Category: Economy

And So the Dissolution of the EU Begins

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Greek Prime Minister Alexis Tsipras will be calling for a referendum on the Troika’s proposal:

In a dramatic move that will put Europe on tenterhooks, the Greek prime minister Alexis Tsipras told his fellow citizens last night he would call a referendum on the bailout accord that international creditors have proposed to keep the debt-stricken country afloat.

Following an emergency meeting of his cabinet, Tsipras said his leftist-led government had decided a package of austerity measures proposed by the country’s creditors – made in a last-ditch effort to avert default – would be put to popular vote. The referendum will take place on Sunday 5 July.

“After five months of hard negotiations our partners, unfortunately, ended up making a proposal that was an ultimatum towards Greek democracy and the Greek people,” he said in a national address, “an ultimatum at odds with the founding principles and values of Europe, the values of our common European construction.”

The leader, who only hours earlier had rejected the proposed reforms after several days of high-stakes talks in Brussels, said Greeks now faced a “historic responsibility” to respond to the ultimatum.

He said the reforms were “blackmail for the acceptance on our part of severe and humiliating austerity without end and without the prospect of ever prospering socially and economically”.

This is actually the intention.

This is politically motivated sadism.

The Germans want it because the want to demonstrate their power and virtue, and because of memories of  a period of hyperinflation that was caused by the triumphalism of the victors in the First World War.

The French want to be sure that they are not on the losing side of this alone.

The other northern tier EU countries have been relegated to spectator status.

What would seem to be Greece’s natural allies, Ireland, Spain, Portugal, and Italy, are desperate for Greece to fail, because if Syriza succeeds, it bolsters the anti-austerity parties in their countries, which threatens their political elites’ hold on power.

So I expect that Greece will be crushed under what is largely a German boot, and that various neo-facist parties, particularly New Dawn in Greece, will gain power as the center delivers misery, and the left is systematically excluded from meaningful governance.

Tell me that this does not look like 1932.

(on edit)

I read something similar to this, but had neglected to bookmark it.

I have now found who it was who explained the politics of this, it was Paul Krugman:

As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.

This is a Feature, Not a Bug

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You are no doubt aware of how proposals for tax advantaged retirement programs, the IRA, 401(k), the 403(b), etc., have been sold.

We have been told that by allowing retirement funds to engage a the markets, higher returns can be achieved, and thus provide for a more secure retirement.

In the process, trillions of dollars have flowed into stock and other financial markets, resulting in, as the laws of supply and demand indicate, significant appreciation in asset values.

Of course, at some point, people have to retire, and at that point, they have to cash in their assets.

What happens when those trillions of dollars leave the markets.

This is going to get ugly:

This morning the Wall Street Journal ran a story which showed that 2013 was the first year in decades that there was a net outflow from 401(k) plans. The immediate reaction by many was that this is just the start of a mass exodus from the markets by retiring baby boomers, which could have huge implications on the markets in the coming years as we patiently wait for Millennials to pick up the slack with their savings in the 2020s.

………

One of the things I’ve learned over the years is that demographics play a huge role in shaping the economic landscape from everything to the unemployment and labor force participation rates to the buying habits in the real estate market to economic growth (see Calculated Risk on why 2% growth is the new 4% growth for more on this). People are quick to blame or shower praise on politicians when it comes to the booms and busts we see in the economy. More often than not, the economic success or failure of those politicians has more to do with lucky timing in regards to where we happen to be in the economic (or demographic) cycle.

So while demographics does play a large role in shaping economic growth, it’s difficult to say how the mass exodus from the workforce by baby boomers is going to affect the financial markets. It probably comes down to investor behavior more than anything. It’s fairly easy for models to predict how the demographics will play out in the U.S. and abroad in the coming years. It’s not so easy to model out how investors will react to those changing demographic profiles.

This guy is a lot more sanguine about this than I am.

Of course, Wall Street gets paid when you invest, and when your money sits there, and when you pull your money out, so the parasitic financial class will be just fine, it’s just the rest of us who will end up asking, “Do you want fries with that?” for the rest of our lives.

And from the Socialist Paradise of Montana ……… Wait? What? Montana?!?!?! ……… Whiskey Tango Foxtrot?!?!?!?

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The city of Missoula, Montana has apparently had enough of mismanagement of their water infrastructure by its Carlyle Group owned private water company, Mountain Water Company, along with the normal private equity hijinks, so they tried to buy it.

The Carlyle Group refused, and so the city condemned the company, and seized it by eminent domain, and now Missoula has won a court victory confirming their right to seize the utility:

Missoula won its legal fight to take ownership of Mountain Water Co. and the city’s drinking water system Monday.

