Greece Still Can Do the Right Thing

Greece has considerable power in the form of two possible routes to take – and I suspect they are the only routes available to a patriotic Greek leadership. The current path, if supported by Greek leadership is mendaciously anti-Greek if not for all Europeans.

The two paths Greece must take, and I think will take:

1. 1 1. Mutually Assured Financial Destruction of all Europe with self imposed default – this would serve only the Greeks interest and would be predatory to all other Europeans, but is the correct route to take if the following path is not taken;

-or-

2. .........2. Absorb and agree to the essence of the troika and German party demands, but retool the method so all of Europe, including Greeks, prosper and a federal EZ results.

The first route, the MAD route, would first require the refusal to acknowledge the authority of the troika or unique EZ representatives, but insist that the only voice Greece will now discuss the issue with are the actual bond holders themselves. The Greeks would then insist that all those on record as owners of Greek debt as of February 1^st 2012 will be counterparties and all bearer bond forms and other non-registered bond holders will have no voice. Then the following terms provided, dictated by Greece, noting the failure in the EU to provide transfer relief or Schengen Plan mobility as sufficient justification:

1. Greece will leave the Euro and convert to the drachma at the rate of 1:E0.01 .
2. Conversion will be on all assets and liabilities of Greek entities and citizens as of February 1^st 2012.
3. The Greek CB is leaving the EACB system immediately with all assets and liabilities converted to drachma as per the above.
4. Tariffs on all Germany sourced goods may or may not be imposed upon competitiveness review.
5. All debt of Greece if held by Greek entities or citizens on the record date will be converted to new issue at par.
6. All Greek sovereign debt held by all those not on record or non-Greek entities or citizens will be voided under the justification of a national emergency.
7. Greece will immediately withdraw from NATO given costs and the emergency.
8. Greece will seek to form a common market union with Turkey and North Africa in general.
9. Greece will seek to form a security pact with the USA.

If it were clear that the above will occur unless the second route below is followed, it would be insanity for Germany not to step away from their current position and support the dismantling of the troika plan.

The second route would be the best for all of Europe, including Greece and in the great tradition of the EU as acknowledged by Jean Monnet, would use the energy from the crisis to move Europe to a construct that would be in the best interest of all.

1. Greece will implement the decisions of a new Euro Commission, with that agreement pre-authorized by all parts of the Greek government if not a national plebiscite.
2. The new EC forum will composed of a national of each EZ member for a total of 17.
3. Each EZ member will appoint this member via national popular election.
4. Each EZ member will agree to affirm and agree to the decisions of this EC forum.
5. Any policy or decision or remedy the EC forum decides for Greece will be applied to all EZ members in all matters from employment to tax rates and collection to fiscal policy.
6. The EC forum will become permanent to provide compliance and to report on the general status of the EZ , Greece being one of 17 members in those reports.

It is obvious this EC forum, started to manage the Greek crisis, becomes permanent and the “upper house” or senate of the EZ and provides direct representative democracy and governance which will not only remedy the current Greek crisis, but maintain minority rights going forward and prevent such crisis in the future.

Now the equal loss of sovereignty for all EZ countries might make such a forum impossible. Then sadly Greece must follow through with the first option. Of course this would be a disaster but is the second best course of action for not only the Greeks but all of Europe. Likely such an experience will move the remaining EZ members into the second path for I see no other way to prevent contagion and the ruin of all of the EZ otherwise. In that case Greece could be forgiven and brought back into the EZ, but this will only occur if Greece presents both options now, for the record.

The worst pathway for Europe and the world is what is happening now for it is clearly a strange usurpation of power without a democratic mandate provided by various factions and blocks, one being the corporatist plutocratic block of near stateless EU bureaucracy. In fact the current path seems to only benefit this plutocracy as Germany and all are about to find out if this is the remedy. In that regard I consider the current crisis the results of what is effectively a plutocratic putsch.

Greece is at an epic and important point, yet they have considerable power they can wield on both the behalf of all Europeans and more importantly for themselves.

The machine that brought Greece here is of course the debt.

Almost all the justification of those using positions of power to impose the troika and German position is based upon qualitative and moral stances considering the notorious tax avoidance in Greece, the out of control patronage for Greek civil service jobs and the myth of indolent Greeks.

And Greeks have made this rather easy for the troika and the rest with some good street drama and chicanery which seems to confirm the veracity of the stance. The justification of the incredible austerity planned and forcing of imbalances resolution through only drastically raised unemployment so a Greek competiveness can be established in relationship to intra-EZ trade.

