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Tick By Tick Research Email - The Austerity Story
The Austerity Story
Dear All
Every year the folks over at Merriam-Webster's Dictionary award the coveted prize of "Word of the Year". Initially devised using a myriad of statistics, the award is now determined using an online poll devised by the popular internet dictionary and encyclopaedia company; which yields truly fascinating results. (Well to me anyway). Over the last four years, we have seen what I would refer to as intrinsically Finance related words take the crown (Pragmatic, Austerity, Admonish and Bailout) versus distinctly unrelated semantics from the preceding years. This includes the likes of the word "Blog" and "w00t". (for those wondering what exactly w00t is - it is the noise made when expressing joy - think whoop whoop!)
"All our work, our whole life is a matter of semantics, because words are the tools with which we work, the material out of which laws are made, out of which the Constitution was written. Everything depends on our understanding of them."
Felix Frankfurter
Anyway, I digress. This development towards a greater lay focus on the activities of the Finance world is hardly paradoxical. The actions of corporations, Governments and individuals alike have had, by the most part, lasting detrimental effects on the global population since the real-estate Ponzi exploded through the later half of the last decade. However, it is the winner of Merriam Webster's 2010 Word of the Year competition that brings me to the real point of this weeks first note. The word in question is: Austerity. Or, according to Wiki, the process of "deficit cutting, lower spending and a reduction in the amount of benefits and public services provided". A concept that the political powers of the US seem unable to get their head around.
The logic to austerity is very simple, cut your costs to reduce (or slow) the debt Burden. However, since its mass inception across various areas of the world, the economic skeptics among us have started to consider the validity of such measures. An excellent research report by Dr Tim Morgan initiated my skepticism over exactly how populations are expected to grow and cut concurrently. Is it possible? Well, Morgan argues that the fundamental growth assumptions built into the UK austerity plan are a little more than ambitious, and if this growth were to falter, we could experience a financially depressive state bought on through debt. Sound familiar? (A copy of the report is available HERE)
"There is no austerity equal to a balanced mind"
Chanakya
So does it work? Well, at this point I would like to introduce Hungary. The IMF austerity poster child. With a GDP half the size of California's, Hungary is a small European economy that has been indirectly crippled through profligacy of a vast quantity of other nations around the world. The story is actually fascinating. During November 2008, Hungary accepted the assistance of IMF, World Bank and Europeans (yes Europeans!) to help counter what can only be described as a run on the entire country. Since this point, the Hungarian government has successfully implemented a range of austerity measures to reduce their sovereign dependence on the global bond markets and, as the IMF puts it, "restore stability in the financial sector". In the period from January to November last year, Domestic borrowing fell by 8%. A truly staggering feat.
However, the story doesn't end here and im afraid that it doesn't end with "They all lived happily every after". Actually the result has been the polar opposite. Hungary, this week, was downgraded to junk by Fitch following what can only be described as a horrific bond auction. But why? The issue actually lies within Hungary's exposure to foreign denominated debt financing. Whilst Domestic Borrowing fell 8%, the repayments of Hungary's non Florint holdings increased by over 20% due to significant moves in the currency market from a weaker Hungarian economy and exposure to currencies such as the Swiss Franc. See, whilst the rest of the world was buying their 3rd, 4th or 5th house, the Hungarian population and Government were borrowing in Foreign currency denominations to avoid particularly high interest rates domestically. An activity that has vaporised the pertinence of any austerity measure in its entirety. The matter is made yet worse by evaluating the countries Monetary Policy. Any form of sovereign Florint printing would not result in a reduction of debt burden but would likely bring inflation.
Does austerity work? Can weak economies grow without reduced capital injections? I'll let you decide.
Before, I share my selection of the best articles from the last few days. I cannot go without mentioning the latest QE rumour that has emerged this week on the back of James Pethokoukis' article. Despite being better than a Jenna Jameson film to a certain bearded man over at the Fed, I see QE as the singularly most hopeless and dangerous policy that has re-emerged over the last decade. Supported by no credible or empirical evidence to suggest real long term growth, the policy is no different than the government lending the population their credit card for three months and expecting everything to be okay. Instead, the inflation that will result over the longer term will make the population as a whole poorer. Similar what they say for dogs, QE isn't just for Christmas it's for life. For those of you short EURUSD, I would urge you to look at the price change of the last two major interventions.
"Quantitative Easing is one of these PhD approved euphemisms that doesn't really convey the essential point..."money printing" would be so much a better step in the direction of intellectual hygiene. These people talk about quantitative easing as if they didn't mean to debase the currency over which they have temporary control"
Jim Grant
Without further ado, here are a number of articles well worth reading for the week ahead.