 In a 68-page decision, Missoula District Court Judge Karen Townsend said the city “carried its burden of proof” and showed that “its contemplated use of the water system as a municipally owned water system is more necessary than the current use as a privately owned for-profit enterprise.”

 “Based on credible evidence at trial, the Court concludes that the object of this condemnation proceeding, the use of the water system, is a public use for which the right of eminent domain may properly be exercised” under Montana law, Townsend said.

 The judge said she “considered the broad range of circumstances,” and weighed “the benefits to be derived from the proposed public use against the impairments to the existing use.”

 Her conclusion: “The proposed public use is more reasonable” and “proper.”

 The city made its case, she continued, and proved that “the taking is a more necessary public use.”

 The city did try to purchase Mountain Water Co. from its owner, global equity firm The Carlyle Group, Townsend said, “and the final written offer was rejected.” It is now, she said, Missoula’s “right to acquire” the water system by exercising its power of eminent domain.

Basically, Mountain Water Company is not performing timely maintenance on the infrastructure (after all, some resources have to go toward paying inflated private equity “Management Fees”):

………

 The water system pumps groundwater from the Missoula aquifer through 37 wells and 327 miles of water main. The system serves 23,500 customers, with 1,500 of them outside the city limits. The city of Missoula estimates that an investment of $66 million to $95 million is needed to bring the system to industry standards.

  • Nearly 50 percent of the mains are more than 45 years old. Twenty percent of the mains have exceeded their useful life.
  • While 81 percent of the system is metered, only 40 percent of the water is measured through meters. The average age of the meters is 20 years and will require $16 million to $20 million to achieve industry standards.
  • Nearly 75 percent of the service lines are galvanized steel and have exceeded their useful life. The cost to bring the lines up to industry standards is roughly $25 million.
  • Rattlesnake Dam and the intake dam have not been maintained and show problems with erosion, slope and stability, requiring $3 million in repairs.
  • The water system leaks at a rate of 50 percent. An estimated 8,000 gallons leak every minute, well above the national Infrastructure Leakage Index.

A 50% leakage rate?  Seriously?  In a locality that is already abnormally dry, and in a world that is drawing down its aquifers at an alarming rate?

And the Carlyle Group thinks that this is all hunky dory?

And then there is the attempt by the Carlyle Group to represent the purchase of a $945.00 coffee maker as a capital expenditure.

Clearly, the private sector is not working the way that all those free market mousketeers would lead us to believe.

Full disclosure:  I worked for a few years at United Defense, which was owned by the Carlyle Group, before it was sold to BAE Systems.

H/T Naked Capitalism.

Pope Frank Pisses off Conservatives Again………

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The Pope, and one would assume the Pope’s Peeps, are working on an encyclical about the economy and the environment, and it has gotten leaked.

Has come out strongly in favor or accepting the science of global warming, as well as condemning shot sighted politicians:

Pope Francis has endorsed the science behind global warming and denounced the world’s political leaders for putting national self-interest ahead of action. Now, Catholic priests are gearing up to spread the word.

The 192-page leaked draft of a papal encyclical, published Monday by the Italian magazine L’Espresso, is an attempt to influence the debate before United Nations climate talks scheduled for the end of the year in Paris. Father Federico Lombardi, the pope’s spokesman, said the text was not the final one, which will be officially released midday local time Thursday by the Vatican.

The encyclical, entitled “Laudato si (Praised Be) on the care of our common home,” is a call to action in the form of a letter to the church’s bishops. With fossil-fuel emissions and temperatures at record levels, the spiritual leader of 1.2 billion Catholics is adding his voice to calls to rein in greenhouse gases.

“International negotiations cannot progress in a significant way because of the positions of the countries which privilege their own national interests rather than the global common good,” the pope wrote. “Those who will suffer the consequences which we are trying to hide will remember this lack of conscience and responsibility.”

Francis squarely put the blame on humans, writing that many scientific studies show “the greater part of global warming in the last decades is due to the great concentration of greenhouse gases (carbon dioxide, methane, nitrogen oxide and others) emitted above all due to human activity.”

Reducing emissions, he wrote, demands “honesty, courage and responsibility, above all by the most powerful and most polluting countries.”

In the U.S., where public opinion has been split on climate change, the Conference of Catholic Bishops has been holding workshops to discuss the encyclical with its members. A coalition of church groups, the Catholic Climate Covenant, will provide inserts on Francis’ message to go in church bulletins around the U.S. and is e-mailing suggested homilies to priests.

Additionally, this document will a call for independent and rigorous studies of pesticides and GMOs:

On the subject of GMOs Pope Francis states; “It is difficult to give an overall judgment on the development of genetically modified organisms (GMO), plant or animal, for medical purposes or in agriculture, since they can be very different and require different considerations.”