However these imbalances are not caused by Greek actions or mischance, but these Greek patterns would only have made the levels of debt slightly less or perhaps more easily noted and monitored – but Greece would have been in this position nonetheless.

The cause of the current Greece debt crisis is the intense intra-Europe mercantalistic trade stance of Germany (and to a lesser degree the Netherlands and Finland) which is dedicated to forcing Greece into a debtor status so as to finance German industry. Of course other countries are doing the same, but Greece being the weakest and least competitive nation from the start of the EZ was the most vulnerable.

The ineffectiveness of the Schengen Plan thesis, the extreme avoidance or refusal of transfer payments, and the lack of a competitive export industry in Greece has made the current crisis a fate. Even if Greeks had paid all taxes and swept the streets and worked as hard as Germans – they would still be at this crisis point with only a slightly stronger point of negotiation. The truth is the Greeks save more and work harder than Germans, and the tax avoidance is caused from a long history going back to the days of the Ottoman of corrupt governance that works on patronage and bribes. This culture in Greece can certainly never be remedied under duress – duress just confirms that the actions taken by the average Greek were spot on and thank God they didn’t pay those taxes as they would now face starvation – and can only be remedied under prosperity.

The above absolves Greece of any blame or need to answer and atone.

It requires that any Greek leadership, if they do not wish the leadership to go to the street and barricades, to refuse to even listen to any justification of the German party nor the troika. They must now with use of every bit of Greek power available arrive at a status that is the most beneficial to the Greek people, and after that duty is met to be mindful of the European people at large.

What the Greeks Can and Must Do for the Sake of Europe - First Close Down Access to Comme Chez Soi

[Comme Chez Soi is the most expensive restaurant in Brussels where I am told only the most senior Eurocrats can gain a table……]

Clausewitz stated that war was continuation of politics via another means. In an era where most feel that hard power no longer has relevancy and soft power is all, then the current play in Greece is a fascinating lab showing what happens now when war no longer is a political tool.

Germany and the troika as it approaches Greece is making a most serious error. They are not considering that that what they feel is the justification of their mandate to provide direction to Greece is based in the world of war, that economic might being the precursor to being able to prevail in war means they have the right to dictate terms to Greece.

But in fact, the relevancy of German GDP or German debt levels or German competiveness to Greece would mean all in terms of 60 German army divisions coming south, as it did in 1940 and 1941, but it is meaningless now.

In fact, though few seem to realize it, that in the “soft power” world Greece is, as far as policy design, every bit the equal to Germany. That in truth Germany has no leverage over Greece and in fact Greece as this massive borrower has huge leverage over Germany.

So Greece should realize this and come up with a game plan which empowers Greeks in this negotiation.

First, Greece has to understand a bit about what brought them here, who is providing leadership for them now, and decide where they wish to go towards. What brought Greece to this point is certain traits of cynicism and extreme local near tribal sensibilities tempted Greece to strike hard and massively at this surfeit of funding that came their way. And the funding had to come their way for Germany had to balance the accounts and fund Greece given the German predatory trade surplus. In many ways the funds that came Greece’s way are of the same “smell” as predatory lending funds for the US home markets came to broad swaths of questionable home markets in the USA. Germany could have played nice and instead of the lending could have made transfer payments to Greece, like sensible Canadians do as Ontario pays off Newfoundland for their internal trade imbalance. Germany could have said; “look, we came into the Euro with a bizarrely cheap DM conversions as we need to repair this East German mess. Let s do this for a decade and we will make transfer payments in the meantime. We will then settle out when done and help Greece with the transformation they require.” But no, like Greentree or Countrywide, Germans (and also to an important degree those sneaky fellow travelers like Finland (cell phones), Netherlands (high end goods) and others snuck into the deal) trumpeted virtue and attempted to dump on Greeks, counting on the obvious silliness and corruption of the Greeks to mask the true source of the debt load.

Now the Greek leadership, ever since that first dinner at Comme Chez Soi that they attended on the invite at their fellow Harvard or MIT or Georgetown alum (though French and oh so polished or tres chic) and which made their head spin, are like guys from Iowa who made it big in NYC – they will do anything to not go back and serve in Athens. They love Brussels. They love the French. Finally they are recognized for the true intellectual giants that they are despite their bushy mustaches. Finally they are Europeans! No, they are Supra-Europeans! They are “New Men” of the third way, a way beyond ugly back rooms in Athens and that rather embarrassing stint washing dishes for the Porcelain Club dinners in Cambridge, MA. They had finally transcended Greekhood! And they will sell all the islands of the Aegean and betray any Greeks and even sell Greece itself to maintain these new sparkling privileges. They are never going back. They are betraying Greece and in the most insidious way possible by first fooling and betraying themselves. All for the pressed duck at Chez Soi.

