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posted on 11 August 2015

Epoch of Belief, Epoch of Incredulity (29): Hot Markets, Cold Wars

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The stillborn Greek debt crisis negotiations once again broke down, at the EU Finance Minister level, as an overreaching political solution was needed to create the momentum and legitimacy required to sell any kind of bailout deal to EU member nations - [i].

The collective European position was further undermined by a very loud dispute between Wolfgang Schaeuble and Mario Draghi - [ii]. Draghi has been dragged into hardening the Euro by Germany; so it is therefore no surprise that there is bad blood between the two. Alexis Tsipras defaulted back to the position of playing the IMF off against the Eurogroup and ECB, in order to facilitate the grand European political bargain that would ostensibly drive what Jean-Claude Juncker describes as the "Anglo Saxon" influence from the continent - [iii].

The problem with this strategy however, is that Eastern frontier nations have more faith in the "Anglo Saxons", based on experiences of previous conflagrations, than they have in the Berlin-Paris Axis. These frontier nations also expressed no faith whatsoever in Greece's sincere intentions and capabilities to comply with the Troika demands.

For Juncker's "Anglo Saxon" we have been reading Trans-Atlantic and hence NATO, although this may now have to change. Juncker's more literal sense of the words may have called for a more specific definition of "Anglo Saxon", but more of this later. NATO has been around longer than the Eurozone and has its own base currency, called the Dollar, with which to price the economic resources which it has defended since the Cold War began. When push comes to shove in Eastern Europe, this is ultimately what counts; more than some vague European ideals of liberty, equality, fraternity co-mingled with the strength through joy imputed into a comparatively new currency called the Euro.

The ephemeral nature of these failed European ideals was evinced in the continued schism between Germany and France over how to address the Greek crisis. The Germans want the principle of the Solidarity Pact that underpins the Euro maintained, whilst the French want the EU to spend more than it taxes on all things European. Germany prioritizes saving the Euro over saving the Greeks; and was even prepared to go as far as temporarily suspending Greek membership of the Eurozone in order to achieve this - [iv] strategic objective.

There was however no doubt as to how the eleventh hour negotiations would end - [v], since Tsipras had already signalled that he intended to cave in to Troika demands. What therefore occurred was a drawn-out climb-down by Greece, in order to give Tsipras some semblance of representing a democratic nation; so that he could attempt to go home with a modicum of credibility in order to deliver the reforms.

Since nothing is minuted, at these closed door session EU negotiations, Tsipras had some chance of claiming that he had stood up for Greece behind the closed doors. Unfortunately, the Northern European long-knives were out for him, so any chance of preserving his image and job went out the window. The low points of the confidential discussions were leaked in lurid detail; so that a picture was created of a lynching by a vociferous Northern European lynch mob with Merkel at its head - [vi].

This was nothing compared to the lynch mob waiting back in Athens for Tsipras, when he returned home totally defeated. So embittered and distrustful were the Northern Europeans that they effectively bullied Tsipras, into the kind of submission that he would have made without the kicking he received from them. His position is therefore tenuous, as is the new debt repayment bill that he tried to force through parliament - [vii]. The bill itself is a financial nonsense, since Greece has no ability to honour any of the terms dictated by the Eurogroup - [viii].

As always, the numbers don't add up in Greece; and a debt write-down will be needed at some time. If the total destruction of the political system and regime change in Greece is desired, then the Eurogroup has facilitated it. Whilst the bill passed through the Greek parliament, as crowds rioted outside, the seeds of destruction began to germinate - [ix]. This germinating scene prompted Wolfgang Schaeuble to opine that a Grexit was the best solution for both the Greeks and the Eurozone - [x]. On this occasion, Schaeuble's words demonstrated wisdom and perspicacity rather than cynicism; as he clearly sees that the situation in Greece has not been solved.

Seeing a political vacuum to expand into, Russia immediately offered aid in the form of energy support - [xi]. As France's Macron had warned, it was a Versailles moment. He also concurred with the view of the IMF, that Greece will ultimately need to have its debt written down and restructured - [xii]. Tsipras therefore went home in disgrace, to sell the deal; and Greeks will never forgive him or each other for the humiliation.

Tsipras's career is over, therefore the search is now on for a new gauleiter to deliver the reforms that have been promised. The search for said gauleiter will prove to be what tears the country apart and effectively starts the new crisis for the Eurozone. It doesn't matter that a deal was done, since at least 61% of Greece has no intention of complying; and no European is brave enough to occupy the country's executive and fiscal offices in order to enforce compliance. Furthermore, the majority of the populations of the rest of the Eurozone members have no intention of subsidising Greece's continued Eurozone membership.

