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A default by any other name is still a default. When Greece defaults, the  inter-connected chains of credit default swaps will fall like dominoes.

For your Superbowl half-time reading, here is a brief summary of the situation in Europe:

1. Greece is poised to default, the end-game everyone anticipated in 2011. It is not a matter of if but when.

2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.

3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.

4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.

5. If that player (counterparty) can’t pay you off, then you can’t meet your obligations on the CDS you originated and sold.

6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.

7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than “default.”

8. This will theoretically keep the first domino–a credit-default swap–from falling.  In other words, if we call a default by some other name, then it isn’t a default.

9.  Those absorbing the losses caused by a Greek default (and let’s stipulate that this references owners of Greek debt who bought CDS as insurance, not speculators who leveraged CDS at 30X the actual bond value) will want to cash in their insurance, i.e.  the CDS they own against a Greek default. They have every incentive to demand a default be  recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them  the CDS.

10. How is this fair?

11. The official response of avoiding default is focused on self-preservation, not fairness, justice or the rule of law.

12. The system can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it’s somewhat like $95 in bets being paid by passing $5 around–much like the famous email that depicts all debts in a small town being paid by the same $5.

13. In the real world, somebody’s bets and insurance will not be perfect and their obligations will exceed their cash on hand. In other words, they will end up with $3 and owe $5. They will default and the dominoes will start falling as everyone down the line doesn’t receive their $5 counterparty payoff.

14. Empires tend to fall when the interests of their Elites diverge.  We are at such a point in the global financial Empire.

15. “Extend and pretend” has “worked” for almost 2 years. If Greece defaults and it is recognized by even one player as a default, then the system will quickly unravel and cash/dollars will be king until the deleveraging runs its course.

Charles Hugh Smith – Of Two Minds

Here’s something the government could do right now, it would have little or no cost, and it would be a major contributor to capital formation among small businesses.

Permit all cash-accounting businesses — which are those that (1) elect it, and (2) meet IRS requirements (the most-important of which is the gross receipts test — under $5m in annual gross) to immediately expense all cash-funded capital goods purchases on a permanent basis.

There was an “immediate expense” provisions in the Obama “recovery” act, but temporary moves like this simply pull forward purchases from one time period to another.

As envisioned I would prevent the use of debt to finance these deductible expenses; a better change would be to prohibit the deductibility of interest entirely (thereby removing the preference for debt over equity) but in the short term that’s going to be much harder to get through Congress than the above would be.

Detractors of this change will claim that it will decrease tax revenue from small businesses.  They’re wrong. If I take the deduction against top-line in the year of acquisition I have no depreciation deduction to take in the following years and am thus exposed to taxation on the full value of everything made with that or as a consequence of the capital good in the future.  This change would also simplify tax accounting for small business.

In this world of technology there are many items that businesses acquire that have useful service lifetimes far shorter than the IRS mandates for depreciated property.  When I ran MCSNet we used to run into this all the time — modem banks, for example, or desktop computers on customer agent desks, had service lifetimes that were typically two years or so in actual use (due to obsolescence) and were worth effectively nothing after that two years but IRS depreciation schedules mandated much longer claimed “service lifetimes.”  This effectively caused us to pay taxes unjustly on forward use that never materialized, as we were unable to match the duration of the item’s useful lifetime to its expensing on the balance sheet.

This becomes less of a problem as a business moves to accrual accounting for a whole host of reasons, but for cash-accounting small businesses it is a major issue.  Since accrual accounting records income and expenses when they’re incurred (as opposed to when they’re received) this mismatch tends to have less of an impact on those firms.

This change would lead small businesses to use retained earnings for capital expenditures to grow the company.  It would likely expand government revenue since the capital purchase would be made for the purpose of growing the business and that higher income in future years would not have the deduction of depreciation available to offset it.  This would in turn tend to create a virtuous cycle where growth would again be reinvested into capital goods to further expand.

Restricting this change to cash-based businesses would fuel the engine of our economy — small business and entrepreneurship.  Being a permanent change it would be one that small businesspeople and those thinking of starting a small business could count on into the future and thus write their business plans around; stability is critical when it comes to tax policy and its impact on business in general.

