Angela Merkel is Bluffing

Sebastian Niedlich, Flickr.

Sebastian Niedlich, Flickr.

SODOM & GOMORRAH: Angela Merkel’s panel of economic advisors have criticized the German Chancellor’s efforts at expanding the European Commission’s control over member-state budgets. Calling it politically improbable, the group claims that Merkel’s efforts have no hope of realization. Perhaps that’s the point.

I mentioned this in June: the European Union has two choices going forward. Either the EU tightens its grip on member-states or it dissolves. In the current crisis, there is no middle ground.

Individual interests are too varied for consolidation. The financial crisis is simply too large for any of the Eurozone leaders to sort through, much less understand. Each member-state has an immediate interest in saving itself from the crisis, and these efforts usually involve relying on a larger, more stable country to bail them out. As the bad debt changes hands, the risks compound and everyone is damaged.

Up to this point, much of the bailing out has been done by Germany, the country most conscious of the moral hazard involved with bailouts. Germany has also been under pressure by several outside forces to do more to promote jobs and economic growth – in other words, adopt an inflationary policy, which they have been firmly opposed to.

And now Angela Merkel’s incredible proposition: allow the European Commission to veto individual member-state budgets when they get out of line. Several countries immediately turned their nose at the idea; bailouts are fine, but the whole point of a bailout is to avoid accountability. If an alliance comprised of Germany and other influential European countries could enter at any time and impose austerity measures, that would be, in the words of Merkel’s advisors, politically improbable. In a word, it would be a disaster. Individual politicians would be thrown out of office for surrendering their sovereignty to outside powers who would force strict austerity measures on any country seeking a bailout.

Angela Merkel is bluffing. She wants to force the issue now so that the EU either strengthens to the point that she could take draconian measures on irresponsible members, or so that the organization stops pressuring her country into bailing everyone else out. It is, in short, a brilliant move.

Retail Purchases in the US Continue Decline

b00nj, Flickr.

b00nj, Flickr.

SODOM & GOMORRAH: Bloomberg news reports that retail sales in the United States “unexpectedly” decreased by 0.5% in June. Unexpected by whom?

For the third straight month, the US Commerce Department reported that retail purchases have fallen. The 0.5% decrease in June was greater than the 0.2% decline seen in May. Bloomberg News reports that this is an “unexpected” decline since they wrongly forecasted a 0.2% rise in June.

The job market continues to put a strain on US households. Retailers such as Target, Macy’s, JC Penney, and others have had a difficult time keeping up with shareholder expectation. Sears has been particularly hit hard by some of the developments in the retail market. In 2012, they have thus far posted a -7.51% profit. While Q2 earnings were a slight positive, the retail giant continues to struggle with its finances as it attempts a number of spin-offs.

“People are just pulling back,” noted Michael Carey, the chief economist for North America at Credit Agricole CIB in New York.

The surprise at the report and the misguided forecast are proof positive that mainstream economists exist only to make astrology look like a legitimate field of study.

It’s Not a Choice Between Inflation and Depression

Will Manley, Flickr.

Will Manley, Flickr.

SODOM & GOMORRAH: The German chancellor Angela Merkel is one of the few world leaders who isn’t being completely idiotic about the financial and economic crisis brewing in Europe. Much to the ire of others, Merkel has resisted political pressure to adopt a more inflationary policy because she feels it would be bad for Europe. The Economist has recently joined her list of critics.

In this week’s Charlemagne, the British paper argues that Merkel is misreading history. The hyperinflation under the Weimar Republic left a deep scar on the German psyche; the moral that is preached is that hyperinflation was the result of an insane policy and that economic chaos created political instability and a second world war. A sound monetary policy is key to avoiding a similar outcome.

The Economist argues that hyperinflation didn’t lead to Hitler’s rise to power, but depression and mass unemployment did. Hitler’s Keynesian-like policy of building freeways and rearming Germany solved the problem, so the story goes.

There are two flaws with this argument.

