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posted on 05 June 2015

Epoch of Belief, Epoch of Incredulity (21): Useful Idiots

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Epoch of Belief, Epoch of Incredulity (20) "Keep Your Friends Close and Your Economists Closer" expanded the thesis of the schism between the Eurogroup and the IMF within the Troika negotiations with Greece. It was suggested that the Eurogroup was trying to create a "political" solution that will allow Greece default to the EU and yet remain within the Eurozone.


The EU will then conditionally bailout Greece and remove further "Anglo Saxon" influence in European affairs; something already flagged by Jean Claude-Juncker - [i]. Last week Juncker suggested that the European plan will fall into place by early June - [ii]. The IMF pushback against this "political" initiative was signalled by Gerry Rice, an IMF spokesman - [iii]. This was then followed by Paul Thomsen, the IMF's European Director, who opined that he cannot even talk to Yanis Varoufakis - [iv].

Readers will remember that Varoufakis's perverse behaviour was put into the context of advancing the conditions for a Eurogroup solution. Thomsen's analysis of his behaviour provides more granular detail to this context. Carefully placed leaks from the IMF then suggested that Greece will be in default by June 5th unless an agreement is concluded within the coming days - [v]. IMF resistance began to materially impact the EU's plan towards the end of last week.

None of the creditors was able to accept the tabled Greek plans to raise taxes and reduce welfare benefits and pensions; because these plans are viewed as insubstantial in terms of fiscal revenue earning potential. Moody's has suggested that capital controls may now have to be applied by the Greek authorities to prevent the continued capital flight - [vi] .

The IMF then evinced the alleged "Anglo Saxon" plan to undermine the European project, when it pointedly criticised France for failure to get its own fiscal house in order - [vii]. Wolfgang Schaeuble had been pushing for a time consuming referendum in Greece on continued Eurozone membership - [viii]; and he was also delaying Britain's attempts to accelerate its own renegotiations with the EU - [ix]. It was speculated that Schaeuble was trying to confront the spectre of the Brexit referendum in Britain, with a Grexit referendum in Greece that would show the downtrodden Greeks still willing to remain within the Eurozone.

Epoch of Belief, Epoch of Incredulity (20) "Keep Your Friends Close and Your Economists Closer" also noted that Merkel and Schaeuble were facing considerable internal resistance from within their party to their final solution for Greece. Their best laid plans began to unravel last week; and with them all hopes of a German "political" solution.

Last week it was reported that this resistance was turning into open revolt, by as much as one-third of the CDU members - [x]. In order to appear tough on Greece, Merkel took the step of giving the country a twelve day ultimatum to reach a deal on its refinancing programme - [xi]. Following Schaeuble's lead on the Brexit, Merkel then opined that she would like to see the UK referendum in early 2016. An earlier UK referendum, especially if the vote is for the Brexit, fits Merkel's 2017 electoral timetable better. Based on what happens in Britain, she will have a clearer view on how to play her cards in order to be re-elected in 2017.

Careful not to let it appear that Germany is driving Europe, Merkel roped in Francoise Hollande to make a joint ultimatum on the Greek issue - [xii]. Merkel's primary objective has always been to control power in Germany. With an eye on elections in 2017, she has therefore had to adopt more nationalistic rhetoric of late. This rhetoric reached a crescendo last week; when she informed Russia that it was still barred from G7, until progress is made on Ukraine - [xiii].

The problem for the Eurogroup's "political" solution to the Greek problem, is that the Greeks have tried to exploit the schism with the IMF in order to get better financial terms for themselves. In fact the Greeks have had the temerity to totally reverse all former pledges to cut public spending and reform their economy altogether. Greek enthusiasm to exploit this schism however, has undermined the potential for a European solution that will be acceptable to the European taxpayers who will ultimately be forced to underwrite yet another Greek bailout under the envisaged "political" solution.

Tsipras was hoping to wangle an attractive "political" solution in a face to face with Merkel and Hollande. By getting a "political" solution, he had hoped to override the painful financial negotiations at the finance minister level.

Sensing that she would be punished in 2017 for caving in to Greek brinksmanship, Merkel swiftly withdrew the option of the "political" solution and reverted the Greeks back to the Troika's "economic" drawing board. All bets on a European "political" solution are now off, until Tsipras blinks. She covered her U-turn with the noble lie that the IMF conditions had proved to be too big a hurdle to achieve a comprehensive solution - [xiv]. She was then rapidly followed by Schaeuble, who announced that a deal with the Greeks was impossible and that their optimism was misplaced - [xv]. He then qualified his position by hinting that a parallel Drachma would be introduced in Greece to trade alongside the Euro - [xvi].

He then swiftly began to rebuild bridges with David Cameron, by opining that Germany wished to be Britain's partner in bringing good governance to the EU - [xvii]. Hollande sensing that he had been set up by both Germany and the Greeks, swiftly zagged back towards the "economic" solution for Greece.

The "Anglo Saxons" had won the day; not by their skill but because of Greek arrogance. Having won a pyrrhic victory, Stanley Fischer then became the magnanimous spokesman for the "Anglo Saxons"; when he opined that although the Eurozone needs growth policies to survive - [xviii] that he doesn't see its demise in the foreseeable future - [xix].

