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Politics and Money Dominate Historic Week

US Politics, The Fiscal Cliff and Euro Debt

In a week that will not be soon forgotten, the United States will elect its President for the next four years. Voters will also fill Senate seats for the next six years and fill House seats for the next two years. The 2012 elections will not only shape the US but also shape  the globe. Regardless who the next President of the US is, the need for a functional Congress may be off greater import.

Last year, Congress achieved the dubious distinction of officially achieving a 10 percent job satisfaction report from US citizens. Even more than the Presidential race, it is the composition and mindset of Congress that will determine how the US and the global economy trends in the next two years. After the past two years, most Americans would just as soon throw out the entire Congress and start anew. If the same gridlock exists after the election, the US and the world could soon be in an insurmountable fiscal position.

Speculation is that there is not the political will in Washington to seriously address the impending Fiscal Cliff, that convergence of events on December 31st that will see the Bush Tax Cuts expire, the payroll tax reduction expire and a series of heavy budget cuts paralyze the US and the globe biggest consumer. If no action is taken, the US will lose about 6,000,000 jobs early next year.

Of equal importance is that the US credit rating will be lowered and the nation’s debt will not adequately be addressed. The country’s top CEOs have united in a call for a significant and far-reaching deficit reduction initiative along the lines of the $4.6 trillion Simpson Bowles Deficit Reduction Plan. If the Democrats do not give on reforms to social programs and the Republicans do not get away from the Norquist Pledge, which Romney signed and which his Vice Presidential running mate endorses wholeheartedly, the best outcome will be a short-term fix to the Fiscal Cliff.

Whether Americans realize it or not, such an outcome is not acceptable. The deficit and budget need to be addressed with serious people with serious, non-partisan solutions. The country must be prepared to pay the price for two unfunded wars, a crisis on Wall Street, two poorly administered governments and the worst Congress in US history.

Americans have been swamped with more than $2 billion of marketing spent by just the Presidential candidates, not to speak of untold billions spent on local and Congressional races. The US is sick and the doctor is out to lunch.

The Presidential election is billed as a battle between a financial wizard (Romney) and the champion of the middle class (Obama). Romney has changed positions so many times during the course of the campaign that nobody really knows his intentions, except that he has signed the Norquist Pledge which he will need to disavow if the country is to move forward. Obama has been battered for four years of a struggling economy that has been further hampered by Congressional Republicans that cast the interests of constituents aside in favor of opposing the President at every turn.

The campaign has been exhausting for candidates and the American public. A lackluster turnout at the polls will favor Romney. In all likelihood, Republicans will remain the majority in the House and Democrats will hold a narrow edge in the Senate. Unfortunately, the US may have reached a point where one party must control the three wings of government to get anything done. Half the country will be disappointed by the outcome of the Presidential election.

The G20

This has been a contentious and frustrated G20 summit this weekend in Mexico City. The world is losing patience with both the euro zone debt crisis and the US Fiscal Cliff. If there is one thing that all G20 nations agree with, it is that the time for action has come and gone. Both the euro zone and the US have acted irresponsibly in addressing their debt. The December 31st cliff is the immediate concern but new requests by Greece and a fragile Spanish economy and others could lead to the dissolution of the euro zone.

The US Congress will soon have to add more debt. Euro zone finance ministers are in gridlock, much like the US with Germany steering the region its way while weaker economies resist. The gridlock in the US and in Europe have unmistakable similarities; the chief one being that politics prevent progress. This is a critical week across the globe. The results of this election will either take the US consumer out of the game or add hope to a world that needs a strong US economy.

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The US Fiscal Cliff – Part II

The US Fiscal Cliff is set to be enacted on December 31, 2012. As portrayed in Part I, the repercussions of the expiration of payroll tax reductions and the Bush Tax cuts combined with automatic budget cuts called sequestration would plunge the US into an immediate, brutal recession. If analysts view this recovery as fragile, there will be no doubts about the crippling repercussions of the Fiscal Cliff.

And, the devastation poses a greater threat to the global economy than the current euro zone debt fiasco. The Fiscal Cliff will sink economies overnight. The crucial element needed to avert the Fiscal Cliff requires a complete reversal of form by the most ineffective Congress in the nation’s history.

The Congress that will need to address the Fiscal Cliff resolution is the same congress that permitted the downgrade of US bonds and was mired in a combative stalemate along party lines that were designed to destroy the reigning US President at the expense of the public in favor of right and left wing special interests.

