A long time reader of the BLOG (hat tip, SM) called and posed an interesting question about the 25% unemployment rate to which the markets seem to continually refer. The reader has a friend whose son is living in Spain and maintains that the unemployment situation in Spain is not nearly as bad as economists say because of the large underground labor pool. While I do not doubt that many people work in the “shadows” so as to avoid the TAX MAN, it seems that Spanish authorities would want to be very open about the positive impact of the underground economy on its citizens purchasing power. If the underground economy is so large in Spain, statisticians should be able to account for it and thus reduce the nation’s overall unemployment situation.
When a country is on the brink of insolvency and the market is nervous about its debt wouldn’t the policy makers want the economic situation to appear healthier rather than weaker? If the underground economy is responsible for 10% of GDP then there ought to be some compensation for the employment data. A nation under severe stress would be better off “fudging the data” to the downside, not the upside. I know that this issue regularly gets discussed but I am going to keep leaning to the higher number and leave the underground labor force for others to analyze. In a further question that arises off Bloomberg headlines: “IMF says Spain Yields Should Be Lower.” Really, if that is the case then the IMF should utilize its large assets–especially its GOLD RESERVES–and do a swap with investors looking to dump Spanish bonds. How is it that the IMF knows the value of what Spanish bonds ought to be?
The IMF revisits the initial Draghi/Schaeuble accord, in that the ECB’s mandate subsumes the job of determining when markets have “mispriced” the value of bonds and it is the ECB’s obligation to intervene to set the appropriate price in the market. This thought process seemed to have seeped into the mindset of the IMF. In reference to the Draghi/Schaueble accord, economist Richard Koo recently raised a very interesting question: If the ECB is doing Outright Monetary Transactions (OMT, or, QE by another name) to correct market mispricing and that is within its self defined mandate, why does there need to be conditionality placed upon any government asking for the ECB to purchase its debt? This is a very important issue that we need to continue monitoring.
***Tomorrow brings three central bank announcements. First, at 6:00 a.m. CST the Bank of England will tell us its monetary policy will be unchanged with an overnight rate of 0.50% and leave its asset purchasing fund at 375 billion pounds. Secondly, at 6:45 a.m. the European Central Bank will provide us with a clue to its next step in easing the problem of rising rates in the peripheries. The present ECB rate is 0.75% and the consensus is for no change. Whether the ECB lowers its official rate is of no consequence for at this time the DECEMBER 2102 EURIBOR futures contract is trading at 0.9981, which translates to a market-created rate of 19 basis points, well below the present official rate.
Later in the night we will hear from the Bank of Japan, which may prove to be the most interesting of all. There is a great deal of political pressure in Japan to try to get the strong YEN lower. The Japanese economy is struggling under a strong YEN in a slowing global economy. It is the Ministry of Finance in Japan that has power over the value of the YEN but the BOJ has recently shown it is aware of the building political pressure as it moved to increase its QE program by buying more JGBs. It thus may well be that the Japanese provide the greatest fireworks with some announced enhancement to its current programs.
***Quick aside: The Aussie yield curve flattened to 55 basis points today reflecting that the RBA is chasing the curve and not leading. The yield curves in the rest of the developed world have continued to hold within their recent ranges as Spain remains at 264 basis points, Italy remains at 287 basis points and Ireland at 336 basis points. So the Draghi programs are still holding and show the initial actions of Mario Draghi and the ECB to be a short-term success as the two-year debt levels have remained well contained. The yield curves will continue to be a guide as to when new stresses are rising in the EUROZONE.