Complexities
May. 18th, 2010 02:04 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksSometimes so much is going on that my head finds it hard to synthesize it all. Hell, I know that is my job; and, as a rule, I think I am fairly good at it. I take long complex stories and turn them into 200 to 300 words of reasonably comprehensible English. Occasionally I even get the facts right.
When the problem is Greece (or Spain, or the UK), things can get complicated, but the whole caboodle seems possible to get a handle on. However, when it comes to the eurozone, the huge number of factors at play make it virtually impossible to synthesize things into something simple. Or, to put it another way, we aren't really looking at a single problem. When we thought it was "Greece, sort the fuckers out", then you could at least look at things and say whether the solutions proposed would solve the problem.
But now it's gone beyond that. It could be "the euro, sort the fucker out", or perhaps it's "global currencies and the current pegs. sort the fuckers out".
The FT today had about a dozen writers and 5,000 words just trying to define the situation, let alone work out any answers. Drawn into the debate was China (less likely to revalue against the dollar given the weakness in the euro) and California (huge economy, fiscally unsound, bonds beginning to suffer widening credit default spreads). And within Europe we have the ECB, Germany, and France, and the peripherals. Fortunately, the UK is almost an outsider here. We might have to stump up €6bn, but this is one European crisis where we can (relatively) say "hmm, good luck in sorting it out, lads". That doesn't mean that the crisis might not eventually hit our banks.
Germany and France don't have that "good luck, lads" option. There's one block of players predicting that the euro is on a one-way trip to parity with the dollar, before exploding in a disastrous fireball of its own creation. On the other side, there's, er, Jim O'Neill and me. That being, that the euro is at the moment subject to spectacularly high levels of short-term futures selling which will unwind sooner rather than later. Of course, the stopping point could still be lower than one would think (hell, it usually is).
But, I digress. Like I said, the problem is there is too much going on at once. The Germans have proposed a strict rule on eurozone budget deficits. The German balanced budget proposal is, er, peculiarly German and particularly suited to, yes, the German economy. It rather looks like an inflexible one-size-fits-all rule that would save Germany having to lay the law down to individual countries in a manner that would look as if the eurozone was controlling individual country's budgets.
The fall in the euro, temporary or not, also evokes different responses from within, let's remember, a group of countries sharing the same currency. Tourist countries are generally delighted (see Spain, France, Italy), because tourism tends to be an elastic demand commodity. But Germany, a country whose exports relied on quality rather than price, gains significantly less from a weakening euro. Imported raw materials cost more, but few extra sales are gathered at the other end, simply because, basically, a Miele or a Neff is not that price-sensitive. I have both, and I bought them because they were good, not because they were cheap (well, they weren't cheap, but you get my drift).
Incidentally I saw an interesting graph which should be compulsory viewing for all Germans who claim that the euro has been a curse for them and they are fed up with propping up those other lazy bastards using the same currency. It whowed that in 1999 German exports of goods and services made up 28% of its GDP, about the same as Portugal. By 2009, exports of goods and services made up 42% of German GDP (having reached a peak of 47% just before the recession hit). Portugal, meanwhile, remained at 28%.
In other words, the euro has been an absolute boon for German industry, with the EU "lending" money to the developing parts of the eurozone, which promptly bought German goods with the money lent. Result, German industry booms, everyone gets a BMW and a Mercedes and holidays in the Black Forest three times a year.
What else have we got? Oh yes, the really important bit, the ECB quantitative easing that isn't. Well, fucked if I know what is going on. My prediction is, as I said, that the ECB will either end up buying up tons of weaker government debt that the private sector won't touch, or it will end up swapping the weaker debt for the stronger debt of Germany and France.
The ECB has spent €16.5bn so far buying crap bonds, and today it is going to launch its "sterilisation" operation so that it doesn't become Quantitative Easing of the UK kind.
I'm afraid that this is beyond my expertise, since the balancing act is apparently going to be in the form of withdrawing one-week fixed term deposits.
