France came under heavy fire on global markets on Tuesday reflecting fears that the euro zone’s second biggest economy is being sucked into a spiraling debt crisis after a warning that Paris’s failure to adapt should be “ringing alarm bells”.
Nervous markets also showed concern about whether Italy’s Mario Monti and new Greek leader Lucas Papademos, unelected European technocrats without a domestic political base, can impose tough austerity measures and economic reform.
European Central Bank President Mario Draghi has predicted the 17-nation currency bloc will be in a mild recession by the end of the year, a view underlined by data showing the economy barely grew in the third quarter and faces a sharp downturn.
“The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter, most likely in the first quarter of next year,” said economist Michael Schroeder of German economic research institute ZEW.
On the markets, Italy’s 10-year bond yield rocketed back above 7 percent, pushing its borrowing costs to a level widely seen as unsustainable in the long term and which helped trigger the fall of Silvio Berlusconi’s government last week.
Spain’s Treasury paid yields not seen since 1997 to sell 12- and 18-month treasury bills.
French 10-year bond yields have risen around 50 basis points in the last week, pushing the spread over safe haven German bonds to a euro-era high of 173 basis points.
French banks are among the biggest holders of Italy’s 1.8 trillion euro public debt pile.
The urgency of resolving the debt crisis was underscored by a think-tank report saying triple-A rated France should also be “ringing euro zone alarm bells” as it could not make rapid adjustments to its economy.
In New York, U.S. stock index futures fell sharply on Tuesday morning after the rise in European bond yields, the drop caused by fears in the United States that Europe’s debt crisis was mushrooming into a wider systemic problem.
“THREAT TO THE WORLD”
President Barack Obama’s top economic adviser said the European debt crisis was the leading risk to the U.S. recovery.
“Clearly, Europe is a tremendous concern,” Alan Krueger, chairman of the White House Council of Economic Advisers, said.
“It is important they act quickly, because it is a threat not only to Europe and the U.S., but the world as a whole.”
But Greek conservatives set themselves on a collision course with the European Commission, refusing its demand to sign a pledge to meet the terms of a bailout designed to save the country from bankruptcy and safeguard the euro zone.
Members of the New Democracy party, a key player in Papademos’s new crisis coalition government, said they would not bow to “dictates from Brussels” to give a written guarantee to honor the bailout.
With the survival of the 17-state currency zone in its current form now at risk, EU governments have until a summit on December 9 to come up with a bolder and more convincing strategy, involving some form of massive, visible financial backing.
The debt crisis is likely to make matters worse in the next months with nations such as Italy, Greece, Ireland, Portugal and Spain forced to adopt politically unpopular cuts to stop the bond market driving them toward default.
Economists say there is no visible growth strategy in place to counter those austerity measures.
After last week’s disastrous week for the euro zone’s third biggest economy, Italy’s Monti appeared to win a key breakthrough on Tuesday when Angelino Alfano, secretary of Berlusconi’s People of Freedom (PDL) party, emerged from the talks saying moves to form a government would succeed.
With the zone under intense scrutiny, Germany and France posted solid growth in the third quarter, statistics released on Tuesday showed, but euro zone nations on the front line of the debt crisis fared much worse and analysts expect bleaker times ahead in the core economies.
“THIS IS ALL HISTORY”
“The key point is that this is all history,” said Jonathan Loynes, chief European economist at Capital Economics.
“Forward-looking indicators suggest that the euro-zone economy is likely to drop back into recession in the fourth quarter and beyond,” he said.
The entire euro zone economy grew just 0.2 percent in the third quarter from the second, lifted by France and Germany, but economists were resigned to the fact the bloc was almost certainly heading for a recession.
Stagnation in Spain, Belgium and a contraction in the Netherlands and Portugal appeared to signal that the worse was yet to come and a summer growth spurt was temporary.
Monti is racing to secure support from feuding politicians to allow his cabinet of experts to speed up reform of pensions, labor markets and business regulation needed to put Italy’s finances on a sustainable footing.