First, it’s a little disturbing that such an intelligent paper can, without cringing, point out that Hitler independently came up with a Keynesian theory of economic stimulus and that modern Germany, Europe, and the rest of the world should follow suit because it worked. There’s a problem when your policy recommendations follow Hitler’s lead. I would also argue that the wanton destruction unleashed by World War II and the Holocaust probably resulted in a net decrease in Germany’s economic position when all was said and done. But even if it did work out, I think that cheaper pharmaceuticals do not justify using slave test subjects to produce them. I know controlling the cost of health care has always been a concern, but there’s more to politics than money.

Second, and in line with the argument that there’s more to it than money, I find the claim that economic conditions created fascism is very shallow. The existence of even one martyr proves that humans are not a couple of missed meals away from genocide. The existence of a human history that included economic hardship without a holocaust proves this as well.

Other factors create insane ideologies. I suspect that modern society’s shallow insistence that money is at the root of all action probably isn’t helping.

On the economic side, Merkel is correct to fight inflation. It’s not a choice between inflation and depression; inflation creates depression. Neither inflation nor depression create fascism, though, but that doesn’t take away from the fact that inflation and depression are painful.

China Launches Spacecraft

adamrice, Flickr.

adamrice, Flickr.

SODOM & GOMORRAH: China’s human-operated Shenshou-9 spacecraft has successfully docked with the country’s space lab today. Millions of people in China watched the craft blast off into orbit on Saturday with the Chinese character “fu”, a symbol for good luck and fortune, displayed prominently outside the cockpit.

Other powers in the world have been cutting back their space programs with the worsening economic climate. This launch marks a time where China can stand on par with other countries that have typically dominated the political and scientific scene.

Shenzhou-9 launched at 6:37 P.M. In Beijing time. Aboard the craft was the first Chinese woman to be sent into space – Major Liu Yang from the Henan province. Liu had previously been a pilot in the Chinese air force, successfully landing a plane in an emergency after the craft had collided with a flock of birds after takeoff.

The Chinese government had strict regulations on who could fly on the mission. Chinese astronauts (taikonauts) are required to have good skin, no body odor, pleasant breath, and no dental cavities. A rumor circulating through China says that spaceflight has adverse effects on female fertility, but Major Liu won’t have to worry as she’s already a mother.

Chinese politicians have widely broadcasted the launch and docking as a sign of the country’s growing influence around the world. In addition to their manned space mission, Chinas has been working to develop a blue-water navy and an education system capable of producing engineers to meet or exceed the brain power of those in other countries.

The Euro Will End With Both a Bang and a Whimper

World Economic Forum, Flickr.

World Economic Forum, Flickr.

SODOM & GOMORRAH: The European Union continues in its path toward eventual dissolution. Eurozone leaders were divided and confused at yet another Brussels summit on the economy.

The Economist points to two solutions for the European Union. On one hand, Europe could strengthen its ties and erode more of the sovereignty of individual member-states while distributing wealth to poorer parts of the union. On the other, the EU could separate.
Superstate is Super Stupid

Individual interests are far too diverse in the European Union. I have been predicting for months that the Euro and, almost by extension, the EU won’t last through 2012. The financial crisis that the Eurozone faces is far bigger than any one or even a group of individuals. It’s simply beyond their capability to deal with. One may rightly suggest that the leaders are in many respects too stupid to adequately respond. But even if they were geniuses, I would argue that the complexities and different currents driving the crisis are too big for any governmental body to handle.

The EU made a critical mistake in making their union about economics instead of about a shared European identity. Granted, the idea of “Europe” as a singular, yet diverse whole, has been a driving force behind much of the popular support for the union, it isn’t the primary focus. It seems instead that the broader policy goals have always been about free trade between member-states, a shared currency, a unified monetary policy, and a foreign policy designed to protect members while carefully vetting new members so as to preserve the favored status of larger parties.

Economic unions work well when the economy is booming. During a period of decline, the selfish ties that brought everyone together tend to drive them apart in new ways.

There has been increasing pressure on Germany to do more to promote jobs and economic growth, but the Germans are strongly against any inflationary measures. No one has adequately been able to deal with Greece’s collapse. Very few can suggest any plausible course of action to stop Italy, Spain, and Portugal from following their Mediterranean neighbor’s lead toward bankruptcy.
Independence Day

Any plan to strengthen the EU is simply a plan to hold every member-state hostage to the crisis. Germany has the sanest plan; manage the deficit as best as possible, avoid inflation, let things correct as best as possible.

