The Structure of Collapse: 2016-2019

Charles Hugh Smith writing on his blog Of Two Minds:

The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.

Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.

1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.

2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.

3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.

4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.

5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.

6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.

Each of these dynamics is easily visible in the global status quo.

As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.

This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.

 Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.

This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.

The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.

The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.

Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.

Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.

Welcome to 2016-2019.


Mapping Russia’s Strategy

Russia is in a geographically vulnerable position; its core is inherently landlocked, and the choke points that its ships would have to traverse to gain access to oceans could be easily cut off. Therefore, Russia can’t be Athens. It must be Sparta, and that means it must be a land power and assume the cultural character of a Spartan nation. Russia must have tough if not sophisticated troops fighting ground wars. It must also be able to produce enough wealth to sustain its military as well as provide a reasonable standard of living for its people—but Russia will not be able to match Europe in this regard.

So it isn’t prosperity that binds the country together, but a shared idealized vision of and loyalty toward Mother Russia. And in this sense, there is a deep chasm between both Europe and the United States (which use prosperity as a justification for loyalty) and Russia (for whom loyalty derives from the power of the state and the inherent definition of being Russian). This support for the Russian nation remains powerful, despite the existence of diverse ethnic groups throughout the country.

As a land power, Russia is inherently vulnerable. It sits on the European plain with few natural barriers to stop an enemy coming from the west. East of the Carpathian Mountains, the plain pivots southward, and the door to Russia opens. In addition, Russia has few rivers, which makes internal transport difficult and further reduces economic efficiency. What agricultural output there is must be transported to markets, and that means the transport system must function well. And with so much of its economic activity located close to the border, and so few natural barriers, Russia is at risk.

It should be no surprise then that Russia’s national strategy is to move its frontier as far west as possible. The first tier of countries on the European Peninsula’s eastern edge—the Baltics, Belarus, and Ukraine—provide depth from which Russia can protect itself, and also provide additional economic opportunities.

With regard to the current battle over Ukraine, the Russians have to assume that the Euro-American interest in creating a pro-Western regime has a purpose beyond Ukraine. From the Russian point of view, not only have they lost a critical buffer zone, but Ukrainian forces hostile to Russia have moved toward the Russian border. It should be noted that the area that the Russians defend most heavily is the area just west of the Russian border, buying as much space as they can.

The fact that this scenario leaves Russia in a precarious position means that the Russians are unlikely to leave the Ukrainian question where it is. Russia does not have the option of assuming that the West’s interest in the region comes from good intentions. At the same time, the West cannot assume that Russia—if it reclaims Ukraine—will stop there. Therefore, we are in the classic case where two forces assume the worst about each other. But Russia occupies the weaker position, having lost the first tier of the European Peninsula. It is struggling to maintain the physical integrity of the Motherland.

Russia does not have the ability to project significant force because its naval force is bottled up and because you cannot support major forces from the air alone. Although it became involved in the Syrian conflict to demonstrate its military capabilities and gain leverage with the West, this operation is peripheral to Russia’s main interests. The primary issue is the western frontier and Ukraine. In the south, the focus is on the Caucasus.

It is clear that Russia’s economy, based as it is on energy exports, is in serious trouble given the plummeting price of oil in the past year and a half. But Russia has always been in serious economic trouble. Its economy was catastrophic prior to World War II, but it won the war anyway… at a cost that few other countries could bear. Russia may be a landlocked and poor country, but it can nonetheless raise an army of loyal Spartans. Europe is wealthy and sophisticated, but its soldiers have complex souls. As for the Americans, they are far away and may choose not to get involved. This gives the Russians an opportunity. However bad their economy is at the moment, the simplicity of their geographic position in all respects gives them capabilities that can surprise their opponents and perhaps even make the Russians more dangerous.

European Inflation

Analysis of European inflation by Ophelie Gilbert.

The sovereign debt crisis in 2011-12 accentuated the downward trend in inflation for the Eurozone. In the aftermath, the core inflation of the Eurozone, which mostly reflects domestic inflation pressures, has declined as slack in the labour market jumped higher. Since 2013, the ongoing fall in international commodity prices has also caused the headline inflation rate to collapse, since this measure includes what economists call the volatile components: commodities and food. So the inflation rate that is prevailing today is not only about oil, but the result both of internal factors and the diffusion of global factors with many transmission channels. In 2015, core inflation even passed below 1%, which is a strong warning level for any central banker.
Why is a low inflation rate so critical? First, low inflation makes for less efficient central bank policy, as its means higher real interest rates. Second, low inflation becomes more troublesome if it is too low for too long, as it could result in a change in people’s expectations of future inflation. This could trigger a dangerous self-fulfilling loop if expectations are de-anchored, and it is very difficult to reverse disinflationary shocks – as shown in Japan
The European Central Bank (ECB) has – finally – implemented strong action to reflate the economy and stop the persistent decline in inflation, and seems to have had a particular focus on increasing the core rate. The ECB’s objective is for Consumer Price Index (CPI) inflation to be close to but below 2%, which was challenging throughout 2015.

2016 was supposed to be the year of the rebound for the headline inflation after the huge impact of the oil collapse on the 2015 inflation rate. The theory was that the negative base effects on energy prices would be removed from December onwards, and support a higher inflation rate next year. This remains true to an extent, however, once again, the oil price is playing the fool. The oil market is suffering from excess supply, and these imbalances need to be absorbed. Oil prices will remain the most important driving force for inflation, in both directions. The market is expecting a slight rebound of the oil price over next year, but if oil remains below $40 it will keep the headline inflation far from the ECB’s projection for 2016, and clearly it will again complicate the ECB’s job.

The ECB’s job is further complicated by the fact that economic growth in the Eurozone is actually on-going, firm and broad-based, and the fall in the oil price is very good news for consumer purchasing power. Nevertheless, consumer price inflation dynamics will be key to the ECB’s reaction function in 2016 in the Euro area.