1. January Surprise: Is Obama preparing a trillion-dollar, mass refinancing of mortgages? - James Pethokoukis (Click HERE)
The article noted above that started the most recent QE rumour
2. Things That Make You Go Hmmm... - Grant Williams (Click HERE)
Grant takes another look at the Eurozone and Gold
3. Boom Time in the Middle East - Religare Research (Click HERE)
Religare discuss the growing Middle Eastern tension
4. Towards the Paranormal - Bill Gross (Click HERE)
Bill's welcome to the New Year
Best Regards
George Adcock
Founder
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Austerity = debauch currency, reduce already taxed/promised entitlements, reward banks, punish responsible citizens
Here's your Austerity: [reprinted from the latest issue of "The Privateer"
http://www.the-privateer.com
Propping Up By Grinding Down:
In late 2008 as the global inter-bank lending system was freezing solid, the Irish government jumped out
of the pack and announced unconditional guarantees on ALL deposits of whatever size in their banking
system. Within 24 hours, every major government in the world had followed suit. As they saw it, they
had no choice. Any government which did not follow Ireland’s lead was risking an instant and
catastrophic bank run with its inevitable consequences. Those would have included a prostrate REAL
economy and a drastic shrinkage in the government’s “tax base” (see Paul Krugman’s quote in the Global
Report). This action by governments everywhere exposed the denied connection between the financial
system and the real economy as nothing else could have. Now, the public plan changed and so did the
rhetoric. The financial system HAD TO be saved for the sake of the REAL economy.
The method used to accomplish this has been the same everywhere. Any market valuation of the paper
assets which form the foundation supporting the system has been cut off. In extremis, these “assets” have
been absorbed onto the balance sheets of the central banks at the equivalent of 100 cents on the Dollar.
The US Fed has repeatedly entered into “swap” agreements with other major central banks to prevent non
US banks from having to raise capital by selling assets (especially US Dollar denominated assets) on the
markets. The equivalent of $US TRILLIONS has been doled out in loans and guarantees to US banks to
prevent them from doing the same thing. Before and especially since late 2008, the entire valuation
structure of global financial assets has been nationalised by government.
And meanwhile, what of the “assets” of the people whose “solvency” is not vital to the survival of the
system? The value of their assets has plunged. No private mortgage holder has been bailed out by being
paid 100 cents on the Dollar for the house he or she can no longer afford to finance. Nor has he or she
been given the opportunity to borrow at 0.25 percent and put the takings in another asset paying 2-3-4-?
percent. Only those happily ensconced inside the system have been able to do that.
The goal has been to preserve the system which props up the power of government and those in
government. The method has been to prolong the agony by preventing the liquidation of the huge
malinvestments built up over the course of the preceding credit expansion. The greater the pressure on
the valuation of the collateral, the more credit money has been created and funnelled to those who held it
on their books. The result is that in place of the deep recession which would and should have happened
in 2008, the world faces a potential financial collapse in 2012 - or not long thereafter. The system has
been propped up by grinding down the economy and the people who depend on it
Nicely stated
I find that its a strange world we live in...
Fight for independence freedom from a king and the feudal system
Only to walk away and forget about where we came from on the pursuit of something better, taking everything we could lay or hands on weather we took it by force or other wars to claim our piece of this nation
Now it seems we cannot escape our kharma by forgettin the lesson of why we fought for freedom
Today we only have replaced the king and his lords with a different feudal system of men who still rule us
I'm pretty sure both systems are based on debt
Maybe the plight of man is really to repeat history over and over again
"Austerity" is another weasel word intended to divert eyes from the real issue. Living within your means is easy enough to do, so long as the criminal banking organization hasn't hooked you on debt.
The World econony has terminal cancer and no amount of "Mexican" medicine is going to do the job. The scary thing about the West, is how to control the troops when they come home. Living with tyrants might become more than tedious.
Austerity can work on a gold standard. You can believe in your money. You know it has value. You know austerity is for everyone and not just you. On a paper printing press standard with fractional reserve banking at this low of a reserve ratio, what is the fkn point? The paper money is going to keep losing value no matter what you do. The bankers are going to keep creating it and you are going to keep being taxed to bail them out. Why the Hell should anyone submit to austerity when it only applies to the one sector of the population that is already being screwed?
Austerity can work in a fair unrigged capitalist system. We don't have that. In the West, austerity is just a trick to lower monetary velocity to enable even more monetary printing. The goal is permanent recession so banker bucks and increased banker slice of the pie retains value a little while longer. But that doesn't work. Money printed causes inflation whether ewe are in a recession or not. They are creating a holocaust.