To force Germany, thus far a huge industrial powerhouse in Europe, to shoulder the burden of trying to bail every irresponsible European country out of the crisis will only condemn the Germans to a similar default.

Chancellor Angela Merkel is right to oppose mutualization in any form. The only way Europe stands a chance of surviving is if they abandon the idea of the EU. Merkel is the most level-headed leader of any large European power, but she may be powerless to stop the crisis from running to its worst possible outcome – after all, it is much larger than she is.

She’s Got the Jack

whoSODOM & GOMORRAH: The World Health Organization (WHO) warns of a new strain of drug resistant gonorrhea that’s quickly spreading across the globe. Governments and doctors are advised to help people make sure their partners aren’t dealing from the bottom of the deck.

WHO reports that drug-resistant strains of the sexually transmitted disease are appearing in Australia, France, Norway, Sweden, the United Kingdom, and several other countries. A strain of gonorrhea appeared in Japan in 2008 which was immune to all recommended antibiotics and has been quickly spreading ever since. Unless the disease is caught and treated early, patients may quickly run out of medical options.

Gonorrhea is the most common STD after chlamydia, spreading to more than 106 million people each year around the world. In 2010, the CDC states that 309,341 cases of gonorrhea were reported in the United States, roughly half of the actual number of infected people. Without adequate precautions, there could be no option for people infected with the super disease. WHO is calling for expanded research into new antimicrobial agents in hopes of finding a drug to treat the strain.

Gonorrhea has already adapted to penicillin, tetracyclines, and quinolones. Health officials warn that the spread of low-potency over the counter antibiotics in Asia and the incredible adaptability of the disease mean that the STD is becoming more and more dangerous.

Extortion Used to Impoverish George Zimmerman

zimmermanSODOM & GOMORRAH: Like the Troy Davis case before, the media and the prosecution have turned the case against George Zimmerman into somthing more than just how and why Trayvon Martin died. Zimmerman was taken back into custody after a discrepency arose about how much money he actually had.

Zimmerman claimed to be a man of little means, say prosecutors, and they filed a motion to revoke his bond after it was discovered that the Zimmerman family had raised close to $150,000 on a website for his legal defense. In such a publicized case, it should come as no surprise that a large number of people were willing to donate money to a man they didn’t know who’s accused of murdering a boy they didn’t know. Yet the prosecution, who along with the media, seems intent on convicting George Zimmerman for centuries of racial violence, have professed ignorance that publicity could have such effects.

They claim that the large sum of money proves that Zimmerman is a flight risk and, as such, should be held before his trial. The issue is not that George Zimmerman was a potential flight risk, it’s that he was a potentially dangerous adversary in court. Normal people don’t have a lot of money and can’t afford an adequate legal defense. Slightly upper-middle class people can afford the defense for a while, but they usually run out of funds to do battle with a government that can simply run up more debt to prosecute criminals.

People like Zimmerman are frightening because the government failed to adequately impoverish him before his trial. Now that he’s proven he can raise money on his own, even after the government tried to bleed him dry with bond, the prosecution has to resort to a new measure to deprive Zimmerman of adequate legal counsel. Since the courts in the United States are so backlogged, it will likely be quite a while before Zimmerman has a trial. In the mean time, the imprisoned Zimmerman is unable to work, unable to pay bills, and unable to contribute any further money to his defense.

The question we must ask is, does George Zimmerman deserve to be able to raise an appropriate legal defense? I would argue that he does.

The Greece Default is Here

archer10 (Dennis) Busy, Flickr.

archer10 (Dennis) Busy, Flickr.

SODOM & GOMORRAH: It’s happened – despite all the hand-wringing, apologizing, and bailing out, the Greece default has happened.

Late Friday, a group of dealers in credit default swaps decided that Greece’s recent bond swap constituted a “credit event”. The yes vote by the International Swaps and Derivatives Association entitles holders of Greek credit default swaps to approximately $3.2 billion. A credit default swap is an insurance policy that can be taken out if a bond issuer defaults.