Yes, there is a need for a formula for disaster that has led to the Fiscal Cliff. There is optimism that a deal will be implemented to avert the Fiscal Cliff, but this optimism would be contrary to the historical performance of this Congress. Regardless of the Presidential race outcome, there is no reason to believe that Congress will be any less divisive after the election. The majority of the Republicans in Congress have signed the Norquist Pledge guaranteeing that they will not agree to any legislation that raises taxes. To moderates and independents, Republican Presidential candidate Mitt Romney’s signature on the Norquist Pledge is not a moderate position. It is a radical move.

A coordinated initiative by CEOs of some of the country’s largest corporations has taken their demands for Fiscal Cliff resolution to Congressional office doors. Certainly these persons have differing political agendas, but it is clear they believe political compromise is necessary and a deficit reduction plan exceeding the Simpson-Bowles plan must be implemented in some form immediately, even if the long-term plan is extended for a few months while a bipartisan initiative is structured.

The CEO’s call to action demands solutions. Presumably, that means a down payment of the debt and a balanced approach to debt reduction that includes revenue increases and cuts to every sector of the economy including social programs and education grants. Millions of jobs will be lost.

No matter how the Fiscal Cliff solution evolves, it is going to be painful. How the pain is dispensed is the key to any hope of compromise.

CEOs want a solution similar to and greater than the $4.6 trillion Simpson-Bowles Deficit Reduction plan. Balanced and fair distribution of pain is sure to be contested. There is a lack of time and a deadline, two elements this Congress has not dealt with acceptably in the past. CEOs realize there are few reasons for optimism. The political gridlock is atrocious and paralyzing. As bad as it is now, it is likely to be worse after the election and after the new Congress is sworn in.

Republicans will be more conservative and even less moderate. The majority will have signed the Norquist Pledge and the few moderate Republicans are off the ticket in favor of more conservative candidates.

The Federal Reserve reports that US households have shed $880 billion in debt since 2008 during a tough economic recovery. Households have done their fair share. If Washington applied the same commitment, the Fiscal Cliff would have been resolved long ago. However, households do not have to represent the interests of financial backers and run for re-election in 2014.

Radical Solutions

Warren Buffet and others suggested that there were ways to fix the deficit:

Limit Congressional terms to one term.

Support this initiative with dramatic cutbacks to congressional benefit packages and a policy that enforces that every time budget expenditures exceed the budget, replace the Congress with an immediate year-end election.

Make Congress share the pain. Cut salaries, cut their benefits and make Congressmen agree to the health coverage choices their constituents purchase.

Make them reduce their staff and overhead like small businesses.

Cut Congressional pay by 50 percent or more.

Ban lobbyists and tell industry to spend their lobbying allowances on public, transparent policy statements.

Open the closed doors in Washington.

Make Congressman spend half the year in their state offices, with their doors open to constituents.

In other words, throw out professional politicians who go to Washington to profit. Elect candidates who are providing a public service by representing the best interests of their constituents and the nation not their personal best interests. Heck, they will only be there for one five of six-year term and if they misbehave in any way, suspend them and put them in front of a jury of the people, not behind the cloak of the Hill.

Isn’t that what happens when “We the People” run afoul?

This nation needs to go back to the basics. Out with what has come to be called professional politicians and back to public service.



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The Fiscal Cliff Draws Near

In the upcoming G-7 meeting, Europe will deflect the angst over its euro zone and European Union debt woes with a unified show of concern about the condition of state of the US economy and the weakness of the USD. There will also be concerns voiced about the status of China’s economy. Indeed, Europe will build its case that the world’s two biggest economies are dragging the global economy down more than the status of the debt-ridden, recessionary euro zone and EU states.

The G-7 was founded in 1975 as the G-6 and consisted of France, West Germany, Italy Japan, the UK and the US. In 1976, Canada was admitted to membership and the entity was re-named the G-7. The G-7 nations once controlled 50.4 percent of global nominal GDP and 39.3 percent of global GDP. The group meets several times a year with the intent of defining the key issues of the day and identifying strategies to correct those issues.

The emphasis of the G-7 debate may shift from the influence and possible solutions of the debt that plagues Europe to the US “fiscal cliff,” a pending crisis in the world’s largest economy that could paralyze global growth.

The fiscal cliff is the direct result of the US Congress’s inability to reach agreement over a tangible plan to trim $1.2 trillion from the national debt. As a result of this impasse, the country’s most ineffective Congress on record, the 112th Congress, agreed to a compromise that would allow the Bush tax cuts to expire, terminate the personal withholding tax reduction and allow a number of billions of dollars of budget cuts to be implemented. The total amount of deficit reduction would be about $1.2 trillion which will take effect on January 1, 2013.