Source: Allianz Global Investors


JP Morgan to Leave UK if it Quits EU

JP Morgan, one of the leading banks in the world has threatened to quit UK if it decides to leave EU after the proposed referendum on the matter.

Jamie Dimon, the chairman and chief executive of JP Morgan, says his bank might quit the UK if Britain exits the European Union. “Britain’s been a great home for financial companies and it’s benefited London quite a bit. We’d like to stay there but if we can’t, we can’t,” he said in Davos, Switzerland and the World Economic Forum meetings.

The bank employs 19,000 people in Britain.

For JPMorgan, British membership in the EU is important since it provides the bank with “passporting” rules that allow it to do business across the 28-member bloc.

For the UK, membership is not as important. Overall trade does not require EU membership. Non-members such as Norway or Switzerland, trade with the EU makes up a bigger share of the total than it does for Britain.

Britain’s Prime Minister’s David Cameron hopes to  hold an EU referendum in June.


Yanis Reveals EU Denial of Any Right of the People to Vote

Varoufakis Yanis

Greece’s Finance Minister Yanis Varoufakis has come out to reveal the quite shocking and anti-democratic events that took place during the last Eurogroup meeting. First, they do hate Yanis’ guts, for he understands far more about the economy than anyone in Brussels. At their demand, any further discussions will be without him. What led to the EU breaking off was exactly what we reported previously — they do not want any member state to EVER allow the people to vote on the euro. Brussels has become a DICTATORSHIP and is so arrogant without any just cause, believing that they know better than the people.

We are watching the total collapse of Democracy and the birth of a new era — Economic Totalitarianism from arrogant people who are totally clueless beyond their own greed for power and money.


Editor Note: Greece is the end of the beginning for the EZ and the beginning of a long period of political, social and economic instability that co-incides with the topping phase of the upward phase of the Industrial Revolution cycle that began in 1783-85.

Brussels to Take Over Tax Collection in Europe – End of Democracy

Germany and France have called for the establishment of a central EU authority for the eurozone to raise taxes independently. This plan is part of a package of proposals for far-reaching integration of the single currency zone: the federalization of Europe. Currently, only national governments may levy taxes. This is part of the step to save Europe and then consolidate the debts. This will become a war against the people, shaking them down to save a failed system design from the outset. This is a significant change and the final straw in the Death of Democracy. If such a power is handed to Brussels, they see it as their way to shakedown the Greeks, and the Greeks will see this as their government betraying their own people.

Transferring the power to tax the people to Brussels is significant, for those on the appointed (not elected) commission are not required to follow any vote in the European Parliament. This will remove all representation for taxation of the people’s rights. This is the ultimate power play – taxation without representation. Welcome the coming age of Economic Totalitarianism.


The Coming Cashless Society

Electronic-EuroYou are now watching newspapers, TV shows, and other forms of media preparing for the coming cashless society. This is a marketing campaign, and may indeed be what October 1, 2015 is all about – 2015.75. I doubt that the USA will be able to move to a cashless society as easily as Europe. The dollar is used around the world and cancelling that outstanding money supply would bring tremendous international unrest. Additionally, the USA is not in crisis financially, as is the case in Europe.

Europe, on the other hand, has an entirely different problem. The failure to have consolidated the debts of member states meant that the reserves of the banks were constituted from a politically correct mixture of debt. Instead of fixing the problem, politicians who are lawyers always move one-step forward with laws. To them the logical solution is to eliminate cash to protect banks from a panic run that would collapse Europe and take Brussels with it.

This is now a deliberate marketing campaign. I know how these things work and pay attention. They are selling this idea everywhere and that is the preparation for the inevitable action. With the speed at which they are moving, it certainly appears they are gearing up for October 1 on our model. It is also interesting that some German press misquoted our date as October 17. I was not sure why they would do that, but perhaps that was intentional as well. This is very curious, for when they take that final step, it will most likely be sudden and overnight. They would announce it and give everyone some time frame to take their paper currency and deposit it into their bank accounts.

For European readers, swap to dollars for hoarding and you can open accounts in the U.S., which for now is a safety valve. While gold makes sense for local hoarding, it may have lost its movability.


At $200 Trillion The World’s Debt Cup Overfloweth

by Bloomberg Business

The world economy is still built on debt.

That’s the warning today from McKinsey & Co.’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product, while the use of other financial services that allow business to do trading with the use of gartley patterns strategies for this.

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain

McKinsey sees little reason to think the trajectory of rising leverage will change any time soon.

Source: McKinsey

 Here are three areas of particular concern:

1. Debt is too high for either austerity or growth to cure

Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.

 Source: McKinsey

2. Households in some nations are still boosting debts

Eighty percent of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

Source: McKinsey

 3. China’s debt is rising rapidly

Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282 percent of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.

Source: McKinsey

via A World Overflowing With Debt – Bloomberg Business.




More private property being confiscated… Get ready – its coming to a government near you!

Simon Black writing for SovereignMan:

…….. speaking of pensioners, you’ve undoubtedly heard by now that Poland has ‘overhauled’ its pension system by making a grab for private pension fund assets.

In nationalizing pension funds, the government of Poland gets to count those assets on its balance sheet, thus ‘reducing’ net public debt by roughly 8% of GDP.

This is a criminal enterprise, plain and simple. And anyone else would get thrown in jail for such a move.

Of course, the government claims that it’s for everyone’s safety and security.

By nationalizing pension funds, the government plans to gradually ‘adjust’ people’s portfolios away from stocks and into… what else? Government bonds.

Naturally, this is for people’s benefit, since government bonds are so safe and secure.

Prime Minister Donald Tusk: “We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer.”

And there you have it– confiscation of private property = Safety.

