Trade, the real fool’s game

Trade, the real fool’s game

I would like to underline one aspect of the trade report that is not getting much attention- well ANY attention.

Although the deficit fell this month, at $44bln it can be annualized to a deficit of $528bln.

When we have a deficit in our trade account (more correctly, the current account) we obtain an equal amount of capital inflows to finance that deficit.

So here is the question:

So,why, when US banks have billions and billions of dollars in excess reserves, empowering them to make billions and billions of dollars in loans which they DO NOT MAKE are foreign investors pouring capital into the US at a pace of over $500 bln per year?

How do you reconcile that paradox?

We argue that there is no great attraction that 'pulls' foreign funds into the US. Instead we view capital flows as being 'pushed' by foreign investors who have other objectives.

That is we do not think that 'high US interest rates' are sucking capital in or that 'high rates of return in business investment' or in 'real estate' are attracting inflows.

We see the inflows as the result of foreign government's decisions to accumulate dollars in order to support the dollar at a relatively high level so they can pursue a policy of export led growth by keeping their currencies relatively weak and exports cheap.

These policies have caused the US current account deficit to persist. Developing countries have amassed the build-up of world foreign exchange reserves an action that can only be regarded as one that supports them in achieving their objective of keeping their respective currencies 'too cheap' and the currencies that they buy 'too strong'. Developing countries do not need FX reserves as much as they need to put those monies to work in their own countries to further their development. But they don't do that...

China's FX reserves rose 30% over the past year and stand at $3trillion. How does that accumulation not act to keep the yuan too weak and to perpetuate the US-with-China trade deficit? How else can it be interpreted?

By 2007 China had comprised over 30% of the annual US trade deficit and in 2009 and 2010 that percentage has moved up to 44%. Despite the US need to buy oil at high world prices China takes up 44% of the US global trade deficit.

A proper functioning exchange rate system would not keep a country's current account in a state of perpetual deficit. Yet, since 1971 the US current account has been in deficit for all by 24 quarters (24 out of 159; or 15%). The current account has averaged since 1971 a deficit that is 2.1% of GDP. The US has not seen a current account surplus since 1991Q2 a twenty year span. Currently, the current account deficit is 3% of GDP after reaching a peak percentage of 6.5% of GDP in in 2005. Interestingly the US had shrunk is current account deficit to 2.4% of GDP by the end of the recent recession, but in recovery even with GDP growth at 2.2% the current account deficit relative to GDP is rising again.

Since 1982 the US current account has been in surplus only two quarters. The ONLY progress in shrinking the deficit has come as the economy has slowed either just ahead of a recession or in a recession. For example from Q3 of 2006 to Q3 of 2007 when recession started, the US current account deficit shrank because GDP growth slipped below 2.5% and then the economy fell into outright recession. That caused the current account to shrink much faster. But it remains in deficit and a larger deficit than what has been normal. Since the last US current account surplus in 1991 the summation of the current account relative to GDP is 65%- no compounding.

Clearly this international monetary system is not working. It may not need to equilibrate the US current account immediately but we do need some signs of progress and improved fundamentals to support progress in that direction. The US current account deficit is huge and is hardly getting better; at 3% of GDP it is 50% above its average since 1971. Pumping the US economy full of debt is not helping. Even S&P can see the risk. The danger is that only debt saturation will stop this madness (bankruptcy). That is what happens if a well-functioning exchange rate system cannot be imposed on this dysfunctional process that perpetuates US debt accumulation (current account deficit). No wonder gold bugs are trying to push a gold standard. It would stop this madness, but would create and entirely new madness. Imagine moving to a gold stand and losing $500bln of gold reserves a year (the current account deficit). What sort of recession would you have to run to eradicate that and to stop losing gold? And with unemployment already at 9%?

Many economists reject this analysis and blame the US for its 'addiction' to debt but I see the US being force-fed debt because foreigners will not let the US mount any consistent export growth. In short the US does not enforce its exchange rate, on the markets. Markets do the ‘enforcing’ and right now markets are being manipulated by foreign governments. The foreign capital inflows (debt accumulation) by the US and the accumulation of massive foreign exchange reserves by foreign exporter countries far in excess of needs are the forensic evidence, the finger prints, of this ongoing currency manipulation.