The logical conclusion to this would be that there will be a shrinkage of liquidity in short-term instruments -- although €16.5bn isn't likely to make much of a difference.
Unfortunately it won't make much of a difference on the "fixing" side either. What happens if the ECB withdraws €150bn of one-week fixed term deposits? Darned if I know, but I shouldn't think that it will be pretty.
Pimco has already signalled that it will unload Greek, Spanish and Portuguese debt. Other funds have indicated privately that they will follow suit. In other words, the ECB's action hasn't restored confidence in these countries' debt. The ECB has just become a buyer of last resort. This is not good news.
What appears to me to be happening is that the actions of the ECB are attempting to rescue Greece by making the eurozone more interconnected rather than less. Kind of "if you bring Greece down now, Greece falls, but if you bring Greece down next year, Europe falls".
You can see the risk that this brings. There are a number of different players here (the EC, the ECB, individual members of the eurozone), all of whom want the euro to survive, but all of whom have different agendas. The creation of "interconnectedness" looks to me to reduce the risk of failure, but to increase the impact of failure, should it occur.
Well, we've been there before, with the banking system. The fall of Lehman Bros left the global system looking into the abyss, and it shat itself. QE and a number of other measures were the result. If the "cure" worked, great, but if the "cure" failed, the impact would be worse when it comes.
The "free market" for European peripheral government debt is bascially dead. There are no buyers. And, I will predict, there won't be any buyers. Does the ECB want to end up like Robert Maxwell, when he was the only buyer in town for Macmillan shares?
Well, either it will, or it won't, and the implications of either decision aren't pretty. I would definitely prefer that the ECB wasn't, because that would at least bring about an early restructuring of Greek and, probably, Spanish debt. This in turn would lead to a banking "crisis" (anyone wanna buy some Santander stock?), but it would not lead to global systemic meltdown.
The longer the ECB, the EU and individual players try to keep the train moving along, the worse the mess will become when the shit finally hit the fan. Already there are signs that politicians and businessmen, even within Germany, are falling out. Ackermann of Deutsche Bank says that "basically, Greece is fucked", so the German economics minister Rainer Bruederle slams into him for "unhelpful" comments.
But not, you will note "inaccurate".
Cromme of Siemens points out that Germany lent the money to the peripherals so that they could buy German goods. This kind of hard home truth did not go down well. The Germans don't want to hear it.
Once again, for the few of you still out there who are economically naive, who like to ask "where did the money go?", let me give a poker comparison (because I love giving poker comparisons).
I play a game against a bad player, but he drives a nice car and lives in a nice apartment, and he's charming. "Zorba The Greek", as we'll call him, does his bollocks. He pays me 10% of what he owes me, and offers to pay the rest off at 10% a week. "Sure, I say". So he's paid me £100, and owes me £900.
So, the next week, he does his bollocks again, and he pays me the 10% of the previous debt (another hundred quid as promised) and 10% of the new debt (£100).
This goes on for a few more weeks until, after 10 weeks, he's accumulated £10k in debt. But, hell, he's kept to his agreements. Although I've only received £1,500 off him in payments, I've no reason to think that he will welsh on me.
So, I count that £10k as "effective money in the bank".
Now let's look at it from Zorba's point of view. That last week finally sent him skint. Not only does he have no hope of paying back the £8,500 he owes, but he can't borrow any more money to carry on playing. Oh well, he says, the other guy's got £1,500 off me. It's still profit for him.
So, where has the other £8,500 gone?
The answer, of course, is that it hasn't gone anywhere, because it never existed, except in the mind of the winner (me).
Well, Germany was the good poker player, and Greece was the bad one. Germany still thinks it will get its 100%. Greece knows that it hasn't got it. End of. No result.
______________
When the problem is Greece (or Spain, or the UK), things can get complicated, but the whole caboodle seems possible to get a handle on. However, when it comes to the eurozone, the huge number of factors at play make it virtually impossible to synthesize things into something simple. Or, to put it another way, we aren't really looking at a single problem. When we thought it was "Greece, sort the fuckers out", then you could at least look at things and say whether the solutions proposed would solve the problem.