We’ve been talking about this trend for four years now. This is no longer theory. It’s real. It’s happening. And it’s coming soon to a bankrupt, insolvent nation near you.

Have you hit your breaking point yet?


Europe is Fixed? Just Like Wall Street Was “Fixed” in May 2008, How’d That Turn Out?

Graham Summers writing for GainsPainsCapital:
In 2008, as the financial crisis picked up steam, one by one the big bank Wall Street CEOs came forward to assure everyone that “everything is fine” and that their banks were “well capitalized.”

Anyone who did a bit of actual research knew this was not the case. But a large component of corporate (and political) leadership is to maintain confidence and calm no matter how bad things get.

As a result of this, in May 2008 alone, executives at Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers, and Merrill Lynch all stated that the worst was over for financials.  That’s right, in just one month executives at ALL of these firms issued proclamations that everything was just dandy for the banks.

The market took about five months to realize the truth, at which point these firms imploded taking the market with them.

I bring this up because we’re seeing this same game played out on a much larger scale in Europe today. Starting in November, various political bigwigs from the EU, whether it be Germany’s Finance Minister Wolfgang Schauble, France’s Prime Minister Francois Hollande, of Spain’s Prime Minister Mariano Rajoy have all stated that the EU Crisis is either over… or that at least the worst of it is over.

It’s rather incredible when you consider the complete and utter failure of these folks to solve the debt problems for a country as small as Greece (which makes up only 2% of the EU’s GDP).

Greece entered a crisis in 2010. Three years later, its major banks are STILL insolvent, the Greece economy has contracted over 20% (the sort of collapse Argentina saw in 2001 when its entire financial system failed), and nothing has been fixed.

So… the EU, with the help of the ECB, IMF, and the US Fed (QE 2 and 4 were basically EU bank bailouts in disguise), COULDN’T SOLVE GREECE’S PROBLEMS. And we’re supposed to believe that these folks can solve Spain, Italy or even France’s!?!

Let’s cut through the crap here.

The European banking system is a complete and total disaster. Remember how bad Wall Street was in 2008? Europe’s banks are many multiples worse than that. The US at least recapitalized its banking system after the Crisis.

Europe hasn’t. At all. That’s right, the banks in Europe have not raised capital to bring down their leverage rations, which is why the ENTIRE EU BANKING SYSTEM IS LEVERAGED AT 26 TO 1.

Lehman, which was a total sewer of garbage debt, was leveraged at 30 to 1. Europe’s ENTIRE SYSTEM is leveraged at 26 to 1.

Ireland’s sovereign debt monetisation

Flag - Ireland_0By G. R. Steele for IEA:

Little more than three years ago, Ireland’s taxpayers were saddled with around 40 billion euros of debt, after their government had been pushed by the European Central Bank into rescuing its largest commercial banks, which had been left floundering in the wake of Ireland’s property price collapse; but there was not enough ‘cash’ to finance the rescue.

Instead, promissory notes were issued to the value of 30 billion euros. Those notes served as collateral to raise a 30 billon euro loan from Ireland’s independent central bank. The proceeds were then used to reimburse the creditors (largely northern European banks and other financial institutions) of Ireland’s failed banks.

Ireland’s loss was Europe’s gain and so a very bad deal for Ireland’s taxpayers, who faced a commitment to honour promissory notes, with annual payments of around 3 billion euros. At those magnitudes and bearing 8 percent interest, the burden was untenable. So, last year a ruse had a trial run. Instead of 3 billion euros in cash, government bonds bearing 3 percent interest were issued and swapped for the promissory notes then due. No one seemed to give the move much attention.

Last week, the ruse was applied full on. This time, bonds to the value of 30 billion euros were issued (and all remaining promissory notes withdrawn) so that Ireland’s failed banks could be placed into liquidation. This was apparently achieved without prior approval from the European Central Bank; but the impending move was leaked to the press. To preclude a possible court injunction, Dáil Éireannsat through a long night to pass the necessary legislation. At a press conference on Thursday, a somewhat bemused ECB President Mario Draghi made the following remarks:

‘On Ireland, let me say this, there wasn’t a decision to take. The Governing Council unanimously took note of the Irish operation and I’m going to refer you to the Irish government and the Irish central bank for the details of this operation which was designed and undertaken by the Irish government and the Irish central bank. I can only say today that we took note of this.’

Sovereign debt within the eurozone has been openly monetised and will remain so pending a schedule of debt repayments beginning only in 2038 and running through until 2052; which is not something that the Governing Council would wish to make clear.


Merkel’s Walking a Tightrope… If She Falls, the EU Could Implode

By Phoenix Capital Research:

The single most important issue for Europe today remains Germany on both an economic and political front.

German Chancellor Angela Merkel has walked a tightrope over the last few years of keeping the EU together without infuriating the German populace to the point of having to abandon ship.

To do this, Merkel has maintained a firm stance of “we’ll write the check provided conditions are met” much as a parent would give a child his or her allowance provided the child performed its chores satisfactorily. In the case of German, the “chores” are required conditions of austerity measures and budgetary requirements in exchange for bailout funds.

By doing this, Merkel is able to play hardball on an economic front (having failed to meet its German-required financial targets Greece had to wait an additional six months to receive another installment of its Second bailout) without appear too hard-nosed on a political front (she continually pushes to keep the Euro together, expressing a willingness to help other nations… as long as they meet her budgetary requirements).

The policy has thus far been a success with Merkel’s approval rating soaring to its highest level since 2009 (before her re-election bid). However, the latest state election in Germany might upset this situation.

Germany’s center-left opposition won a wafer-thin victory over Chancellor Angela Merkel’s coalition in a major state election Sunday, dealing a setback as she seeks a third term at the helm of Europe’s biggest economy later this year.