Let’s make a change that will actually make a difference.  While I advocate for much more serious change to the tax system in America this is one that is modest, targeted at the engine of job growth and yet inflicts no direct reduction on Treasury revenue.

Shortly after Dutch finance minister, said “We want no further delays” came news of further delays. The reason: Greek political parties all refuse to go along with more austerity measures.

Please consider Greece’s leaders oppose new austerity measures

All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default.

Representatives of the so-called “troika” – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue.

But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs.

In addition, a Greek government official said the EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent.

Finance ministers from the four remaining triple As – Germany, the Netherlands, Finland and Luxembourg – met in Berlin on Friday where they agreed that Athens must move quickly or they would withhold assistance.

“We want no further delays,” Jan Kees de Jager, the Dutch finance minister, said after the meeting.

The delays in Athens could give new momentum to officials in Germany, the Netherlands and Finland who have been agitating to abandon the cornerstone of the new bail-out – a €200bn bond swap in which private debt holders would accept losses of 50 per cent in the face value of their holdings. A full-scale default would allow Greece to write off all privately held debt.

The brinkmanship in Athens became so intense on Friday that a government spokesman was forced to deny reports that the acting technocratic prime minister, Lucas Papademos, was considering resigning if governing parties did not agree to the new measures.

Keyword of the Day is “Hardball”

In case you missed it here is the key phrase “EU and IMF negotiators rejected a counter-proposal that would have  frozen Greek wages for three years and cut social security contributions  by 10 per cent.”

That was a pretty significant offer by Greece in the midst of an economic depression. There was no counter-offer, only a take-it-or-leave-it hardball.

For now, Greece said “Leave It” so you can add that to the words of the day as well. As I have said numerous times recently, Germany wants Greece out of the Eurozone. Those actions reinforce my opinion. Germany could easily have said a Greek wage freeze for three years and cut social security contributions by 10 per cent would suffice.

Minimum Wage

I am not a fan of minimum wage laws at all. However, let’s ponder Germany’s demand. A “25 per cent cut in the €750 minimum monthly wage” would take the minimum wage down to €562.5, roughly $739 a month.

Taxes

According to Wikipedia the following  Greece Taxes apply.

• Social Security Tax: 16%
• VAT: as high as 23% (Category 2 goods 4.5%)
• Income Tax: Progressive

I cannot find a precise description of Category 2, but eating out is category 1 and taxed at 23%. Minimum wage appears to avoid income tax.

The after SS-tax income at the proposed minimum wage is $621 a month or $7452 per year.

How far will a take-home pay of  $7452 per year go?

Living Greece discusses Value-added tax (VAT) rates in Greece

• Greece has the third highest rate of VAT in Europe
• Second highest gas/petrol tax
• Third highest tax on social insurance contributions
• Fifth highest VAT on alcohol
• Highest property tax
• One of the worst corporate tax rates
• Without the quality of living or competitiveness to match

Bear in mind that was from 2010.

On the assumption that everyone earning minimum wage is  spending every penny of it, subtract another 10% to 20% in actual purchasing power.

Keep Talking Greece has a humorous (to those not from Greece) article on Greek VAT Insanity: 6.5% for Foreigners, 23% for Greeks

That Greece is an absurd country I knew the moment I decided to return from living abroad over some decades. But it was beyond my vivid imagination that I will have to experience this, day by day – and even moment to moment. With a decision that touches the limits of European constitution because of discrimination against the citizens of this hapless country, the Finance Minister  announced that the increased VAT of 23% on catering goods  will be paid only by the Greeks -meanwhile known also as money-spewing machines!

Earlier on Monday, Finance Minister Evangelos Venizelos clarified that the increased VAT from 13% to 23% will apply to restaurants, taverns, cafes and hotel restaurants. However if you buy an All-Inclusive package abroad, you will have a 6.5% VAT.  Greeks who will buy similar packages in the country will pay 23% VAT.

The new increased VAT regulations are as complicated as they can be: there is a different VAT for consuming sitting or standing (restaurant/cafe), different for take away (but only if you take it yourself, not through delivery boy).