He continues; “Although we do not have definitive evidence about the damage that transgenic cereals could cause to humans, and in some regions their use has produced economic growth that has helped solve some problems, there are significant problems that should not be minimized. In many areas, following the introduction of these crops, there has been a concentration of productive land in the hands of the few, due to the gradual disappearance of small producers, who, as a consequence of the loss of cultivated land, have been forced to retreat from direct production.

“The most fragile among them become temporary workers and many farm workers migrate to end up in miserable urban settlements. The spread of these (GM) crops destroys the complex web of ecosystems, decreases diversity in production and affects the present and the future of regional economies. In several countries there is a trend in the development of oligopolies in the production of seeds and other products needed for cultivation, and the dependence deepens when you consider the production of sterile seeds, which end up forcing farmers to buy (seeds) from producers.”

“No doubt there is a need for constant attention…to consider all ethical aspects involved. To this end it is necessary to ensure a scientific and social debate that is responsible and large, able to consider all the information available and to call things by their names.

“GMOs is an issue which is complex, it must be approached with a sympathetic look at all its aspects, and this requires at least one more effort to finance several lines of independent and interdisciplinary research… as we have seen in this chapter, the technique is unlikely to be able to …self-limit its power.”

To my mind, what is most significant here is that he is clearly laying the groundwork for aggressive push-back against Big Ag, Monsanto and their ilk, as being harmful both to the environment, and to most economically disadvantaged.

I hear wing-nut heads exploding, and it pleases me.

I Quote the Prophet, Bear Who Swims

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Over a year ago, the Bear Who Swims predicted to me (via email, not his blog) that the Europe was on a path to another war.

If you follow the history of Europe, there seems to be one every hundred years or so.

Well, now the Shrill One, Nobel Prize winning economist Paul Krugman, is making allusions to seeing the same thing:

U.S. officials are generally cautious about intervening in European policy debates. The European Union is, after all, an economic superpower in its own right — far too big and rich for America to have much direct influence — led by sophisticated people who should be able to manage their own affairs. So it’s startling to learn that Jacob Lew, the Treasury secretary, recently warned Europeans that they had better settle the Greek situation soon, lest there be a destructive “accident.”

But I understand why Mr. Lew said what he did. A forced Greek exit from the euro would create huge economic and political risks, yet Europe seems to be sleepwalking toward that outcome. So Mr. Lew was doing his best to deliver a wake-up call.

And yes, the allusion to Christopher Clark’s recent magisterial book on the origins of World War I, “The Sleepwalkers,” is deliberate. There’s a definite 1914 feeling to what’s happening, a sense that pride, annoyance, and sheer miscalculation are leading Europe off a cliff it could and should have avoided.

………

Yet there seems to be more to it than lack of trust. Some major players seem strangely fatalistic, willing and even anxious to get on with the catastrophe – a sort of modern version of the “spirit of 1914,” in which many people were enthusiastic about the prospect of war. These players have convinced themselves that the rest of Europe can shrug off a Greek exit from the euro, and that such an exit might even have a salutary effect by showing the price of bad behavior.

But they are making a terrible mistake. Even in the short run, the financial safeguards that would supposedly contain the effects of a Greek exit have never been tested, and could well fail. Beyond that, Greece is, like it or not, part of the European Union, and its troubles would surely spill over to the rest of the union even if the financial bulwarks hold.

I generally agree with my brother, aka “Bear who Swims”, that Europe is heading back into what seems to be a once a century path to conflict, though I differ in degree:  He posits a shooting war, and I expect something analogous to a Cold War along with a dissolution of the EU.

And once again, I’ll blame the Germans.

H/T Stephen Saroff      o o  The Bear who Swims      
                        (_)_____o      
                     ~~~~(______)~~~~~~~~~~
                         oo    oo

Seriously, Is Anyone Surprised by This?

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In nature, parasites are associated with decreased success of the host, so it should come as no surprise that an IMF study shows that economic parasite, such as a bloated finance industry, also hinders economic success:

As the world has floundered in low growth post-crisis, with advanced economies still suffering with credit overhangs and hypertrophied, largely unreformed financial services sectors, it has become acceptable, even among Serious Economists, to question the logic that a bigger financial sector is necessarily better. Of course, the logic of “more finance, please” was never stated in those terms; it was presented in the voodoo of “financial deepening,” meaning, in layperson’s terms, that more access to more types of financial products and services would be a boon. For instance, one argument often made in favor of more robust financial services is that they allow for consumers to engage in “lifetime smoothing” of spending. That basically means if times are bad or an individual has a big investment they to make, he can borrow against future earnings. But we have seen how well that works in practice. Most people have an optimistic bias, so they will tend to underestimate how long it will take them to get back to their old level of income, assuming that even happens, which makes it too easy for them to rationalize borrowing rather than going into radical belt tightening ASAP. And we’ve seen, dramatically, on how college debt pushers get students to take on debt to “invest” in their education, when for many, the payoff never comes.