Italy has to refinance some 200 billion euros ($273 billion) of bonds by the end of April, a daunting prospect
Expected to seek a confidence vote by Friday, Monti has said that he aimed to serve until scheduled elections in 2013, not just until reforms had been pushed through.
Far-reaching reforms are seen as crucial if Italy is to end years of stagnant growth, trim a debt mountain equal to 120 percent of gross domestic product and avoid the sort of crisis that forced bailouts of Greece, Ireland and Portugal.
In Athens, Papademos said late on Monday that Greece had no choice but to stay in the euro zone, telling lawmakers reforms were the only solution.
But conservatives on whom Papademos must rely for support demanded pro-growth policies and rejected any more cuts, fueling fears of a Greek default that may force Athens out of the currency group triggering a euro zone debt meltdown.
GREECE MUST SIGN
Austerity measures had deepened Greece’s recession but reforms — including widening the tax base and fighting rampant tax evasion — could mitigate the problem, said Papademos, who oversaw Greece’s entry to the euro zone in 2002.
But New Democracy leader Antonis Samaras said he would not vote for new austerity measures and he would not sign any pledge about new belt-tightening.
The European Commission issued a stark warning to Greece on Tuesday that it must provide written confirmation to its European partners of its commitment to reforms to bring down its debt, no matter who wins the next elections.
“The Eurogroup as a whole expects Greece, the Greek political forces, to provide a clear and unequivocal commitment to the agreement … and we expect this in writing. It has to be a letter and signed,” Commission spokesman on economic and monetary affairs Amadeu Altafaj told reporters.
Most Greeks hailed Papademos’s appointment, but thousands of people angry at more than a year of austerity are expected to rally on Thursday, the anniversary of a 1973 student uprising that helped to bring down the colonels’ junta of 1967-74....
I guess it is no time for subtlety....
"'Vulture Capitalism': Iceland’s New Bank Disaster" by Olafur Arnarson and Michael Hudson and Gunnar Tomasson:
"After the September 2008 crash, Iceland’s government took over the old, collapsed, banks and created new ones in their place. Original bondholders of the old banks off-loaded the Icelandic bank bonds in the market for pennies on the dollar. The buyers were vulture funds. These bondholders became the owners of the old banks, as all shareholders were wiped out. In October, the government’s monetary authority appointed new boards to control the banks. Three new banks were set up, and all the deposits, mortgages and other bank loans were transferred to these new, healthier banks – at a steep discount. These new banks received 80 percent of the assets, the old banks 20 percent.
Then, owners of the old banks were given control over two of the new banks (87% and 95% respectively). The owners of these new banks were called vultures not only because of the steep discount at which the financial assets and claims of the old banks were transferred, but mainly because they already had bought control of the old banks at pennies on the dollar.
The result is that instead of the government keeping the banks and simply wiping them out in bankruptcy, the government kept aside and let vulture investors reap a giant windfall – that now threatens to plunge Iceland’s economy into chronic financial austerity. In retrospect, none of this was necessary. The question is, what can the government do to clean up the mess that it has created by so gullibly taking bad IMF advice?"
Funny that we're in the middle of a big propaganda blitz that Iceland did the right thing and is a model for us all, while it looks like a slightly more sophisticated defalcation.
"You Are The 98%" (found via here, with much better comments). He sounds like an old man waving his cane at the kids and yelling for them to get off his lawn. What all these guys don't understand is that their clueless reaction is one of the important results of the actions of the protesters. In fact, it is the reaction of the establishment - which is already involving violence - which is the key to the protest. I did however like his comment on Naomi Klein, a problem, not a solution, just like Žižek, Krugman, Chomsky, and all the other elites who want to take charge/credit for what the people are starting to do:
"Grant me that when Naomi Klein is invited to speak for the 99%, at least 45% are looking at each other like, wtf, who let Linda Tripp in here? "
Some bright lights in Germany and the Benelux....?Europe's Lehman Brothers....