The excess bank reserves are evidence that those flows are not being attracted by an insatiable US appetite for debt. We could slake that thirst at home with the banks.

If this were CSI I'd be ready to go to court.

Root of all evil (well, most of it anyway...)

In other words, this is not free trade. This is not fair trade. This is a fool's game and it is coming to an end one way or another. It is a process that is responsible for many other Ills in the economy that the fiscal deficit folk and the monetary mavens are trying to solve. It is at the root of our many and varied asset bubbles. But we are unlikely to fix either US fiscal policy or monetary policy until we deal with international monetary problem because it greatly exacerbates the other problems. Don't look for the G-7 to go there because no one seems to have a clue.

New CEA head and more...

Lots of criticism over the new Obama head of the council of economic advisers (CEA). People say he is too far to the left...

so did you expect Obama to appoint a Republican's economist to the post?

We have a BIG budget problem nothing should be off the table- no not even a national sales tax which Alan Krueger supports (a tax, by the way, that Democrats hate, Republicans despise and State Governors (and many mayors) abhor-all for different reasons. To Democrats the tax is too regressive, to Republicans it is too powerful, to Governors and mayors, sales taxes have been their exclusive province for 'fund raising')...

Cutting entitlements is 'job one' to get the deficits in line. But not job one through 'n.' All this Republican whining about taxes is misplaced. Tax reform and more taxes are almost surely part of a real workable solution. But enlightened tax reform, not vicious now-you-are-going-to-get-yours tax reform. America does not need class (or classless) warfare, Everyone should be paying taxes, everyone should pay their 'fair share.' The tax code already is progressive. suck it up and write the check but pare the obligation down to a workable profile that is American in nature. We are not the social welfare economy that Europe has become and is struggling to maintain.

Europe is no role-model for American

There is all too much spin doctoring about our problems and our dilemma and not enough willingness to take the bull by the tail and look the situation square in the err...'eye' and deal with it.

Deficits did not spring fully born out of the head of Obama as in some tale of Greek mythology. 'W' -remember him? ran TWO unfunded wars (cha-ching!) added a large drug benefit to medicare (Cha-ching!) and added a new cabinet post, Homeland Security (Cha-ching!). He handed over to the O-man an economy that was losing jobs at a pace of nearly 1-million PER MONTH ( Kur-Plunk!) in the early months of his nascent Presidency. The economy was not just weak, it was spiraling out of control. (here take the wheel I'm outta here....) While I do not give Obama good marks for his fiscal plans (or results!) I think we need to be careful where we put the blame and to whom we ascribe the bulge in the deficits. Hey is that a big deficit in your pants or are you just happy to see me? Let me be clear. Deficits emerge in response to something-something done or not done. They do not spring forth out of nowhere. The Obama deficits merged the context of great stress on the economy.

The Bush contributions to the deficit were all policy-induced and not executed in the midst of a crisis. His famed tax cuts propelled the economy to nowhere but are staunchly defended by the faithful. Choose the altar where you plan to worship carefully...Bush's tax cuts based on results were no success story. Still, this is no defense of Obama who, based on his current body of work, does not deserve reelection. (Has any Nobel Prize winner ever failed to be elected the very next time he faced the public?)

Only look to Europe to see what I call the quadriplegic strategy: Cutting and cutting will not really get you anywhere but stuck some place from which you cannot move. It's medicine is slow-acting. It is structural not counter-cyclical. We do not need to shrink government to free up up resources for the private sector: what to you call 9% unemployment if not free resources? We need enlightened minds in both parties and instead we have friggin ideologues ON BOTH SIDES OF THE AISLE.

We need to focus not on policies that will add former government workers to the ranks of the unemployed but on policies that will spur growth, add to output and add to job rolls. We do need hard core nonthinking redistribution plans from the Democrats or shrink-o-nomics from the Republicans.

