Thursday, November 24, 2011

Advice to politicians: Be Superman not Clark Kent ! (eng)

(german version click here)
Dear reader,
as the author encountered some remarks by politicians and also read some blogs of other politicians which expressed some kind helplessness facing the current dramatic events which made him to put a document on the net which


a.) should help explain the "market thinking" to politicians
b.) resulting from those insights to find some practical ways out of the crisis


Were are experiencing dramatic times as also Chancellor Merkel has expressed already. The most most dramatic times since the end of WW 2 as she put it. The fundamental problem is less to be searched in the quite restrictive monetary policy of central banks or the ECB but more in the lack of understanding of politics or politicians what are the real reasons for the fact that many market participants are refusing to purchase bonds of southern European states (periphery) but also increasingly from more northern countries considered to be the core at acceptable (for state budgets) yield levels. Like at a bazaar there is a sell off of hardly to sell items going on and instead of ever decreasing prices for those shelf warmers on the money markets ever higher yields must be offered to lure buyers of state debt no matter of what lifespan into purchasing those. The refinancing of states to date depending on at least partial co-financing by such debts is now threatened of drying out and also the intervention of the ECB can only cloak this fact. Currently there are reports of auctions at which only the ECB is buying the offered bonds and other auctions have been reported to be called off because of a lack of actual buyers. (no ECB involvement either)

What is the reason for this ? In the judgment of the author who doesn't wear any pink specs of ideology but who perceives all facts cool and without any prejudice and only afterwards comes to an conclusion.


a.) the recently achieved compromise at the summit on oct. 27th of a haircut for Greece has worried international investors by making them believe that formerly the 100% believed to be secure investments in such bonds can at one day be in danger when worth less then circumstances change and they have to accept a „haircut“ in the end.

b.) the general estimation has suffered severe damage that European states and their politicians on the „steering wheel“ are being able to solve the problems as quickly and as sustainable as necessary. Especially since the „coup“ of the Greek PM Papandreou has raised fears that politicians lack any sensibility for reliability of politics and in negotiations of treaties (e.g. with financing banks)

  1. the „summitis“ where every few weeks a new crisis arises and new summit is announced in order to solve problems which seem to have been solved just few weeks before. (> confirming errors in judgment)

  1. the author has lack of understanding for lack of creativity despite the looming total catastrophe and the proposals for measures which (if at all) being taken only months later will work therefore with a certain degree of probability will come too late.

[update Nov 18th]

e.) „brilliant“ ideas such as abolishment or restriction or punishment of independent judgments (ratings) , introduction of a European „Tobin tax“ without taking into consideration the immediate evading movements in the direction of: Switzerland, Liechtenstein, New York City, Singapore, Hong Kong etc. The times have ended most definitely where politicians simply had „just“ to „sell“ all kind of crappy ideas and when they think to be obliged to introduce new regulations against the financial markets which can easily be circumvented (see banned naked short selling in France) will they induce calamity of historic proportions.
[/update]

(the probably most important point)
f.) Unwillingness to further invest in „money burning machinery“ where prospects of growth are lacking and just austerity is being applied which is based on optimistic (rosy and therefore unrealistic) views on expected future performance of the economy. Whereas even the potentials for
savings don't seem to be realistic. But much more than that the lack of a viable „business model“ for the Eurozone which could level the trading imbalances and which could justify the European economical zone as working part of the global economy and not just be an „European welfare agency“

The statement f.) is based on statements of e.g. the Chinese and their willingness for investment in shares of companies (positive) or the so far lacking will to engage into the EFSF or the instruments SPIV or CIF as it now known trumpeted with so much effort by Mr Regling. One could also hear from Brazil, Norway and Russia similar voices which told not to be interested in EFSF and instead (if anything) see it as conceivable to get involved as part of the IMF knowing perfectly well that this organization has some effective instruments to „remind“ borrowing countries of their obligations first before handing out new tranches of cash. As for the Russians some engagement into German energy market could already be observed as for instance the fresh participation in the end user market for producing and distributing electricity besides the existing engagement in the delivery of carbonhydrates as also some announcements of further projects. Specific is the key word. Investors don't want to hear „gossip“ anymore of announcements concerning economic and fiscal policies of SINGLE states but they want to have the „producing location“ Europe as a secure location for future orientated investments and also to conserve and enhance the existing very close trading relations. They know about the reasons of the current crisis which is the lacking competitiveness exposed by the common rock solid currency and they don't want to ensure a „ever lasting crisis prolongation“ by pampering of the existing model. Until a crystal clear view of a specific initiative for growth exists instead of just a quite useful addition to further (and really necessary!) austerity measures is given the „state bond buyer refusal“ will last. The demand for transformation of the ECB to some kind of European FED and thereby to a money printing machine undoubtedly to be heard everywhere but for some investors with a long running investment strategy it is all too clear
that this goes along with a „carry on“