By Martin Hutchinson
There has been considerable discussion as to whether the potential Greek default makes it this cycle's Lehman Brothers, but that is surely wrong. Greece is much too small to destroy large areas of the world economy, as did the bankruptcy of Lehman Brothers. It is also being bailed out on exceptionally favorable, not to say squishy terms, as was Bear Stearns, where shareholders received an entirely unjustified US$10 per share from JPMorgan Chase.
To be Lehman Brothers, one must be a previously undoubted name, albeit with hidden weaknesses in management, whose bankruptcy is large enough to disrupt the entire global economic system and plunge it into depression for years thereafter. There is surely only one candidate for such an honor: it is not Greece, Portugal or Ireland (too small) or Spain (getting better management, and stronger than it looks - think Citigroup) but Italy.
In the past decade, Italy under Silvio Berlusconi has been considerably better managed than was Lehman Brothers. The now former prime minister Berlusconi and in particular his finance minister, Giulio Tremonti, had an excellent grasp of Italy's weaknesses, and tried within the constraints of the Italian political system to bring the country's bloated spending under control, improve its abysmal tax compliance and, as a corollary, reduce its excessive burden of taxes.
In consequence, the Berlusconi governments at least stabilized Italy's grossly excessive public debt, which had risen disgracefully from 30% of GDP in 1970 to 120% in 1995 but has been flat since then in spite of Italy's deteriorating demographic profile. They also accomplished a considerable amount in pension reform, but did not adequately reformed Italy's corrupt public sector, its over-burden of regulation or its opaque and sluggish corporations.
The main criticism of the Berlusconi governments, which should really be directed at the leftist governments that intermingled with them, is that they did not prevent a substantial deterioration in Italy's relative productivity against its eurozone neighbors, which has gradually made Italian exports uncompetitive and widened its balance of payments deficit to 3.7% of GDP.
Italy's problem is now a political one. Under Berlusconi it was mostly competently run and could hold its own internationally if only through the force of Berlusconi's personality. As the market figured out in its negative second-day movement after Berlusconi's departure, it is most unlikely that any Berlusconi successor will be anything like as good. Even if some figure from Berlusconi's own party, such as Angelino Alfano, were to succeed him, he would have far less authority over the fractious center-right coalition and far less ability to keep the necessary budget-cutting reforms moving forward.
A "technocrat" successor such as the much loved (by the European Union bureaucracy) Mario Monti [at present the prime minister designate] would be much worse; he would secure a large handout from his friends at the EU or the International Monetary Fund, and would then waste the proceeds in government aggrandizement, making an eventual Italian bankruptcy 12-18 months down the road all the more painful. Since the market would quickly spot the road down which a Monti government was heading, it would withdraw support for Italian bonds within weeks, well before that inevitable destination had been reached.
Of course, if Italy had kept Berlusconi there would have been a clear solution to its problems; departure from the euro. Unlike Greece, whose currency parity needs to drop to a third or less of its current euro parity to be viable, Italy becomes competitive with a devaluation of no more than 20% or so.
With a Berlusconi to keep public spending under control, an Italy devalued 20% could even service its public debt, since its average maturity is relatively long and any cost increase resulting from re-lirazation could be easily absorbed over time. The current panic at bond yields over 7% merely reflects the youth and inexperience of the trading community, which fails to remember the double-digit yields of a generation ago.
Such a devaluation would break up the euro as it currently exists, since Italy, unlike Greece or Portugal, is a major component of the currency. Indeed it would almost certainly also lead to a departure from the euro of Spain, France and probably Belgium, since they would find themselves more uncompetitive through the Italian devaluation.
However it would not remove the currency bloc altogether, which could happily continue with Germany, the Netherlands, parts of Scandinavia and its highly competitive and flexible East European members Slovakia, Slovenia and Estonia. There would be no world recession, and no major bond defaults beyond Greece and possibly Portugal.