Greeks should immediately see that unless they too can get a seat at Chez Soi (they cannot), they better dump all the current leadership. A pretty good way is to declare that due to the emergency - and of course there will be errors for many, but this is an emergency – anyone educated in the great graduate schools of the USA and also served in any function for the EU machinery in Brussels will be locked up for the next few months. Sorry – but the spirit of Demosthenes calls for their sacrifice.

Now what to do, and what are the Greek strengths in the bargaining.

The Greeks should ask themselves if they still wish for a federal Eurozone which they will be a member of and share in a common currency. And if so what form should that EZ take. Obviously the current form sucks and requires great changes. Greece should understand, that as likely the weaker sister in the EZ for decades to come, the EZ should be in a form that empowers minority rights. It is not hard to define the optimal form – just take advantage of the USA education with a million causalities from the Civil War and what has transpired there since– for the USA Civil War was all about, because of their embrace of the odious system of slavery, weaker member states who had to face more populous and economically powerful states and still divide the pie with any equality. Greece has a huge leg up here as they don’t have to do a back flip to dump anything like slavery – maybe do a bit of work on local level political corruption and brush up on civitas, but that’s it. Greece then obviously has only one path or form which would make the EZ bearable and workable for Greeks (and really all PIIGS) and that is to have one of the governing bodies of the EZ which would have full equivalency of power to any other EZ governance bodies but be an upper chamber with the same number of deputies or senators or whatever they are called per each EZ member state. And that to maintain that equivalency requires a supreme judiciary to define and maintain that equivalency between units, and to judge things, this judiciary needs a constitution to work over. So Greeks should determine that the only acceptable form the EZ can take is where one of the governance bodies has to be an upper house with equal representation per state, no matter how small or large that state is and that no other arm of the government can have more power.

So once the objective is realized, the Greeks have to table this as a nonnegotiable requirement for any discussion.

Second, the Greeks must insist on the sanctity and priority of Europe upon itself. There is absolutely no roll for any suprasovereign institution like the IMF. For if the IMF is involved , some will not like the outcome and the presence of the IMF forever weakens the binding of the agreement outcome and justifies insurgency.

Next, the Greeks require as nonnegotiable that all EZ members form the body that negotiates the settlement, replacing the troika, and that all representatives of this body be made up of one per member country, and that this member be authorized to negotiate based upon a legislative ruling. And that this member in the forum not be the executive of the country. No Merkel, no Papademos. Of course this forum becomes the seed for the “upper house” senate and begins to set precedent for federal empowerment.

Then, the Greeks should insist as nonnegotiable that any solution or remedy be bonded for performance equally by all members of the EZ and that any application of the remedy in terms of reorganizing Greece procedures or governance become adopted in exactly the same manner by all members. Then Greece would then comply with the outcome.

Crisis solved and the basis for a federal EZ laid in the doing.

But all the above is required on a nonnegotiable basis – what leverage or bargaining strength does Greece have to gain this forum?

The most important factor is Clausewitz is off the table. There are no 60 divisions of German soldiers headed towards Greece (this time) and Greece can thereby make certain the above forum occurs. Greeks can do this by making the alternative so loathsome, so unpleasant for the rest of the EZ that there is compliance. Since there is no possibility of a war of enforcement or a punitive adventure, it is not difficult for Greece to design such actions. But it is crucial that the current leadership not be the ones to level the threat nor the design – for Chez Soi calls always. Also the choice cannot be a threat but communicated with firmness and great clarity and assured implementation if the above forum is not provided. This must be the financial and economic equivalent of a thermo nuke for this is in essence a policy of assured mutual destruction – MAD.

The MAD weapon:

Irrevocably and completely at Noon February 9^th, 2012 Greece will enact the following:

• All Greek debt held by institutions without at least 30% Greek ownership will be repudiated;
• All Greek debt held by the ECB or any non-Greek EACB will be repudiated;
• All property domiciled in Greece that is not held by at least 60% Greek ownership will be registered as “foreign held”;
• All such foreign held property will have a surcharge tax of 10% of asset value levied as of January 1^st 2012 which if not paid in 5 business days will be forfeitured to the Greek state;
• All such foreign held property will be levied an annual tax of 8%;
• All Euro denominated assets, whether cash or financial or property, will be exchanged for drachma at the rate of 1: E0.0050;
• All Euro denominated debt, no matter where the domicile owed by Greek institutions or citizens will be converted to drachma at the rate of 1:E0.0050;
• Greece will immediately withdraw from NATO;
• No right of passage will be provided to any non-Greek military vehicles;
• Greece will immediately require visas for all other EU member citizens;
• Greece will provide a 0% corporate tax rate for all new ventures for 10 years;
• Greece will lower the corporate tax rate to 10%;
• Greece will lower the capital gains tax rate to 10%;
• Greece will abolish estate tax;
• Greece will impose a 25% flat tax on all income with no deductions for 10 years.
• Greece can only rescind the above and revert to the Euro and the EZ provided a E250 billion subsidization fund is made available and the above repudiation remains.