So, here is an appeal to the religious right: God help us.

Learning from Irene

Irene good night,

Irene good night

Good night Irene

Good night Irene I’ll see you in my dreams (nightmares)

About Irene and what we can learn from her passage…

While Irene was a bust of disaster in most of Manhattan it did wreak some havoc in the surrounding areas, some very real property damage and five deaths are being reported. The New England States appear to have gotten hit hard.

The more general disruption of business from airlines to trucking to package delivery business and much more has been enormous. But some of the losses will be made up. Some will not. The storm’s hitting at month-end could mean August activity is reduced and September’s is boosted. Coming so late in the month we may still be seeing come recovery effects extended to the week of the 12^th of September, the week that serves as the survey basis for the nonfarm jobs report. It could be artificially boosted. Municipalities, already short on funds, will be forced to spend monies they don’t have for needed repairs, tree removal and repair of damaged infrastructure and so on.

From my vantage point on the Upper Wet Side (former Upper West Side) of Manhattan, it was a lot of rain and not even that much wind. It might have been too much wind to fly a kite but it was not blowing of a worrisome sort. All my neighborhood stores closed and the subways did not run. I was officially stranded. I took pictures both up and down West End Avenue with NO TRAFFIC at all, just like in a Sci-Fi movie. It was Sci-Fi except no Zombies- just rain. My local grocery store (soon to be renamed Wet-side Market) did more business on Saturday as the storm approached than it may ever have done ever before (in my estimation). Going through the store when it managed to open with a bare-bones crew on Sunday morning I had never seen such bare shelves. Moral: some kinds of businesses benefited.

I was amazed on Saturday as stores were shuttering ahead of the pending subway shut down, that a high end women’s shoe store in the neighborhood was still open… Never underestimate the need for more shoes (with very high heels) as rain and the threat of flooding gets real. Fashion is never to be discounted (except at Loemann’s).

The church on the corner of West End Ave and 77^th put up notices on Saturday that there would be no Sunday service. Meteorologists scared the Hell into people that day; that is the moral of that story. In the end, Sunday was a fine day on the Upper West Side of NYC despite the fact the 8AM was supposed to be the time of the storm’s closest reach to my neighborhood. By 10AM the sun was out and instead of disaster we had a very fine day.

We cannot say the same for the states North and East of us or for the economy as a whole. This was a very odd event. Is this more of the effects of ‘global warning’ that many seem to not believe in? On balance is it another warning shot (a warming shot?) about the future? And it is another blow to property and casualty insurance companies. Have the winds of change really shifted so much?

If nothing else it is a good lesson of the role that expectations play. I do not criticize the Mayor or the Governor for their actions. NY it seems was ‘spared;’ the storm’s true severity has been amply demonstrated tough its impact on the suburbs. As it went through our area and did worst damage North and East of us as well as south of us. And the greater NY area took enough of a pounding for it to be a real wakeup call about future prospects. But people acted as though and were forced to act as though things would be worse. My local church sure could have held services. Few people in the neighborhood take the subway to their local church. But no one knew. So when you look at the economy let this be a lesson about how people act on their expectations and how risk aversion interacts with those expectations.

The economy’s poor performance since Barack Obama has been President stems in no small measure from his decision to have run as the ‘Yes we can candidate’ but to govern as the ‘what the heck was that’ President. I believe his desire was to see that Republicans were blamed for the bad economy he inherited (knowing full well that that was what he was getting). He even set himself up as an economic know-it-all in contrast to John McCain who admitted he was not an economic expert in the campaign for office, so don’t cut Barack too much slack here. Meanwhile, Obama has been out-maneuvered by savvier Republicans who saw he was President and knew where the buck would stop for a too-weak economy. Economists were pessimistic from the get-go forecasting a double dip before we had even a single–scoop. We had a perfect storm of soured expectations and it has played out that way in the real world, almost as it did on the Upper West side of NY this weekend when the subways were closed. Doing that killed it even for the optimists as well as for those who were in in denial. People could not get to work; stores were closed and it was a ghost town.