The opposition Social Democrats and Greens won a single-seat majority in the state legislature in Lower Saxony, ousting the coalition of Merkel’s conservative Christian Democratic Union and the pro-market Free Democrats that has run the northwestern region for 10 years. The same parties form the national government.

The 58-year-old Merkel will seek another four-year term in a national parliamentary election expected in September. She and her party are riding high in national polls, but the opposition hoped the Lower Saxony vote would show she is vulnerable.

The outcome could boost what so far has been a sputtering campaign by Merkel’s Social Democratic challenger, Peer Steinbrueck.

“This evening gives us real tailwind for the national election,” said Katrin Goering-Eckardt, a leader of Steinbrueck’s allies, the Greens. “We can and will manage to replace the (center-right) coalition.”

However, the close outcome also underscores the possibility of a messy result in September, with no clear winner.

To understand the significance of this, you need to understand a key difference between the US and Europe. In the US, the economy often drives politics (often but not always). In Europe, politics drives everything.

You will never hear a discussion of “how involved should the Government be in the economy?” in most of Europe; it is just assumed that the Government should always be involved to a significant degree. The question is whether it should be a lot (the public sector accounts for 30% of jobs in Germany) or almost entirely (the public sector accounts for 56% of jobs in France).

With that in mind, Merkel is up for re-election in the fall of this year (likely in September). Her bid for re-election will be a major issue for the future of the EU and the Euro in 2013.

The other two candidates for the job are Peer Steinbrück, former Finance Minister to Merkel who has been extremely critical of Merkel’s handling of the EU Crisis and Rainer Brüderle who believes that Greece leaving the EU would not be a “calamity.”

Obviously whoever wins this election will change the political landscape for Europe significantly. As a result, the run up to this election will have a significant impact on the markets for 2013, much as the Obama-Romney Presidential campaigns had significant impacts on the US markets in 2012.

An important issue for this campaign will be the German economy. Germany is the second largest exporter of goods in the world behind China. And the German economy is getting slammed due to:

  1. The EU economy collapsing.
  2. The ECB’s interventions have pushed the Euro higher hurting export profits.

By most counts Europe is an economic disaster. Southern countries such as Spain and Greece have begun to resemble third world countries with commensurate poverty and malnutrition. However, even when we include stronger economies such as Germany, the EU as a whole is back in recession as of September 2012. With 71% of German exports going to the EU, this is a real problem for the German economy.

Regarding #2, every tick higher in the Euro means less profits for Germany. And the Euro has been rising dramatically since July when the ECB first hinted at providing unlimited bond buying to backstop the EU banking system.

As a result of this, the German economy is estimated to have shrunken 0.5% in the fourth quarter of 2012. If things continue to worsen here, Germany’s population will grow increasingly unhappy with the prospect of more EU bailouts. And with Merkel battling for re-election this year, this could potentially upset her high wire act of balancing German voter sentiment with a pro-EU agenda.

With that in mind, the recent state election loss is a bad omen for Merkel. True, the loss occurred by a razor thin margin. But as we mentioned before, politics is everything in Europe. The more energy Merkel has to devote to wooing German voters the less energy she will have to focus on maintaining her “we’ll backstop the EU” policy.

This will make for a very volatile year in European markets as the markets will be hinging on German officials’ statements throughout the campaign trail. With that in mind, the German economy will be an absolutely critical issue both for the German Federal elections and the solidarity of the EU as a whole in 2013.

We have produced a FREE Special Report available to all investors titled What Europe’s Collapse Means For You and Your Savings.

This report features ten pages of material outlining our independent analysis real debt situation in Europe (numbers far worse than is publicly admitted), the true nature of the EU banking system, and the systemic risks Europe poses to investors around the world.

It also outlines a number of investments to profit from this; investments that anyone can use to take advantage of the European Debt Crisis.

Best of all, this report is 100% FREE. You can pick up a copy today at:

EU threatens to punish Norway for breaching EEA agreement

In the Commission draft report , which looks into the functioning of the EEA, the Scandinavian country is being criticized for imposing tariffs on EU products from 2013 and “resisted EU efforts for ambitious liberalization” of the EU’s single market.

According to the draft, obtained by EurActiv, 427 acts whose compliance date in the EU has expired, also remained to be incorporated in Norway by October 2012.

“This situation might thus lead to competitive advantages for operators based in the EEA-EFTA countries, and more fundamentally risks undermining the legal certainty and homogeneity of the single market,” the report reads.

“This problem is of great concern for the EU side and should be solved as a matter of urgency,” the report states.

‘Selfish Norway’

Moreover, the EU also dislikes the fact that Norway has rejected several directives coming from Brussels. The Norwegian government has for example warned it won’t implement the EU’s postal directive about competitiveness for letter mail weighting less than 50 grams.

Danish MEP Bendt Bendtsen (European People’s Party), who has been closely following the trade issues with Norway, told EurActiv the problems started in 2012 when Norway raised the price of hydrangeas from the EU by 72%.

Eventually, the extra taxes spread to EU food products such as cheese and meat.

Bendtsen said Norway is acting “selfishly” and that the taxes were put on EU goods “deliberately” as the Norwegian Centre Party, which is part of the Norwegian government, has for a long time pushed for the extra taxes.

“Norway only wants the cream on the cake,” the MEP said.

Threaten with punishment

The EU’s foreign service and the Commission, which have the formal responsibility for the relationship with Norway through the EEA agreement, have confirmed that there is an increasing disapproval with Norway.

“This development worries us. We don’t like the backlog on implementing directives, and this is a case we are trying to deal with now,” Maja Kocijancic, spokesperson of Catherine Ashton, the European Union High Representative for Foreign Affairs and Security Policy, told Norwegian TV2 .

She confirmed that the EU is looking into the possibilities for sanctions within the EEA agreement’s frame.