As soon as Germany realize that the above will happen without the federal forum and elimination of the troika and the subsuming of Germany current approach to only one voice among 17, Germany will comply and then do as they always should have done and seek consensus via the democracy that Greece first presented to the world in the days of the Demos.

I will even go further. The above isn't far fetched and I strongly feel that ether in a hodge podge and chaotic fashion or with leadership and vision the above will occur. It is far better for the EZ if the forum approach becomes the pathway applied now. These swaps between ECB and EFSF and so on and so forth are canards, ruses.

What is striking is that the Chez Soi sell out is not Greek specific but is actually infecting all of the EZ. In fact it can be perceived that under the smoke and sparks of the specifics of the Greece situation, a general supra-sovereign putsch is underway and that Merkel , assuming she is dedicated to the German constitution, is a dupe of this Chez Soi cabal. That “something happened” over the last decade where the likes of Jean Monnet and Adenauer were replaced by a subtle but very powerful stateless plutocracy. Chez Soi diners all. What I proposed and the logic I table was actually the expected development and outcome for the formation of the United States of Europe. That only a crisis like that occurring now would wake folks up and get them past their deadly and inefficient and destructive tribalism of area nationalism. I think the crisis has achieved that objective, but what Jean Monnet did not plan for or expect is this vast organized international cabal of stateless, proudly so by the way, plutocrats who wish to simply abolish sovereignty and federalism entire and impose a plutocracy. That the descendants of Marxism and other corporatists would use the opaque confusion and complexity of deconstrustionalism of the French with the neo-Adorno Habermasian ‘deliberative democracy” and basically carry off a putsch. With Clausewitz out of the room very strange mutations have occurred indeed.

The "German" Proposal; A Remedy for the EZ Crisis

The German Solution

The “German Solution” trial balloon floated Friday was so leaden that one might think that it was designed to prompt the response over the weekend that it did receive from Greece. That it was a memo of an “agent provocateur” to harden positions and reduce the ability of reasonable folks to find remedy by inciting passion. That it was crafted to start Greece towards leaving, on their volition, the EZ.

There is the seeds of a solution in this event, though.

As a crisis of a treaty, a currency board or confederacy – then there is not much positive in this event.

But if the current crisis is perceived correctly as a constitutional crisis then all issues become matters of law precedent and all points become something to use in negotiating a constitutional remedy.

The Greeks should grab hold of that part of the memo which is to their, and the entire EZ, benefit – that an authority could have seniority over Greek governance. Embrace and accept that idea and then broaden it to one of equality and uniformity for all the EZ. The idea of such seniority under a European Commissioner should be accepted by Greece provided the following conditions are met:

1. That the European entity, the commission, be broadened to 17 members.

2. That one member for the commission be popularly elected from each EZ country.

3. That the commission be called the European Financial Office

4. That all EZ countries subscribe to oversight from this EFO, in the same manner

5. That the EFO be mandated via a referendum held at the same time for each 17 member countries

6. The EFO supersedes the EP, the EC and the existing commissioners.

Before the EFO is institutionalized, 60% of all existing EZ sovereign debt is retired at par via conversion, with the ECB acting as fiscal agent for the EFO, and debt equal in value to par amount of converted debt be issued in the name of the EFO which will be full faith and credit of the EZ. That only this debt will be presented to the ECB discount window for monetary operations and be the primary asset held by the ECB to effect all monetary operations.

After conversion, the existing debt for the nation members and all subsequent debt will be solely the credit of the nation’s specifically and will not be allowed to be presented to the ECB or the EACB system for discounting. This debt will not be susceptible to any opinion or ruling from any EU or EZ entity or authority such as the ECB.

The EFO with the ECB acting as the sole fiscal agent, will be able to issue or retire debt at will

All members of the EFO will be elected for 7 years with the election for the office held in each member country with franchisement to vote for all residents of that country irrespective of their birth origin, upon the same day.

