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Germany’s Choice

By   Peter Zeihan and Marko Papic

Seventeen   months ago, STRATFOR described how the future of Europe was bound to the   decision-making processes in Germany. Throughout the post-World War II era,   other European countries treated Germany as a feeding trough, bleeding the   country for resources (primarily financial) in order to smooth over the   rougher portions of their systems. Considering the carnage wrought in World   War II, most Europeans — and even many Germans — considered this perfectly   reasonable right up to the current decade. Germany dutifully followed the   orders of the others, most notably the French, and wrote check after check to   underwrite European solidarity.

However,   with the end of the Cold War and German reunification, the Germans began to stand up for themselves once   again. Europe’s contemporary financial crisis can be as   complicated as one wants to make it, but strip away all the talk of bonds,   defaults and credit-default swaps and the core of the matter consists of   these three points:

  • Europe cannot function as a unified entity unless someone is in control.
  • At present, Germany is the only country with a large enough economy and        population to achieve that control.
  • Being in control comes with a cost: It requires deep and ongoing financial        support for the European Union’s weaker members.

What happened since STRATFOR published Germany’s Choice was   a debate within Germany about how central the European Union was to German   interests and how much the Germans were willing to pay to keep it intact.   With their July 22 approval of a new bailout mechanism — from which the   Greeks immediately received another 109 billion euros ($155 billion) — the   Germans made clear their answers to those questions, and with that decision,   Europe enters a new era.

The   Origins of the Eurozone

The foundations of the European Union were laid in the early post-World War II   years, but the critical event happened in 1992 with the signing of the   Maastricht Treaty on Monetary Union. In that treaty, the Europeans committed   themselves to a common currency and monetary system while scrupulously   maintaining national control of fiscal policy, finance and banking. They  would share capital but not banks, interest rates but not tax policy. They would also share a currency but none of the political mechanisms required to manage an economy. One of the many inevitable consequences of this was that   governments and investors alike assumed that Germany’s support for the new   common currency was total, that the Germans would back any government that   participated fully in Maastricht. As a result, the ability of weaker eurozone   members to borrow was drastically improved. In Greece in particular, the rate   on government bonds dropped from an 18 percentage-point premium over German bonds to less than 1 percentage point in less than a decade. To put that into context, borrowers of $200,000 mortgages would see their monthly payments drop by $2,500.

Faced with unprecedentedly low capital costs, parts of Europe that had not been   economically dynamic in centuries — in some cases, millennia — sprang to   life. Ireland, Greece, Iberia and southern Italy all experienced the  strongest growth they had known in generations. But they were not borrowing money generated locally — they were not even borrowing against their own income potential. Such borrowing was not simply a government affair. Local banks that normally faced steep financing costs could now access capital as if they were headquartered in Frankfurt and servicing Germans. The cheap   credit flooded every corner of the eurozone. It was a subprime mortgage frenzy on a multinational scale, and the party couldn’t last forever. The 2008 global financial crisis forced a reckoning all over the world, and in the traditionally poorer parts of Europe the process unearthed the political-financial disconnects of Maastricht.

The investment community has been driving the issue ever since. Once investors  perceived that there was no direct link between the German government and   Greek debt, they started to again think of Greece on its own merits. The rate charged for Greece to borrow started creeping up again, breaking 16 percent at  its height. To extend the mortgage comparison, the Greek “house”  now cost an extra $2,000 a month to maintain compared to the mid-2000s. A  default was not just inevitable but imminent, and all eyes turned to the Germans.

A   Temporary Solution

It  is easy to see why the Germans did not simply immediately write a check.   Doing that for the Greeks (and others) would have merely sent more money into   the same system that generated the crisis in the first place. That said, the Germans couldn’t simply let the Greeks sink. Despite its flaws, the system that currently manages Europe has granted Germany economic wealth of global reach without costing a single German life. Given the horrors of World War II, this was not something to be breezily discarded. No country in Europe has benefited more from the eurozone than Germany. For the German elite, the   eurozone was an easy means of making Germany matter on a global stage without   the sort of military revitalization that would have spawned panic across   Europe and the former Soviet Union. And it also made the Germans rich.

But this was not obvious to the average German voter. From this voter’s point of view, Germany had already picked up the tab for Europe three times: first in paying for European institutions throughout the history of the union, second in paying for all of   the costs of German reunification and third in accepting a mismatched  deutschemark-euro conversion rate when the euro was launched while most other  EU states hardwired in a currency advantage. To compensate for those sacrifices, the Germans have been forced to partially dismantle their  much-loved welfare state while the Greeks (and others) have taken advantage of German credit to expand theirs.