Leader of the pro-EU organisation Europabevegelsen Paal Frisvold said Norway risks exclusion from the European marine and cargo market and could lose cooperation on mobile roaming prices, making them more expensive in Norway.

However, Bendtsen said that the right EU punishment would be to hit Norway’s fishing industry, or to take the step even further: “The consequence should be kicking Norway out of the EEA,” the MEP said.

Stupid situation

Norway’s Prime Minister Jens Stoltenberg said the country has a good relationship with the EU, but the fact that there are disagreements over individual directives is nothing new.

Erna Solberg, leader of the biggest opposition party, the Conservatives, said the Norwegian government doesn’t understand the EEA’s mutual obligations. She said Norway isn’t active enough when it comes to its Europe policy and doesn’t use the opportunities in effecting the EU legislation enough.

“It is stupid that we have put ourselves in a situation where our closest partners obviously are frustrated with us,” Solberg said .

Potential impact on British EU debate

Bendtsen said the problems in the EU-Norway relations could eventually affect the ongoing British debate on whether to stay in or leave the EU.

Norway has previously been mentioned as a positive example of a non-EU member which still gets advantages and benefits of being part of the EU’s single market.

However, in his EU speech last Wednesday, British Prime Minister David Cameron asked whether it was in Britain’s best interest and desirable for Britain to be like Norway or Switzerland – with access to the single market, but outside the EU.

“While Norway is part of the single market – and pays for the principle – it has no say at all in setting its rules: it just has to implement its directives,” Cameron said.

[Emerging Events Comment: A reflection of the polarization and splitting effect of ongoing negative social mood that will ultimately bring the EU down]


As The Euro Soars, This Is Where The “Max Pain” In Europe Is

Zerohedge submits:

Determining the “pain threshold” beyond which the euro appreciation would significantly impair the recovery is crucial at this juncture. Deutsche Bank’s quantification of this “pain threshold”, is not fixed but depends critically on the pace of global growth. If world demand accelerates from a current pace of 1.3% YoY to 4.2% YoY by Q3 2013 (30% below trend), as per OECD forecasts, the EURUSD exchange rate which would be consistent with maintained competitiveness would stand at 1.37 (not far from where we are).

However, if growth is lower (as we humbly suspect) the threshold for currency strength to hamper growth is considerably below current levels. What is more concerning, as a dysfunctional union of economies might be suspected of, is the divergences between member states and their pain thresholds.

Crucially, the fact that Italy and France are already facing problems as the current EURUSD rate is well above their pain threshold, while Germany remains below (despite its protestations) may be fuel for more Franco-German instability as the push-pull of easier monetary policy places Draghi between a rock of core stability and a hard place of depression.

EURUSD at 12-month highs…

Via Deutsche Bank, Euro appreciation: the moving pain threshold

Exchange rate issues have made a spectacular come-back in European policy debate this week, on the back of speculations on “currency wars” emanating from emerging economies and Japan. While market sentiment towards the Euro area and specifically on the periphery has improved significantly over the last few months, a higher euro is seen as a potential “spanner in the works” which could rekindle doubts surrounding debt sustainability there, if the expected export led recovery is postponed by several quarters by a loss in competitiveness.

When controlling for the pace of world demand and when looking at the Euro area as an aggregate, we are according to our estimates currently in or near the “danger zone” where the exchange rate is effectively undermining competitiveness.

We apply our model to the four largest economies of the Euro area. We find that while the pain threshold for Germany, and probably more counter-intuitively for Spain, now stands higher than any level ever reached since the beginning of monetary union, it is actually quite low for France (1.24) and Italy (1.17), for a world demand pace of 4.2%.

It is therefore surprising, at first glance, to observe that most of the recent flurry of comments on exchange rate issues came from Germany. We suggest that the German concerns over currency wars do not primarily stem from a fear of the consequence for German exporters, but rather from the fact that further euro appreciation could unduly delay the normalization of the ECB monetary policy framework.

What these comments from Germany reflect in our view is a concern that currency wars ultimately generate global inflation which the ECB could not easily resist given the persistent fragility of the periphery.

It follows from these considerations that on balance further euro appreciation is the likeliest path, short of a rapid relapse in widespread doubts in the periphery’s sustainability (which would be likely if the Euro area “misses the recovery” in 1H 2013. This means that France and Italy must make rapid progress on productivity and flexibility (as well as possibly off-shoring) to enhance their resilience to currency appreciation.


The ECB will come under pressure in the currency wars

Mohamed El-Erian of Pimco writing for FT:

I was reminded recently that there is an important distinction between a problem and a dilemma. A problem has a solution while a dilemma must be continuously managed. The euro’s situation has evolved from being a severe problem to posing a dilemma for eurozone countries seeking to grow and secure debt sustainability.

Six months ago, stress on the European financial system led to existential questions about the euro. The financial system was fragmenting, deposits were pouring out of the weaker countries, and high interest rates were converting liquidity problems into solvency ones, adding to the regional headaches caused by countries already in vicious debt cycles.

Bold policy reactions stopped this dynamic – so much so that, today, several investors are again emphasising rate convergence for many eurozone bond markets. And while harmful credit rationing persists, especially for small- and medium-sized companies in peripheral economies, banks are less fragile.

The immediate solution to the euro’s existential problem came in the form of the European Central Bank’s “outright monetary transactions “. The ECB was supported by the progress made by governments in agreeing to reinforce monetary union with greater fiscal union, political integration and banking union.

Having solved its urgent problem, the eurozone needs to deal with a new dilemma: that of an appreciating currency. There is a growing number of countries seeking to weaken their own currencies. Indeed, in the last six months, the euro has appreciated by 11 per cent against the US dollar and by 8 per cent in nominal trade weighted terms. It has appreciated by a lot more against the Japanese yen.