Regarding the expiration of the Bush Tax Cuts, the Tax Policy Center estimates the net affect will be to increase taxes by an average of $3,500 per US household. This tax increase will come into play if Congress does not act. The G-7 is rightfully concerned about the fiscal cliff’s impact on the US economy. Most economists suggest this tax policy will plunge the country into recession in 2013.

In the area of the budget cuts, the biggest loser will be the Department of Defense, which will have to shed about $600 billion is expenditures. This figure will put the nation’s security at risk and could limit our ability to respond to crisis in other areas of the globe.

In any case, the payroll tax holiday appears to be at an end. Both parties have expressed concern over the future of the Social Security system if the cut is extended. Both House and Senate members, including members of the Tea Party appear ready to allow this tax increase to take effect.

On the day of the first debate between the two presidential candidates, Barack Obama and Mitt Romney, it is expected that questions about the fiscal cliff will be asked. The significance of resolving the financial cliff issue must be resolved before December 31st or the budget cuts and tax increases will be enacted.

The Bush Tax Cuts include lowered income taxes, lower capital gains taxes, lower dividend taxes and other tax decreases. These tax cuts were originally proposed and passed in 2001 and were extended in 2003. The income tax cut was proposed by Obama and has resulted in about a $1,000 savings per year for the average American.

Europe is expected to declare that it is working on a number of initiatives to stabilize their debt challenges but that the US appears to have its hands tied and is unwilling to address the fiscal cliff. Failure to solve the fiscal cliff will not only throw the US economy into recession but also will push the global economy into recession.

The theory is that the fiscal cliff will not be addressed before the election and that only an extension of the current programs will be agreed upon until the presidential and congress elections take place. Kicking it down the road is the status quo of the 112th Congress.

On another issue, Japan is expected to call for unified actions to get the cost of oil under control. European members and Japan are expected to push for an increase in global use of oil in order to stabilize prices.

At the current rate, the Federal Reserve is now estimating growth in GDP to rise 2.5 to 3.0 percent next year. If the fiscal cliff takes hold, the country will enter recession in mid-2013. Europe rightfully sees this possible outcome as sealing the fate of troubled European economies.

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For Euro The Trend is Down

Once again what was perceived to be an encouraging remedy offered by the ECB last week is muddled in political and financial theater, causing the Euro to reverse last week’s positive trend. This time Spain looks to be the culprit.  Further hindering the Euro was a release from Germany indicating that the Euro Zone’s strongest economy may be heading into recession.

The news from Spain was predictable.  But, the message from Germany may have far-reaching ramifications for the region.  September marks the fifth consecutive month that German business sentiment has trended down.  The lack of confidence in Germany increased investor concerns concerning a stalling global economy.

In Spain, Prime Minister Mariano Rajoy is holding firm that the request for bailout funding is not necessary at this time.  It is believed that the Prime Minister will eventually apply for rescue funds after a regional election to be held on October 21.  Spain’s resistance is puzzling because the country was active in pushing Ireland and Portugal to pursue a Euro Zone bailout deal.  Now, it is Ireland that is pushing Spain to apply and accept the bailout financing.

Countries like Ireland rely upon a stable euro to attract outside investment and are nervously awaiting Lisbon’s decision.  Rajoy became Prime Minister just nine months ago.  His policy is completely opposite from the posture of the previous administration. So, the message appears clear. If Rajoy applies for bailout funding, he will be voted out of office. Let’s be charitable and say that the Prime Minister is in over his head

In addition to Portugal and Ireland, France and Italy are also applying pressure to Spain to proceed immediately.  However, the Euro Zone’s paymaster, Germany, is not in any hurry to support a request from Lisbon.  France and Italy need investor confidence in the Euro zone to stabilize so as to reduce their yields on their bonds.

In Germany, 2013 is a critical election year.  Public sentiment opposes underwriting bailout funding for other Euro Zone states.  Germany’s financial leaders do not view the European Financial Stability Facility (DFSF) and the European Stability Mechanism (ESM) as a means for governments to obtain inexpensive funding for governmental operations.

For Germany and Austria, it is clear that the use of these funds is a last resort. They are determined to not make it easy for Euro zone members to access these funds until every other resource has been exhausted.  Austrian finance minister stated that position last week saying, “The goal is not to get as many countries as possible under the program, but to keep them stable enough so that they do not need a program.”

Last week, the ECB said it would buy potentially unlimited quantities of short-term bonds in secondary markets.  However for the ECB to act, nations must apply for Euro Zone bailout funds and agree to implement related fiscal and economic reforms which are monitored by an international supervisory committee.  Rajoy feels the austerity conditions accompanying bailout funding are prohibitive and contrary to any opportunity Spain would have to grow its economy.  Spain is scheduled to submit a new package of reforms at the end of this week at the same time that the prime minister submits his 2013 Budget.