As they have done and are continuing to do in Greece, the EU panjandrums, by taking over the management of Italy by putting in their man Monti and providing limited bailout help, will make matters much worse. For one thing, their solution and the austerity they will call for will have very little legitimacy.
As we saw only last week with Ohio voters' rejection of the Republicans' perfectly sensible reforms of that state's public sector workforce and its pension and healthcare rights, claims of actuarial catastrophe have very little salience with the electorate. Voters don't understand the actuarial calculations involved, which are of necessity opaque, and they rightly suspect that the political class is capable of producing spurious scientific-seeming justifications when it wants to do something.
The same distrust will attach itself to Monti's calls for austerity, and whereas Berlusconi's policies could be opposed within the system by aligning with the parliamentary left, opposition to Monti's apparently high-minded reforms, which will not tackle the corruption endemic in Italian politics, will spill into the streets.
With the budget more out of balance than under Berlusconi because the politically connected lobbies that Monti has brought with him will seize the opportunities to seize available resources, the markets will wrongly perceive Italy as being as much of a basket case as Greece, and close access to Italian government re-financing.
Within a very short period, that may not drive Italy out of the euro, but it will produce a default on Italian debt that could have been avoided with better management. Since Italy's debt is so huge, the resources for a full bailout do not exist (even Germany's taxpayers suffer under a high tax regime that is within a few percentage points of becoming counterproductive) and so the southern European government securities market will collapse.
Just as with Lehman Brothers, regulatory actions, and not just the misdirected short-term maneuvers of politicians and banks, will bear a considerable share of blame for the debacle. In this case, the Basel rules assessing Organization for Economic Cooperation and Development government debt as having zero risk and thus requiring zero capital allocation will be most to blame. Those rules allowed banks, without constraint from their capital inadequacy, to load up on debt that had less economic reality behind it than the debt of any solid well-established corporation.
Britain came close to default in 1797, not because of any failure of its burgeoning economy, but because its government approached the limits of its tax capacity at around 20% of GDP (and France suffered the revolution eight years earlier through a similar problem).
In modern societies, with income taxes and the great majority of populations well above the subsistence level, national tax capacities are well above 20% of GDP, more like 50%. However they are not 100% or even 70% of GDP, nor can they ever be anywhere close to those levels. Taxation at that level produces economic decay even in the short term, as Sweden discovered in the 1980s.
With 20th century welfare systems strained by the aging European population, it was always absurd to assume that any modern government's debt was "risk-free" except for that of a few countries like Singapore and South Korea whose tax systems were operating far below their maximum capacity.
Countries can increase their own economies' viability and their governments' tax capacity, as a percentage of GDP, for a few years by a one-off devaluation, but as various South American states have shown (albeit at a lower level of income) that too is only a short-term solution.
Whereas Italy could probably service its debt through austerity and devaluation (as Britain did after its 1967 devaluation) Greece is quite unable to reach any such equilibrium. In Greece's case, devaluation is necessary to get the economy working at all, but after devaluation output will still not be great enough to service the country's gigantic debt.
The last three years of ultra-low interest rates and government profligacy and meddling thus seem all too likely to produce a second financial crisis, an unprecedentedly short time after the first. Presumably the Reinhart-Rogoff argument in their book This time is different, that financial crises are especially difficult to emerge from, will apply with redoubled force to the emergence from two crises rather than one.
Sadly, even this second disaster seems unlikely to be sufficient to discredit the policy foolishnesses that have caused both crises or to prevent a spiral of money creation, meddling and debt that will lead to a third crisis and long-term economic decline.
We are supposed to be an intelligent species, which can learn from our disasters. With such learning very unlikely, the global economy may be destined to decades of decline, from which emergence may be impossible.So, shall our analysis focus on how things appeared Friday or Wednesday? From the Friday perspective, there are a few hopeful stability green shoots emerging in Europe. For the week, Italian 10-year yields were only up 8 basis points (bps). The euro was down only slightly, while European, US and global equities recovered much of steep early-week losses.
