Notes From Underground: Devil With The Blue Suit On

In his regular Monday Financial Times column, Wolfgang Munchau takes full aim at Bundesbank President Jens Weidmann for trying to make ECB President Draghi the devil incarnate. Because Weidmann invoked the Faustian character, Mephistopheles, from German hero Goethe’s play Dr. Faustus, Munchau accuses the Bundesbank President of undermining the policies of the ECB. Weidmann is going directly to the German public to plead his case that the ECB is taking the EU down the road of inflationary hell and monetary debasement. Munchau takes up the Draghi/Bernanke/Woodford argument that “the debate about nominal income targeting, where a central bank no longer stabilizes the inflation rate directly but focuses instead on stabilizing NOMINAL GDP (emphasis mine).” Munchau assumes that the central banks would be vigilante in controlling inflation but offers no view about what happens if NGDP rises with a significant rise in inflation but unemployment has not met the desired target.

In the U.K., which has inflation targeting, Mervyn King merely write a letter to the exchequer to explain why the inflation target was missed for two consecutive years–so ultimately the targets are not hardened but subject to much discretion on the part of policy makers. Munchau attacks Weidmann by saying that he is “sabotaging the euro through the most effective means he has at his disposal–by reinforcing people’s fears about the common currency.” It seems that Weidmann is the devil in Munchau’s “drama” because he has the audacity to believe that the Bavarian Burghers ought to have a say in how their euros are spent. It is the same view of another German economic giant, Otmar Issing, who wrote two months ago that to do otherwise is “taxation without representation.”

The German High Court invoked the need for the Bundestag to be an arbiter of how much liability the German people carried in any type of ECB/ESM bailout. Mr. Weidmann wants to make sure that the German public is informed about the intentions of Eurocrats with German wealth. Munchau adds that Weidmann’s approach reminds him of the political debate in Britain that turned the public anti-EU. Yes Wolfgang, we all know what a terrible decision that was for the U.K.

***Today in Washington, Christine Lagarde spoke at the Peterson Institute for International Finance. In a Bloomberg article by Sandrine Rastello, it was reported that the IMF Managing Director acknowledged a “financing gap  has emerged [in Greece] because of the macroeconomic situation, the major delay in privatization and the shortfall in proceeds form privatization, as well as ‘limited revenue collection.'” Lagarde thus acknowledges that an adverse feedback loop is wreaking havoc on the Greek economy and causing all the conditions accepted by the Greek government to fall short of troika demands for the bailout. Director Lagarde indicated that the IMF would not provide any additional funding for Greece and whatever shortfalls exist will have to be provided by the EU.

However, “The IMF has recommended slowing the pace of fiscal adjustment for Portugal and Spain.” I interpret this as the IMF will take on greater responsibility for Spain and Portugal and other peripherals while it leaves responsibility for Greece for Brussels. This is a nice sleight of hand for as Tim Geithner would say, “MONEY IS FUNGIBLE.” So instead Spain and Portugal will receive  some IMF funding, freeing the EU to provide Greece with some type of forbearance. This follows a weekend speech by the French Finance Minister and Prime Minister both suggesting that Greece should be provided with more time to meets its conditions of the bailout. IMF money will play an immediate role in soothing the German angst over the extent of its liabilities. Mix politics with economic desires and stir aggressively and wait for the volatility.

****Some of that political uncertainty is rising to the top as Catalonia has forwarded the idea of seceding from Spain. This is just noise at this time but it represents the havoc that “conditional austerity” can play on domestic politics. As the Spanish budget is embracing austerity to assure a bailout from the ESM, the regional governments are feeling the pain, not only financially but politically as Madrid tightens the reins on what have been relatively independent regions since the fall of Franco. These are the unforseen elements that economic models cannot anticipate. Yes, 2+2=5.

Will be off for the next few days so enjoy month end and stay clear of month-end, quarter-end maneuverings by the elephants at the waterhole. For all those imbibing in Yom Kippur, have an easy fast and all that entails.

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3 Responses to “Notes From Underground: Devil With The Blue Suit On”

  1. charles reeder Says:

    L’shana tova

  2. Marty Liebman Says:

    Thanks for all of your insights.
    A Happy and Healthy New Year to you and your family.

  3. jeff waldman Says:

    Wishing all the best in the coming year.

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