At the request of all EU entities, the EFO will consider the funding of any general expense of the EU entities – provided the expense is solely for the benefit of the EZ area. But only the EFO may authorize such expenditures and can cancel or renew such requests at will.

Every member country will, upon the determination of the EFO, make available up to 60% of all tax revenue raised at the national level to the EFO. The EFO will be the sole entity which will determine the use of those funds. The EFO will have no right nor be able to seek any taxation or revenues found at the municipal or provincial levels of organization. But for the costs to administer and adjudicate such services, the EFO will have all revenues generated from customs and tariffs or passport or travel fees within but between EZ areas or to and from the EZ area entire. The EFO will have the budgetary oversight over all organizations which police, administer, and implement law in regards to customs and immigration.

The EFO will provide an annual report to the EP disclosing all finances and current position of debt and revenue. Furthermore, the EFO will present, nominating three EFO members to do so, to the EMP on a quarterly annual basis.

All disputes which an EZ member may table towards or with the EFO will be adjudicated by the European Court of Justice which the decisions will be final. It may very well require a special ECJ which is built upon justices with proven residency in only the EZ member states – a “European Court of Budget and Taxation”.

A customs, tariff, excise and taxation police capability will form which will report and be administered by the EFO.

With the above and using the near unworkable German Proposal of this weekend, the Greeks could reverberate back throughout the EZ the usable principals in the proposal to establish remedy.

Guidance for Merkel; Hope for the European People

Whether they like it or not, the USA is the most accomplished and successful entity in history in addressing and managing the problems Europe is now facing. Of course incredible trial, terrible error and often crass outcomes have occurred to the USA during the last two centuries to acquire this knowledge. Much pain and death from the twin poles - forever connected in American history - of racism and slavery versus minority institutional rights, in defining the interplay between the freedom of institutions and the freedom of the individual - occurred as this knowledge was acquired. Democracy versus corporatism. Labor versus capital. Utilitarianism versus libertarianism.

To avoid accepting and learning these lessons, Europe endures ever more pain and suffering, and this European ignorance is deliberately cultivated so a very small elite minority maintains power via a corporatist structure. So as to not be "American", Europe has every 30 to 70 years visits upon itself carnage of incredible ferocity yet, in comparison, the USA required only one Civil War to arrive at settling on the truth and the best governance possible that avoids constant carnage. Jefferson's Pol Pot/Maoist like thought that the tree of liberty needed to be constantly watered by blood never took hold in the USA - though most would of course say the Civil war was enough blood for a millennium of irrigation.

Europe carries on and on with blood watering almost constantly, given their terrible disease of commitment to special interest corporatism, for the sake of these strongly embedded and tradition based organized blocks of special interest a fanatical subtle dedication to maintain this system continues, a system which is basically a complex net of guilds developed in the Middle Ages -Europe has constantly sacrifice millions and millions and millions of souls so as to avoid the basic enlightened principles proven true over 200 years ago for they would end corporatism. The core and true governance of Europe is applied always so these long bastions of power, these corporatists blocks, are maintained. The blocks are clocked and hidden under the claim to the primary importance of "culture" and that they really do not even exist.

A major point of enlightenment was when I came across Keynes phrase used in 1919 peace talks describing WW I as "the European civil war". His criticism of the resulting Versailles Treaty was that of a person considering a whole "United States of Europe".

I thought it would be useful to reread the Gettysburg Address not in context of the USA, but in context of Europe - that no one in Europe has reached a "Lincoln Moment" of reflection and redemption and progress (or of greatness) that generated a Gettysburg Address. But there is hope if Lincoln is correct in claiming these truths are universal and "self evident". That means one day, one year, one century - Europe will adopt universal truth so as to avoid great evil.

That hope is firmly part of the the great root that Lincoln stated as the "last best hope of Earth" which is not that the USA will dominate or have empire, but that the ideals of the USA were worthy of the slaughter of the Civil War given that they were universal truths, first brought in front of the public eye in the Declaration. Lincoln said on the Declaration: "something in that Declaration giving liberty, not alone to the people of this country, but hope to the world for all future time". If Europe wishes to grant their people more perfect union and "hope", they must surrender their subtle elitist and but powerful corporatism system which is extra-democratic governance and accept these universals truths. They should not be repelled that the source seems to be from the USA, for the source that the USA applied and then modified and tested was, of course, from Europe. rather that anit-american disdain is a ruse by the groups in power to maintain power for corporatism cannot survive as the dominate power in a Lincoln democracy.