Germany’s choice was not a pleasant one: Either let the structures of the past two   generations fall apart and write off the possibility of Europe becoming a   great power or salvage the eurozone by underwriting 2 trillion euros of debt issued by eurozone governments every year.

Beset with such a weighty decision, the Germans dealt with the immediate Greek   problem of early 2010 by dithering. Even the bailout fund known as the European Financial Security   Facility (EFSF) was at best a temporary patch. The German   leadership had to balance messages and plans while they decided what they really wanted. That meant reassuring the other eurozone states that Berlin still cared while assuaging investor fears and pandering to a large and angry anti-bailout constituency at home. With so many audiences to speak to, it is not at all surprising that Berlin chose a  solution that was sub-optimal throughout the crisis.

That   sub-optimal solution is the EFSF, a bailout mechanism whose bonds enjoyed full government guarantees from the healthy eurozone states, most notably Germany. Because of those guarantees, the EFSF was able to raise funds on the bond market and then funnel that capital to the distressed states in exchange for austerity programs. Unlike previous EU institutions (which the Germans strongly influence), the EFSF takes its orders from the Germans. The mechanism is not enshrined in EU treaties; it is instead a private bank, the   director of which is German. The EFSF worked as a patch but eventually proved   insufficient. All the EFSF bailouts did was buy a little time until investors   could do the math and realize that even with bailouts the distressed states would never be able to grow out of their mountains of debt. These states had engorged themselves on cheap credit so much during the euro’s first decade that even 273 billion euros of bailouts was insufficient. This issue came to a boil over the past few weeks in Greece. Faced with the futility of yet   another stopgap solution to the eurozone’s financial woes, the Germans finally made a tough decision.

The New EFSF

The result was an EFSF redesign. Under the new system the distressed states can now access — with German permission — all the capital they need from the fund  without having to go back repeatedly to the EU Council of Ministers. The maturity on all such EFSF credit has been increased from 7.5 years to as much  as 40 years, while the cost of that credit has been slashed to whatever the market charges the EFSF itself to raise it (right now that’s about 3.5   percent, far lower than what the peripheral — and even some not-so-peripheral   — countries could access on the international bond markets). All outstanding   debts, including the previous EFSF programs, can be reworked under the new   rules. The EFSF has been granted the ability to participate directly in the   bond market by buying the government debt of states that cannot find anyone   else interested, or even act pre-emptively should future crises threaten,   without needing to first negotiate a bailout program. The EFSF can even extend credit to states that were considering internal bailouts of their banking   systems. It is a massive debt consolidation program for both private and   public sectors. In order to get the money, distressed states merely have to do whatever Germany — the manager of the fund — wants. The decision-making   occurs within the fund, not at the EU institutional level.

In   practical terms, these changes cause two major things to happen. First, they   essentially remove any potential cap on the amount of money that the EFSF can   raise, eliminating concerns that the fund is insufficiently stocked.   Technically, the fund is still operating with a 440 billion-euro ceiling, but   now that the Germans have fully committed themselves, that number is a mere   technicality (it was German reticence before that kept the EFSF’s funding   limit so “low”).

Second,   all of the distressed states’ outstanding bonds will be refinanced at lower   rates over longer maturities, so there will no longer be very many   “Greek” or “Portuguese” bonds. Under the EFSF all of this   debt will in essence be a sort of “eurobond,” a new class of bond   in Europe upon which the weak states utterly depend and which the Germans   utterly control. For states that experience problems, almost all of their   financial existence will now be wrapped up in the EFSF structure. Accepting   EFSF assistance means accepting a surrender of financial autonomy to the German commanders of the EFSF. For now, that means accepting German-designed  austerity programs, but there is nothing that forces the Germans to limit their  conditions to the purely financial/fiscal.

For all practical purposes, the next chapter of history has now opened in Europe.   Regardless of intentions, Germany has just experienced an important   development in its ability to influence fellow EU member states —   particularly those experiencing financial troubles. It can now easily usurp   huge amounts of national sovereignty. Rather than constraining Germany’s   geopolitical potential, the European Union now enhances it; Germany is on the verge of once again becoming a great power. This hardly means that a   regeneration of the Wehrmacht is imminent, but Germany’s re-emergence does   force a radical rethinking of the European and Eurasian architectures.

