn party.

Golden Dawn coming to power would not bode well for the future, either in Greece, or across Europe.

I Think that the ECB Just Blinked

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The European Central Bank has just increased emergency liquidy funding to Greek banks by €5 billion:

The European Central Bank (ECB) just increased the amount of emergency funding available to Greek banks by €5 billion — despite indications that the savers were pulling less of their money out in February.

On Thursday, Reuters reported that the ECB was extending the Emergency Liquidity Assistance that can be given to Greek banks from its current (self-imposed) maximum of €60 billion to €65 billion. However, its reasons for doing so remain unclear.

Earlier reports had suggested that fears of deposit flight, where Greek savers withdrew their money from banks and deprived them of a key source of funding, after the left-wing Syriza party took power and the ECB altered its rules to prevent Greek government debt (and government-guaranteed debt) from being used to access its emergency loan programme were failing to materialise. A survey of Greek banks found that although savers remained nervous about the new government’s plans deposit outflows had slowed in February, according to Reuters.

What happened here is pretty clear.
The ECB tried to get tough and saw the beginnings of a bank run, and they reversed course because they knew that if there were a bank run in Greece, it would spread to the Southern tier of the EU, as people took out cash, or transferred money to banks in the north.
Merkel has been emphatic that a Grexit (Greek exit from the Euro Zone) would be manageable.
This shows that this is a delusion.