Readable - 12/12/11

The EU agreement is a historic one, in the sense that it marks the end of Keynesian policy as a tool in European economic management after more than half a century of being more or less the dominant view. From now on maintaining the debt level has priority, and if your economy will shrink without stimulus, then let it shrink! - Edward Hugh


In concentrating on long-term fiscal reform and not the crisis at hand, the Dec. 8-9 European Union summit asked the wrong questions -- then failed to answer even those. - Bloomberg


Suppose a government is, in fact, running actual deficits greater than 3% of GDP, or "structural" deficits greater than 0.5%, which is the desired maximum. It will be impossible, at that point, to credibly say, "Uh oh, you're running larger deficits than are allowed - therefore, you're going to have to pay a penalty, which will effectively drive you into larger deficits. Otherwise, you're going to lose your vote in the EU, which will accelerate the risk of your disorderly departure from the union." - John Hussman


By explicitly stating PSI is over, the EU is implying the big bazooka will be there to fund any shortfalls in rolling over bond maturities. - Global Macro Monitor


Any “set things right” action on Germany’s part is, one way or another, a form of doubling down.  If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany.  The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.”  That’s a tough call. - Tyler Cowen


Europe doesn't face a liquidity problem. It faces a solvency problem. What investors really want isn't just for someone to buy distressed European debt, but for someone to buy that debt and willingly take a loss on it so the money doesn't ever actually have to be repaid. That isn't going to happen easily. Short of major fiscal improvements in Europe (which appear increasingly hopeless in the face of an oncoming recession) any solution will have to explicitly or implicitly impose losses on someone. In my view, the best "someone" is the investors who willingly made the loans in expectation of earning a spread, and who knowingly took a risk. - John Hussman


For three years from 1986 to 1989 countless financial CEOs, spokespersons, commentators, regulators, lobbyists, journalists, consultants, and hacks warned Mexico would never sell another bond in our natural lives if anything like the structured default of the Brady bond were to occur. Once it occurred, Mexico was back in the market within about nine months. - David Apgar


It is an easy political stance to say, "We should go back to the drachma and lira and peso." It makes for nice, nationalistic demagoguery. But if you start thinking about the consequences, it gets much harder. When you walk to the edge of the abyss and look over, you can't see the bottom. It is a long, long, long way down. - John Mauldin


There is no evidence that fiscal austerity depresses demand and activity to the point that the government deficit actually fails to improve or indeed increases, i.e. there is no empirical evidence whatsoever for the existence of a Keynesian Laffer curve. So fiscal austerity should work, i.e. it will restore fiscal sustainability despite depressing activity and growth, if it is politically possible to stick to it. - Willem Buiter


Greece (and other countries on Europe's periphery) do face years of austerity and cut backs, with very little in the way of real growth (and especially employment growth). What I haven't got clear is how political systems which have been based on cushioning citizens from reductions in their real living standards are going to handle this new reality. - Edward Hugh


On the one hand, there are those who believe that the end justifies the means. If saving the Euro requires the destruction of the notion of money as a common good, so be it. The fact that the Euro is slowly destroying Europe (as was entirely predictable), thus leads our “Keynesians” to recommend measures and actions which have been specifically forbidden in the treaties, the German constitution, or the bylaws of the ECB.  ..........  I also have a lot of sympathy for the German view of questioning why we should sacrifice every rule, and treaty, to uphold a currency that is clearly not working for a number of countries? Must the survival of the Euro in Southern Europe really only occupy every waking hour, of every European policymaker (and investor)? Must it really take precedence over every other institutional framework? In short, is the Euro really the end-all, be-all of European civilization; the altar on which everything else can be sacrificed? Is this really as good as we get? Or are European policymakers only trying to save the Euro (and sacrificing the youth of a number of countries) to avoid having to admit that they made a colossal mistake? - Charles Gave


The question in the end comes always down to whether one wants to take the losses as soon as possible and begin again with a clean slate, or whether one wants to delay the day of reckoning by doing again – and usually on a bigger scale – what has led to the crisis in the first place. The choice is always between short term pain in exchange for long term gain or the avoidance of short term pain in exchange for long term misery. - Pater Tenebrarum


The problem is not a political one but is now an economic one. In other words, French politicians may decide to ignore economics but the rules of economics are not ignoring France and France may well not be able to cling to Germany much longer. - Anatole Kaletsky


 I do not think that anyone in France would suggest that if Germany left the Euro, or if France simply refused the German constraint, the French economic situation would improve. Our problems are of our own making and are not so much related to having the wrong currency, as to having a welfare, and regulatory, state on steroids. - Francois Xavier Chauchat


Haven't we moved past Greece already? Well, no. Based on reported holdings of Greek debt in the European banking system, the implied losses on Greek debt alone are now enough to put many European banks into capital shortage. Europe could solve Italy's issues tomorrow and European banks would still face a banking crisis. - John Hussman