Reactions   to the New Europe

Every   state will react to this new world differently. The French are both thrilled   and terrified — thrilled that the Germans have finally agreed to commit the   resources required to make the European Union work and terrified that Berlin   has found a way to do it that preserves German control of those resources.   The French realize that they are losing control of Europe, and fast. France   designed the European Union to explicitly contain German power so it could   never be harmed again while harnessing that power to fuel a French rise to   greatness. The French nightmare scenario of an unrestrained Germany is now   possible.

The   British are feeling extremely thoughtful. They have always been the outsiders   in the European Union, joining primarily so that they can put up obstacles   from time to time. With the Germans now asserting financial control outside   of EU structures, the all-important British veto is now largely useless. Just   as the Germans are in need of a national debate about their role in the   world, the British are in need of a national debate about their role in   Europe. The Europe that was a cage for Germany is no more, which means that   the United Kingdom is now a member of a different sort of organization that   may or may not serve its purposes.

The   Russians are feeling opportunistic. They have always been distrustful of the   European Union, since it, like NATO, is an organization formed in part to   keep them out. In recent years the union has farmed out its foreign policy to   whatever state was most affected by the issue in question, and in many cases these   states has been former Soviet satellites in Central Europe, all of which have   an ax to grind. With Germany rising to leadership, the Russians have just one   decision-maker to deal with. Between Germany’s need for natural gas and   Russia’s ample export capacity, a German-Russian partnership is blooming. It   is not that the Russians are unconcerned about the possibilities of strong   German power — the memories of the Great Patriotic War burn far too hot and   bright for that — but now there is a belt of 12 countries between the two   powers. The Russo-German bilateral relationship will not be perfect, but   there is another chapter of history to be written before the Germans and   Russians need to worry seriously about each other.

Those   12 countries are trapped between rising German and consolidating Russian   power. For all practical purposes, Belarus, Ukraine and Moldova have already   been reintegrated into the Russian sphere. Estonia, Latvia, Lithuania,   Poland, the Czech Republic, Slovakia, Hungary, Romania and Bulgaria are   finding themselves under ever-stronger German influence but are fighting to   retain their independence. As much as the nine distrust the Russians and   Germans, however, they have no alternative at present.

The   obvious solution for these “Intermarium” states — as well as for   the French — is sponsorship by the United States. But the Americans are   distracted and contemplating a new period of isolationism, forcing the nine   to consider other, less palatable, options. These include everything from a   local Intermarium alliance that would be questionable at best to picking   either the Russians or Germans and suing for terms. France’s nightmare   scenario is on the horizon, but for these nine states — which labored under   the Soviet lash only 22 years ago — it is front and center.

source:http://www.financialsense.com/contributors/john-mauldin/2011/07/28/germany-choice-part-2

The Lesser Depression

By

Fred R. Conrad/The New York Times

These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets

We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.

In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.

Let’s talk for a moment about why our economies are (still) so depressed.

The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.

Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.

Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.

So we have depressed economies. What are policy makers proposing to do about it? Less than nothing.

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.

Yet the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe.

On Thursday, the “heads of state or government of the euro area and the E.U. institutions” — that mouthful tells you, all by itself, how messy European governance has become — issued their big statement. It wasn’t reassuring.

For one thing, it’s hard to believe that the Rube Goldberg financial engineering the statement proposes can really resolve the Greek crisis, let alone the wider European crisis.

But, even if it does, then what? The statement calls for sharp deficit reductions “in all countries except those under a programme” to take place “by 2013 at the latest.” Since those countries “under a programme” are being forced into drastic fiscal austerity, this amounts to a plan to have all of Europe slash spending at the same time. And there is nothing in the European data suggesting that the private sector will be ready to take up the slack in less than two years.

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

Did I mention that the European Central Bank — although not, thankfully, the Federal Reserve — seems determined to make things even worse by raising interest rates?

There’s an old quotation, attributed to various people, that always comes to mind when I look at public policy: “You do not know, my son, with how little wisdom the world is governed.” Now that lack of wisdom is on full display, as policy elites on both sides of the Atlantic bungle the response to economic trauma, ignoring all the lessons of history. And the Lesser Depression goes on.

19 Facts About The Deindustrialization Of America

Flag of the United States in the Moon Light 月光...