Disappointing economic new-age from Germany

The lack of business confidence in Germany spread quickly across global equity and currency markets.  The immediate future does not look good for the Euro which made a pretty spectacular rally last week.

On the US equity front, the S&P 500 had climbed 6% on expectations that central banks would provide strong stimulus to assist the recovery. It appears that the ECB initiative is temporarily blocked.  Investors are also concerned about the Federal Reserve’s newest buying spree.  Many analysts thought the Fed would implement more direct investment to reduce the unemployment rate.

On Monday, the Euro hit a session low old 1.289 USB, its lowest valuation since September 13th.  Against the yen, the Euro traded at 100.54 yen, down 0.8%.  It is clear that the rally in the Euro spawned by the ECB’s new policy has already lost its momentum.

Don’t overlook Greece

Greece has made some progress in managing its debt by implementing some pretty severe austerity programs.  The question is whether the EU/IMF report on November 6 will qualify the country for the next round of bailout funding.

Greece has steadfastly insisted that they will meet the EU/IMF qualifications to entitle the country to the next round of funding.  Most analysts do not see how Greece can meet the overwhelming conditions.

Greece will not only have to trim programs, but will also have to show some growth.  There is no indication that Greece, which has been in and out of recession five times in the last seven years, can possibly generate growth.  This means that stronger austerity cuts are the only way for the country to meet its deadline terms.

So, where does that leave investors?  Investors seem to be attracted to reliable U.S. stock performers.  With U.S. bonds at historically low rates, certain US equity opportunities are in strong demand.  And, of course, if the dollar weakens, the U.S. may well increase its export trade.  Stay tuned, there’s a lot to come before the end of the week.

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Merkel Turns Positive Again

In the complicated politics that is holding the global economy ransom, Angela Merkel stepped out in front of the bus to sound optimistic about the solution to the Euro Zone debt crisis. If you think you have heard this message before, you have. Yes, it is a posture the politically troubled German Chancellor has taken in the past only to reverse her position within weeks. At home and abroad, Merkel is losing her grip.

But, once again, equity markets and currency markets responded positively to her latest endorsement of the Euro Zone and the ECB.  But, like Merkel, her message is tired and probably lacks credibility. She has become a tap dancer of sorts dodging bullets and buying time by mixed messages of support, intimidation and bullying. Could this be a last gasp effort to try to rally support for what promises to be a stern political challenge at home? Definitely.

For Germany, the Euro Zone, the ECB and the US, September will be a crucial month. Politicians and investors are expected to return to work and either pump life into the global economic woes or squash all hope.  Germany’s announcement came on the heels of Finland’s report that the country was preparing for the possibility of a Euro Zone breakup.

There is a strong case for Germany to withdraw from the Euro Zone. Politically, Merkel is the only Euro Zone head of state that has faced an election and still remains in power. Her grip on Parliament is a single vote majority, a situation that will reverse in the next election. Merkel has played just about every card in the deck, including a generous tax refund to the populace to try to quell resistance but the chancellor may be playing into a done deal.

Merkel threw her support behind ECB President Victor Draghi’s recent stance that the ECB would aggressively buy bonds in the Euro Zones most troubled economies. Germany has insisted, along with the International Monetary Fund (IMF) that countries like Greece and Spain should not receive any bailout funds until they commit and stand behind the requirements of the European Stability Mechanism (ESM).

Merkel’s stance has alienated many Euro Zone nations who believe a more measured and balanced approach is the only way to grow economies and get their citizens back to work. In a recent statement, France has joined the call for less austerity and more pro-growth initiatives. France has adamantly supported its position that it will not cater to Germany or Merkel. The Euro Zone’s second largest economy does have some clout at home and abroad.  Its position is more in line with what economists believe to be reasonable.

However, the impact of Merkel’s statement was felt in global equity and currency markets. The euro climbed to six-week high against the yen. The dollar also rose to a five-week high against the yen. As The largest importer of American goods, what is good for the Euro Zone is good for the US. However, one of Federal Reserve Chairman Ben Bernanke’s available boosts for the US economy is to weaken the dollar in efforts to make US goods more affordable and desirable.

Overall market conditions are low. Volume is low, bulls are driving the market and September may change the playing field one more time before the US elections. There is some speculation that a poor economy will actually boost President Obama’s chances come November.  The thinking is that the worse the economy is the more likely voters are to disdain an overhaul of the questionable federal benefit programs.

A more realistic analysis is that no matter who wins the Presidency, if Congress, which yesterday posted a 10 percent approval rating, is not fixed the office of the President of The United States will be largely ineffective.