So, why are French banks selling protection on France like it is going out of style? Why are Italian banks doubling down on Italy?  Because if the bailouts work, it is free money.  Huge tightening on top of the spread income until the bailout finally wins.  If the sovereign defaults, is the bank really going to be around anyways? - Peter Tchir


I doubt whether much of the available EFSF resources (whatever they turn out to be) will actually be used to support the sovereigns, directly or indirectly. Rather they will just use enough to allow the ECB to argue that they are acting jointly with the fiscal facility. - Willem Buiter


Ironically, the ECB purchaser-of-last-resort and eurobond alternatives probably would break up the euro zone. The inflationary strains of the former, and the accountability problems of the latter, would never survive the next referendum in a euro zone state. The purpose of the euro is to facilitate trade and commerce – not facilitate government borrowing.   .........   This, then, is the impasse euro zone bond investors have reached. To avoid losses, they clamor for alternatives that could disrupt the currency itself – one of the few things that might actually make them worse off in real terms than they are right now. - David Apgar


Have Europe’s debt crisis and deflationary-bust moved beyond the powers of an ECB’s magic wand? Not that I don’t believe in Santa Claus, or in the ability of central banks to cure every ill, but it seems to me that, should the ECB decide (a day late and a Euro short?) to now intervene in size to prevent the European bond markets from deteriorating further, it would face some very significant hurdles. - Louis-Vincent Gave


An unlimited commitment to monetize the sovereign paper would imply that the ECB has surrendered any ability to control either quantity of reserves in the system or manipulate short-term interest rates. In short, its ability to execute monetary policy will have been abandoned. It would in effect become an off-budget financing arm of a non-existent and at the same time dysfunctional pan-Europe Finance Ministry. - Richard Alford


Let us imagine that, tomorrow, the ECB follows every editorialists’ advice and comes in to mop up a third of Spanish and Italian debt in a bid to get yields fixed at, say 5%. Will our Spanish and Italian bondholders a) jump at the chance to get out of their positions with a smaller loss than forecast? Or b) sit tight and allow themselves to be transformed into junior bond holders? Indeed, the Greek precedent (where basically the ECB insisted on being made whole while the private sector shared in the losses of lending money to the spendthrift Greek government) means that the default assumption of sovereign debt holders should be that a mass intervention of the ECB into their markets will relegate them to the “junior ranks.” And needless to say, most institutions who invest in sovereign bonds are not looking to be junior bond holders. They are looking for absolute safety. So in a perverse way, massive purchases by the ECB may actually highlight that the asset one owns is anything but safe; implying that for an ECB intervention to work, the amounts would likely have to be staggering. This is why I tend to believe that even if the Bundesbank did agree to monetization (which is hardly a foregone conclusion), the window for this to work may now have closed. Instead we should brace ourselves for either defaults, or countries leaving and re-denominating debt in local currencies. - Louis-Vincent Gave

Investors were quite excited last week when central banks announced a coordinated reduction in the interest rate for U.S. dollar swap lines. It's interesting that the more arcane an intervention is, the more excited investors get - maybe because complex-sounding interventions allow Wall Street's imagination to run wild and substitute for actual understanding. - John Hussman

What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consume for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires our scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education). Nietzsche famously said "What does not kill me makes me stronger." The corollary is "What constantly rescues me makes me weaker." The world will only stop looking for bailouts when policy makers stop handing them out. - John Hussman

The amazing thing about the Japanese situation is that Greenspan and Bernanke both made statements that Japan should write down bad debts, but when the US faced the same situation, Bernanke not only did the opposite, but now says that letting Lehman collapse was his biggest mistake. - Mish

The U.S. government doesn’t have enough spare cash to bail out a lemonade stand. - Peter Schiff

I need the money - Pranab Mukherjee (while pushing for FDI in retail)

FDI in retail was permitted up to 1996. Only in 1997 was a formal ban introduced.

So FDI in retail has been put on hold. What a sorry spectacle this has been, and what a shameful figure every political party has cut in the whole fiasco! If the Congress displayed once more how inept it is, its allies exposed themselves yet again as self-serving opportunists, and the BJP proved beyond doubt that as the principal Opposition party, it feels its only duty is to oppose anything that the government may propose. At least, about the Left, you have to say this much: that they consistent in their rabid adherence to long-discredited dogma. But the others?      ...........      Whether our politcians are part of the ruling alliance, support the government from outside, or are in opposition, all of them are plumbing the depths currently, clutching at any excuse for empty bombast that they hope will obscure their utter loss of credibility. And in the process, make a mockery of all parliamentary procedure, decorum and responsibility.     ..........     We live in dark times. And strangely enough, the light at the end of the tunnel is neither the escape route nor the lights of an onrushing train, In fact, there’s no light visible. It’s just the tunnel. - Sandipan Deb

