With the “shutting down” of the federal government looming, Republican and Democratic lawmakers on Capitol Hill are scrambling to hit their respective marks on the stage of public attention. Reportedly, Republicans in the Senate are unanimously behind passage of a Balanced Budget Amendment, while Democrats in both houses are clamoring to raise the debt ceiling, lest Social Security checks not be mailed. The performances are predictable and the soliloquies are so well-rehearsed and so familiar to critic and citizen alike that most of the dramatized sound and fury goes unnoticed and little of the legitimate signal breaks through the noise of rhetoric.
As has become his custom, however, there is one man in Washington consistently breaking the fourth wall, going off script, and speaking directly to the people.
What news could possibly draw a smile from the normally sphinx-faced Chairman of the Federal Reserve, Ben Bernanke? The news that his longtime adversary on Capitol Hill, Ron Paul, is retiring from Congress. But it’s doubtful that Bernanke will have many other light moments in the months to come.
The man once credited with staving off a second Great Depression persists as dogmatically as ever in his faith in the Federal Reserve money machine’s power to cure, or at least to palliate, all economic ills, in spite of mounting evidence that — as Ron Paul and others have been insisting — the Fed’s inflationary “solution” to the economic crisis has only made things worse.
In an effort to plug leaks at the Federal Reserve, the U.S.'s central bank issued a statement yesterday that members of the Federal Open Market Committee “will refrain” from sharing insider information “with any individual, firm, or organization who could profit financially from…that information.”
Since the establishment of the Federal Reserve in 1913, its operations and decision-making processes have been deliberately opaque. In the 1990s the minutes of its policy meetings weren’t made public for five years. And with then-Chairman Alan Greenspan’s deliberate obfuscation of Fed policy — called “FedSpeak” — an entire cottage industry sprang up trying to interpret the Fed’s machinations and likely next moves on monetary policy.
There is a theme to news stories about the PIGS (Portugal, Ireland, Greece, and Spain) in the last few years: Rosy projections always turn out worse than expected. So it's of little surprise that Reuters announced on July 11 that the recession in Greece is worse than the “experts” had predicted.
The interim budget, upon which so much of the bailout of the nation rested, greatly understated the budget gap. (The underestimation of the budget shortfall over an earlier projection was by almost one-third.)
Europe’s slow-motion economic collapse continues apace as Eurozone governments and banks continue to wring their hands over what to do to postpone the inevitable Greek default. And now there’s a new wrinkle: Italy, whose level of sovereign indebtedness relative to GDP is second only to that of Greece, has suddenly appeared on investors’ radar screens. If Italy — the second largest economy in the Eurozone — goes the way of Greece, Ireland, and Portugal, there will not be enough money in Europe’s rapidly-dwindling rescue fund (the European Financial Stability Facility or EFSF) to effect a bailout.
The impasse over Greece is bad enough. Several countries in the European Union, including the Netherlands and Germany, expect private holders — large European banks — of Greek bonds to share some of the burden for the next Greek bailout, reckoned at some €110 billion. But European megabanks, given the precedents set with numerous recent taxpayer-funded bailouts on both sides of the Atlantic, are refusing to consider losing any of their own money. And all sides are finally awakening to the realization that a Greek default in the form of some kind of debt restructuring is inevitable. As Julian Toyer and Dan Flynn of Reuters report:
Americans know the term "stagflation"; the decline in economic activity accompanied by an artificially inflated money supply is what Europe is presently experiencing. On Thursday, European Central Bank President Jean-Claude Trichet announced that the ECB had raised its interest rates 1.5 points and suggested that this action, intended to contract the money supply, might be pursued more aggressively in the future — even though the so-called "PIGS" nations of Europe (Portugal, Ireland, Greece, and Spain) need influxes of money in order to prevent default.
While Trichet recognized that this hike in interest rates might slow down the world economy, he stated that controlling inflation remained the bank’s most important task at present. He hinted that another raise might be in store in future months, noting that the bank would “monitor very closely” price developments, which has been a code for suggesting that interest rates would not be raised the next month. “Our monetary policy stance remains accommodative," he assured. "It is essential [that] recent price developments do not give rise to broad based inflation pressures over the medium term.” Marc Ostvald, an market strategist at Monument Securities, advised: "A further quarter point rate hike probably in October or November still appears to be the central scenario."
Problem loans at China’s banks are significantly worse than initially thought, according to Moody’s Investors Service’s news release on July 4th. This raises concerns already expressed about China’s continued ability to grow its economy at annual rates approaching double-digits. The weakness is so pervasive that Moody’s “views the credit outlook for the Chinese banking system as potentially turning to negative. ” It added:
We assume that the majority of loans [by the banks] to local governments are of good quality, but based on our assessment of the loan classifications and risk characteristics, as provided by the NAO [China’s National Audit Office] and other Chinese agencies, we conclude that the banks’ exposure to local government borrowers is greater than we anticipated…
Constitutionally minded members of Congress, Senator Jim DeMint of South Carolina Senator Rand Paul of Kentucky and Representative Mike Lee of Utah, have introduced federal legislation that would exempt gold and silver coins issued by state governments as legal tender from federal taxation. This bill, called the Sound Money Protection Act, is intended to protect efforts by states to create a stable, inflation-free form of money. In particular, it would protect from federal gains taxation transaction between legal money in states which are species (e.g. gold or silver) and paper.
Utah has already passed a state law that recognizes these gold and silver coins as legal tender in Utah. A dozen other states, Senator DeMint’s South Carolina, are considering similar laws. Senator DeMint expressed the need from such state laws:
Eurogroup President Jean-Claude Juncker said in an interview over the weekend that the austerity measures being imposed on Greece in exchange for additional bail-out funding from the IMF will result in “the sovereignty of Greece [being] massively limited. ” He added, “One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone.”
Although the average Greek citizen has no interest whatsoever in such austerity measures being imposed on him by outsiders (recent polls show 80 percent opposed), the socialist-controlled parliament, headed by President George Papandreou of the Panhellenic Socialist Movement, has agreed to accept such intervention in order to obtain funds sufficient for the country to avoid default, at least for the time being. Those measures include higher taxes and much tighter enforcement of tax collection measures, as well as selling off major publicly owned properties in order to raise $8 billion by the end of the year.
Unwilling to be intimidated by the often-violent mass protests of radicals, Greek lawmakers passed yesterday the second and final austerity bill that was essential in order for the country to receive crucial bailout funds to prevent the government from defaulting by mid-July.
The second austerity measure passed the Greek Parliament by a vote of 155 to 136, just one day after the main austerity bill was approved. During the vote yesterday, rioters clashed with police just outside Parliament.