With growth already sluggish, the eurozone can ill afford a stronger currency. Sharp appreciation undermines economic activity – not only for export powerhouses such as Germany but also for countries such as Spain where, for the past eight quarters, the contribution of net exports has been positive.

With budgetary concerns continuing to dominate mindsets, few countries are able and willing to stimulate their economies by loosening national fiscal policies. As a result, the number of unemployed citizens – which is 6m higher than at the outset of the global financial crisis – remains alarmingly high, and especially so among the young.

Given what other countries are doing around the world, European politicians need to significantly accelerate policy reforms if they wish to maintain competitiveness in a safe and orderly fashion. This involves quickly moving from the design to the implementation of key measures.

At the regional level, productivity-enhancing structural reforms need to accompany a renewed push on fiscal union, banking union and political integration; and, for starters, politicians should not wait for the June summit to press ahead with the “four presidents” report .

But, having averted an existential financial problem, politicians seem more interested to bask in their success than deal with remaining challenges. This understandable desire to savour the moment – and with it, the illusion of stability – is inevitably strong in the run-up to several key elections this year.

With politicians failing to manage the dilemma directly, it is only a matter of time until they again look to the ECB for help.

Expect the ECB to be pressed hard to join other central banks in actively seeking to depreciate the currency – by cutting the policy rate (currently 0.75 per cent) and quantitative easing of the type pursued by the Bank of England, the Bank of Japan and the US Federal Reserve.

This is not a road that the ECB will embark on easily. And if it does, it would seek to address a regional dilemma by adding to a global one.

Being a relative price, all countries cannot simultaneously weaken their exchange rates (except against gold, real estate and other “real” assets). And should the ECB feel forced to join collective attempts to do the impossible, the risks of a global currency war and related beggar-thy-neighbor outcomes would increase meaningfully.


Euro Crisis Seen Reaping Social Toll With Record Jobless

By Scott Hamilton writing for Bloomberg:

Euro-area jobless data this week will expose the social cost of last year’s debt crisis and recession on southern European economies as unemployment across the region probably rose to a record in December.

Unemployment in the 17-nation bloc climbed for a fifth month to 11.9 percent, according to the median of 34 economists’s forecasts in a Bloomberg News survey. That result due on Feb. 1 would show the highest jobless rate since records began in 1995. By contrast, German unemployment data the day before may show the jobless rate there held steady for a fourth month at 6.9 percent in January, a separate survey found.Euro Crisis Seen Taking Social Toll With Record Unemployment A sign reading “employment office” sits on the windows of an employment center in Barcelona. Photographer: David Ramos Vidal/Bloomberg

Euro Crisis Seen Reaping Social Toll With Record Unemployment Fran Lopez, a jobless electrician, checks his mobile phone on a street bench near his home in Madrid, Spain. Photographer: Photographer: Angel Navarrete/Bloomberg

While measures to stem the region’s debt turmoil have helped reduce sovereign bond yields from Spain to Greece, the recession and crisis have led to job cuts by companies and governments. The European Central Bank predicts the currency bloc’s economy will shrink 0.3 percent this year and President Mario Draghi said last week that the “jury is still out” on whether investor optimism can be reflected in economic momentum.

“The worst may be over for financial markets, but definitely not for the real economy,” Marco Valli, chief euro- area economist at UniCredit Global Research in Milan, said by telephone. “The unemployment situation is going to remain very poor at least for another year, if not longer.”

Spanish Unemployment

Spanish data last week showed a record 26 percent of the workforce without jobs in the fourth quarter, bringing the total close to 6 million people. In Greece, the rate was even higher in October, at 26.8 percent, also a record.

“Companies are still shedding labor, especially in southern Europe,” Martin Van Vliet, an economist at ING Groep NV in Amsterdam, said in an interview. “Unemployment will probably continue to trend higher in the next couple of months.”

While economists predict the German unemployment rate will stay unchanged, they still see an increase of 8,000 people without work this month from December, according to the median forecast of 31 economists in a Bloomberg news survey.

The euro-area economy has shrunk for two successive quarters and economists predict a further 0.4 percent decline in gross domestic product in the final three months of last year, according to the median of 26 estimates in a Bloomberg survey. The International Monetary Fund on Jan. 23 cut its global growth forecast and projected a second year of contraction in the euro region.

Tensions Ease

While investor confidence in Germany, Europe’s largest economy, rose to the highest in 2 1/2 years this month as debt tensions ease, high unemployment and continued austerity measures elsewhere are undermining household sentiment and spending. An index of euro-area economic confidence probably rose to the highest level since June, according to median estimate in a Bloomberg News survey of 30 economists.

“We’re in the phase of financial conditions improving and markets becoming more optimistic, but that has to feed through to the real economy,” ING’s Van Vliet said.

ECB Governing Council member Luc Coene said he would prefer the central bank’s as-yet-untapped bond-buying program to stay that way and it’s now up to governments to generate growth in the euro area.

‘Shallow’ Recovery

“There is only so much a central bank can do,” Coene, who heads Belgium’s central bank, said in an interview at the World Economic Forum in Davos, Switzerland, on Jan. 26. “Governments can make the adjustments that are needed to make the economy grow again. We are going to hear that message this year again and again. The next move won’t be from the ECB.”

No country has yet asked for a bailout that could trigger bond buying by the ECB after Draghi’s rescue plan, announced in July, ended a wave of panic in euro-region debt markets. The currency block will see a “shallow” recovery starting this year as long as leaders don’t hesitate to implement measures to reduce debt and increase competitiveness, Coene said.

France needs an economic overhaul to revive growth and help underpin the political union required to stabilize the euro region, Harvard economist Kenneth Rogoff said.