In short a pizza has four different VAT depending on whether you sit, stand, walk or lay (hotel room/all-inclusive).

Tortured to Death

The point of this discussion is not about minimum wage, but about absurd taxes on top of a reduction in minimum wages at a time the Greek economy is already imploding.

I am 100% in favor of work rule changes, pension changes, etc., but the tax hikes and tax structures are insane.

Furthermore, I fail to see how increased taxation and further austerity measures can possibly help Greece in the short-run. And by the way, the short run has now been extended to 2020 from 2013.
Greece is imploding. It’s really too bad Greece did not exit the Eurozone three years ago instead of now smack in the midst of a depression.

Moreover, this is exactly what Spain and Portugal ought to be thinking about as well.
Mike  “Mish”  Shedlock – Global Economic Analysis

Normally, I do not make commentary on specific candidates for any office other than those candidates (of any political party), which support and uphold individual liberty and sound economic policy.  FedUpUSA in general is apolitical, since economics is based upon MATH, not politics.  However, as events are unfolding, I feel compelled to make the following statement:

Anyone considering voting for Romney had better watch this video.  Have we as Americans learned NOTHING in the past 5 years?!  How many times are we going to elect the SAME fascist oligarchs and expect a different outcome?!

If this happens, we deserve everything we get.  Romney is NOT better than Obama – in many ways he is far worse.  The only bright spot about a Romney nomination is that he will be at the helm when the Republican party goes the way of the Whigs and what remains of this country is destroyed.

For crying out loud, wake up America, you’re being herded like sheep to the candidate pre-chosen by those who already control our lives and this country – the same people who have eroded our liberties through discarding the US Constitution.  If you can’t figure this out, we apparently don’t deserve to be saved.

Seriously folks, this is what I see every day among young people.  It’s pervasive and if it doesn’t stop we are finished as a nation.

To the kids who believe this, let me make reality perfectly clear to you: You’re fucked, as government by definition can only take from one person and give to someone else. 

Therefore what you believe is mathematically impossible.

The Market-Ticker

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There are times when one questions a report as possibly being wrong or in error, and then there are times when one has to raise a flag and say “This is an intentionally false picture being presented by a government agency.”

I’m in the latter camp with this one, and it is rare for me to brand something as not possibly wrong and in error, but intentionally fraudulent.

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month.

This looks really good; here’s the chart that is on the front page:

I wish I could take this report, pick it apart at the household level, and find confirmation.  Remember that last month the alleged 200,000 jobs that were gained were a phantom; when one looked inside the household data we found instead deterioration in both the employment participation rate and a decline in the absolute number of employed persons, while population rose.  That is, the actual counts (as opposed to black-box statements) said that the labor picture deteriorated in December, contrary to the reported numbers.

This month it was worse.  Far worse.

Let’s start with the “base picture” that is causing the cheering:

That nice red line looks good, right?  Well……

“Not in labor force” numbers leaped upward on an annualized basis (seasonally adjusted the “right way”) and what’s worse on a raw basis 1.572 million people exited the labor force last month.

That’s 0.6% of the entire labor force that departed the working population in one month, three times the alleged drop in the unemployment rate.  This means that internally, the numbers were even worse than they first appear!

Indeed, the total number of employed persons fell.  A lot.  To put a number on it, the total number of employed persons fell by 737,000 by actual count.

Now the cheerleaders will state that this is a common thing in January, and indeed it is.  But the correct adjustment is to look at the population increase and subtract that back off as well.  In other words, we take the loss of employment and add the population growth.  When we do this we get a whopping 2.422 million in the wrong direction which was bested only by the -2.618 million in January of 2009 through the process of this downturn!

In fact other than January 2009 there has never been a single month in my table, which dates back to 1999, that put up a worse combined number.  This “performance” rates a literal ”second from utter despair and disaster”, and the employment rate shows it:

This is not a strong report folks, and in fact documents an actual and ongoing collapse in the US labor force, despite the crooning on the mainstream media disinformation channels!

The Market-Ticker

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