Modern India has a choice. The first, for all its painful bumps, leads toward greater openness, competition and prosperity. The second goes backward and means India will fall further behind China and other Asian upstarts. Which will it be, Prime Minister Singh?     ..........     India’s historical laggard status reflects a longstanding romance with Karl Marx and too little familiarity with Joseph Schumpeter. There’s still an excess of Marx and the German philosopher’s statist solutions in Asia’s No. 3 economy and not enough of Austrian Schumpeter’s creative destruction. - William Pesek

Investors are pulling out money and India is no longer the darling of the investment community. Over the last few years, we’ve quietly ignored policy-makers in the hopes that industrialists would find ways around them; that cannot continue indefinitely. The country cannot sustain such high growth with this government, which is enacting a comedy show for the world to witness. -  Krishna Gupta


The lame-duck Manmohan Singh government may, going forward, become even more lame, and be crippled from taking anything but the most populist policy decisions in the hope that taking the path of least resistance will at least maximise its survival quotient. In every way, the UPA government is a dead man walking. - Venky Vembu

Under the current system, India’s democracy is condemned to be run by the lowest common denominator — hardly a recipe for decisive action. - Shashi Tharoor

Consider India's position in the World Bank Group's Doing Business 2012 rankings. India ranks 132nd overall out of 183 countries as a desirable place to do business, just above Nigeria and just below the West Bank and Gaza. In several individual rankings, India is near the very bottom. For example, for starting a business, India ranks 166th, for obtaining construction permits, India ranks 181st, and with respect to enforcing contracts, India ranks 182nd.  - Daniel Wagner

India is among the four countries—behind Pakistan and Srilanka—in the world where power T&D losses are above 20 per cent. The global average of T&D losses is about 4 per cent. - Samiran Saha

With 3,57,000 employees, BSNL produces Rs 27,044 crore in annual revenues. Bharti Airtel, with just 5 percent of BSNL’s employee strength, had a turnover that was more than twice its size at Rs 59,467 crore. Vodafone, with more than 12 times its revenue globally, has all of 84,000 employees. - R. Jagannathan

The real issue obviously is the fact that politicians don’t like professionals invading their turf – and that is why Nandan Nilekani is being given the thumbs down by the system. - R. Jagannathan

During the Anna Hazare movement, Sibal summoned representatives of the social networks. In a king-and-subjects interaction, he kept them waiting, then kept them standing in his room; gave them a pre-emptive dressing down; and snapped: "I don't want any anti-government stuff on your networks. Fix it." There was no room for discussion.    .........     If Kapil Sibal is to defend himself against the charge of sycophancy, he is on a weak footing. There were many prior potential triggers for tackling social media, including fanatic religious posts, derogatory comments by Pakistan sympathisers, Anna Hazare, and more. That he finally picked a post that targeted Sonia Gandhi suggests that this was not out of serious, objective concern about India's stability, security or secular fabric. - MSN News

The $950bn worth of gold held by Indian households is the equivalent of 50 per cent of the country’s nominal GDP in dollar terms. All those gorgeous necklaces and other extravagances weigh 18,000 tonnes, or 11 per cent of the world’s stock. India imports 92 per cent of its gold, making it the third largest of its merchandise imports behind crude oil and capital goods. Gold made up 9.6 per cent of imports so far for the year ending March 2012 – significantly expanding the current account deficit. - Macquarie Report

The paradox is that as the rupee depreciates, inflation worsens since imported goods cost more in rupee terms. And when inflation worsens, it makes more sense to hold gold to retain the value of your wealth. But as more gold is imported, it skews out trade gap, contributing to the rupee’s weakness. - R. Jagannathan

The great Wall Street re-hypothecation scandal - Christopher Elias/Reuters

European CEOs prepare for Euro break-up - Bloomberg

The Japan endgame - Wolf Richter/Zero Hedge

The facts they don't want you to know - Niels Jensen/Credit Writedowns

India inches closer to crisis - Swati Bhat & Emily Kaiser/Livemint

Is India heading the Eurozone way? - Arjun Parthasarathy/Firstpost

How to ruin the Indian economy: a political primer - Venky Vembu/Firstpost

Mumbai property: Is price correction inevitable? - Pranab Datta/Livemint

Retail FDI: evenly distributed shame - Sandipan Deb/Livemint

Aam bania is more powerful than the aam aadmi - Swaminathan Aiyer/Times of India

Kapil Sibal and the slippery slope to a nanny state - Venky Vembu/Firstpost

Taxing investors to pay NGOs - Ajay Shah

Let's raid the PSU treasuries - Sunil B.S./Livemint