 Moreover, despite an enormous increase activity and widespread use of technology, costs of financial intermediation have increased, as Walter Turbewille shows, citing a study by Thomas Philippon:

But the recent IMF paper, Rethinking Financial Deepening: Stability and Growth in Emerging Markets, is particularly deadly. Even though it focused on the impact of financial development on growth in emerging markets, its authors clearly viewed the findings as germane to advanced economies. Their conclusion was that the growth benefits of financial deepening were positive only up to a certain point, and after that point, increased depth became a drag. But what is most surprising about the IMF paper is that the growth benefit of more complex and extensive banking systems topped out at a comparatively low level of size and sophistication. We’ve embedded the paper at the end of this post and strongly urge you to read it in full. (at link)

 The contribution of the IMF paper is that the authors developed a new index to do a comprehensive job of capturing financial activity. Previous work had tended to look either at the size and sophistication of financial institutions, or the depth and complexity of financial markets. The new index incorporates both aspects of financial activity, as well as incorporating access. The writers concede that their measure is still imperfect, but is an improvement over other approaches. They also stress that they are well aware of the issue of establishing that the relationship between the size and complexity of the financial sector is causal, and not a mere correlation:

Empirically, establishing causality from finance to economic growth has been a key challenge. King and Levine (1993) were the first to address this issue in a cross-country regression context. Their paper found that initial levels of financial depth—approximated by the size of the banking system relative to GDP—could predict subsequent growth rates over extended periods, even when controlling for other explanatory variables. Stock market depth was also incorporated later by Levine and Zervos (1998), with the finding that causality went from finance to growth. These results held up with further refinements of the approach, by using instrumental variables (Levine, Loayza, and Beck 2000). In the 2000s, the empirical work continued to evolve with the application of dynamic panel data techniques, using lagged values of the financial variables as instruments and controlling for other determinants of growth (Beck and Levine 2004). The present paper follows this last approach, using similar control variables and econometric techniques to ensure that the relationship is not one of simple correlations but of causality that goes from finance to growth.

This is the money chart:

I have always maintained that the financial industry should be restricted to the minimum size possible, because anything above the level required to bring the generate capital for the “real” economy is inherently parasitic.

It appears that the IMF agrees with me.

I Wish that I Were Finnish

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IN Finland, fines are based on daily earnings, so a rich asshole got a a €54,024 fine for doing 64 in a 50 zone:

Getting a speeding ticket is not a feel-good moment for anyone. But consider Reima Kuisla, a Finnish businessman.

He was recently fined 54,024 euros (about $58,000) for traveling a modest, if illegal, 64 miles per hour in a 50 m.p.h. zone. And no, the 54,024 euros did not turn out to be a typo, or a mistake of any kind.

Mr. Kuisla is a millionaire, and in Finland the fines for more serious speeding infractions are calculated according to income. The thinking here is that if it stings for the little guy, it should sting for the big guy, too.

The ticket had its desired effect. Mr. Kuisla, 61, took to Facebook last month with 12 furious posts in which he included a picture of his speeding ticket and a picture of what 54,024 euros could buy if it were not going to the state coffers — a new Mercedes. He said he was seriously considering leaving Finland altogether, a position to which he held firm when reached by phone at a bar where he was watching horse races.

“The way things are done here makes no sense,” Mr. Kuisla sputtered, saying he would not be giving interviews. Before hanging up, he added: “For what and for whom does this society exist? It is hard to say.”

………

But the idea that the rich should pay heavier fines did not seem to be much in question. “It is an old system,” said Pasi Kemppainen, chief superintendent at the National Police Board. “It may lead to high fines, but only for people who can afford it.”

In fact, the Finnish “day fine” system, also in use in some other Scandinavian countries, dates to the 1920s, when fines based on income were instituted for all manner of lesser crimes, such as petty theft and assault, and helped greatly reduce the prison population.

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The fines are calculated based on half an offender’s daily net income, with some consideration for the number of children under his or her roof and a deduction deemed to be enough to cover basic living expenses, currently 255 euros per month.

Then, that figure is multiplied by the number of days of income the offender should lose, according to the severity of the offense.