European governments’ policy responses to the debt crisis, such as a “half-hearted” banking union and national budget oversight by the European Commission, aren’t enough, Rogoff was quoted as saying in an interview published in German newspaper Die Welt today. Leaders need to start now with a push toward political integration that includes a European government with taxation powers, he told the Berlin-based daily.

‘Small Adjustment’

If governments follow through on their promises in the coming months, underlying momentum could mean the ECB will revise its prediction that the euro-area economy will contract by 0.3 percent this year, Coene said.

“When you look at the latest indicators in Germany, they point to a stronger underlying base of activity than was assumed,” he said. “If there is any adjustment to happen, it will be a small adjustment, and probably rather on the upside than the downside.”

Mark Carney, who is due to take over as Bank of England governor in July, said policy makers should secure “escape velocity” for their economies and there’s room for more monetary stimulus around the world. Policy in developed countries isn’t “maxed out” and central bankers can be flexible in meeting inflation goals, Carney, currently governor of the Bank of Canada, said on Jan. 26 in Davos.

‘Tough’ Conditions

Alongside the euro-area unemployment data, Eurostat, the European Union’s statistics office, will also release data on consumer prices for January. The annual inflation rate will remain at 2.2 percent compared with December, according to the median of 39 economists’ forecasts in a survey.

Euro-area economic conditions will be “tough” in the first half before a wider recovery takes hold in 2014, according to Patrick de Maeseneire, chief executive officer of Adecco SA (ADEN), the world’s biggest supplier of temporary workers.

This year “is not going to be a good year,” De Maeseneire said in an interview on Jan. 25. “The first six months will be tough, especially in France, especially in southern Europe,” he said. “Germany is also slowing down, we see automotive slowing down, and that’s going to have an effect on the surrounding economies.”

Job Cuts

PSA Peugeot Citroen (UG), Europe’s second-largest carmaker, said last month it will eliminate an additional 1,500 jobs by 2014, on top of 8,000 announced in July.

“Job shedding continues because it’s clear the euro zone economy is still in recession,” said UniCredit’s Valli. Still, “what we’re seeing right now is all the preconditions that are necessary in order to have some sort of economic improvement. Nothing in the near term, but down the road.”


Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State

By Lyubov Pronina for Bloomberg:

The biggest developing nations risk overturning the achievements of the past decade by increasing the state’s role in the economy, according to Nouriel Roubini.

Roubini — dubbed Dr. Doom for predicting hard times before the global financial crisis began in 2008 — said Brazil, Russia, India and China have been moving away from market economies recently.Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State Nouriel Roubini said, “BRICs have been hyped up too much.” Photographer: Simon Dawson/Bloomberg

“BRICs have been hyped up too much,” Roubini said in an interview today at the World Economic Forum’s annual meeting in Davos, Switzerland. “Too much state role in enterprises, banks, resource nationalization, protectionism, lack of structural market-oriented reforms that increase the size of the private sector — this is happening in most of the BRICs.”

China maintained control of its biggest companies, Russian businesses spent shareholder money on projects favored by the government and Brazilian politicians intervened to cut utility rates last year.

State-owned OAO Gazprom (GAZP) may lose its monopoly on natural gas exports as long as the move doesn’t cut prices and damage Russia’s economic interests, Prime Minister Dmitry Medvedev said in a Jan. 23 interview in Davos. Gazprom is using its cash to finance the industry’s largest capital expenditure program, part of which goes to fund projects favored by President Vladimir Putin.

Downgrade Threat

It took the threat of a credit-rating downgrade for Indian Prime Minister Manmohan Singh’s administration to remove barriers on foreign investment in the retail and aviation industries and cut fuel subsidies. Roubini, a professor at New York University, said he favors the Philippines and Indonesia over China and India.

“They are actually doing more in terms of structural reform,” Roubini said. “The economies are growing more than 6 percent.”

Developing economies are set to grow by an average 5 percent worldwide this year, compared with 1 percent for advanced nations, according to Roubini.

In Latin America, Chile and Colombia “have done a lot of things to improve their potential for growth,” he said. “In central Europe, I see success stories like Poland and Czech Republic doing reforms.”


Europe’s ‘Bank Sector Involvement’

Zerohedge via Mark J. Grant, author Out of the Box:

How many European Union officials does it take to change a light bulb?

None. There is nothing wrong with the light bulb; its condition is improving every day. Any reports of its lack of incandescence are an illusional spin from the American media. Illuminating European rooms is hard work. That light bulb has served honorably, and any commentary not approved by the EU undermines the lighting effort.

One thing that is rationally learned from watching Europe is that what is said, what is fed to the media as fact, is often only factual in the minds of those that have created the fairy tale. Whether it is the debt to GDP ratios of the nations in Europe or the uncounted liabilities of a country or the loans to some bank that are recorded as investments and not liabilities; the drape of charade hangs resiliently over the entire spectacle. It is often a farce interwoven with a sham presented as fully cooked pie that is really half-baked and then we are all expected to eat it and rave about not just the recipe but the ingredients and the presentation. All well and good for the sheep and the herders leading them; but I have been to the top of Mt. Olympus and there are neither gods nor temples.

Now on January 30 the ECB will get paid back $182.2 billion from the European banks that borrowed the money in the LTRO operations. This is not 25% of the loans made, as touted in almost every headline, but about 10% of the loans outstanding as somehow it is conveniently forgotten that there were two loan packages totaling $1.3 trillion which were initiated in December 2011 and the second in February 2012. This is not two years ahead of schedule as headlined in the Press as about half of the loans ($655 billion) were made in the 2011 tranche. Let us begin then with a nod to accuracy and explore the rest of what we are told.

I have learned, over the last several years, that Europe is psychotic. They create an illusion, tell us that it is reality and then are angered when we question the validity of what we are told. This is not authenticity but pretense and this sort of pretense is concocted to lead you into places that no rational man wants to wander.