There is therefore no democratic political consensus within Greece or within the Eurozone in general to support its continued Eurozone membership - [xiii]. Only the IMF has the structure and mandate to occupy a defaulted country; but the Europeans have effectively tried to exclude its involvement at the microeconomic level where the reforms are needed. As usual, the European postscript was left to the ECB and Mario Draghi at his latest press conference. Draghi told the markets what they wanted to hear, namely that Greece will remain in the Eurozone - [xiv]; and also that the emergency loan extended to it after the parliament accepted defeat will be repaid in full - [xv]. This was not the first time that Draghi lied on camera neither will it be the last. He was however telling the truth, when he opined that the Eurozone ex-Greece is back in growth mode - [xvi]. It now remains to be seen if this growth will continue, as the Fed moves beyond the Greek crisis and starts to zero in on its rate hiking cycle.

The role and position of Christine Lagarde at the IMF came under closer scrutiny in Epoch of Belief, Epoch of Incredulity (28) "The (Anglo Saxon) Plot Thickens". Lagarde appeared to compromise her position by aligning with Germany on the issue of Greek austerity - [xvii]; a position that is not advocated by the American contingent within the IMF, who advocate a Greek debt write-down followed by further financial support.

Jean-Claude Juncker's position was also questioned, after his failed attempt to establish an unlikely partnership with Tsipras in order to achieve a compromise with the Greeks. Last week it became clear exactly to whom Juncker was referring, when he said "Anglo Saxon" in his cryptic reference to an alleged plot to destroy the European Project - [xviii]. Juncker is known for his plain if somewhat emotive speaking. He should therefore be taken literally, when he utters the words "Anglo Saxon".

Juncker is clearly an agent of the undemocratic institution of the European Commission, which hopes to rule a united Europe by fiat rather than by democratic principle. His enthusiasm to cut a deal with Greece at any price, therefore aligns his interest more closely with the position taken by the United States. America is in favour of fiscal and monetary excess in Europe, which vitiates against the Freshwater Economic School principles desired for the Eurozone by Germany.

With Lagarde in retreat, from the Saltwater faction within the IMF led by America, the organization began to opine of the need for a new Greek debt write-down more openly - [xix]. At the same time, Juncker began to opine of the need for a further bailout of Greece; and also demanded that all EU member nations participate - [xx]. Germany and Britain however see things differently. Speaking for Germany, Wolfgang Schaeuble replied that there are those in his government who would still like to see the Grexit albeit a temporary solution - [xxi]. The duration of this temporary solution may however be up to five years.

It is clear that Germany is still keen on hardening the Euro and also avoiding the burden of a further Greek bailout on German taxpayers. Angela Merkel has her eyes on re-election. If Greece can be pushed out of the Eurozone and quarantined, before the German elections, Merkel is in a much more re-electable position. So much for the "Saxon" part of the "Anglo Saxon" plot that Juncker fears.

In relation to the "Anglo" component George Osborne made it abundantly clear that, having just hit the UK economy with a twelve billion Pound fiscal hit, British taxpayers will not participate in any further EU bailout of Greece - [xxii]. It is thus clear that Juncker's "Anglo Saxon" refers to Britain and Germany; and does not involve America. In fact, Britain and Germany have aligned against American influence in Europe; a position that they may yet both regret in the bigger scheme of geopolitics.

David Cameron and Angela Merkel have made a big play of their joint efforts to reform Europe. The "Anglo Saxon" plot is therefore evidence of their joint efforts. The result could see the "Grexit", followed by "Brexit" and a Eurozone that resembles the old Deutschemark zone pre-EMU. America however wishes to see an inclusive Eurozone including Britain that can finance and defend itself against the perceived threat from the East. These diverse and conflicting opinions should make for some interesting reading and volatility going forward, as all the players try and work towards their favoured outcome. Something has to give however, since some of the outcomes are mutually exclusive. No wonder America spied on its European allies with such attention.

The good news for the FOMC from Greece, if it can be called that, is that the door is now open to the first rate hike. The markets will now be tested, to see what kind of Taper Tantrum they can discount into asset prices. Such a test should not be too volatile or painful, as global and domestic US economic data is showing significant signs of cooling. The Cleveland Fed's Loretta Mester tested the extreme downside of the Taper Tantrum, with no real adverse market impact, when she suggested that she is in favour at least two rate hikes this year. Presumably the markets think that, given the global economic weakness, the Fed will be finished after two hikes - [xxiii].