Mr. Kuisla, a betting man who parlayed his winnings into a real estate empire, was clocked speeding near the Seinajoki airport. Given the speed he was going, Mr. Kuisla was assessed eight days. His fine was then calculated from his 2013 income, 6,559,742 euros, or more than $7 million at current exchange rates.

Someone committing a similar offense and earning about 50,000 euros a year, or $54,000, none of it capital gains, and with no young children, would get a fine of about 345 euros, or about $370. Someone earning 300,000 euros ($322,000), would have to pay about 1,480 euros ($1,590).

My heart bleeds borscht for Reima Kuisla.

Man up you over-pampered parasite.

Quote of the Day

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Alas, reality trumps theory. As we have seen almost every time this thesis has been put into practice, it fails. The tax cuts don’t magically kick the economy into higher gear and the government ends up short of money. Remember former President George W. Bush and his tax cuts? Same deal.

—Barry Ritholtz, on Kansas’ fiscal implosion from worshiping at the alter of supply side economics and tax cuts.

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.

Inbreeding in Economics

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Over at Fortune magazine, Steve Keen makes a very interesting observation about the state of discourse about the discourse at the higher level of economics.

Specifically, not only did these guys go to the same school, they literally took the same course with the same professor:

Ben Bernanke has recently started blogging (and tweeting), and his opening topics were why interest rates are so low around the world, and a critique of Larry Summers’ “secular stagnation” explanation for this phenomenon, and for persistent low growth since the financial crisis. Summers then replied to Bernanke’s argument, and a debate was on.

So who is right: Bernanke who argues that the cause is a “global savings glut”, or Summers who argues that the cause is a slowdown in population growth, combined with a dearth of profitable investment opportunities, not only now but for the foreseeable future?

I’d argue both of them, and neither simultaneously—both, because they can both point to empirical data that support their case; neither, because they are only putting forward explanations that are consistent with their largely shared view of how the economy works.

And the extent to which they are the product of a single way of thinking about the world simply cannot be exaggerated. It goes well beyond merely belonging to the same school of thought within economics (the “Neoclassical School” as opposed to the “Austrian”, “Post Keynesian”, “Marxist” etc.), or even the same sect within this school (“New Keynesian” as opposed to “New Classical”). Far beyond.

They did their graduate training in the same economics department at the Massachusetts Institute of Technology (MIT). They attended the same macroeconomics class: Stanley Fisher’s course in monetary economics at MIT for graduate students (was it the same year—does anybody know?) Some of their fellow Fisher alumni included Ken Rogoff and Olivier Blanchard.

………

If I were describing a group of thoroughbred horses, alarm bells would already be ringing about a dangerous level of in-breeding. Sensible advice would be proffered about the need to inject new blood into this dangerously limited breeding pool. But the issue would only be of importance to the horseracing community.

Instead I am talking about a set of individuals whose ideas have had enormous influence upon both the development of economic thought and the formation of economic policy around the globe for the last four decades. The fact that so much of the dominant approach to thinking about the economy emanates, not merely from such a limited perspective, but from such a limited and interconnected pool of people, should be serious cause for alarm—especially given how the world has fared under the influence of this thoroughbred group.

This has me thinking that I should take a serious look at Modern Monetary Theory (MMT) and Hyman Minsky’s theories.

This was a Foreseeable Consequence of the German Hegemony in the European Union

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The EU sanctions against Russia have to be renewed by a unanimous vote.

It’s a core feature of EU governance, and it’s also why the aggressive growth strategy of the organization is a bad idea. It allows any nation to hold major decisions hostage.

Now, after many years of being punished by, and being used as a political whipping boy by Germany, Greece is looking to discuss EU sanctions against Russia:

Russian President Vladimir Putin and Greek Prime Minister Alexis Tsipras plan to discuss economic ties and the European Union’s sanctions against Moscow when they meet for talks next week, a Kremlin spokesman said on Friday.

 Russia wants the EU to lift the sanctions imposed over Moscow’s role in the turmoil in Ukraine and hopes to get support from some EU member states, notably Hungary and Greece.

 The Kremlin spokesman, Dmitry Peskov, said it was too early to talk about any possibility of Moscow providing financial help to the cash-strapped Greece before the talks.

 “Relations between Moscow and the European Union will be discussed in the light of Brussels’s policy of sanctions and Athens’ quite cold attitude to this policy,” Peskov said.

 Greece’s new left-wing government has said it will not seek aid from Moscow but has so far failed to reach a deal with its EU/IMF creditors to unlock fresh funds.

 Putin and Tsipras will meet in Moscow on April 8. It will be Tsipras’ first visit to the Russian capital after his leftist Syriza party swept to victory in a snap election in January.