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Euro Zone Offers Spain 100 Billion Euros

After receiving calls from leaders of most of the global community, the euro zone nations agreed to lend Spain up to 100 billion euros to be used to capitalize the country’s struggling banking sector and build adequate reserves. A 2.5 hour conference call between the 17 euro zone member nations was reported to be heated at times. However, Spain’s application for assistance was met with strong support and euro zone members were quick to state their intentions to help Spain.

A statement from the euro group said, “The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total.” This is the type rescue plan the global economy needed to see.  A banking failure in Spain would lead to euro zone contagion on a much wider scale.  With most countries on the continent in recession, one failure could devastate the euro economy.

In the tense and fragile global economic environment all nations are now feeling the economic pain.  The world’s largest economy, the US, is struggling with political dysfunction and a thread bare recovery so delicate that Fed Chairman Ben Bernanke appealed to Congress to reserve severe austerity trimming until the economy has an upward trend. Bernanke would like to see additional investments in growth and employment, a message echoed by the President on Friday.  The President called upon Europe to take swift and decisive action to remedy the regions multiple debt crises.

Spain has been hesitant to request assistance because of a sense of national pride and because the austerity programs required by the euro zone were too stringent. With its back to the wall, Spain opted to request the aid.  The amount will be determined by an audit that was scheduled to be released Monday but will now be released June 21, 4 days after Greece votes for a new government.

Spain insisted that the IMF not provide any assistance. Spain’s Economy Minister Luis de Guindos announced that “The Spanish government declares its intention to request European financing for its recapitalization of the Spanish banks that need it.”

While the IMF funding will not occur, the IMF and EU institutions will participate in monitoring Spain’s economic and banking activity. While euro zone embers preferred that a specific amount be requested, Spain chose to wait until the completed audits were presented. The region would like to have finances in place before the Greek elections which could lead to a withdrawal of Greece from the euro zone and a fiscal collapse.

In an interesting report provided by the BBC, the youths of Spain and the youths of Greece have a common pursuit. Disillusioned by city life and high unemployment, youths are migrating to the country to attempt to make use of farming land.

While the promise of funds for Spain’s banks is encouraging, markets will be only moderately settled until specifics of where the funds will come from are described. Funds could come from the EFSF or the more permanent ESM which goes live next month.

To satisfactorily capitalize itself with acceptable reserves, Bankia will need 23.5 billion euros.  Bankia was nationalized last year and now consists of the original entity plus seven community banks. Moody’s had pared Spain’s credit rating by three notches to BBB.  The reason for the downgrade is the banking sector’s exposure to bad real estate loans and a slumping marketplace. Last week, Spain was extended another year to get its sovereign debt down to 3 percent of GDP.

The next two fire alarms in the euro zone will be the Greek elections and the fate of Italy’s banks. It will be interesting to see what the credit agencies think of this plan and what its effect on stronger euro zone nations will be.

Germany’s normally conservative Finance Minister, Wolfgang Schaeuble, threw his support behind Spain’s request. “Spain has taken big steps to get its economic and financial problems under control. It has launched profound structural reforms and that is what all international institutions are saying.”

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The IMF Weighs In

As Greece struggles to reach an agreement about future bailout funds, the private investor and public investors are distancing themselves from a viable solution that would enable the country to meet a critical short-term payment deadline.  More discouraging is the unwillingness of the two parties to pull together.

In a scene that resembles the gridlock in Washington, the likelihood of Greece continuing as a Euro Zone member looks dismal.  Rumors circulated today about the country’s dismal trajectory and the strong probability that regardless of what happens with these talks, Greece may not be a Euro Zone member 12 months from now.

That bitter dose of reality is cause for concern among potential investors.  The issue is as clear as the traditional bailout question, “Why pour good money after bad?”  Viewed in that perspective, who would invest in Greece?

What is remarkable is that this little country with a dreadful economy and track record and encumbered by a poor work ethic has positioned itself at the center of the economic universe.  Recently, the IMF presented compelling information and advice about the state of the global economy, the state of the Euro Zone economy and the impact of failure by the region to help its most desperate member. The greatest fear is that if Greece fails, other economies will also fail.

The private investors have retained Charles Dallara of the International Institute of Finance (IIF) to lead their negotiations with Greece and the other Euro Zone entities.  Private investors have offered a debt swap that calls for a 65 percent loss for current investments and a yield on 30-year rollover balances averaging 4 percent.  Greece has countered saying that the country cannot pay more than 3.5 percent.

Critics have begun to evaluate the consequences of an unstructured default.  If negotiators fail to cut a deal by the end of the month, there may not be any choice.

On Tuesday, the IMF released disturbing projections that indicate the Euro Zone failure will cause a global recession.  Here are the IMF’s salient points. 