There is a new "technocratic" government in Greece and one in the works in Italy, giving a twinge of hope on the policy front after virtual political paralysis. The Germans and French have strongly reaffirmed their unflinching commitment to the euro and further European fiscal integration. One with an optimistic bent could look to Wednesday's market tumult as an (another) inflection point in dealing with the crisis.
What about the Wednesday perspective? The financial world seemed altogether different. Wednesday saw Italian two-year yields surge a stunning 81 bps to 7.11%, up 150 bps in three sessions and 240 bps in two weeks. Alarmingly, two-year Italian notes were being priced with a 44 bps bid/ask spread, as liquidity all but evaporated in the third-largest sovereign debt market in the world. Demand for French debt was faltering as well, as the spread to German bunds widened 18 bps to 147 bps (2-wk widening of 45bps). The euro was hit for more than 2.25% at one point, while many developing currencies (Eastern Europe and Asia) suffered greater losses. Global equities were under intense selling pressure as contagion risk, again, was gaining the upper hand.
A Wednesday afternoon article from Reuters (Julien Toyer and Annika Breidthardt) weighed further on fragile market confidence: "French and Germans explore idea of a small euro zone. German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources say ... One senior German government official said it was a case of pruning the euro zone to make it stronger. 'You'll still call it the euro, but it will be fewer countries ... We won't be able to speak with one voice and make the tough decisions in the euro zone as it is today. You can't have one country, one vote ... ' While the two-speed Europe referred to by Sarkozy is already reality in many respects ... the officials interviewed by Reuters spoke of a more formal process to create a two-tier structure and allow the smaller group to push on."
From the Wednesday perspective, rapidly deteriorating Italian debt markets were placing European monetary integration (and the European banking system) in clear and present danger. The Reuters story resonated, as it only made sense that discussions between German and French leaders would be moving rapidly toward the type of radical measures necessary to preserve the euro, even if this required excluding the likes of Greece, Portugal, Ireland, Spain and Italy. With the European debt crisis now spiraling out of control, it appeared that it had finally reached the point where the "core" must commence a process of desperate measures required to isolate itself from the "periphery's" cancerous debt contagion.
With US$2.6 trillion of outstanding sovereign debt (and a large financial sector), the market appreciates that Italy is too big to bail. A great amount of energy has been expended attempting to fashion creative mechanisms to ring-fence the Italian debt market. It's now too late for what was always high-stakes poker. All the same, talk continues of leveraging the European Financial Stability Facility, of International Monetary Fund (IMF) credit lines, of more aggressive support from the European Central Bank (ECB) and other measures to bolster confidence in Italian credit.
But the reality is that China and other non-Europeans have, understandably, no interest in assuming Italian credit risk; the IMF has limited resources; and that France's increasingly vulnerable credit standing leaves little room for a transfer of resources to Italy. The spread between French and German 10-year yields ended the week 26 bps wider to 148 bps, with two-week widening of 50 bps.
The bottom line is that European monetary integration now rests capriciously on the markets' view of Italian solvency. Is it an issue of illiquidity or insolvency? When Italian debt markets seize up as they did Wednesday, it is reasonable for the marketplace to think "tipping point" - and position accordingly.
The euro region would be a more stable place today had Greece exited the euro 18 months ago. And a strong case can be made that forcing out the weak players remains the best hope for salvaging European monetary integration. Yet policymakers are determined to treat the crisis as a liquidity issue, while the markets are increasingly sensitive to the age-old dilemma of "throwing good money after bad".
An even stronger case can be made that European officials will move down the harrowing path to a "leaner and meaner" euro path only as a last resort. From this perspective, it is absolutely imperative that they voice unqualified support for the current euro arrangement - even if contingency planning is in the works to deal with an Italian breakdown. Officials have gone from buying time in preparation of a Greek default to an extremely pricy Italian escapade.