This economy as been an example of what partisan politics can do to the economy when each side pursues its own agenda at the expense of the economy and at the expense of the welfare of the American people. It’s as though our politicians shut down the subway without the threat of a storm. Our government can isolate us. It can also help us. Ronald Reagan made the phrase, ‘I’m from the government and I’m here to help you, into a laugh line. Government is powerful. It needs to be mindful of its power when it flexes its muscle. Now government itself is in the middle of the debate about the economy. Has IT been the problem? As it been new policies and restrictive rules that have hammered growth, or has it been mostly the conduct of public officials killing off optimism? How much of it is still the lingering effects of financial crisis with tis complex bi-partisan causes? Unfortunately, this debate is not like tropical storm, It does not pass and the sun does not automatically come out. There is still a bitter taste in the mouths of politicians from both sides. Each side still smells the other’s blood in the water- not even the storm washed that away. And there is so much more politicking to do. Yet the economy is need of near term help. What will it be? More government or less? Who will win? The answer is not an easy one. Neither side will capitulate. So be afraid, Be very afraid. ‘This' is not over, this political storm has more damage yet to wreak.

Deficits turn policy upside-down and calls for hard choices

I have two recent articles published elsewhere you may wish to read:

CNBC on the pluses and minuses of a national sales tax
http://www.cnbc.com/id/44108811

MarketWatch on the sad political charade and its upside-down logic

http://www.marketwatch.com/story/debt-spat-takes-cake-pineapple-upside-down-cake-2011-07-27?dist=countdown

AMERICA’S DARKEST HOUR

I do not mean this to be hyperbole. There is no greater danger than the one that comes from within. And it is in play.

No Give and take- Democrats and Republicans can have their spats; it is part of the game. But the ballet in Washington now puts the nation and its finances squarely at risk –and over what? It seems that a number of Republicans ran for office on the pledge of no new taxes, but when push comes to shove and deal making requires taxes they are more concerned about their own necks than about the fate of the country. Such is the stuff that patriotism is not made of.

The obscure prize- And what of taxes, that powerful elixir that drives this insanity? Let’s look at a seven year moving average of the top margin tax rate Vs real GDP growth:

OOPs the chart does not want to print, you'll have to request that from me

Surely THIS can’t be what they are fighting over? The correlation between high tax and high growth is 0.46. That’s right. In the post-war period the higher the top margin tax rate the stronger was growth.

Now I know blood is going to start to boil over this. We know it’s the taxes you pay that matter but the tax rate you avoid is pretty important too. And the simple point here is that the simple tax rate is not a powerful predictor, is it? So what is this tax debate really about? It’s about re-election. Period.

That is not to say that I think high taxes are ‘good.’

It’s all about MEEee - It is simply clear that taxes are not the end of life for growth like drinking poison. It may be the end of the line for those who overpromised to get into office, however. And we should not mortgage our future for their sake. They are now putting the country under extraordinary stress because they have set up huge spending cut targets and want to give nothing in return. Has politics ever worked like that? No. Only if you have really big leverage can you do such a thing. And they are holding hostage the United States of America.

Cartoon Economics: Ron Paul is the real character is this whole charade that I would most like to eject from the discussion. He may not be so influential but he is spewing the most incredible lies about our country. He gets paid his deference as he is a senator and he chairs the all-important Senate banking committee. How did a guy with such warped views of the US economy get to hold such an important position? His economic statements and knowledge are severely wanting. In a recent interview (click link below)

Ron Paul tells it like it ain’t:

http://www.bloomberg.com/video/72444680/

Mr. Paul was asked about the importance of the US AAA rating. His response was evasive and then he made outrageously false statements. He first says that ratings lag and the US has not been worth that rating for some time. Then he says the US is bankrupt. Then he says that the rating could be kept in the short run but that it would eventually be lost.

None of this is true.

Still numero uno- The US is still the wealthiest most productive nation on the plant. When its leaders tell lies like this it depresses the American people and makes them feel helpless. Some may even believe it. And if they do it’s not surprising that they go for Mr. Paul’s idea which is to not defend our rating; he has even said that the US should repudiate its debt! And he is a financial leader of this country. Why has his own party not locked him away in a closet somewhere?