  • Global growth for 2012 was reduced to3.3 percent from 4.0 percent. 
  • Global growth could fall to 1.3 percent if the Euro Zone continues stalling for solutions. 
  • Growth in 2013 is expected to reach 3.9 percent. 
  • The Euro Zone economy will contract 0.5 percent this year. 
  • The U.S. GDP will grow by 1.8 percent in 2012. 
  • Japan’s GDP was trimmed from 2.3 percent to 1.7 percent. 
  • Overall growth in advanced economies will be 1.5 percent in 2012 and 2013. 
  • Growth projections in emerging economies were pared from 6.2 percent to 5.4 percent. 
  • 2012 Growth projections in China were trimmed from 9.0 percent to 8.2 percent but will bounce back to 8.8 percent in 2013. 
  • Asia’s emerging economies will be loser to7.3 percent compared to original projections of 8 percent. 
  • The area hit largest by the global slowdown will be evident in central and eastern Europe where 2012 growth may expand by a slim 1.21 percent. 
  • Non-oil commodities are projected to increase by a stunning 14 percent. 

A leading analyst, Olivier Blanchard, said that if Europe did not arrive at a collective agreement to deal with the recession that has gripped the region, the impact on global GDP will be even more dramatic.        

In a written statement, the IMF said, “The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation.”  While that is a formula for success, it sounds easier than it is.  

The elephant in the room is quantitative easing, the controversial printing of euros.  Quantitative easing is what enabled the U.S. and the UK to stay afloat at the outset of the recession.  It would result in lowering the value of the euro and faces some constitutional challenges, but given the traumatic state of politics and state economies there appears no other remedy.  To date, every other option has failed. 

If the Euro Zone fails, it is very possible the U.S. will trigger another round of quantitative easing.   

The Managing Director of the IMF and former finance minister for France has said that the failure to create a larger failsafe than currently exists in the European Financial Stability Facility will result in a 1930’s style global depression. 

The only recourse the Euro Zone has is to boost the bailout fund as soon as possible.  That is the only action that will quell investor doubts and show potential investors that the Euro Zone is serious about restoring confidence in the flamboyant market place that is under subscribing to the region’s bond auctions.

In the United States, what appears to be a recovering consumer confidence could be dashed if contagion in Europe is unchecked.    Japan’s projection for reduce debt was accompanied by a call for more stringent debt reduction.

The projections for 1.5 percent growth in advanced economies will not be enough to significantly ease high unemployment rates. 

The private investors in Greece have renewed their call for action by the Euro Zone’s public creditors.  Funds to meet Greece’s upcoming 14.5 billion euro call as part of the overall 130 billion relief fund recommended by the IMF are necessary to stem an unstructured default.    

Understanding the ESM and the EFSF 

The European Stability Mechanism (ESM) is a new and permanent platform that will swing into action in mid-2013.  The ESM was proposed and created under guidance by the European Union and is not restricted to act on behalf of the Euro Zone members.  Rather, the ESM is designed to service the 27 members of the European Union, except for Great Britain, whose finance ministers agreed to the concept on November 28, 2010. 

The ESM will expand the capabilities of the existing European Financial Stability Facility. This body will have wider enforcement and surveillance guidelines that will include the consenting EU members. 

Great Britain has declined to participate because the country uses its own currency rather than the euro.  The purpose of the ESM will be to prevent a recurrence of the ongoing crisis.  The agency will generate an evaluation of the EU by mid-2016 and to provide assistance to distressed economies. 

Private sector involvement will also be monitored by the EMS.  This activity will be studied on a case-by-case example.  Private investment will be consistent with guidelines established by the IMF. 

The hope is that stressed economies with liquidity issues will be relieved by the ESM.  When these economies seek assistance with investors, the ESM will help the troubled members negotiate a private solution that will encourage the investment.  Basically, this is a more transparent and comprehensive mechanism.  The ESM will not be available to interact with private investors until mid-2013.

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Papandreou and Greek Surprise

Greece has 10 million residents.  The country contributes 3 percent to the Euro Zone GDP.  The weakness in the global economy has kept this country on center stage for the past two years.  While the other 16 members of the Euro Zone have supported this illegitimate member of their economy, the tenuous nature of the region’s political and economic climate surfaced one more time on Thursday.

This week’s G20 Summit in Cannes was expected to deal with global economy and currency issues. Instead, the meeting of the world’s 20 largest economies has been pushed to the back page in favor of high stakes gamblers German Chancellor Angela Merkel, France’s President Nicolas Sarkozy and Greek Prime Minister George Papandreou. 