National Public Radio (David Kestenbaum) enlightened listeners with a timely segment Wednesday evening, "Leaving the Euro is Hard to Do.""You might think leaving the euro would be easy. Greece, for instance, could just reverse everything it did when it joined. Replace the euros inside its borders with new Greek money. Bring back the drachma. It turns out to be very difficult. There's a famous historical example here. Ok, it's not that famous. But it's worth looking at: The break-up of the Austro-Hungarian currency union in 1918.Well, I'll assume the affluent Greeks some time ago transferred their savings out of Greece's financial institutions. I worry much more about Italy, especially from the Wednesday perspective. With euro disintegration no longer an impossibility, why would the more financially sophisticated Italians and others leave their euro-denominated funds in their home country banks instead of shifting them to, say, Germany?
Just as the countries of Europe today share the euro, the Austrian empire and the Kingdom of Hungary had created a shared currency: the Austro-Hungarian crown. After World War I, the region broke up. All of a sudden there were lots of countries wanting to switch to their own currencies. At the beginning, they used a simple system: countries simply stamped existing Austro-Hungarian currency with particular markings to turn it into new, domestic currency. Some countries used ornate stamps; Romania's stamp was just a cross. This quickly led to chaos. Everyone wanted to get their money stamped in the country they thought would have the strongest currency. Countries sealed their borders, but it was no use.
"You had boxcar loads of currency" moving across borders, says Michael Spencer, an economist who has written about this period. Imagine what would happen now, when people can move money with the click of a mouse. If some official in Greece even breathes a word about maybe, possibly, theoretically considering leaving the euro, money could fly out of the country before anyone had time to even think about sealing the borders.
A Bloomberg article (John Glover and Elisa Martinuzzi) from Friday morning was headlined "Invisible Bank Run Becomes Conversation with 7% Italy Yield". "Italy's highest bond yields since the birth of the euro are reverberating through the financial system of Europe's biggest debt issuer, driving lenders to seek record amounts of central bank financing. Italian banks borrowed 111.3 billion euros (US$152 billion) from the European Central Bank at the end of October, up from 104.7 billion euros in September and 41.3 billion euros in June..."
What will these numbers look like by the end of the month?
Increasingly, the backdrop is reminiscent of previous financial collapses, with the not too distant fiascos in Southeast Asia, Russia and Argentina coming to mind. In all cases, policymakers for months fought resolutely to thwart the forces of credit bubble collapse. And, in the end, policy measures contributed greatly to the severity of the eventual financial crashes. Without exception, central banks used valuable reserve resources (and credibility) to finance capital flight, while supporting their currencies and general marketplace liquidity. Later, the atrophied status of central bank balance sheets proved critical to the implosion of financial and economic systems.
Importantly, policymakers' headstrong battle to delay the day of reckoning ensured only greater financial and economic imbalances and contagion risks. Market intervention fomented destabilizing speculation, which tended to incite volatility while subverting the marketplaces' capacity to effectively discount deteriorating financial and economic conditions. In the end, policies ensured catastrophic "non-linear" breakdowns.
It's my view that derivative markets have played an instrumental if less than fully appreciated role in the series of crises over the past two decades. I would further posit that policymaker determination to thwart market forces works to increase, likely dramatically, the scope of derivative positions - position both to hedge against market and systemic risks as well as to seek profits from faltering markets (certainly including currencies).
When policymakers inevitably lose their battle against credit and market breakdown, the marketplace is left with an unsupportable financial structure: in particular, massive derivative positions that were supposedly to protect investors (and potentially reward speculators) from myriad credit, currency, equities and market risks. A large portion of outstanding derivative exposures required trend-following ("dynamic hedging"), selling into collapsing markets by financial institution counterparties themselves jeopardized by rapidly escalating financial and economic crisis. It is in the end an untenable situation, although it appears to work until it doesn't work at all.