Uncle Scrooge? - Why should the richest county in the world not pay its bills? What is to be gained in doing (not doing) that? What would happen to the rest of the world if we did that? And what would happen to our own most conservative institutions if treasury debt were to go into a true default, not a technical one, which is Mr. Paul’s idea?

It’s hard to go down that road but the Great Depression might seem like a picnic in comparison. The great recession would be known as the minor precursor.

Hard deadlines/soft thinking- The game being played about the August 2 date not being hard deadline is a real fool’s game. And as such only real fools should play it. As the Fed Chairman points out, that is a dangerous thing to do. Just think about it: here is what is being proposed- To prioritize debt payments for tax revenue and then pay other bills as the treasury ‘can.’ It does not take much of a financial expert to see that this would lead to cascading lay-offs first in government and then spreading elsewhere. Other kinds of payments ‘defaults’ and would weaken the economy and future tax revenues to the point that the government cuts would have to get even deeper. This is not a plan it’s a guarantee of a severe recession and worse. I don’t think Aug 2 is a drop dead data in the sense that if we do not lift the limit on that date the US will default and the world will come to an end. But it’s an important date and the legislators/politicians should respect instead of trying to ‘fool’ with it.

Whose deficits are theses? - Republicans blaming the Democrats for the weak economy is just not reasonable since both parties were responsible for the financial excesses that led to the financial crisis and the economic recession. Both parties are failing in getting the economy in gear. I do fault the Obama administration for a poorly constructed stimulus plan but that is only one part of it.

Desperation demands grow- On balance we have little balance. As the impasse has dragged on the Republicans seem to up their demands. The recent one: Boehner’s call for a balanced budget amendment. The Fed Chairman has come out against such a thing because it would be too inflexible. As upset as you are with current policy imagine if such a rule were in place today and the recession was causing not just state and local governments to pare down activities and fire people but the Federal government as well.

The debt ceiling BELONGS to Republicans too- Republicans keep getting heated up about cutting as much spending as we hike the debt ceiling. But that is a huge target. Democrats clearly want something in return after all Republicans act as though the debt ceiling is a Democrat objective and should compromise all sorts of stuff to hike that ceiling. The Republicans have vastly misjudged their leverage and position and are struggling to find a way forward.

Debt is a legacy- The nation’s debt simply reflects all the spending that has occurred that Congress, both Republicans and Democrats, has authorized in excess of revenues. What now is this opposition to hiking the debt ceiling? Is it bait and switch on the part of those who oppose the hike? Is this some cruel trick by Congressmen and women who voted vote for all these spending programs now want to vote to not fund them and blame Democrats? Apparently tax hikes and closing tax loopholes are not on the table either. With what are the Democrats supposed to bargain? Obama seems to have been quite flexible in trying to get some revenue raisers in compromise but not calling them tax hikes.

In my view this is the Republican’s gambit.

Their risk- They are the ones talking about shutting down government and about not hiking the debt ceiling. If anything bad happens they will be blamed. Their tactics already may have cost them dearly among moderate voters. One thing these newbie Republicans do not seem to understand is that the voters want spending cut but none of their benefits cut. So Republicans may yet see a backlash from their single-minded interpretation of their election mandate which, on close inspection, is much more complicated then they admit.

In all of this I fear for the nation. We have some real kooks in positions of power and I fear that the Republican leadership is not in control of its own forces as the newbies are driving the leadership to a hardened position that could prove fatal.

The story behind the debt eight-ball

The economic data have been weaker in recent weeks than their counterparts for the year to date. This past week the degree of weakness became exaggerated. It does not point to declines in output (yet?) but it is very weak and disturbing. If you are not wary or confused about the outlook you are not paying attention.