Merkel, and all leaders of Europe should for the sake of their People accept and apply these hard learned universal truths versus the steadfast European rejection of the last 200 years. There is hope in this crisis as it is not like the previous ones for the current crisis can be seen not as a challenge to these universal truths, but rather that the current EZ and the EU being basically a design brought to Europe by the USA post WW II, is undergoing a "counter-coup" by the still deeply entrenched European corporatists - only this crisis, instead of manifesting in the form of fascism or Marxism or monarchism - all corporatists at heart, is a more clever subtle anti-democratic Habermasian perpetual complex dialogue of technocratic elite which maintains it is a refinement of the universal truths of Lincoln. But it is not, it is still corporatism the likes of Lorenzo Medici would understand and likely actually compliment as being especially insidious and effective.

Europe should ponder the below not in terms of American hegemony objectives, but in terms of asking why is it the USA required only one Civil War in the last 200 years while Europe is now approaching their sixth civil war. Why is it the USA only required one lesson of slaughter of their own people, with about 700,000 casualties of wounded and dead from the Civil War while Europe, in the same time of 200 years, has suffered well over 200,000,000 in casualties of wounded and dead? The price the European corporatists are willing to spend in terms of blood is staggering - beyond the most rapacious thoughts of a Caligula or an Attila.

To not read deeply the below, and to go on and implement the universal values and truths in Europe the below so succinctly declares, is indicative of an incredible evil and dark side to the European psyche. Europe should face that they are not dealing with a sovereign debt crisis now, which once solved with technical devices, Europe can then return to the so called European "third way"and thereby maintain the corporatism governance, but that Europe is once more, by attempting to maintain a unique political philosophy of corporatists governance, will lead to great suffering and blood once again.

Europe must surrender corporatism and the belief that only the few can lead - they must trust and give power to the 'People", not in terms of populism cant but in terms of ' We the People". The current system is an evil - perhaps the most evil in history. The fact it is masked and hidden under decades of refined civilized discourse and "culture" perhaps makes it the most insidious and deadly evil in history of man. There - how about that? Prove me wrong.

"Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate -- we can not consecrate -- we can not hallow -- this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth."

EZ Crisis worst possible outcome occurring....

I am afraid the worst case path for the EZ crisis, in terms of possible pathways I considered and outlines last September, is occuring.

1. The EZ is entering into a general slump, at least as most describe it – a “recession” but what is most ominous is the recent German factory orders announced Friday the 6th:

“[German] Industrial orders dropped 4.8 percent month-on-month, reversing October's 5 percent growth, figures published by the Federal Ministry of Economy and Technology showed on Friday. The decline far exceeded the 1.8 percent fall forecast by economists…”

This is most serious considering that highly engineered exports are the heart of the German economy. What is strange is that most pundits are using descriptors like “soft patch” or “slowdown” , though I suspect this is the beginning of a calamity.

Germany is the cause of the EZ debt crisis as their intra-EZ anticompetitive policy (wage pact and subsidized industry in zaibatsu like structures) has established a significant intra-EZ trade imbalance in Germany’s favor which is mercantilist in characteristics. Germany has made the PIIGS their effective economic colonies. Imbalances imposed, especially to the weaker and smaller PIIGS, are not able (nay, allowed) to be corrected but for severe unemployment adjustments and austerity. Being basically a mercantilist construct, these imbalance adjustments in the end eliminates the export markets required by the German economic model. Therefore in lock step with the grief being felt by the PIIGS, as priced in sovereign debt and rising unemployment levels, the German economy is imploding.

Therefore the words “slowdown” and “soft patch” are optimistic and pan gloss as the common sense of trade accounting identities will show, the problems in the PIIGS will be visited upon the Germans. In short Germans are likely to enter a depression if austerity and unemployment is felt to be the only remedy available for the EZ – as Merkel, and to a lesser degree, Sarkozy are insisting upon.

If the “grand strategy” objective of the EU and EZ is to provide repair and then stability for the European economy post WW II and to subsume Germany to a greater sovereign egalitarian Europe – the risk of that “grand strategy” failing spectacularly is now high.

The EZ debt crisis remains endemic and chronic to where the point I made earlier about the frog’s willingness to stay in a pan of water over the stove burner as long as the water is only incrementally increased could not be more apt. The EZ frog’s water is about to hit boiling.

2. Yet the USA has decoupled from the EZ crisis so that tactically there is little if any risk of contagion from the EZ crisis or outcome to the USA economy. The Federal Reserve has done a magnificent job in providing this defense through a massive link of central bank cooperation, principally through reinstating and then activating the foreign exchange and foreign central bank swap lines as were utilized in the 2009 crisis. This time the swap lines are now aligned with significant resources from all non-EZ area central banks such as Japan, Canada and Switzerland. Private sector US financials have fairly well made themselves immune to EZ contagion from reduced exposure if not total elimination of any EZ area assets in money market funds to lending and securities and derivative holdings with EZ explicit or implicit exposure. Total immunization is not possible, of course, but given the Federal Reserve actions taken above there should be minimal impact from any EZ problems. I do not think there is systemic financial risk for the USA from Europe.