Obviously, Europe is no Southeast Asia. And unlike the '90s, global policymakers are not oblivious to financial crisis dynamics and won't just simply sit back and watch the euro region implode. But there are uncomfortable parallels, as policymakers act with increasing desperation to thwart the downside of credit bubble dynamics. I see an increasingly vulnerable central bank, working both to stabilize an escalating debt crisis and to finance capital flight. The breakdowns of currency "pegs" were instrumental in previous dislocations, perhaps providing unappreciated omens of the cataclysm associated with the unraveling of a historic currency integration regime/experiment.
Continuing with uncomfortable parallels, there is today's highly speculative marketplace for now content to bet on the necessity of unrelenting aggressive policy measures. At the same time, I'll assume that already astronomical outstanding derivative exposures grow only more briskly, as market participants seek protection against escalating credit and currency risk throughout the region (and beyond).Moreover, much of this derivative protection has been written (sold) by financial institutions and market operators that won't fare all so well in the event of a market breakdown. In the meantime, the backdrop sure creates virtual mayhem as increasingly high-strung bulls, bears, hedge fund speculators, derivatives operators, "high frequency traders" and performance chasers all engage in bloody trench warfare.
It's worth noting that, at $93 billion, October Chinese bank lending was stronger-than-expected, supporting the view that easing measures have already commenced. Bank loans growth is on pace for another trillion-plus year. In Brazil, the government is said to be contemplating the removal of credit controls, while the market positions for imminent rate cuts. One is left to ponder to what extent Brazil's credit growth will accelerate from the recent 2.1% monthly - and 19.6% y-o-y - rate of expansion.
With the "developed" world ready to respond to heightened global financial stress with another round of quantitative easing and the "developing" poised to further accommodate overheated Credit systems, today's almost $100 crude and near $1,800 gold are reminders of percolating inflationary pressures (which, thus far, have little impact on bond yields while working to keep the speculative juices flowing generally).
Of late, it seems as if "risk on versus risk off" has morphed into "Italy risks breakdown of euro as catalyst for global crisis versus synchronized global policy response to grave systemic fragility ensures ongoing liquidity and speculative excess." Way too much "money" chasing too few real investment opportunities, one could aptly argue.
Perhaps we're still some distance from a major financial crisis. From the Friday perspective, my analysis seems more than Chicken Littlish. The Dow closed up 260 points on Friday, and markets would like to believe that Italy may just have turned the corner. The thought that the marketplace could ever turn on Treasuries, as it's done with Italian and, increasingly, with French debt, is simply ludicrous. Clearly, the world won't tolerate euro disintegration.
The euro currency is within striking distance of 140, having so far held its ground through a tumultuous 2011. Commodities look good and "developing" currencies not that bad. US data? Well, "better-than-expected". Thank God it's Friday! And in reading numerous accounts from the long litany of past financial fiascos, I am invariably struck by market participants' voracity for continuing to play despite what should have been rather obvious indications that time was running short....for the many Dominoes to keep falling in the Zioconned Western Crooked World....As the financial crisis rumbles on we are constantly told that what while there are a few problems, all the benefits of modernity are the unambiguous results of the capitalist system.
That the invisible hand famously documented by Adam Smith is what has brought us industrial progress from the factory system to the telegraph to the Internet. But in reality, the factory system inspired by Arkwright, more than a century before Henry Ford, grew up as a response to the effects of the Agricultural
Vast pools of cheap labor created by the enclosure of common land coupled with mercantilist economic policies made especially effective by a growing empire allowed Britain to lead the process of industrialization. It was this interaction between state and private sector that was necessary for industrial development. These are lessons which may be lost to the West, but the current most economically successful country, China, takes heed.
Britain only adopted free trade as a policy in the later 19th century. By this time a fully industrialized nation seeking to defend an entrenched position, including limiting the development of competitors. The key driver for the development of the first electronic communications network, the telegraph, was the British Empire.
It was a state-driven development, and state intervention, most particularly from the United States Department of Defense was fundamental to development of computing networks. Here lies an important truth. The pressure of competition from the Soviets inspired state-directed development of computer to computer communications.
This state-directed development took place in the "capitalist" West. In short, the West won the Cold War not so much because it was capitalist and the Soviets communists, but because the West remained more pragmatic. Economic development and organization was more mixed.