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19 Facts About The Deindustrialization Of America That Will Blow Your Mind

The United States is rapidly becoming the very first “post-industrial” nation on the globe.  All great economic empires eventually become fat and lazy and squander the great wealth that their forefathers have left them, but the pace at which America is accomplishing this is absolutely amazing.  It was America that was at the forefront of the industrial revolution.  It was America that showed the world how to mass produce everything from automobiles to televisions to airplanes.  It was the great American manufacturing base that crushed Germany and Japan in World War II.  But now we are witnessing the deindustrialization of America.  Tens of thousands of factories have left the United States in the past decade alone.  Millions upon millions of manufacturing jobs have been lost in the same time period.  The United States has become a nation that consumes everything in sight and yet produces increasingly little.  Do you know what our biggest export is today?  Waste paper.  Yes, trash is the number one thing that we ship out to the rest of the world as we voraciously blow our money on whatever the rest of the world wants to sell to us.  The United States has become bloated and spoiled and our economy is now  just a shadow of what it once was.  Once upon a time America could literally outproduce the rest of the world combined.  Today that is no longer true, but Americans sure do consume more than anyone else in the world.  If the deindustrialization of America continues at this current pace, what possible kind of a future are we going to be leaving to our children?

Any great nation throughout history has been great at making things.  So if the United States continues to allow its manufacturing base to erode at a staggering pace how in the world can the U.S. continue to consider itself to be a great nation?  We have created the biggest debt bubble in the history of the world in an effort to maintain a very high standard of living, but the current state of affairs is not anywhere close to sustainable.  Every single month America does into more debt and every single month America gets poorer.

So what happens when the debt bubble pops?

The deindustrialization of the United States should be a top concern for every man, woman and child in the country.  But sadly, most Americans do not have any idea what is going on around them.

For people like that, take this article and print it out and hand it to them.  Perhaps what they will read below will shock them badly enough to awaken them from their slumber.   

The following are 19 facts about the deindustrialization of America that will blow your mind….

#1 The United States has lost approximately 42,400 factories since 2001.  About 75 percent of those factories employed over 500 people when they were still in operation.

#2 Dell Inc., one of America’s largest manufacturers of computers, has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.

#3 Dell has announced that it will be closing its last large U.S. manufacturing facility in Winston-Salem, North Carolina in November.  Approximately 900 jobs will be lost.

#4 In 2008, 1.2 billion cellphones were sold worldwide.  So how many of them were manufactured inside the United States?  Zero.

#5 According to a new study conducted by the Economic Policy Institute, if the U.S. trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.

#6 As of the end of July, the U.S. trade deficit with China had risen 18 percent compared to the same time period a year ago.

#7 The United States has lost a total of about 5.5 million manufacturing jobs since October 2000.

#8 According to Tax Notes, between 1999 and 2008 employment at the foreign affiliates of U.S. parent companies increased an astounding 30 percent to 10.1 million. During that exact same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.

#9 In 1959, manufacturing represented 28 percent of U.S. economic output.  In 2008, it represented 11.5 percent.

#10 Ford Motor Company recently announced the closure of a factory that produces the Ford Ranger in St. Paul, Minnesota. Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford’s new “global” manufacturing strategy.

#11 As of the end of 2009, less than 12 million Americans worked in manufacturing.  The last time less than 12 million Americans were employed in manufacturing was in 1941.

#12 In the United States today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services.

#13 The United States has lost a whopping 32 percent of its manufacturing jobs since the year 2000.

#14 In 2001, the United States ranked fourth in the world in per capita broadband Internet use.  Today it ranks 15th.

#15 Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975.

#16 Printed circuit boards are used in tens of thousands of different products.  Asia now produces 84 percent of them worldwide.

#17 The United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.

#18 One prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

#19 The U.S. Census Bureau says that 43.6 million Americans are now living in poverty and according to them that is the highest number of poor Americans in the 51 years that records have been kept.

So how many tens of thousands more factories do we need to lose before we do something about it?

How many millions more Americans are going to become unemployed before we all admit that we have a very, very serious problem on our hands?

How many more trillions of dollars are going to leave the country before we realize that we are losing wealth at a pace that is killing our economy?

How many once great manufacturing cities are going to become rotting war zones like Detroit before we understand that we are committing national economic suicide?

The deindustrialization of America is a national crisis.  It needs to be treated like one.

If you disagree with this article, I have a direct challenge for you.  If anyone can explain how a deindustrialized America has any kind of viable economic future, please do so below in the comments section.

America is in deep, deep trouble folks.  It is time to wake up.

source http://www.blacklistednews.com/?news_id=10688

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