As if this isn't enough of bad news there is also another imbalance taking place in the form of a drainage of capital from the southern countries of the EZ to the northern ones which is expressed in the ever decreasing yields on German bunds or the already negative yields of some swiss bonds . It's ill advised to be „proud“ upon those historically low yields (as mentioned to the author by germ. politicians) these German bunds are selling like fast and at those excellent conditions (for the Germans). Instead of showing this pride it is perhaps better to hand back the savings out of these rather unusual super conditions to the disadvantaged instead of giving a boost to an already quite well balanced own budget. Maybe by a small national investment bank for the benefit of small & medium sized companies in those disenfranchised countries (where drastic austerity measures have to taken) At least for the part below the „normal bandwidth“ of yields. So the trust of the investors can be redirected in order to prevent or at least slow down the „spiral of death“ a bit.

[update Nov 19th]
As things happened as described just above until mid of the week it now turns out that those shifts
of investments in bonds from „soft countries“ to Germany and Switzerland are now shifting in the direction of direct withdrawal of funding to Asia and Northern America. 
[/update]

What is missing is a change in the minds of politicians where until recently they thought to be able to on forever like they did the last 30-40 years and instead of following the role model of the current Saviour of the EZ called Germany. A new concept for a supranational industrial politics is needed which is not sticking to individual countries „peanuts“ but must envision larger or wider goals to be set which can be achieved within 10 years or so (earlier is better of course) and which deliver sweet fruits of success such as the project Airbus did (now part of EADS)
Which projects are intended the author has already specified earlier here on his blog. Energy and infrastructure tasks with some wider goals then „just“ developing Europe
(The Globe has many underdeveloped regions) (Besides the savings to be achieved by reducing the dependency on ever more expensive energy and the advantages of an improved trading and shipping logistics. Furthermore strategic questions would be addressed such as the dependency on certain supplier countries for carbonhydrates and the accessibility of other raw materials essential for EU economies which can be at least „eased“ by such measures.)

But it is to be criticized that politicians are still running in a spiritual mode of „political business as usual“ and are mainly orientated towards polls, voting results instead of realizing the full gravity of the current situation and to join business leaders (not only national and EU but also e.g. TATA + Mittal etc) as well as some the most respected professors of economy and even investment funds (Pimco etc) in order to discuss what next steps are to be taken in order to avert a catastrophe.
The funding necessary shouldn't be much of a problem in times where investors even accept negative yields to park their capital „safe“ e.g. in Switzerland. In order to do that all resources of the involved government should be mobilized in order to establish the prerequisites for such a problem solving task force. And to this full scale task force departments such as foreign office or even defense department should be included in order not only to ease tensions between Greece and Turkey (Cyprus) but to reshape their relations to improve their bilateral trade relations . Of course also to form a future hub to those now free countries and markets developing in the southern & Mideast region (not immediately but in some 10 years from now) It would be advisable to observe close cooperation on these issues with out traditional allies ..the United States and Canada and perhaps to get them also to contribute along with their investment funds and industrial companies (such as GE) to the debate of what steps are to be taken. In general the close cooperation within the G-20 club is to be hailed because without it the global financial system would have probably collapsed already.

It is to be noted that Germany wasn't putting itself into the role of a European “Saviour” but was pushed into this role bit by bit by the financial markets on a daily basis. It is he more urgent to accept that role it was given by others and first of all to implement the necessary mental flexibility under consideration of course of obedience of all existing legal obligations (laws). It is not the time to play the role of the “headmaster” or “critic” but to accept the failures of the past (as bad they might be) and one has now to look and think FORWARD and follow the path of the big bazooka instead of just accepting the role of the “paymaster” (as the word was already used in the British press). One should point out he advantages to the German industry but also to the European and international partners of the current situation in Germany (looked upon isolated) and to recommend itself as a strong partner also with willingness of participation of its industrial and financial companies. (As already demonstrated on a “smaller scale” with the Desertec project) The citizens and investors alike would prefer a Europe which is oriented at the top performer instead of being interested in redistribution of wealth and lasting decline or even the unavoidable collapse of a model without consideration (or corrective measures) of the dividing force of different levels of productivity. (exposed by the common currency)
Please take into consideration (priority) the needs of the real economy and not of those of the state budgets or the banks. Budgets will profit automatically by higher tax revenues and declining expenses on benefits and banks would have to accept for the benefit of societies to have less profits over some years to come when the ECB is used as an emergency measure (LOLR) to support the real economy. It's still better for all (including banks) to accept such a scenario instead of being subject for a complete meltdown effecting all ! Please learn to fly immediately (like Superman) or we will all be paralyzed.