This is not to say that free-market thinking has nothing to offer regarding economic policy. Simply put, markets spring up because people, left to their own devices, will naturally seek to specialize and trade. That is a market. Smith's genius was as much in documenting and theorizing a natural state of affairs as in recommending an economic model.
A major insight was the significance of the marginal over the absolute. Water, far more vital and important than whisky, sells for much less. Why was that? The answer lay in the marginal benefit. The price people are prepared to pay is not governed by the absolute value of a commodity, but the value placed on one more glass of water, or whisky. Scotland, where Smith came from, has no shortage of water.
And in a perfect market, theory tells us, pricing tends toward the marginal cost of production. You can only sell something for the extra cost incurred of producing just one more. In such a system how, can anyone invest?
Key to any technical development are educational institutions. These are not capitalist. Any educational worthy of the name gives awards not in response to payment received, but in recognition of some sort of test passed. This is not a market system. If it was you could simply buy a degree.
Any institution that is seen to sell qualifications is instantly devalued. In short, the vast majority of major technical developments, if not all, require state intervention and protection from competition in order to survive. What the private sector does so well is take the innovative developments replicate them produce them and distribute them.
Yet current political and economic discourse still assumes the capitalist system to be vital to the development of new technology. This is a belief that is based more on faith than on fact. By now, the theory of the rational market should be as discredited as Soviet communism.
What capitalism does is spread, by means of trade, new and better products or ways of doing things. Capitalism communicates innovations rapidly. It does not produce these innovations. It is not innovation that capitalism fosters, but trade. A market is any forum in which buyers and sellers can agree a price and complete an exchange.
Markets can vary from eBay to an African village square. If a price can be found by large number of sellers acting independently yet as part of a whole much like birds in a flock or bees in a swarm, trade can be said to be free. This is not innovation. This sort of behavior is as old, if not older than, civilization.
So why is it a generally accepted conventional wisdom that capitalism encourages innovation? Conventional wisdom decrees that the private sector is good, and the public sector bad. That all regulation of the private, capitalist, sector stifles innovation. Yet it is unregulated capitalism that lies at the root of the current economic crisis.
There are direct parallels in the deregulation of the 1980s and 1990s with the 1920s, and in the current crisis with the great depression of the 1930s. Not least with the collapse of the gold standard and the current eurozone crisis.
In many ways, our current phase of globalization is a second phase, the first being in the 1920s. This is not the first time. Unregulated capitalism beings us to this same place, like it did before. The belief in capitalism is indeed a belief. A faith. Not only are markets not rational, neither are the proponents of the current system.
Until policymakers and leaders develop a realistic idea of the useful functions and limitations of capitalism, there seems little chance of a useful framework for economic policy in the future.
Dafydd Taylor is a United Kingdom-based political analyst....From source article:And in fact, there are a handful of banking families, including the Rothschilds and the Rockefellers, who have come to dominate economic and political affairs in the Western world. Unlike aristocrats, capitalists are not tied to a place, or to the maintenance of a place. Capital is disloyal and mobile -- it flows to where the most growth can be found, as it flowed from Holland to Britain, then from Britain to the USA, and most recently from everywhere to China.-- Richard K. Moore/New Dawn Magazine/Global ResearchDominant Social Theme: The elites are a bunch of corporations and greedy capitalists. What banking families? They're never mentioned in the mainstream media, are they? So how can they exist?
Free-Market Analysis: This is an excellent article in our view, perhaps because we agree with most of it -- though at the end of this analysis we will present some important ways in which we DISAGREE.
Nonetheless, it's "our" paradigm in some ways, presented eloquently by Richard K Moore, "an expatriate from Silicon Valley, [who] retired and moved to Ireland in 1994 to begin his 'real work' -- trying to understand how the world works, and how we can make it better."Media Conglomerates, Mergers, Concentration of Ownership, Global Issues, Updated: January 02, 2009.