Evergreen Gavekal’s weekly snapshot
From Farce To Irrelevance (Anatole Kaletsky, Evergreen Gavekal)
The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe. The bad news is that Tsipras does not seem to understand this. To judge by Tsipras’ belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe. This is the true “absurdity” in the present negotiations, and Tsipras’ misapprehension of his bargaining power now risks catastrophe for his country, humiliation for his Syriza party, or both.
The most likely outcome is that Tsipras will eat his words and submit to the conditions set by the “troika” (the European Commission, European Central Bank (ECB), and the International Monetary Fund) before the end of June. If not, the ECB will stop supporting the Greek banking system, and the government will run out of money to service foreign debts and, more dramatically, to pay Greek citizens their pensions and wages.
Cut off from all external finance, Greece will become an economic pariah—the Argentina of Europe—and public pressure will presumably oust Syriza from power. This outcome is all the more tragic, given that the analysis underlying Syriza’s demand for an easing of austerity was broadly right. Instead of seeking a face-saving compromise on softening the troika program, Tsipras wasted six months on symbolic battles over economically irrelevant issues such as labor laws, privatizations, even the name of the troika. This provocative behavior lost Greece potential allies in France and Italy. Worse still, the time wasted on political grandstanding destroyed the primary budget surplus, which was Tsipras’ trump card in the early negotiations.
Now Tsipras thinks he holds another trump card: Europe’s fear of a Greek default. But this is a delusion promoted by his finance minister, Yanis Varoufakis. A professor of game theory, Varoufakis recently boasted that “little Greece, in order to survive, [could] bring down the financial world.” Apparently, Varoufakis believes that his “sophisticated grasp of game theory” gives Greece an advantage in “the complicated dynamics” of the negotiations. In fact, the game being played out in Europe is less like chess than like tic-tac-toe, where a draw is the normal outcome, but a wrong move means certain defeat.
The rules of this game are much simpler than Varoufakis expected because of a momentous event that occurred in the same week as the Greek election. On January 22, the ECB took decisive action to protect the eurozone from a possible Greek default. By announcing a huge program of bond purchases, much bigger relative to the eurozone bond market than the quantitative easing implemented in the United States, Britain, or Japan, ECB President Mario Draghi erected the impenetrable firewall that had long been needed to protect the monetary union from a Lehman-style financial meltdown.
The ECB’s newfound ability to print money, essentially without limit, to support both banks and governments has reduced Greek contagion to insignificance. That represents a profound change in Europe’s financial environment, which Greek politicians, along with many economic analysts, still fail to understand.
Before the ECB’s decision, contagion from Greece was a genuine threat. If the Greek government defaulted or tried to abandon the euro, Greece’s banks would collapse, and Greeks who failed to get their money out of the country would lose their savings, as occurred in Cyprus in 2013. When savers in other indebted euro countries such as Portugal and Spain observed this, they would fear similar losses and move their money to banks in Germany or Austria, as well as sell their holdings of Portuguese or Spanish government bonds.
As a result, the debtor countries’ bond prices would collapse, interest rates would soar, and banks would be threatened with collapse. If the contagion from Greece intensified, the next-weakest country, probably Portugal, would find itself unable to support its banking system or pay its debts. In extremis, it would abandon the euro, following the Greek example. Before January, this sequence of events was quite likely, but the ECB’s bond-buying program put a firebreak at each point of
the contagion process. If holders of Portuguese bonds are alarmed by a future Greek default, the ECB will simply increase its bond buying; with no limit to its buying power, it will easily overwhelm any selling pressure.
If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits. Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent— which they will, so long as the ECB continues to buy Portuguese government bonds.
In short, the ECB bond-buying program has transformed the ECB from a passive observer of the euro crisis, paralyzed by the outdated legalistic constraints of the Maastricht Treaty, into a proper lender of last resort. With powers to monetize government debts similar to those exercised by the US Federal Reserve, the Bank of Japan, and the Bank of England, the ECB can now guarantee the eurozone against financial contagion.
Unfortunately for Greece, this has been lost on the Tsipras government. Greek politicians who still see the threat of financial contagion as their trump card should note the coincidence of the Greek election and the ECB’s bond-buying program and draw the obvious conclusion. The ECB’s new policy was designed to protect the euro from the consequences of a Greek exit or default.
The latest Greek negotiating strategy is to demand a ransom to desist threatening suicide. Such blackmail might work for a suicide bomber. But Greece is just holding a gun to its own head—and Europe does not need to care very much if it pulls the trigger.
This article was published on www.project-syndicate.org on June 11 and will appear in 50 newspapers around the world next week.