The Euro Zone must admire Greece’s flare for the dramatic.  After being ruled economically ineligible for admittance to the Euro Zone, Greece showed their creative style by cooking the books.  Supported by a vivid misrepresentation of the country’s financial position, Greece successfully applied for Euro Zone membership in 2004 and converted to the euro.

Over the summer, several meetings were held at the highest levels in Euro Zone.  Germany’s Merkel and France’s Sarkozy were caught in the hard reality that their banks have too much exposure to Greek debt. 

German voters were opposed to their tax money being spent in Greece where lavishly unrealistic lifestyles had led to this crisis.  Add to this dangerous formula the very real threat of contagion throughout the southern tier and the Euro Zone crisis became more ominous than the collapse of Lehman Brothers.

On Wednesday, Papandreou shocked the world and the 16 other Euro Zone nations by insisting that the most recent bailout of Greece would have to be put to a popular referendum vote. Such a vote could not be held until early January.

Currency markets, equity markets and comm. oddities all fell with the news.  Meanwhile, talks in Greece’s parliament became animated and Papandreou’s leadership will now need to survive a tense vote of confidence on Friday.

As events began to unfold, Sarkozy, Merkel and Papandreou met in Cannes to discuss the situation in Greece. However, the European Central Bank also weighed in with some unexpected news.

The ECB reduced their interest rate by 0.25 percent.  In announcing the interest rate decrease, the ECB explained the move because the Euro Zone is entering another recession.  While this news can hardly surprise the regions financial leaders, it caused uneasiness at the G20.

Two factors seemed to influence the rallies at U.S. equity markets as all three major exchanges climbed significantly.  The euro held firm because of Papandreou’s agreement to withdraw the call for a referendum.  A better than expected preliminary unemployment report in the U.S. seemed to drive the market.

The meeting between Sarkozy, Papandreou and Merkel were described as tense and heated.  Merkel made it clear that not one euro would be forthcoming before the current plan was accepted.  With a 9 billion euro debt service payment due next week, Papandreou eventually agreed to accept the plan.

However, even this announcement was loaded with surprises.  The opposition leader to PASOK, Papandreou’s party, agreed to support the bailout but claimed that his support was based on Papandreou’s promise to resign.

In Greece’s 300-member Parliament, PAS has 152 members.  One supporter has already announced she will not support Papandreou in tomorrow confidence vote.  Several of Papandreou’s cabinet members have opposed the confidence vote until Greece receives the 9 billion installment next week.

What is once more painfully clear is that the currency markets and the equity markets are quickly influence by media reports.  In a region that relies on 17 different Parliament to agree to direction, every headline can move or halt the markets.

The press clippings from the Euro Zone are classically overstated and somehow lack the most basic journalistic support. In the Euro Zone, it is one rumor followed by another rumor; one insinuation and a counter insinuation.  And, here we though the US had cornered the market on that kind of rhetoric.

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Markets Await Jobs Tally

With a hopeful eye on tomorrow’s employment numbers from the U.S. Labor Department, markets around the world were treading wateron Thursday.  Global economic markets reacted positively to the possibility of an agreement with Greece that really amounts to little more than kicking the can down the road for three years.  Meanwhile, indications are that Ireland is following in Greece’s path.  Both countries have received mixed messages and little assistance from the EU/IMF, which may well control the fate of both nations.

The euro rose to $1.45 against the dollar.  To add to the stress on the banking sector, Goldman Sachs was subpoenaed by Congress for the purpose of explaining its conduct at the outset of the recession.  The country’s financial institutions are taking deep hits in equity markets as housing prices slip further and foreclosures continue to rise.

There are 44 million Americans currently receiving food stamps.  Most Americans are having difficulty keeping pace with the rising gas prices and with the escalating food prices.  The Obama Administration and the country have a lot riding on Friday’s jobs report.  Analysts project a jobs report showing 180,000 new jobs.  Anything less will be problematic economically and politically.

According to NBC News, the top two elements causing weakness in consumer confidence are the price of oil and the inaction by Congress on the debt ceiling.  Moody’s Investor Services reported that there was a “small but rising risk of a short-lived default by the United States if the government’s debt limit was not increased in coming weeks.”    

Many Main Street residents wonder if the Republican Party, in its all-consuming dedication to upsetting President Obama’s second term is trying to destroy the nation and global economy along the way.    Main Street thinks the budget cuts are very necessary but that this is not the time or place for these negotiations. 

Republicans have a bold budget plan on the table but when polled individually, very few of them, including one announced Presidential candidate Newt Gingrich, are opposed to the concept while yet another, Mitt Romney, is a supporter of health reform similar to Obamacare.