But now it's gone beyond that. It could be "the euro, sort the fucker out", or perhaps it's "global currencies and the current pegs. sort the fuckers out".
The FT today had about a dozen writers and 5,000 words just trying to define the situation, let alone work out any answers. Drawn into the debate was China (less likely to revalue against the dollar given the weakness in the euro) and California (huge economy, fiscally unsound, bonds beginning to suffer widening credit default spreads). And within Europe we have the ECB, Germany, and France, and the peripherals. Fortunately, the UK is almost an outsider here. We might have to stump up €6bn, but this is one European crisis where we can (relatively) say "hmm, good luck in sorting it out, lads". That doesn't mean that the crisis might not eventually hit our banks.
Germany and France don't have that "good luck, lads" option. There's one block of players predicting that the euro is on a one-way trip to parity with the dollar, before exploding in a disastrous fireball of its own creation. On the other side, there's, er, Jim O'Neill and me. That being, that the euro is at the moment subject to spectacularly high levels of short-term futures selling which will unwind sooner rather than later. Of course, the stopping point could still be lower than one would think (hell, it usually is).
But, I digress. Like I said, the problem is there is too much going on at once. The Germans have proposed a strict rule on eurozone budget deficits. The German balanced budget proposal is, er, peculiarly German and particularly suited to, yes, the German economy. It rather looks like an inflexible one-size-fits-all rule that would save Germany having to lay the law down to individual countries in a manner that would look as if the eurozone was controlling individual country's budgets.
The fall in the euro, temporary or not, also evokes different responses from within, let's remember, a group of countries sharing the same currency. Tourist countries are generally delighted (see Spain, France, Italy), because tourism tends to be an elastic demand commodity. But Germany, a country whose exports relied on quality rather than price, gains significantly less from a weakening euro. Imported raw materials cost more, but few extra sales are gathered at the other end, simply because, basically, a Miele or a Neff is not that price-sensitive. I have both, and I bought them because they were good, not because they were cheap (well, they weren't cheap, but you get my drift).
Incidentally I saw an interesting graph which should be compulsory viewing for all Germans who claim that the euro has been a curse for them and they are fed up with propping up those other lazy bastards using the same currency. It whowed that in 1999 German exports of goods and services made up 28% of its GDP, about the same as Portugal. By 2009, exports of goods and services made up 42% of German GDP (having reached a peak of 47% just before the recession hit). Portugal, meanwhile, remained at 28%.
In other words, the euro has been an absolute boon for German industry, with the EU "lending" money to the developing parts of the eurozone, which promptly bought German goods with the money lent. Result, German industry booms, everyone gets a BMW and a Mercedes and holidays in the Black Forest three times a year.
What else have we got? Oh yes, the really important bit, the ECB quantitative easing that isn't. Well, fucked if I know what is going on. My prediction is, as I said, that the ECB will either end up buying up tons of weaker government debt that the private sector won't touch, or it will end up swapping the weaker debt for the stronger debt of Germany and France.
The ECB has spent €16.5bn so far buying crap bonds, and today it is going to launch its "sterilisation" operation so that it doesn't become Quantitative Easing of the UK kind.
I'm afraid that this is beyond my expertise, since the balancing act is apparently going to be in the form of withdrawing one-week fixed term deposits.
The logical conclusion to this would be that there will be a shrinkage of liquidity in short-term instruments -- although €16.5bn isn't likely to make much of a difference.
Unfortunately it won't make much of a difference on the "fixing" side either. What happens if the ECB withdraws €150bn of one-week fixed term deposits? Darned if I know, but I shouldn't think that it will be pretty.
Pimco has already signalled that it will unload Greek, Spanish and Portuguese debt. Other funds have indicated privately that they will follow suit. In other words, the ECB's action hasn't restored confidence in these countries' debt. The ECB has just become a buyer of last resort. This is not good news.