Furthermore the USA is entering a robust resumption of trend economic growth that is likely now exceeding potential. Unemployment has been showing this turn since early summer 2010 in the household survey data which leads establishment survey data at this point in the US economic cycle. The administration is righteously stating 1.9 MM jobs were created in 2010, which was not noticed by most Street folks and professional economists as it was masked in the headline number with returning job seekers to the labor pool – this is why the headline number stands at “only” 8.5% while the 1.9 MM is about 1 ½% improvement on a gross basis (meaning the unemployment rate if the labor pool stayed unchanged would have a 7% handle now). I didn’t realize we were in a full recovery until October. This likely assures the Obama re-election. Various financial markets in the US are starting to leave their obsession with the EZ crisis and as the markets come to understand the US recovery and economic vigor and the bulwark of defense, they are starting and will price in a general recovery and then trend growth. Nominal pricing of USA risk free bonds will take a tumble but “real” pricing will likely maintain stability given the actions taken by the Federal Reserve and equity markets should have large returns for 2011. This may cause problems in the hedge fund and risks taking financial communities as most are positioned for the opposite outcome. I do not think even the more astute hedge funds and risk managers understand the scaling and size of the USA in relationship to the rest of the world and they do not understand the efficacy of the Federal Reserve.

The above is becoming a very bullish environment for the USA current political and financial markets and returning the USA to a normalized economy without subsidizing or expending political capital on the EZ crisis. But I am afraid that the current more positive USA economy and environment is actually allowing a dangerous “America First” like mentality, a dangerous withdrawal from the European political sphere at a critical time.

It seems support for the technocratic “muddle through” approach to the EZ crisis is the adopted US policy and given the above results in the USA – it would seem to be the right approach, especially for your Client. And with only a one horizon to the election that may in fact be the optimal approach in terms of political expediency. But I suspect it will be in the end leading to a disaster and possibly a costly error, not in terms of financial markets or the economy but in terms of providing cost efficient security for the US.

3. The recently announced RIF, approaching 500 billion reduction, is a most serious “new” factor for the above points. The market has not even begun to appreciate the positive impact of the RIF. The last time we had a strategic RIF, the period from post Desert Storm 1992 to 2001, the US went from a chronic deficit posture to where we had a surpluses and even were then discussing the dangers of not having enough US Treasury debt. The US “long bond” was eliminated (since reinstated of course) and real yields were at record lows. There was a lot of flash and hype on the internet but the stock markets and basically all financial markets enjoyed a strong bull market from 1994 to 2001. The internet “bubble” was an overextension of this bull market, but the very presence of Google and the likes today show it was not a bubble in reality. To my view the main change post 2001 was reversing the RIF and going to a war footing post 9/11, not the internet bubble crash. Now we are returning to RIF and as it was in the beginning of the Bosnia conflict (remember Rebecca West’s “Black Lamb and Grey Falcon” fears on how Yugoslavia tied down 40 German divisions in WW II?) there is skepticism that the USA can still present security and implement a RIF. Of course I do not have to recite why I think the USA can implement RIF to you, but there is one difference that does challenge the ability of the USA to implement a RIF versus the 1990s.

4. Since the USA is avoiding any persuasion to the EZ but for current efforts and that the USA indicates it will not take actions beyond supporting “muddle through”, and given that the EZ leadership are showing a complete inability to leave parochial politics and provide a suitable remedy to the crisis for all EZ people, then the EZ will likely crash. It seems the administration is gambling that the EZ crashes after the election and not before.

5. When the EZ crashes it will enter a long and bitter reconstruction phase which will mean the sole available remedy, a federation of the EZ sovereign states to one sovereign entity, will be a long time in the coming post-crash. In this eventuality, the US will find it impossible to implement the planned RIF if any reasonable security is expected.

Only a federal EZ can ever provide either a suitable hard power ally of the USA or that would allow a setting for US hard power projection. The “pity” is that hindsight will likely conclude that the long torturous route post-crash to reach the necessary federal Europe could be achieved in principle in one weekend now if the USA would expend political capital and insist upon this outcome.