In the troubled eurozone, Greece’s efforts to privatize certain assets for collateral purposes are stalled and decisions from the EU and IMF about more funds seem to contradict any resolution.  The announcement that Greece was granted three additional years to restructure its debt seemed to stabilize the euro.  Ireland appears to be the next mounting hurdle as the EU and IMF are clinging to their available resources.

Here’s hoping the jobs report does not disappoint tomorrow.

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Record Commodities Prices and the Forex Markets

Propelled by economic recovery and the recent Mideast political turmoil, oil prices have firmly shaken off any lingering credit crisis weakness, and are headed towards a record high. Moreover, analysts are warning that due to certain fundamental changes to the global economy, prices will almost certainly remain high for the foreseeable future. The same goes for commodities. Whether directly or indirectly, the implications for forex market will be significant.

First of all, there is a direct impact on trade, and hence on the demand for particular currencies. Norway, Russia, Saudia Arabia, and a dozen other countries are witnessing record capital inflow expanding current account surpluses. If not for the fact that many of these countries peg their currencies to the Dollar and/or seem to suffer from myriad other issues, there currencies would almost surely appreciate. In fact, the Russian Rouble and Norwegian Krona have both begun to rise in recent months. On the other hand, Canada and Australia (and to a lesser extent, New Zealand) are experiencing rising trade deficits, which shows that their is not an automatic relationship between rising commodity prices and commodity currency strength.

Those countries that are net energy importers could experience some weakness in their currencies, as trade balances move against them. In fact, China just recorded its first quarterly trade deficit in seven years. Instead of viewing this in terms of a shift in economic structure, economists need to understand that this is due in no small part to rising raw materials prices. Either way, the People’s Bank of China (PBOC) will probably tighten control over the appreciation of the Chinese Yuan. Meanwhile, the nuclear crisis in Japan is almost certainly going to decrease interest in nuclear power, especially in the short-term. This will cause oil and natural gas prices to rise even further, and magnify the impact on global trade imbalances.

A bigger issue is whether rising commodities prices will spur inflation. With the notable exception of the Fed, all of the world’s Central Banks have now voiced concerns over energy prices. The European Central Bank (ECB), has gone so far as to preemptively raise its benchmark interest rate, even though Eurozone inflation is still quite low. In light of his spectacular failure to anticipate the housing crisis, Fed Chairman Ben Bernanke is being careful not to offer unambiguous views on the impact of high oil prices. Thus, he has warned that it could translate into decreased GDP growth and higher prices for consumers, but he has stopped short of labeling it a serious threat.

On the one hand, the US economy is undergone some significant structural changes since the last energy crisis, which could mitigate the impact of sustained high prices. “The energy intensity of the U.S. economy — that is, the energy required to produce $1 of GDP — has fallen by 50% since then as manufacturing has moved overseas or become more efficient. Also, the price of natural gas today has stayed low; in the past, oil and gas moved in tandem. And finally, ‘we’re closer to alternative sources of energy for our transportation,’ ” summarized Wharton Finance Professor Jeremy Siegal. From this standpoint, it’s understandable that every $10 increase in the price of oil causes GDP to drop by only .25%.

On the other hand, we’re not talking about a $10 increase in the price of oil, but rather a $50 or even $100 spike. In addition, while industry is not sensitive to high commodity prices, American consumers certainly are. From automobile gasoline to home eating oil to agricultural staples (you know things are bad when thieves are targeting produce!), commodities still represent a big portion of consumer spending. Thus, each 1 cent increase in the price of gas sucks $1 Billion from the economy. “If gas prices increased to $4.50 per gallon for more than two months, it would ‘pose a serious strain on households and could put the entire recovery in jeopardy. Once you get above $5, [there is] probably above a 50% chance that the economy could face a downturn.’ ”

Even if stagflation can be avoided, some degree of inflation seems inevitable. In fact, US CPI is now 2.7%, the highest level in 18 months and rising. It is similarly 2.7% in the Eurozone and Australia, where both Central Banks have started to become more aggressive about tightening monetary policy. In the end, no country will be spared from inflation if commodity prices remain high; the only difference will be one of extent.

Over the near-term, much depends on what happens in the Middle East, since an abatement in political tensions would cause energy prices to ease. Over the medium-term, the focus will be on Central Banks, to see if/how they deal with rising inflation. Will they raise interest rates and withdraw liquidity, or will they wait to act for fear of inhibiting economic recovery? Over the long-term, the pivotal issue is whether economies (especially China) can become less energy intensive or more diversified in their energy consumption.

At the moment, most economies are dangerously exposed, with China and the US topping the list. Russia, Norway, Brazil and a select few others will earn a net benefit from a boom in prices, while most others (notably Australia and Canada) are somewhere in the middle.

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