With actual negative events in the mix we have reason to think that this week’s data reflect more than simply volatility-the economy is being pushed by something. The degree of weakness is extreme with the two ISMs each making falls of historic proportion over the past two months. The drop off in job growth is large. The unemployment rate trend which was moving lower has been stopped and set in motion in reverse. Consumer attitude surveys are not uniform on the month but all are clearly very weak – they agree on the big picture if not on the details.

Events in Washington really are worrisome.

Let me repeat something here that I think is important and worth saying AGAIN. The deficit and debt problems are not economic problems as much as they have solutions that have become political issues. We could put in place a VAT tax (think national sales tax) to raise money to narrow the budget gap. Easy as 1% 2% 3%. Even Alan Greenspan is calling for higher taxes. The Tea Party types continue to stone-wall as if any tax hike is like the Ebola virus… Painful? Yes. Deadly? No. There are simple solutions out there but none without some pain or repercussions.

I continue to wonder why, in a nation with such varied costs of living and varied housing costs/prices the income tax continues to be the centerpiece of tax policy and the rhetoric of ‘tax the rich’ is used in conjunction with income flows that have such differing purchasing power from state to state. Will we ever learn or wake up? Or is this sort of class warfare based on a fundamental falsity just part of the American way? Way? No Way! In America $100K ≠$100K. It depends in what state you live when you earn it how well you would live on such an income. So what base tax policy on such an uneven benchmark?

We know that with longer life expectancy we must push back the retirement age for Social Security. A fifth grade math class could demonstrate that to you. A fixed date for retirement makes no sense when every successive generation is living longer. Yet we can’t do this…

Finally, medical care simply cannot be offered for free any more than can any other service or good without demand for it being abused. Is medical care something different or special? To some extent, yes, still you can’t make it free without real financial consequences. AARP be damned.

Moreover if the government is going to subsidize or provide medical care it must use its clout to get reduced costs. Medical lobby be damned.

The economic logic here is clear. But the political will is splintered because each party has a different idea of how to make change and each wants to use this time of conflict as a springboard to more political gains.

So no one wants to alienate old people (AARP). No one wants to alienate the drug companies (use government buying clout) or the medical lobby or the insurance lobby- so nothing gets done. We kick the can down the road until it kicks our cans back and we are getting closer to that. At some point, it’s THEM OR US. WHO WILL IT BE?

You can see this at work with the financial crisis having come and gone-well maybe not yet gone-and the power of the financial lobby whereby real reform just can’t be had.

Oh, by the way…I have invented a new glue much stronger than ‘Super Glue.’ I am going to call it ‘Financial Lobby’ because nothing in the world is stronger than that…

As far as I can see much of the hoo-ha about the debt/deficit is largely being done by the two political parties that run things here in America. We voters are just the baubles they redecorate with every two or four years. They call it ‘democracy’ but after the election is over and we see the actual ‘pig’ we bought in that poke it feels much more like ‘hypocrisy’.

Right now the two parties are wrecking the economy with their various threats instead of fixing it. The cynic in me wonders if Republicans would push so hard to cut spending if they were in the White House and running for re-election this time around. Would the need to cut spending so much so soon, seem as compelling if their administration were on the line?

I don’t know if any of that makes you feel any better about what is happening. Having politicians who claim they are willing to let the US default on its debt when it could well afford to pay it may be worse than finding that you do not have the means to pay it at all. A politician unwilling to pay a bill to achieve his political end is a danger 100% of the time not just when times get tough.

This is not an argument for not doing debt and deficit and spending reform, just to put the tactic and need in context. Doctors too can stop the spread of disease and ‘cure’ patients by letting them die. It’s a simple solution and not really very effective when you think about the end result Vs the goal. Similarly, how does wrecking the US economy fix it? Riddle me that Bat man…

EMU takes a new hit; frazzled outlook

Main EMU sectors hit major air-pocket- The EMU MFG and Services indices are sharply lower. The MFG index fell by 2.9 points while the services index fell by 1.43 points. Those drops are huge in the histories of those respective series. For MFG the drop ranks as the fourth largest in the series’ history. For services the setback was the 14^th largest. This ranking makes the MFG drop an event that occurs only about 2% of the time; the services drop is an event that occurs only about 10% of the time, a little more than one a year. The services sector last saw a drop larger than this is in September of 2010. Still it’s a large drop, but the MFG drop is enormous. MFG last fell by more last in November of 2008.