The interest rate, being paid by the European banks to the ECB is 0.75%, so one may rationally assume that no financial institution, in their right mind, would pay off such a loan for economic reasons. The banks cannot borrow on their own for three years at this level and so to pay them off early makes no economic sense. Yet they are being paid off and if it does not make sense economically then it must make sense for some other reason or reasons. If the agenda is devoid of common sense in its presentation then there must be a hidden agenda and a man working feverishly behind the curtains and manipulating the levers. Here it may well be the financial condition of the ECB itself which, without doubt, is stuffed with both loans and securitizations that given the wretched state of most economies in Europe, must be in very poor condition where the assets are only worth cents on the dollar or perhaps not even that if one considers the Real Estate markets in Greece, Spain, Portugal and Ireland. It is then quite obvious that the banks did not want to pay off the loans but that they were “encouraged” to do so for other reasons and one reason may well be to fund the ECB so that the central bank does not have to take on even more debt and inflate its own balance sheet as its assets values have deteriorated. Here we have a variation of the “Public Sector Involvement” which can be termed “Bank Sector Involvement” which may not cause losses on its face but which will certainly increase the funding costs for the European banks and so impair their balance sheets by the increased cost of funding which of course goes unmentioned in any European Press release and so uncommented upon by an accepting European media that blissfully accepts and willingly comments upon what it has been officially told.

“It is dangerous to let the public behind the scenes. They are easily disillusioned and then they are angry with you, for it was the illusion they loved.”

                 -W. Summerset Maugham

The Wall Street Journal, yesterday, published an article, “Europe’s Banks to Repay Aid Early,” which stated, “The data provide one of the clearest illustrations to date of the surprisingly swift healing of large swaths of the European banking system. It removes a major impediment to a gradual recovery of the broader European economy, which hinges on the health of its banks.” With great respect for the Journal I must say that they have it totally wrong. The banks, without doubt, will have higher funding costs in paying off these loans and less attractive balance sheets as a result and so it is neither Europe nor her banks that will benefit with the only possible beneficiary being the European Central Bank. All of this has been made possible not by healthier economies nor by particular cheaper funding rates for the European sovereigns or banks but by the continual and unobstructed flow of money created by the ECB and other central banks. The world has become addicted, like in Frank Herbert’s marvelous Science Fiction novel, “Dune,” where “The spice must flow.” Whether it is the global equity or debt markets, the troubled nations in Europe and even the economy in America; there is but one pillar supporting the construct and that is the printing of money and the use of the newly created pieces of paper that are supporting the various houses of cards where politics in America and on the Continent have no other answer other than to spew out money in such a torrent and at such a velocity that it puts Niagara Falls to shame.

The world seems devoid of politicians that sensibly lead though they have been quite adept at spending past what can be afforded. The worlds’ central banks have been left to pick up the bills. The balance sheets bulge, the quality of the assets, especially in Europe, deteriorate. More is spent, more money is created, the markets head higher, more money is created, there is no other answer or response than more new paper, more green ink, more blue ink, and the bubble is systemic and perilous and chock full of fiscal risks. Remember, this morning, what I have told you because there will come a time when you will wish that you had considered more carefully what I said.

“Try looking into that place where you dare not look! You’ll find me there, staring out at you!”

            -Frank Herbert, Dune


The EU’s tariffs are daylight robbery

(Or why Britain wants to leave)

By Sam Bowman for the Adam Smith Institute:

One attractive aspect of an EU exit would be the exit of the Common External Tariff. As Daniel Hannan has pointed out , the Single Market is more like a customs union than a free trade bloc. All goods coming into Britain from outside the EU are subject to tariffs, designed to protect European industries from cheaper competition.

Unlike VAT, which isn’t levied on essentials (although I’m not sure I like the idea that beer and wine aren’t essentials), the tariffs are highest on things like food and clothes. (Courtesy of the WTO, here is a list of goods affected by the Common External Tariff .)

There’s a 16% tax on bananas from outside the EU, a 17% tax on trainers, 12% on stoned fruit like peaches and plums, and 12% on shirts, suits, coats and school uniforms. Cars are taxed at 9.7%. Twine and string get a 9.2% hit. Knitted gloves carry an 8.8% tariff whereas non-knitted gloves are hit by 7.6%. You name it, they tax it.

The loser is the consumer. On its own, the European cucumber industry (protected by a 12.8% tariff) might not be very influential, but any threat to a tariff causes businesses and their lobbyists to circle the wagons.

The ‘bra wars ‘ ended with European consumers paying more for Chinese underwear – not because Big Brassiere is unbeatable, but because related industries recognised that, individually, they would fall, and marshalled their political representatives into action.

The most perverse part is that if we got rid of all these tariffs, many, if not most, producers would be better off too. They are consumers as well as producers, and tariffs make the inputs they use (like steel – 2.7%) more expensive. But they face exactly the same collective action problems as consumers at large do.

The old public choice problem holds: free-riding is more costly for members of small interest groups than for members of big ones. Ostracism from trade associations, and so on, is much easier (and more harmful) for firms that don’t go along with the lobbying. Unfortunately, there aren’t many people who will ostracise their fellow consumers for failing to renew their subscription to the Adam Smith Institute.

The public choice problem in politics is often overstated. Most of the people who march against austerity really do think the cuts are bad. Most of the people who want to keep out immigrants really do think that they’ll cost them jobs. And, no doubt, most people who support tariffs really do think that protecting native industries is a good idea.

But voters are not as aware of the Common External Tariff as they are of many other issues. It isn’t clear what the ‘left-wing’ position on taxing cheap clothes from China ought to be, nor the ‘conservative’ position on exposing native industries to the free market. It’s hard to escape the impression that the Tariff really is an example of businesses hijacking democracy. The External Tariff represents one of the biggest swindles of modern times: a collective theft from consumers by politically powerful producers.