I don’t expect the meeting to generate any substantive policy changes in Greek foreign policy, but it is a warning that, absent some amelioration of the EU and IMF created humanitarian crisis in Greece, there could be substantive changes in EU foreign policy.

The EU and the Euro zone are both in trouble because the people behind it decided to move forward before the necessary economic and political structures were in place. (To say nothing of popular support, as shown by the repeated failures of plebiscites for the treaties and subsequent re-votes.)

I do not think that the Euro will survive in its current form, (I expect pretty much all the non-Germanic nations to drop out eventually) and I would give even money that the EU will either be scaled back to a simple customs union, or that a significant number of members will leave in the next 10-20 years.

STEM Shortage, My Ass!

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For years, various industries have claimed that there is a shortage of STEM (Science, Technology, Engineering, and Math) employees in asking for training subsidies and visas (H-1B and L-1).

People on the other side have observed that colleges and universities are pumping out more than enough graduates, and that the lobbying for subsidies for companies to hire STEM workers in order to drive the cost (wages) of technical employees down.

Well, it appears that notwithstanding the claims of a worker shortage STEM graduates cannot find jobs:

All credible research finds the same evidence about the STEM workforce: ample supply, stagnant wages and, by industry accounts, thousands of applicants for any advertised job. The real concern should be about the dim employment prospects for our best STEM graduates: The National Institutes of Health, for example, has developed a program to help new biomedical Ph.D.s find alternative careers in the face of “unattractive” job prospects in the field. Opportunities for engineers vary by the field and economic cycle – as oil exploration has increased, so has demand (and salaries) for petroleum engineers, resulting in a near tripling of petroleum engineering graduates. In contrast, average wages in the IT industry are the same as those that prevailed when Bill Clinton was president despite industry cries of a “shortage.” Overall, U.S. colleges produce twice the number of STEM graduates annually as find jobs in those fields.

In the face of these stark facts, we now see several studies that seem to be desperate Hail Mary passes, using rather unconventional means to find “shortages.” Some analysts do this by expanding the definition of STEM jobs – traditionally those involved in innovation, discovery and development – to include air conditioning technicians and even some retail jobs to make the case that this workforce is large and growing. Without any coherent meaning, such analyses now serve only rhetorical purposes to advance particular legislation.

Cries that “the STEM sky is falling” are just the latest in a cyclical pattern of shortage predictions over the past half-century, none of which were even remotely accurate. In a desert of evidence, the growth of STEM shortage claims is driven by heavy industry funding for lobbyists and think tanks. Their goal is government intervention in the market under the guise of solving national economic problems. The highly profitable IT industry, for example, is devoting millions to convince Congress and the White House to provide its employers with more low-cost, foreign guestworkers instead of trying to attract and retain employees from an ample domestic labor pool of native and immigrant citizens and permanent residents. Guestworkers currently make up two-thirds of all new IT hires, but employers are demanding further increases. If such lobbying efforts succeed, firms will have enough guestworkers for at least 100 percent of their new hiring and can continue to legally substitute these younger workers for current employees, holding down wages for both them and new hires.

The problem is not that there is a shortage of tech workers, it’s that employers want them on the cheap, so they can spend the money of obscene bonuses for upper management, stock buybacks, and lobbying Congress.

F%$# that.

Time to Panic!!!!!!!!

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The finance world is freaking out because the latest Federal Reserve statement has dropped the word, “Patient,” from the text. (See here, here, and here)

It’s not a change in policy, it’s simply making a bit more likely that will make a statement that they might change policy some time in the future, or, as Fed Chair Janet Yellen said, “Just because we removed the word ‘patient’ doesn’t mean we’re going to be impatient.”

It’s kind of a tempest in a teapot.

Tech Headline of the Day

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Nine reasons only a tool would buy the Apple Watch.

While Apple has had its share of failures, the Newton comes to mind, but the Apple Watch is the first time I’ve seen an Apple product reviled as lame pander to “Trustifarian” rich kids.

Since the original MacIntosh, Apple has always sold its products on its chic elegance and its tightly controlled (and intuitive) interface, but it has always had a subtext of Apple producing “The Computer for the rest of us.”

This is not “The Computer for the rest of us”.

What has attracted the most attention is the $17,000 (£13,500) solid gold version, and it casts the entire watch product line as a bloated Veblin good.*

People like status objects, but they do not like to be made fools of, and this product screams, “More money than brains.”

*Named after economist Thorstein Veblin, who in his seminal work The Theory of the Leisure Class, coined the term “Conspicuous consumption”, and detailed how some items, like a solid gold Apple Watch, serve no purpose beyond status markers.

BTW, Those People Saying that Greece has no Leverage? It’s Bullsh%$

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Greece, the only Eastern Orthodox Christian nation in the Eurozone, has a number of close cultural ties to Russia.