While we have seen the EMU metrics on growth show setbacks in recent months, the step-back this month is severe.

Level readings for sector as not a problem- Still at 54.85 the MFG index is still showing growth and is well above its average value of 51.62. Services at 55.40 also are still showing growth and are above their average mark as well. The dividing line between growth and contraction on this metric is 50 and both are well above that so it’s not a growth setback we worry about, at least not yet. The values still sit in the 79 percentile and the 69 percentile in the MFG and Services high-low ranges, respectively. These are still adequate-to-firm readings.

NO recession worries…yet - The levels of their headlines are not a problem at this time but the momentum of the sectors is an issue and the severity of the one-month drop is as well. Both indices still seem to be on the same growth plateau that they reached early in 2010. We have even seen somewhat similar losses of momentum in this recovery period and we have seen the sectors rebound from that weakness.

Escalated debt crisis worries? - But this time there are new factors in the mix. Europe’s debt problems are emerging again, this time a warning to Italy is in the mix. That is an escalation of the threat. A week ago the IMF warned that the debt problems in the Zone could spread from the periphery to the core. Is that now happening?

Euro-politics- Spain, a large EMU member country that has fought off further attacks after some rough spots early in the year has just had a big election set back. In Germany Angela Merkel, banker to the EMU-bailout schemes, lost support sharply in a small state election. The German electorate is not pleased with its role backstopping Europe. The economic situation remains difficult in Europe as the political situation becomes even more confused. In Italy Silvio Berlusconi has been under his own cloud of mistrust for some time, due his own sex scandal. In France Nicolas Sarkozy who was lagging in the polls now finds himself free of his most potent challenger due to a sex scandal involving the former IMF director who was to be his nemesis. Let’s not forget Finland whose new government is against any more bailouts in the Zone. Finland is one of only six AAA-rated sovereign states in the 17-nation euro zone

Can’t make this up- Quite honestly you can’t make this stuff up. If you look at the political map in Europe it is in chaos. The ECB itself is due for a changing of the guard later this year and it appears to have selected an Italian to follow in the footsteps of Trichet. Right now it’s looking like a tough time for transition.

Like Post WWI...again? All of this reminds me a lot of the financial strains that emerged in the wake of World War I. At that time Germany had lost the war and the reparations placed on its back were too heavy a load for it to bear but the victors wanted to make Germany pay. This time around, it’s not a war but a financial crisis and there has, one again, been misdeeds. This time it is the Germans with the financial muscle to help and yet they do not really want to. Then again if they do help, they want their pound of flesh from the Greeks and anyone else that has gone astray. This is one ‘safety net’ that you don’t want to fall into.

Muddles interests and a complex blame-game- Asking for too much penance to eliminate the risk of moral hazard can backfire and it has done so in the past. Will Europe wake in time to see the risks? Or are Europeans so set in getting revenge or in making those who strayed pay, that it will cut off their own nose to spite their face? This is a risk, a real risk. What makes this more of a muddle is that Germany is not simply being asked to be altruistic or to turn the other cheek to help out the already too cheeky. If euro-sovereign finances go sour en mass, it is the German, French and UK banks that will suffer the most. The Germans do have skin in the game and yes, it is their own. But in Germany this is not the way German financial involvement is being portrayed. That is probably because, like Americans, Germans get little satisfaction from a policy to take expensive steps to protect the interests of their own banks.

Get a CLUE! And so the Euro game will continue to play out like a giant game of Clue™. If EMU goes down, or is clobbered with debt and refinancing issues, who will be to blame? The Greeks, at home, in the overpriced Olympic stadium? The Germans in their beer garden by their unwillingness to help? The German bankers, with their troubled portfolios by the means of bad loans sprinkled everywhere? Who is your candidate for blame? How did they do it? Where was the ‘crime’ committed? It’s a fun game. Play it.