What appears to me to be happening is that the actions of the ECB are attempting to rescue Greece by making the eurozone more interconnected rather than less. Kind of "if you bring Greece down now, Greece falls, but if you bring Greece down next year, Europe falls".
You can see the risk that this brings. There are a number of different players here (the EC, the ECB, individual members of the eurozone), all of whom want the euro to survive, but all of whom have different agendas. The creation of "interconnectedness" looks to me to reduce the risk of failure, but to increase the impact of failure, should it occur.
Well, we've been there before, with the banking system. The fall of Lehman Bros left the global system looking into the abyss, and it shat itself. QE and a number of other measures were the result. If the "cure" worked, great, but if the "cure" failed, the impact would be worse when it comes.
The "free market" for European peripheral government debt is bascially dead. There are no buyers. And, I will predict, there won't be any buyers. Does the ECB want to end up like Robert Maxwell, when he was the only buyer in town for Macmillan shares?
Well, either it will, or it won't, and the implications of either decision aren't pretty. I would definitely prefer that the ECB wasn't, because that would at least bring about an early restructuring of Greek and, probably, Spanish debt. This in turn would lead to a banking "crisis" (anyone wanna buy some Santander stock?), but it would not lead to global systemic meltdown.
The longer the ECB, the EU and individual players try to keep the train moving along, the worse the mess will become when the shit finally hit the fan. Already there are signs that politicians and businessmen, even within Germany, are falling out. Ackermann of Deutsche Bank says that "basically, Greece is fucked", so the German economics minister Rainer Bruederle slams into him for "unhelpful" comments.
"I find the declarations strange, surprising and annoying."
"At a time when the debate is being carried out so publicly, such a strong statement on the television is not helpful".
But not, you will note "inaccurate".
Cromme of Siemens points out that Germany lent the money to the peripherals so that they could buy German goods. This kind of hard home truth did not go down well. The Germans don't want to hear it.
Once again, for the few of you still out there who are economically naive, who like to ask "where did the money go?", let me give a poker comparison (because I love giving poker comparisons).
I play a game against a bad player, but he drives a nice car and lives in a nice apartment, and he's charming. "Zorba The Greek", as we'll call him, does his bollocks. He pays me 10% of what he owes me, and offers to pay the rest off at 10% a week. "Sure, I say". So he's paid me £100, and owes me £900.
So, the next week, he does his bollocks again, and he pays me the 10% of the previous debt (another hundred quid as promised) and 10% of the new debt (£100).
This goes on for a few more weeks until, after 10 weeks, he's accumulated £10k in debt. But, hell, he's kept to his agreements. Although I've only received £1,500 off him in payments, I've no reason to think that he will welsh on me.
So, I count that £10k as "effective money in the bank".
Now let's look at it from Zorba's point of view. That last week finally sent him skint. Not only does he have no hope of paying back the £8,500 he owes, but he can't borrow any more money to carry on playing. Oh well, he says, the other guy's got £1,500 off me. It's still profit for him.
So, where has the other £8,500 gone?
The answer, of course, is that it hasn't gone anywhere, because it never existed, except in the mind of the winner (me).
Well, Germany was the good poker player, and Greece was the bad one. Germany still thinks it will get its 100%. Greece knows that it hasn't got it. End of. No result.
______________
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
anyone wanna buy some Santander stock?
Date: 2010-05-18 03:41 pm (UTC)JG
no subject
Date: 2010-05-18 04:46 pm (UTC)bdd
Timeo Danaos et Debita Ferentes
Date: 2010-05-18 06:57 pm (UTC)Have you ever considered applying for Trichet's job?
Poker's probably too complicated for Jean-Claude Anne Marie Louis; I'd suggest Spoof as an alternative.
I understand that "[J-C. A. M. L.] Trichet learned how to juggle the romance of poetry and the cold facts of mathematics from his father, Jean, a professor of Greek and Latin literature."