What’s more, Russian tourism, which has been hurt by sanctions, is a big part of their economy.

It is not in Greece’s national interest to extend the sanctions, and I expect the new PM, and whoever ends up his Foreign Minister are likely to make this clear on any negotiations with the ECB and EU:

The first test for Syriza would be its stance toward European sanctions on Russia. EU measures including curbs on financing for Russian state-owned banks and a ban on the export of sophisticated energy-exploration equipment will lapse in July unless renewed unanimously by the 28 EU governments.

July is the same deadline for the continuation for Greece’s bailout.

I’m pretty sure that Greece could get a decent deal from Russia if it voted against sanctions.

Smells like leverage to me.

Syriza Wins Election

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He formed a (rather odd) coalition with the, “populist right-wing Independent Greeks party,” as he secured only 149 seats in the 300 seat assembly, Syriza chief Alexis Tsipras has been sworn in as Prime Minister:

A new chapter in Greece’s uphill struggle to remain solvent – and in the eurozone – has begun in earnest as anti-austerity politicians assumed the helm of government following the radical left Syriza party’s spectacular electoral victory on Sunday night.

Ushering in the new era, Alexis Tsipras was not sworn in, as tradition dictates, in the presence of Archbishop Iernonymos but instead took the oath of office in a civil ceremony. At 40, he becomes the country’s youngest premier in modern times.

The leftist, who surprised Greeks by speedily agreeing to share power with the populist rightwing Independent Greeks party, Anel, was on Monday afternoon handed a mandate by president Karolos Papoulias to form a government following his investiture at the presidential palace. Afterwards, the new prime minister pronounced that he will give his all “to protect the interests of the Greek people”.

Earlier, Panos Kammenos, Anel’s rumbustious leader, emerged from hour-long talks with Tsipras saying the two politicians had successfully formed a coalition.

“I want to say, simply, that from this moment, there is a government,” Kammenos told reporters gathered outside Syriza’s headquarters.

This was a bit of a surprise.

It was generally expected that the centrist/center left The River (To Potami) party would be a likely coalition partner, who would be expected to be more attuned with Syriza’s stated policies.

I think that there were 7 reasons for him to go with Anel:

  1. To Potami was formed roughly a year ago by a TV news personality, Stavros Theodorakis, and as such its existence beyond this election cycle is not by any means a sure thing.  (Anel is only a bit older, having been formed in 2012)
  2. Theodorakis is very much not a Euroskeptic, and drew “Red Lines” (German) on leaving the Euro and a deposit levy, and taking the first item off the table fatally weakens the Greek negotiating position.
  3. To Potami has very much focused on “Structural Reforms” (which appear to be defined as the reduction in patronage and corruption) to the exclusion of everything else, which would also make them an unreliable.
  4. Anel has a history of working left wing parties on issues of common interest. (Panhellenic Citizen Chariot)
  5. Anel is Euroskeptic, and really hates the Germans. (It has a demand for reparations from Germany for WWII).
  6. The founder of Anel is a long term politician, the founder of To Potami is a news talking head.  I think that the latter is far more likely to channel the behavior of pastry chefs.
  7. To Potami seems to be kind of a “Seinfeld” party, in that it doesn’t seem to be about much beyond platitudes, and Theodorakis’ personality.

 In any case, it is significant that Tsipras’ first act as PM was pretty clearly a bit “F%$# You” to the Germans:

His first act as prime minister was to lay flowers at the National Resistance Memorial at Kaisariani, which commemorates 200 Greeks who were killed by Nazis there in the second world war. The highly symbolic act was interpreted by Greek TV commentators as “another up yours to the Germans”.

I would call it a very well deserved “Up Yours” to the Germans.  Merkel has been “n***er baiting” the southern tier of the Eurozone for domestic political consumption, .

As to what it means, a lot of ink (electrons?) has been spilled about how little leverage Greece has, but this has been the same media sources who try to cast Syriza as the new Khmer Rouge.

Two Nobel Prize economists, Joseph Stiglitz, and Paul Krugman, have both weighed in on the damage inflicted by “confidence fairy” based austerity today, and they both gave it a thumbs down.

Stiglitz is very clear, and he blames Germany, not Greece for the disaster that is the policy for Greece: (And Ireland and Portugal, and to a lesser degree, Spain and Italy)

Nobel Prize-winning economist Joseph Stiglitz told CNBC on Monday that the euro zone should stay together but if it breaks apart, it would be better for Germany to leave than for Greece.

“While it was an experiment to bring them together, nothing has divided Europe as much as the euro,” Stiglitz said in a “Squawk Box” interview.