[update Nov 27th]

Conclusions once again :

Through a relocation of a “special” credit based funding away from states and their budgets
which is forbidden under the paragraphs of the Lisbon treaty in the direction to one of a private sector especially of those states hit the most by the crisis (PIIGS) or wherever some “freezing” of credits for companies of the private sector pop up it should be possible to balance the downward spiral by massive austerity in all member states of the EZ. Where regular banking sector is understandably keen on ever higher demands for sufficient collateral and as a result the “regular credit supply” would dry up the ECB could in the opinion of the author jump in and could supply unlimited funding either by using the model used by Schacht in the 1930s or by accepting a banking license for an European “bank of reconstruction” (following the example of the German version called KfW which is funded by German budget) and act as lender of last resort (LOLR) to this European bank dedicated to funding new European infrastructure in order to prevent short term collapse of the financial system. This new bank could be established first and later some stocks of it could be sold later to investors like those state owned funds originally intended (but without success) by the EFSF. In addition some major players of European but also international industry, private investors could join the investment fund and will participate in some major construction of new European infrastructure (preferably with some future capacity for producing long term revenues like toll roads, transport fees, licensing etc ) (So its is even possible to repossess buildings, machines constructions already completed etc)
It's clear that with those measures the economic policy of individual member states will be transferred towards this Eubfr (European bank for reconstruction) but on the other hand the needs for subsidies and other “supporting measures” now handled by governments for their some parts of their economies could stop. That is one way of easing pressures for budgets the other would be the generation of more tax revenues previously out of the question. Those European firms would also profit from their knowledge and their skills acquired to overcome problems (=> Airbus) and this would also contribute to further success in exporting to other nations outside the EZ and EU. And this would also inspire investors reluctant before to invest in the EFSF to put their financial resources into those projects but also into those state bonds again because the budgets can be healthy and prospects look less bleak than before without such an initiative for growth and the risks are decreasing as well of course. A strong signal of the European statesmen along with the ECB as well as with involvement of the biggest industrial firms of Europe would go out to those international investors to commit their money also in future to Europe. (But in the long run balanced and self sustained budgets should be achieved by forcing all member states to cut their spendings accordingly)
After a while there will be calm returning to the financial markets again there will still be possibilities to reduce credits given to firms involved in the “reconstruction effort” smoothly to fight any rising inflationary dangers. (According to Paul Krugman those are nowhere to be seen and the current loose monetary policy of the FED according to latest data isn't invoking much inflation over there either. Also according to Paul Krugman on the contrary the applied European restrictive monetary policy of the ECB has managed the inflation the inflation in the core zone pretty well but induced a deflation in the peripheral countries such as Spain (contributing to their current problems)
Mr Roubini is of the opinion that in order to heal the problems of the EZ a strict fiscal discipline is needed in the peripheral countries and for compensation the core zone must create growth by “loose spending”. But whatever approach is taken there must always be a balance not just austerity applied everywhere with the result of deep recession or even another depression. (Many (if not all) economists agree on that !)
[/update]
[update Nov. 28th]
China fund keen on Western infrastructure

So that's confirming my assumptions 100% ... 

Only that also needs some thinking of strategic "limits" of China involvement in our states in the (currently unlikely) event of confrontation/tensions. But that question also would have come up by other financial involvement for buying u large chunks of out (the USA, Europe) state bonds. But in the current (self inflicted!) situation i guess we don't have much of a choice. Mr Osborne in UK already setup an investment fund for British infrastructure . .there are articles by ft.comm but only for registered users. As more "free" info on the subject becomes available.. you will find it here (of course)
Osborne Said to Ready $46 Billion U.K. Infrastructure Program
Osborne Vows 20 Billion Pounds of Loans to U.K. Small Companies
£30bn infrastructure investment paid for by more cuts
[/update]

[update Nov 19th]
some links:
Prof. Paul de Grauwe: Who cares about the survival of the eurozone ?
Today in Euromess: “Germany is our new master”
Why Only Germany Can Fix the Euro
Prof. Paul Krugman: The Brüning thing ...
Europe’s liquidity crisis (Reuters market analysis)
The Euro: As Good (and Bad) as Gold
Frankreichs zweierlei Geschwindigkeiten
Resource consumption: Big green bills on the sidewalk (The Economist)
[/update]
Jan 1st 2012 Insight: West in political crisis has echoes of 1930s

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