Mish's Global Economic Trend Analysis

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ECB's "One Size Fits Germany" Policy; Portugal 10-Yr Debt at Record Yield; Greece, Ireland Near Highs; 3 Hikes by Year End? Rate Hikes to Stress PIIGS Posted: 08 Mar 2011 10:21 AM PST ECB president Jean-Claude Trichet uses the word "vigilance" as a market signal he is going to hike. Trichet has used that word a couple of times recently. Today, outgoing German Central Bank president Axel Weber expressed agreement with Trichet regarding "vigilance", going so far as to say he would not correct the market's expectation of 3 hikes by year-end. Please consider Axel Weber: Markets have understood ECB correctly Markets have understood the European Central Bank's policy signals, ECB policymaker Axel Weber said on Tuesday, adding he did not want to correct expectations for rates to be at 1.75 percent by year's end. "I think President Trichet said the right thing: it's possible but not on auto-pilot," Weber told reporters when asked if a rate hike should be expected in April or May. "I think markets have understood this kind of language, which is a bit stylized, in the past very well. And I think they've got it this time." Asked if he was comfortable with market expectations that ECB rates will rise from their current record low of 1 percent to 1.75 percent by year's end, Weber replied: "I wouldn't do anything to try to correct market expectations at this point." One Size Does Not Fit All Pray tell what inflation is the ECB worried about? One cannot find it in Greece, Spain, Ireland, or Portugal, where various austerity measures have reduced both jobs and wages. Here's a better question: Where was the ECB when credit was exploding in Spain and Ireland, fueling enormous property bubbles? Nowhere is where. Inflation in Germany was close to 0%. One Size Fits Germany It was in the best interest of Germany to ignore reckless credit expansion elsewhere. Now, because gasoline prices are soaring in the wake of a crisis in Libya and the Mid-East, Trichet wants to be vigilant. Here's the deal. This has nothing to do with the price of oil or the price of anything else. Trichet is using the price of oil as an excuse to do what he wants to do, and that is hike. Why does he want to hike? Because recent wage negotiations in Germany have headed much higher as noted by Factbox. Public Sector 3 Percent Chemical Industry 7 Percent German Construction Unions 5.9 Percent Wages have collapsed in Ireland and Greece, and are lower in Spain and Portugal. However, Germany and France call the shots because they have the largest economies. Those rate hikes will increase the already significant stress in the rest of the Eurozone. 10-Year Yield Greece: 12.331% 10-Year Yield Ireland: 9.416% 10-Year Yield Portugal: 7.558% 10-Year Yield Spain: 5.381% 10-Year Yield Italy: 4.893% 10-Year Yield Belgium: 4.279% 10-Year Yield France: 3.623% 10-Year Yield Germany: 3.273% Sovereign Debt Spread to Germany Jan 2010-Mar 8 2011 Country Jan 01 May 07 Dec 30 Mar 08 Belgium 0.3% 0.7% 1.0% 1.01% France 0.2% 0.4% 0.4% 0.35% Greece 2.4% 9.7% 9.5% 9.06% Ireland 1.4% 3.1% 6.0% 6.14% Italy 0.3% 1.5% 1.8% 1.62% Portugal 0.7% 3.5% 3.6% 4.29% Spain 0.6% 1.6% 2.5% 2.11% Portuguese, Irish, and Greek sovereign debt yields are at or near record highs as are yields relative to Germany. Moreover, the ECB's "One Size Fits Germany" policy is not going to help those countries any. The ECB ignored rampant inflation in Spain and Ireland, and other problems elsewhere because it suited the interests of Germany and France at the time. Now the ECB is ignoring rampant deflation in those same countries because it suits the interest of Germany and France. The ECB is not concerned with such matters or what countries it wrecks. It is just concerned that Ireland, Greece, and Spain pay back debt owed to German and French banks. Here is the key question: How long can the other countries survive in a one size fits Germany setup? For more on the mess in Europe including a look at gasoline prices please see Goldman's Blood-Sucking Leeches Model, Money Multipliers, Macroeconomic Dark Ages, the Taylor Rule, and Nonsense from Trichet Record Gasoline Prices in Europe, Over $8 in UK, Italy, Germany; California Faces $4; Reflections on "Inflation" Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Kansas Bill Seeks to Outsource Government Jobs Posted: 07 Mar 2011 11:19 PM PST A bill in Kansas establishes a commission to study ways to outsource government jobs to private sector jobs or to non-profit organizations. The bill passed, the house. If it passes the senate, governor Sam Brownback will likely sign it. Please consider Kansas bill encourages outsourcing of government jobs. After a lengthy floor debate, the House passed a bill Friday establishing an 11-member commission to study ways to outsource public jobs to private-sector companies and nonprofit groups. The group would be called the Kansas Advisory Council on Privatization and Public-Private Partnerships. According to House Bill 2194, the council's main responsibility would be to "review and evaluate the possibility of outsourcing goods or services provided by a state agency to a private business or not-for-profit organization that is able to provide the same type of good or service, and whether such action would result in cost savings to the state." The council would also identify areas where government services compete with private business, "to determine ways to eliminate such competition." One possible concern is this bill will simply produce another stack of paper that no one will act on. However, the cost of the study is not much, and the goal of eliminating every possible government job is sound. Let's hope the study comes up with some rock solid proposals that are enacted. I assure you there is fertile ground. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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