Austerity is another name for fucking the poor.
Reminds me of a bunch of Henry the 8th wannabes feasting hard on meade and turkey legs in an expensive inn. Then when the bill comes, they stick it on the beggar outside in the cold. Maybe he is happy to come inside to be warm while he washes dishes for a decade to pay off his slave debt? Or maybe he has a nutsack? We will find out if they keep this garbage up.
Austerity is a word... the actions (cutting Govt down to size, preferably zero) is not happening
You only need to see bankrupt Britain to see the words have no actions, because politicians want Empire and are too spineless and cannot see further than their own nose (election chances), to save a penny
The bloated British State, completely insolvent from 80 years of suicide socialist expansion, is incapable of getting off the 40 pork pies, 20 pints of beer and 12 packets of full fat crisps it downs every day.. in fact the insidious lying scum of Westminster have actually INCREASED TAXES on the pirvate sector destroying any chance of recovery and INCREASED SPENDING while gobbing off about austerity
Austerity is another fraud, another miserable bloody lie, peddled by the biggest fattest frauds in society, politicians. Spend yurself into oblivion you spineless scum
WHAT A FRIGGING IDIOT
#With a GDP half the size of California's, Hungary is a small European economy#
HEY IDIOT... GDP of hungary is about 200 bln, its 10 TIMES LESS THAN CALIFORNA , not half..
did all those idiots who write here never went to simple elementary school?
whole story is BS.. dont waste time reading. sorry to see I 'm 1st to catch idiot.
alx
PS
SEE
http://en.wikipedia.org/wiki/California
http://en.wikipedia.org/wiki/Hungary
Prescription: chamomile tea, epsom salts bath.
Austerity needs to be combined with debt repudiation by the goverments to work. In other words, quoting that famous line from the classic movie Animal House, "you f**ked up, you trusted us". And of course there will be pain first as most countries will need to balance their budgets (even without interest payments) and recapitalize banks.
From reading the article, Hungary's problems aren't due to austerity, they're due to borrowing in foreign currency and then getting killed on the FX. So explaint to me again how their problem isn't fundamentally rooted in spending money they don't have. Only difference is they're one of the first to actually have to suffer the inevitable consequences. But the consequences are of excess debt, not the ensuing austerity. If they hadn't needed to borrow in foreign currency, there wouldn't have been a problem (and maybe if they'd managed their money more effectively, domestic rates wouldn't have been 'too high', tempting them into the trap of foreign borrowing).
Austerity, in its modern form, means a massive transfer of wealth from the poor and middle classes, who generate the wealth, to the rich and psychopathic. Only time will tell if this will work.
"Austerity" (AKA sensible public finance) is the obverse of what happens when public policy encourages debt-financed spending by removing or obfuscating rational market limits (i.e.; a bubble). In other words, the problem happened on the BOOM side of the cycle, and there is no escaping it today without destroying the wealth of those who either did not participate in the boom via excess leverage, or those who were (improperly) bailed out when the boom busted.
Oh, it's working all right--exactly the way it's meant to work:
http://michael-hudson.com/2011/06/how-financial-oligarchy-replaces-democracy/
And as long as Mr. Market is kept happily fed, the self-satisfied tools in the top 10% will be happy to embrace Austerity for everybody else.
http://www.zerohedge.com/news/guest-post-if-market-crashes-who-owns-enough-stock-even-care
It will continue to work until it doesn't . . . which will likely be when the "useless masses" roll out the guillotines, imo.
I coined the phrase "nothing suceeds like excess" to describe our Fed's actions going into the crisis...i wish i had taken myself more seriously as indeed it does! All austerity is forced therefore it is doomed to fail. "Better to die of natural causes" than as of some..."plan." What is needed is a Sovereign equivalent of "Friendster" such that all these poor countries floating in the Economic Sea of Listlessness can lash themselves together to protect themselves from the Wall Street Loch Ness Monster that appears with striking regularity these days.
Austerity reminds me of the Stoics, and stiff upper lip at Waterloo. Its the signal of Thermoplyae moment of Eurozone.
But this global financial Waterloo is a trip where there will be no winners in First world. The Rothschilds of tomorrow seem to be all from emerging world; Oil oligarchs or Chinese entrepreneurs or Brazilian Samba dancers or Indian rope trick specialists.
Maybe a few Hf maestros, but where will they put all their fiat wealth? Its a bitch to live in another land when your own burns, and your wealth machine then loses its comparitive advantage of home territory; where you were king of manipulative mayhem, one step ahead of the unfurling wave. Good surfing, Stoics and Epicurians.