Andrew Smithers: Interest rates, secular stagnation and secular decline
(…) the chart also shows that the trend since 1980 or 1990 seems to be a rising rather than a falling one. It doesn’t therefore seem to me reasonable to assume that the world is about to experience of the sort of longer -term slowdown that can reasonably be described as secular stagnation, though of course this may happen. (…)
It is, however, sadly likely that the developed world is experiencing a secular decline in its growth as shown in chart two. The falling trend is common to all G5 countries and is driven by both demography and poor productivity. (…)
Even though it seems quite likely that growth will slow in the emerging economies, this will not necessarily slow the rate at which the world’s economy expands, because emerging economies are still growing rapidly and are becoming an ever more important constituent of the total increase in world output. (…)
In practice, however, experience suggests that growth either in US or world terms will have little if any impact on US real interest rates. As I illustrate in chart five, there has been no apparent relationship between US real T-bills returns and the growth of world GDP per head, nor in terms of the growth of the world measured in total GDP.
In practice it seems probable that US real interest rates will be determined by the Fed’s attempts to contain inflation. The weaker the monetary policy, the greater the risk that inflation, and expectations for it, will increase and the more real interest rates will then have to rise. A prolonged period of sustained low interest rates is thus more likely if the Fed increases interest rates soon. (…)
What Happens When an Ex-Google Executive Creates a School System? Max Ventilla used to run a team that personalized your search results—now he wants to do the same for kids’ education.
“It’s a spectacle of excess at the highest level”, quoted an art consultant to the N.Y. Times. Perhaps it was. Christie’s, even not counting its archrival Sotheby’s, had bagged $1 billion in sales during its May auction week – rivaling even the frenzied bidding for Manhattan high rise condos. As with high flying stocks, the logic was that the money had to go somewhere and why not a wall instead of a monthly portfolio statement.
I’ve never been much of an art aficionado myself, having settled for framing some All American Rockwells neatly clipped from old Saturday Evening Post covers. There was a time though when a well-publicized Rockwell came to auction and Sue and I expressed some interest. Ever since, we’ve been on the art house’s mailing lists and I must admit, it’s fun to browse through the Picassos, Rothkos, and whatever else currently frenzies modern collectors. I’m no expert though, and if I begin to pretend that I am, Sue puts me in my place because she’s the artist in the family. She likes to paint replicas of some of the famous pieces, using an overhead projector to copy the outlines and then just sort of fill in the spaces. “Why spend $20 million?” she’d say – “I can paint that one for $75”, and I must admit that one fabulous Picasso with signature “Sue”, heads the fireplace mantle in our bedroom.
My own artistic skills are severely limited – I even suspect I am missing the entire right half of my brain which drives fine motor skills and the ability to draw. Because of the auction catalogues we get in the mail though, I have determined that I am not unique in this regard – even famous artists it seems are lacking the right side of their brains. One of those is Yves Klein to which (1928-1962) follows his title on two spectacular pieces listed in a Christie’s twentieth century art sales catalogue. The “1962” points out I guess that he’s dead which is too bad, because it makes it harder to compare “right brain” notes with him. Still, the similarity is obvious because this guy painted like I draw self-portraits, and he got paid for it too. I present to you the first of his two images for your perusal and careful discrimination:
This “tour de farce” was titled “IKB” and consisted of “pigment and synthetic resin laid down on panel”, as Christie’s described it. All blue. It was 8×7 inches, which is important in the art world but which in this case might otherwise be described as a tad “puny”. Nevertheless, it sold for $35,000 because I assume Mr. Klein’s blues were the bluest of all possible blues – creativity and right side brain nevertheless lacking.
As further proof of his brain’s black hole, I present for you another of Mr. Klein’s creations; the better known (17×14) piece entitled “IKB 121”, priced at $150,000 no less:
Well, if that’s not the clincher. This guy was truly a painter extraordinaire. Mr. Klein as it turns out, called himself “Yves le monochrome”, and I can surely see why. When you’ve got a niche, exploit it, Yves must have figured. I can’t speak French very well, but I recently tried to reach my kindred half brain spirit in a séance-like half dream. I addressed him as Mr. Blue out of respect. “Mr. Bleu, Mon Ami”, I said “where, oh where in the art world is my niche?” The following was his suggestion that I now lay before you for critical acclaim:
What I should have expected, I suppose. But as his ghostly voice faded out of my brain’s right side, I heard him say – “I got a monopoly on the blue, kid. Why don’t you try red.” Half brain. Some kindred spirit he was. (…)