………

Greece is not the only economy struggling under the euro, and that’s why a new approach is needed, Stiglitz said. “The policies that Europe has foisted on Greece just have not worked and that’s true of Spain and other countries.”

………

He said the real problem is Germany, which has benefited greatly under the euro. “Most economists are saying the best solution for Europe, if it’s going to break up, is for Germany to leave. The mark would raise, the German economy would be dampened.”

Under that scenario, Germany would find out just how much it needs the euro to stay together, he added, and possibly be more willing to help out the countries that are struggling. “The hope was, by having a shared currency, they would grow together.” But he said that should work both ways.

I’ve been saying that Germany is the problem, and not the solution for a while.

Prof Krugman sees it as primarily a failure of policy brought on by adherence to thoroughly discredited economic theory:

To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika — the I.M.F., the European Central Bank and the European Commission — extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.

You see, the economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. Greece was already in recession when the deal was reached, but the projections assumed that this downturn would end soon — that there would be only a small contraction in 2011, and that by 2012 Greece would be recovering. Unemployment, the projections conceded, would rise substantially, from 9.4 percent in 2009 to almost 15 percent in 2012, but would then begin coming down fairly quickly.

What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. Greece didn’t hit the bottom until 2014, and by that point it had experienced a full-fledged depression, with overall unemployment rising to 28 percent and youth unemployment rising to almost 60 percent. And the recovery now underway, such as it is, is barely visible, offering no prospect of returning to precrisis living standards for the foreseeable future.

………

Still, in calling for a major change, Mr. Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare.

I’m inclined to go with Stiglitz’ here. 

I think that once again, the German sense of exceptionalism has screwed up the Eurozone from day one, and until the rest of the member nations get together to challenge Merkel’s fairy tail, the Euro will continue to circle the drain.

A Classic Case of Trotskyite Thinking

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My experience with Trotskyites, and I’ve had more than I would have preferred, having a liberal Jewish mom who grew up in New York,* is that their beliefs are impervious to facts.

When the facts don’t cooperate, you change the facts.

Well, an interesting fact is that pretty much everyone among the founders of Neoconservatism, except William F. Buckley, started off as Trotskyites.

While their beliefs had changed, their way of thinking remains in a similar form, and has infested conservatism more generally.

Case in point, the Republicans are about to introduce funny math at the Congressional Budget Office: (CBO)

After the drama of electing a new speaker of the House and the changing of control in the Senate, the House on Tuesday approved an obscure but significant rule change requiring the economic effects of legislation to be included in a bill’s official cost to the Treasury.

The change on “dynamic scoring” — ardently sought since the 1990s by Republicans — could ease passage of major tax cuts by showing that their impact on economic growth would substantially reduce their cost to the Treasury. The move is widely seen as a way for Republican leaders to set ground rules for an ambitious overhaul of the entire United States tax code.

Democrats blasted the change as “voodoo economics,” a “gamble” and “tax fraud.” Opponents said the rule change would invite politicized scorekeeping, further tilt policy to benefit the rich, and expand the budget deficit. Shaun Donovan, the White House budget director, implored the House not to “upend the level playing field that has existed for decades” and “call into question the accuracy, consistency and fairness” of congressional budget estimates.

“The basic problem remains that macroeconomic work is useful in the laboratory but not in the field,” said Edward D. Kleinbard, a law professor at the University of Southern California and a longtime chief of staff at the congressional Joint Committee on Taxation, which officially tallies the cost of tax proposals. “The models are too simplistic and the range of the possible outcomes so great that it opens the process to too much in the way of political intuitions.”

Also, I would note that we had a 12 year experiment with the Laughable (Laffer) Curve, under Reagan and Bush, where the deficit exploded, and where average GDP growth was less than under Carter or Clinton. (Link)

And then there is the disaster that is Sam Brownback’s Kansas.

But like any good Trotskyite, the Republicans are not going to allow facts to get in the way of their theories.

*In fact, my older brother, AKA Bear who Swims, had a teddy bear named Bronny bear, named after Lev Davidovich Bronshtein.†
†Don’t ask him about it. The loss of the bear in the Juneau Alaska airport is one of the great traumas of his life.‡
‡FWIW, no, Stephen is not a Trotskyite. If anything he is more disdainful of those idiots than I am.

Call me a Curmudgeon, But………

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The most recent news on employment, which shows good employment growth, is good news, but I would not start singing Hosannas yet.

There are a number of temporary externalities, most notably a 40% drop in the price of oil in the past 6 months and renewed froth in the housing market, that account for much of this, and neither of them are sustainable.

Also, it increasingly looks like the big casino on Wall Street is back, and they can f%$# up anything.