The Greece default was preceded by a bond swap deal that forced bond holders to take significant losses on the return of their money. The swap, approved by roughly 84% of bond holders, triggered the Collective Action Clause which forced the ISDA to decide that Greece has created a “credit event.” The ISDA defines three types of events: bankruptcy, failure to pay, and a restructuring according to Gavan Nolan a credit analyst at Markit. The Greek restructuring is tantamount to a default since the Greek government has basically acknowledged that it can’t pay bond holders the money they’re entitled to.

Nolan downplayed the event, saying that $3.2 billion was much smaller than expected and that the event is likely to be over-exaggerated.

We have yet to witness a wide-scale default such as this. Far from being exaggerated, the Greece default and the triggering of credit default swaps signifies the beginning of the end for Greece, the Euro, and any myth of stability we’ve seen thus far in the international financial markets. We’re all about to be screwed.

A Currency to Rival the Euro

Davide "Dodo" Oliva, Flickr.

Davide “Dodo” Oliva, Flickr.

SODOM & GOMORRAH: The first cracks begin to appear in the Eurozone; financially distraught Iceland considers adopting a new currency.

The Economist reports that Iceland is debating whether to move away from the krona and adopt a different currency. Canadians are likely to be thrilled by the idea, since the current proposal is to use the Canadian dollar (known as the Loonie). The move bolsters the Conservative government’s claim that the Canadian economy is one of the strongest in the world.

Alan Bones, Canada’s ambassador to Iceland said on March 2nd that his government was open to discussing the idea, yet thus far there has been a lack of real consideration for the move. Some politicians in Iceland suggest that the move was a ploy to get Iceland to discuss alternatives to joining the European Union and, thus, adopting the Euro as its currency. The Canadian government was also pretty quick to back away from Bones’ initial suggestion.

Current polls show that 70% of Icelanders are in favor of moving away from the krona but that they were evenly split over whether the Euro or the Loonie should be adopted. Since both countries share a geopolitical interest and Canada has thus far avoided some of the default woes that Europe has been facing, it will be interesting to see what Iceland chooses to do. I feel that the debate shows a real desire for alternatives to the Euro; ploy or not, the idea is gaining some traction and might be worth investing energy into. Economists who have analyzed the situation say that there are very few technical obstacles to adopting a currency such as the Loonie since it is well know.

Climate in Iraq Was More Extreme in Ancient Times

SODOM & GOMORRAH: Archaeologists and historians have found ancient texts composed between 816 and 1009 AD in Iraq. Researchers published an analysis in Weather of the various writings done by scholars, historians, and diarists who lived during the Islamic Golden Age.

The team found that the climate in Iraq likely experienced greater extremes than they do today. The writings document significant climate events such as severe cold weather that are rare in present time.

chrisdebruyn, Flickr.

chrisdebruyn, Flickr.

“Climate information recovered from these ancient sources mainly refers to extreme events which impacted wider society such as droughts and floods,” said the primary author, Dr. Fernando Dominguez-Castro. “However, they also document conditions which were rarely experienced in ancient Baghdad such as hailstorms, the freezing of rivers or even cases of snow.”

In 891, Baghdad was considered a city without rival that had hot summers and cold winters, making the climate in Iraq perfect for strong agriculture. Even Herodotus tells us that the size of grain crops in Mesopotamia were larger and more plentiful than anywhere else in the world. The writers documented a number of cold events in the first parts of the 10th century. There were significant temperature drops during July 920 AD, snowfall in 908, 944, and 1007 – compared to the only record of snow in modern Baghdad in 2008.

The published study focuses primarily on Iraq, but it clearly has implications for the rest of the era. Dominguez-Castro says that “Ancient Arabic documentary sources are a very useful tool for finding eye witness descriptions which support the theories made by climate models” and that “The ability to reconstruct past climates provides us with useful historical context for understanding our own climate. We hope this potential will encourage Arabic historians and climatologists to work together to increase the climate data rescue from across the Islamic world.”

Thanks to Anthony Watts for the tip.