Mish's Global Economic Trend Analysis

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• Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen
• Bernanke Calls Krugman "Reckless"; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space
• Swiss Politician Says "Too Many Germans in Switzerland", Seeks Stronger Immigration Controls; Word of the Day: "Backlash"

Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen Posted: 26 Apr 2012 07:53 PM PDT Why Spanish debt was Rated "A" for as long as it has been remains a mystery. Indeed BBB+ seems like a gift. Nonetheless, expect howls from Europe as Spain Cut by S&P for 2nd Time This Year on Banks, Economy. Spain's sovereign credit rating was cut for the second time this year by Standard & Poor's on concern that the country will have to provide further fiscal support to banks as the economy contracts. S&P lowered the long-term grade to BBB+ from A, with a negative outlook. Spain's short-term rating was reduced to A-2 from A-1, New York-based S&P said in a statement yesterday. "Spain's budget trajectory will likely deteriorate against a background of economic contraction," S&P wrote in the statement yesterday. "At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain's net general govern debt could rise further." "We could also consider a downgrade if political support for the current reform agenda were to wane," the S&P statement said. "Moreover, we could lower the ratings if we see that Spain's external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth." 100% Certain Conditions in Spain Worsen One has to wonder what the S&P is smoking with that last statement. The odds Spain's position worsens is 100% and the odds Spain's competitiveness rises to match productivity in Northern Europe is close to 0%. The article continues ... Spanish banks probably need 50 billion euros of additional capital, Morgan Stanley analysts estimate. The figure may rise to as much as 160 billion euros in a worst-case scenario, said Elaine Lin, a strategist at Morgan Stanley in London. The banks could try to raise the capital themselves or get it from either the Spanish government or the European Financial Stability Facility, she said. How Much? I propose the worst case scenario is likely to soon become the best case scenario. Spain is imploding and nothing can stop it but free money from Germany (not going to happen voluntarily), or a Spanish exit from the Eurozone. The latter is likely, but may not occur until Spain becomes the next Greece. 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.

Bernanke Calls Krugman "Reckless"; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space Posted: 26 Apr 2012 10:20 AM PDT Paul Krugman is now so far into outer space with ridiculous economic proposals that even Helicopter Ben Bernanke recognizes Krugman's proposals as "reckless". Bloomberg reports Bernanke Takes On Krugman's Criticism Ignoring Own Advice Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation "reckless." "The question is, does it make sense to actively seek a higher inflation rate in order to achieve" a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. "The view of the committee is that that would be very reckless." Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke's comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan's consumer prices fell 0.2 percent that year. "While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers," Krugman wrote. "Higher expected inflation would aid an economy" because it would persuade investors and businesses "that sitting on cash is a bad idea," Krugman said. The chairman spoke in response to a reporter's question referring to Krugman's story, titled "Earth to Ben Bernanke," published April 24. The article cited "the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done." Bernanke said pushing the increase in prices above the Fed's 2 percent goal would risk undermining inflation expectations and erode the central bank's credibility as a force for stable prices." "We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we've been able to take strong accommodative actions in the last four, five years," Bernanke told reporters. "To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do." Krugman and Bernanke Both in Outer Space The irony in this bickering is that both Krugman and Bernanke are economic failures. The idea that more inflation will help those mired in debt is preposterous. Japan attempted to halt deflation for 20 years and has nothing to show for it but a mountain of debt. On the other hand, Bernanke brags about "30 years building up credibility" that the Fed simply does not have. The US has seen bubble after bubble, each with increasing amplitude and troughs, so Bernanke has to be on some sort of mind-altering drugs to talk of either credibility or price stability. Perhaps his mind was altered by gamma rays from being in "deep academic space" for so long. Price-wise, Bernanke is correct the US is in a state of inflation, and Japan not. I expect Krugman to counter with housing. If one takes housing into consideration, inflation is well under the Fed's target as I pointed out in How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI CPI Adjusted for Home Price Index (HPI) The Fed kept interest rates at historic lows between 2002 and mid-2004. The last two rate cuts by Alan Greenspan were not justified at all, by any measure, and downright absurd considering the bubble brewing in housing prices vs. rent. Allegedly the Fed held interest rates low to prevent "deflation". Instead it exacerbated "price deflation". Clearly the Fed had no idea what it was doing, and still doesn't, (unless of course you believe this is a Fed conspiracy to deliberately screw the middle class). The result is bubbles and crashes of ever-increasing amplitude as the Fed chases its own tail. New bubbles have formed in the stock market and commodities right now. Outer Space Policies  Bernanke is trying like a madman to get banks to increase lending but Bernanke and Krugman both do not understand economic reality. Banks cannot lend because they are still capital impaired, hiding losses yet to come, and holding assets that are marked-to-fantasy instead of marked-to-market Consumers are busted and holding interest rates at 0% when prices of food and gasoline are soaring exacerbates the problem There are few credit-worthy businesses that want to borrow in this environment  The businesses that do want to borrow are not credit-worthy and banks would be foolish to lend to them Boomers are headed into retirement with too much debt, too little income, too few assets and they need to save not spend.  Real wages (discounting the decline in housing), are hugely negative, and forcing more inflation would be downright idiotic The Fed can inject liquidity but it cannot determine where it goes.  The Fed desperately wants home prices to rise and businesses to borrow, but instead food and energy prices have risen, and there is little hiring. Krugman wants Bernanke to do more of the same even though the same has already proven to be the problem. Academic Wonderland, Somewhere Beyond Pluto Quite frankly all eight points above are common sense ideas. However, neither Bernanke nor Krugman have real world experience. Both come from academic wonderland, well beyond the orbit of Pluto. Clearly neither Krugman nor Bernanke have any solid grasp of the concept of debt-deflation. Neither understands boomer demographics. Neither understands why businesses are not hiring. Neither understands that debt eventually has to be dealt with, and it is the debt itself is the problem. Neither understands that inflation will destroy those without a job. Neither understands (but especially Krugman) that increased inflation will not guarantee more jobs. Finally, I would like to point out that Krugman is totally clueless about the damage that public unions cause. We could get far more roads and bridges repaired, employing far more people for the same price,  while alleviating budget constraints at the same time if only we could get rid of Davis-Bacon and prevailing wage laws and end collective bargaining of public unions. That my friends is the sad state of affairs. 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.