Epoch of Belief, Epoch of Incredulity (20) "Keep Your Friends Close and Your Economists Closer" observed that Mario Draghi must be "squirming" about the fact that the spike in Eurozone interest rates has now undone all of the good work from his QE in Q1. Last week ECB Council Member Benoit Coeure swiftly stepped up to the plate to cap Eurozone interest rates, when he signalled that the QE announced in Q1 will be front loaded - [xx] going forward; thus confirming Draghi's earlier signal that the full amount of QE will be implemented despite signs of a Eurozone recovery - [xxi]. The ECB is clearly taking no chances, especially as events surrounding a Greek default and bailout by the Eurozone appear to be imminent.

Nicola Sturgeon and the SNP were David Cameron's useful idiots who destroyed Labour, north and south of Hadrian's Wall. As English nationalism enjoys further gains throughout land, leading up to the referendum on EU membership, the Scots gave it greater momentum last week when a senior SNP source leaked that devolution could occur much faster than people think - [xxii].

Capitalising on his new majority and the events in Scotland and Greece, Cameron swiftly introduced new plans for immigration policy - [xxiii]. His timing was auspicious, as it coincided with new figures which show that Britain is being overrun. British industry is strongly supporting the case for continued EU membership; which is hardly surprising since membership provides said business with the bountiful cheap labour that the latest immigration data shows. British taxpayers and voters, facing a referendum on continuing to pay for a system that undermines their employment opportunities will have a much different view from that of their employers however.

George Osborne, who has been entrusted with the two related jobs of managing further austerity and renegotiating with the EU, lost no time in using the wave of nationalism to hide the next wave of spending cuts behind. He announced that an emergency budget will come on July 8th - [xxiv]; that will explain where the expected £12 billion in cuts will come from. One can imagine that Scotland and the EU will be framed as large components of the fiscal excess that needs cutting back on. The Tories can then engage the EU and the SNP, with the full support of a pecuniary nation; that would like tax burdens reduced, whilst the NHS is simultaneously saved.

David Cameron wasted little time capitalising on events in Europe and the Queen's Speech, to bring forward the timetable for the referendum - [xxv]. Epoch of Belief, Epoch of Incredulity (17) "Hope and Glory" - [xxvi] suggested; that "Based on the numbers Sterling is a sell, but based on the optics it's a buy". Having come through the optics of the General Election result overshoot, Sterling is now losing steam as the economic reality sets in. This reality was driven home by last week's CPI data, which was the first negative print since 1960 - [xxvii]; signalling that the inflexion point in Sterling had been fundamentally reached. Going forward the political optics also look less positive, as Osborne goes into battle with the Europeans and a referendum on the Brexit becomes tomorrow's fish and chip wrapper.

Elizabeth Warren may ultimately become a useful idiot, if her behaviour can be framed as something that is inherently dangerous to the American economy. Thus far, all attempts to do this have failed. Ben Bernanke has taken up the challenge; and in doing so risks becoming a useful idiot for Wall Street himself. Having moved from the Fed to Wall Street however, he has no choice but to defend his current and former employers. Warren (D-Massachusetts) and David Vitter (R-Louisiana) have sponsored a bill to curb the Fed's emergency bailout powers - [xxviii].

The so-called "Bailout Prevention Act 2015" would curb the Fed by:

  • firstly , requiring the Fed and any other supervisors of a firm receiving loans to certify the firm's solvency, and to make its solvency analyses public immediately; and
  • secondly, requiring that the interest rate on any emergency loans be at least 5 percentage points above the Treasury rate.

The Fed could suspend these two conditions, but Congress would have to approve the suspensions within thirty days or the lending programs would have to be shut down.
Warren wouldn't stop QE per se, she would just make sure that Wall Street couldn't misappropriate it. The Fed is thus now under attack from both the Senate Banking Committee's Richard Shelby and Elizabeth Warren. Fortunately for the Fed, Shelby and Warren are antipathetic towards each other. Yellen (and Bernanke) will no doubt consult both Shelby and Warren; and then cut a deal which divides and then plays off both lawmakers against each other. At this point Shelby, who wishes to curb the New York Fed's power and redistribute it to the regional banks, would appear to offer the best compromise - [xxix].

Zhou Xiaochuan and the PBOC are swiftly becoming China's useful idiots, as the central bank is nudged into underwriting the bad debts and speculative mania that has seized the economy. Before the annual party congress, observers had been primed to accept the "new normal" of seven per cent'ish growth. Given the recent desperate attempts of policy makers to stimulate growth, it has become clear that the "new normal" is not working. The PBOC must therefore make its currency reserves available to the patriotic drive for economic growth at all costs. The bubble phase followed by a collapse which the PBOC lacks the monetary dry powder to address, because it was all used up in the bubble phase, is now in process. To signify this, the latest weak Chinese PMI data was followed with another one of those 3%+ equity rallies, based on the conviction that the PBOC must go all in with the nation's reserves.

- [xxix]

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