Having broken the ice, Mester then vacated the stage for Janet Yellen to see what damage she could create at the House Financial Services Committee. When Yellen opined that she could see a rate increase this year the markets barely skipped a beat; suggesting that an equity rally will actually occur when the Fed hikes - [xxiv]. The door was therefore open for John Williams - [xxv] to jump on board and start talking about the first interest rate hike.

Even though British inflation and employment have started to fall[xxvi], both Mark Carney[xxvii] and the until-now Dove David Miles[xxviii] signalled that the Bank of England would also be going into rate hike mode. One suspects that the Bank is even more premature than the Fed, given that George Osborne just dealt a fatal blow to the UK economy with his summer budget. Fiscal and monetary policy tightness will prove that the UK economy is not as strong as the markets are being led to believe that it is. The latest data, which showed that wages are rising[xxix], only signals that there is an added cost pressure headwind to UK employers, to add to the fiscal and monetary headwinds.

There is no good news from Greece for Chinese policy makers however; since they will now be exposed to the full force of speculation on the global impacts of the Fed’s expected Taper Tantrum. They will also have to contend with acerbic headlines in the Western media, which appear to have an innate bias against them.

The natural reaction of policy makers to ease, in the face of signs of economic weakness, risk creating a slide in the Yuan and the kind of capital flight that will make the situation worse. Already the invisible hands behind the headlines are anticipating this untenable situation. China’s headline GDP figures have been exposed as being a product of inflation accounting[xxx], with real GDP running 2% below the official 7% headline. Chinese growth at 5% is a disaster for the policy makers and for any other country that has hitched its economy to the Chinese growth engine.

Japan continues to try and finesse the timing, of its next monetary stimulus, to mitigate a fiscal tightening that is conditional upon the global headwinds abating. The latest thinking, signalled by Abe’s advisor Koichi Hamada[xxxi], is that it is safe to press on with the proscribed sales tax increase whilst keeping a wary eye on the fallout from China’s equity market volatility. Following these baby-steps policy moves, the BOJ therefore refrained from increasing its monetary stimulus last week. It did however lower its inflation forecast over the short term, whilst adhering to its higher long term projection[xxxii]. This head-fake, on the short term inflation front, thus signals that the window has been opened to do some monetary easing should the global macro picture be conducive.

Initially this subtlety was lost on the blunt instruments known as FX traders, who preferred to focus on the Yen strengthening context that the unchanged monetary policy decision implied. Kuroda therefore had to emphasize the point, that he still intends to hit the 2% inflation target, in order to remind them that the option to expand the easing programme exists[xxxiii]. The temporary Yen strength created played into the BOJ’s hands, by providing the base from which to weaken the currency further. Janet Yellen however provided the real ammunition to weaken the Yen, when she tested the waters for a Fed rate hike later in the year.

Some readers were surprised by the “inflammatory” theme in Epoch of Belief, Epoch of Insecurity (28) The (Anglo Saxon) Plot Thickens”. Those who are “covered” by Goldman may wish to refer to its Office of Global Security (OGS), if they are privileged enough to have access to this quasi-NGO. Former CIA veteran and head of the OGS Robert Dannenberg does however seem to confirm this analysis[xxxiv], similarly confirmed by the head Joint Chiefs of Staff elect[xxxv] and US Air Force Secretary[xxxvi] in Epoch of Belief, Epoch of Insecurity (28) The (Anglo Saxon) Plot Thickens, that Russia is the greatest existential threat; and that conflict is coming between it and NATO.

Matters became even more inflamed, as Chancellor Merkel prepared to tour the Balkans, when it was revealed that a Patriot missile battery owned and operated by Germany on the Turkish-Syrian border had been hacked by a “foreign source”. Given the all-time low in relations between Germany and America, over the NSA’s spying on German politicians, it would seem that the “foreign source” has exploited this fundamental political weakness at the heart of NATO’s missile shield with great success.

Epoch of Belief, Epoch of Incredulity (28) The (Anglo Saxon) Plot Thickens explained how George Osborne had ring-fenced Britain’s fiscal ability to wage war. David Cameron followed up last week, by elucidating how he would get more bang for his buck. Britain will invest in more drones and special forces[xxxvii]; suggesting that the coming conflagration is one in which the players will fight each other by remote proxy, rather than face to face, in far flung corners of the globe where the loss of life does not create a political backlash at the ballot box.

As explained earlier, Britain is not fully aligned with America on foreign policy in relation to the Eurozone. This is because the Tory government ideologically wishes to cut the size of the state in UK domestic politics; which may then involve the “Brexit” if Germany cannot accommodate a streamlined Britain in a reformed EU. Ring-fencing Britain’s commitment to NATO has therefore been done in the hope that, this will satisfy America to accept that, Britain is still its strategic proxy in the European theatre.













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