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Wednesday, March 06, 2013

Big News - Italy

Okay, to sum it up every major faction after the Italian election is now anti-austerity. Bersani has caved and is putting forth a plan much closer to the Five Star Movement's agenda than the Monti agenda. He has been forced to do so because without this step he cannot form a government. 

Bloomberg article, which is at least in English.Don't say I don't try. The Reuters Italian edition usually has good coverage, but it is in Italian. Bersani's bloc is farting in Berlusconi's face and trying to come to an arrangement with the Five Stars. After looking at the cards, Bersani and his allies have realized that if it comes to another election, they will be the big losers - out of the running, and Berlusconi and the Five Stars will be controlling the outcome.

What this means is that Draghi may have to ante up on the ECB commitment, but if he does so to save Italy, it obviously will throw out all the restrictions of the program announced last year. Italy's public finances will probably worsen considerably this year - they have severe drag from unemployment and a continuing recession, and even if increased social spending passes, it will take a while for the recession to unwind.

Seismographs around the world will be recording the thuds as the Bundesbank staff collectively hit the floor in a dead faint. 

Italy is very much in the driver's seat here. Without their cooperation, the Germans have to ante up on hundreds of billions of dollars worth of guarantees to bailout funds. So everybody now has skin in the game, and the bargaining (Ireland, for example, is trying renegotiate debt terms) now gets down and dirty. ECB already has a huge chunk of Italian bonds in hand, so the ECB has an incentive to keep the play going.

So, the Italians have seized control of Eurofinances and the Grillinis have seized control of the Italian agenda. The next few months are going to be epic. The Czech and Polish economies are deeply linked with the German economy. With the failure of the traditional German-French bloc and German elections pending, any hope of picking up enough votes to pressure Europeans in a more German-friendly direction will now probably require the Germans getting the northern countries (which they already have) plus the eastern European countries together. However, of the countries in the Euro, the anti-austerity group now predominates. 

This is really good for stocks. Italy being anti-austerity and with new relative strength will enhance the prospects for more stimulus in Europe.

So the European die is cast. Germany finally either has devalue the euro to pay out Italian pensions (and Greek, and French, and Spanish, and Irish, and...) or they have to cut the baggage loose and form a Northern Union. Decision time.

I'd say this is a big positive for U.S. equities, but more because of capital flight from the likely bankrupt countries.

It's like seizing control of a time bomb. The winner loses.
So the dollar strengthens and oil prices fall, allowing
Ben to print more . So short term dollar positive, long
term dollar negative ?


I'm not sure commodities will fall in dollar terms. Strong against other currencies does not mean that the currency is strong.

Well, in the short term a stronger US dollar brings money in.

In the longer term, a stronger US dollar will tend to limit exports.

But surely more money must roll into dollars because of this! Within the dollar system perhaps Treasuries have a negative real yield, but if you want to hedge against a Euro decline, your real yield might be much higher.

If you back off and look at it, has any one of the problems for the Euro actually been solved? No, I would say not. They all seem to be getting bigger right now or staying perhaps stable. But even the "successes" are going to come back to the table with demands for easing.

One way or another Europe has to find a way to dump some of that debt. It may hurt a bit, but they have to do it.

I would be a lot happier with Europe if they would start on the task. Waiting until Italy is at 135% doesn't seem very feasible.
Charles - perhaps not for financial types, but for the countries and populations involved, yes.

They are playing and have been playing a game of toss the hot potato, but the potato keeps getting hotter and hotter and there is a natural limit to the toss speed.
The NY Times has an interesting article on how a
wealth tax might work. 2/9/13 edition. Charles Kiting
might find it interesting reading , whether he agrees
with it or not.
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That's just it - Beppe Grillo reminds me of Sporkfed: pissed off for the right reasons but all his proposed solutions amount to spending a lot more energy and effort in maintaining the status quo.

My proposed solutions would involve restructuring
our tax and trade policies . That is hardly proposing
maintaining the status quo, but don't let facts get in
the way of your opinions.
Spork, restructuring taxes is DC's favorite pastime. Or do you expect the 58th time to be the charm?

The problem with wealth disparity is mostly due to the Fed's continuously feeding newly-printed dollars to the financial class. But the enabler of that is Congress - the more they spend the more it benefits the financial class.

I guarantee that within a short time frame the wealthy would not pay a wealth tax. People who might become wealthy outside of the power structure would pay it, though.

So a wealth tax would either ossify the existing elites, or the new ones that got the wealth tax passed and then voted themselves exemptions. Look at the results of the wealth tax now--Bernanke's devaluation is a back-door wealth tax. It doesn't hit the truly wealthy, it hits the middle and lower classes.

There's a reason that wealth taxes are historically the dying gasp of a failed regime.

Tinkering with the tax code is their favorite past time,
not an over haul. The tax burden has shifted from capital
to labor and labor can't shoulder the burden while competing with lower wage workers overseas.

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