Swiss Politician Says "Too Many Germans in Switzerland", Seeks Stronger Immigration Controls; Word of the Day: "Backlash" Posted: 26 Apr 2012 12:35 AM PDT The European recession is starting to take its toll. Voters everywhere are fed up with austerity, fed up with high unemployment, fed up with immigration, and fed up with politicians currently in power. On May 6, voter backlash will cost French President Nicolas Sarkozy his job. Hollande Sustains Lead Over Sarkozy In Presidential Race-Poll Francois Hollande, the socialist candidate in French elections, is maintaining his lead over incumbent President Nicolas Sarkozy with 12 days to go to the runoff for the French presidency, a poll showed Tuesday. Hollande will take 54% of the vote in the second round and Sarkozy 46%, according to the poll of 1,145 people on the electoral register conducted by Opinionway Monday and Tuesday. The result of the Opinionway poll was unchanged from the previous comparable poll Sunday, when the French chose between 10 candidates in the first round. The Opinionway poll shows 47% of Le Pen voters would switch to Sarkozy and 27% would go for Hollande in the runoff, with 26% abstaining from voting. The poll also shows 41% of those who voted for centrist candidate Francois Bayrou--who took 9.13% of the vote in the first round--plan to vote for Sarkozy and 36% for Hollande. However, Hollande benefits from a clear transfer of votes from far-left candidate Jean-Luc Melenchon, who took 11.1% of the first-round vote and has called for his supporters to vote for Hollande. Hollande would take 91% of Melenchon's voters and Sarkozy only 2%, according to the Opinionway poll. Voters are so disgusted with Sarkozy that less than half of of those voting voting for extreme-right candidate Marine Le Pen plan on voting for center-right president Sarkozy. 53% will abstain or vote for the Socialist Hollande. Backlash Against Eurozone Austerity The Financial Times discusses Backlash Against Eurozone Austerity A political backlash against fiscal austerity left mainstream French and Dutch politicians struggling on Monday to shore up support as a key economic indicator highlighted the eurozone's slide into deeper recession. In the Netherlands, one of the eurozone's most fiscally disciplinarian governments collapsed as Mark Rutte, prime minister, tendered his government's resignation at a meeting with Queen Beatrix, clearing the way for elections. In France, the Socialist Mr Hollande's first-round victory was accompanied by a surge in support for the far-right National Front. Backlash Against Germans Der Speigel Online reports Politician Sparks Uproar with Call to Limit German Workers A Swiss politician has prompted a heated debate after suggesting that there are too many German immigrants in her country. "We really have too many Germans in the country," Natalie Rickli, a member of Switzerland's parliament with the right-wing populist Swiss People's Party (SVP), said during a television talk show on Sunday. The actual topic of discussion on the talk show, broadcast on Zürich local television station TeleZüri, was supposed to be Switzerland's decision last week to curb immigration from eight central and eastern European countries. Last Wednesday, the Swiss cabinet, the Federal Council, announced it had decided to invoke the so-called "safeguard clause" in its agreement with the European Union on the free movement of persons. The move will significantly reduce the number of jobseekers from these countries allowed to enter Switzerland for a one-year period. But that initiative apparently does not go far enough for Rickli. On the talk show, she argued that the safeguard clause should also apply to Germans. Many people shared her view that there were "too many Germans" in Switzerland, she said. The other guests on the show reacted with shock, but Rickli kept going. "The parliament should have already activated the safeguard clause in 2009, when it would have also affected the Germans," she said, adding that Switzerland had a problem with the sheer scale of immigration. She said that she had already received a lot of mail from Swiss people saying that they had lost their jobs because cheaper Germans had been hired instead. Rickli's comments reflect her SVP party's anti-EU and anti-immigration policies. The verbal attack comes at a time of mutual tensions between Germany and Switzerland over a controversial bilateral tax treaty which is aimed at cracking down on wealthy Germans who commit tax evasion by stashing their money in Swiss banks. Bear in mind the Swiss People's Party (SVP) is not a small fringe party. It is the leading political party in Switzerland for 32 years with about 25% of the vote in the last election. So, not only is there a call to limit immigration from eastern European countries, the leading party in Switzerland is fed up with Germans willing to work in Switzerland for cheaper prices than the Swiss. Wasn't one of the reasons behind the creation of the Eurozone to allow freedom of movement as a way to encourage growth? Indeed it was. Switzerland is not the Eurozone, but this really takes the cake. Breakin' Up is Hard to Do Note the increasing trade disputes between France and Spain, Between Southern Europe and Eastern Europe, between Northern Europe and Eastern Europe, between Northern Europe and Southern Europe, and now between Switzerland and Germany. Also note that France and Southern Europe want Eurobonds. Northern Europe does not. Somehow there is supposed to be a fiscal union complete with numerous trade barriers and immigration controls on top eurobond disputes and nannyzone bickering that will not be resolved soon. Indeed, the only way eurobonds are likely to happen at all is if Germany, Finland, the Netherlands, and Austria get fed up enough with France and the Club Med countries and exit the treaty. An extremely painful breakup is coming, but the sooner it happens, the better off Europe will be. 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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