I can't help you with romance, cold facts, or indeed Latin beyond a mediocre O-Level, but I'm sure as hell behind you with my expert knowledge of Greek literature. Hubris, nemesis, catharsis -- yes, I've got all of that. I can even write a banner out to hang over the Acropolis.
Let's do this! The world needs crazed and disappointed 40+ year olds who can Divine the Auguries (organic and kosher only, please. I have no desire to be assassinated by a Green or a Khomeneiad).
Middle of 2011. Euro dead. My final offer.
Re: Timeo Danaos et Debita Ferentes
Date: 2010-05-18 07:28 pm (UTC)As to the poker debt -- unfortunately, this is often how it worked in real life (in the olden days...). Losers often ended up paying only a proportion of their losses (particularly if this meant that they came back for more the following year). Since the winners knew that the maxuimum they could take off these guys was all their money, they didn't tend to worry too much about the "theoretical" amount that they had won off them.
PJ
Re: Timeo Danaos et Debita Ferentes
Date: 2010-05-18 08:11 pm (UTC)Poker -- yup, I follow that. On the other hand, you refer to "in the olden days..." It's a good anecdotal foundation, but it doesn't have much relevance to online poker as of now, does it? (Nor should it. I got the reference.)
Yes, mid-2011 is short-to-medium. However, I subscribe to the "inverted pyramid" point of view (which I'm not going to explain, because you just have to be there). Month to month, there are nasty tweaks in the fabric of the ECB universe (including this weird 750 billion unfunded guarantee; a straight swap for lousy assets against higher-value ECB assets; and -- currently -- a complete refusal to recognise EU-wide deflationary tendencies, or to set up the possibility of ECB quantitative easing, if necessary).
I agree that, as of today, and without black swans (TM), the Euro should survive. On the other hand, as a historian (and this is what we're trained to do), I look back to a year or two ago.
Who would have thunk we'd be here now? Nobody.
Who has the faintest idea what the bond markets (just as one example. I'm not even going to think about civil unrest) will do in the next six months?
July 2011. If not before.
Euro
Date: 2010-05-18 09:05 pm (UTC)Having spent two years of my life working on the introduction of the euro, I am very concerned about the practicalities of unwinding and reintroducing national currencies (eg. drachma). This can NOT be done quickly. Even if it could be done in 6 months, which I doubt, there will be absolute carnage during the interim period. The EU deliberately made it virtually impossible to exit the single currency precisely so it would come to be seen as unthinkable.
In the meantime the EU wastes a vast amount of time and effort on the proposed AIFM Directive - an unworkable abortion of measures. Absolute madness.
In the meantime, the UK inflation rate is starting to accelerate - with likely more to come quickly if VAT goes up. So stagflation here we come. And with Osbourne in charge as well...
I think I might need to move back to New Zealand.
Pete N.
Re: Euro
Date: 2010-05-19 12:15 pm (UTC)On the inflation front, it's interesting to compare King's wordings this month with those of February. The key part is where he says that if "inflationary expectation" increases, we could be in for a tough time.
Well, no shit, Sherlock. This is the first acknowledgement in a King statement where he has accepted that expectations are a factor in how inflation goes up and down. His previous letters to the Treasury have stuck on time-zero fundamentals (or, to put it simply, people price things on how things are now, rather than on how they expect them to be next year).
This is precisely the "inflationists'" argument that was so ignored by King and other "deflationists", who kept wittering about excess capacity/competition in the retail sector/blah blah blah. None of this allowed for expectation. Now, at last, King admits that it could be a problem. What I'd like for him to do now is come up with a solution.
Oh, wait, he can't.
PJ
Re: Euro
Date: 2010-05-20 05:13 pm (UTC)While redenomination of Greek debt into new Drachmas would undoubtedly constitute a credit event, it would be interesting to see the technical analysis on what the Germans would have to do should they convert to the Super Euro (faster than a speeding rate cut, stronger than central banker). Wuuld conversion be an event, or keeping the current debt denominated in the devaluing old currency?
Pete: Hi again, I've been lurking for a while, but only posted last week when I found something to disagree with.