6. The EZ crisis was always, given the history of the EZ and the motive for its creation sponsored and encouraged and even “permissioned” by the USA, about security. The EZ was always about security for Europeans and security for the USA. Therefore it is the security of the USA at stake in the EZ crisis, not financial or economic considerations. The only way to approach the EZ crisis and reach prescience and also to design a robust solution that is in accord with US values is to approach the EZ crisis as a constitutional crisis.

“We are led, by events and common sense, to one conclusion: The survival of liberty in our land increasingly depends on the success of liberty in other lands. The best hope for peace in our world is the expansion of freedom in all the world. “

While most are using the “Bush Doctrine” in reference to the current event s in the Arab world and North Africa, I think the most important implications of those words in terms of security for the USA is now to be found in Europe, specifically the current tolerance the USA shows for the undemocratic authoritarian technocratic “muddle through” policy now being applied to Europe is not aligned with US values. While the USA pursuing of a “Bush Doctrine” for Europe may not be feasible at this point from any short term consideration for political reality, plans should be made now for a most intense diplomatic and even covert campaign to prompt the EZ to form a democratic federal union and not permit the current technocratic confederation or the authoritarian plutocracy Europe seems headed towards. There are excellent chances that the EZ crashes before November 2012, but with some luck it does not and then after the election the USA can then turn and prompt the EZ towards federal Union – it will not happen any other way. It is clear to me that only the USA can evoke a democratic federal EZ being formed. Be best if it were now, but it seems that is not to be.

With luck the EZ will not blow prior to the election. But I think it is very likely that the first two quarters 2012 will be dramatically fast paced as US withdrawal from the EZ becomes understood and Europeans will take defensive actions, civil disobedience will rise, likely exponentially, and extreme financial stress that would take a weekend now to remedy will take decades to mend. As is now it is difficult for the US to implement the RIF and to look to Europe as a reasonable partner in international security. Where EZ is headed and if it enters a catastrophe the US will find it impossible to implement a RIF and in fact will likely have to greatly increase security expenditure in Europe.

It should be noted the situation in Hungary and the Ukraine and the inability for the EU to provide suasion or an answer or apply leverage. They are powerless. To my mind both the situation in Hungary and that in the Ukraine are like developments from the press of the 1920s.

I wonder if the USA has made Europe aware of what form the EZ should be in that would be most welcome to the USA. Has that been unambiguously relayed to the Europeans? Is there a form the EZ should take that is agreed to be optimal by US policy makers? To date all I have read is the USA mentioning rather technical details about TARP like financing and the EZ crisis should be solved and so on and so forth – basically trivialities and details - but without the USA giving any mention as to what form or shape the EZ might change towards or should seek. Is the USA comfortable with the unelected technical rule of Italy? Or the technical rule for Greece? Why is Sec Geithner leading this dialogue and not Sec Clinton if the EZ is in fact a national security issue? To my mind and given the above points, if valid, this use of Treasury versus State and your Agency might indicate the administration does not understand the nature of the problem. If the EZ crashes before the election, more will start to ask this question as the consequences for US security become clear and as the US shows it is basically free from financial contagion. “Where was Sec Clinton prior to the crash?”, will be asked. “Why did the US allow this?” , will be asked.

Everything I read and observe leads me to believe the current time is very similar to that prior to WW I – a most dangerous era indeed. Europe is returning to dominate our security concerns, I am afraid.

The two most dangerous errors that I see being made now by our government and also by the majority of the world leadership and intelligentsia are first with the declinism thesis applied to the USA and second the belief that general war and the general deployment of “great power” hard power in symmetrical conflict is something that will never occur again. (Of course the belief that hard power is no longer a factor suits nicely the US declinism thesis.)

And the reality is that no time in the last century has ever been more like the time immediately prior to WW I – it is not identical of course but it resonates with many rhymes. This is why Europe counts and should take center stage, until the EZ crisis is ended, for USA national security strategic formulation.

State Unemployment Insurance Claims Indicate Strong Recovery

"Conorsen" on Twitter gave the heads up on how to look at the weekly unemployment claims correctly, as he detrended the series with USA population growth.

Working on that line of logic, I detrended the weekly seasonally adjusted data by the Civilian Labor Pool growth since 1967.

A very interesting picture appears with the blue above being the detrended and green/olive as reported.

The detrended series puts the current data in historical context of the USA GDP - and clearly USA unemployment stress has clearly been repaired such that it is indicating a full and strong recovery is now taking place. In fact despite the current bathos - this has been a large but a typical economic recession in terms of the stress to the economy.

Another, perhaps rather crude, but effective way to illustrate the importance of the above is to scatter plot the inverse change in the above detrended UI weekly annual percentage change with the annual change in the SP500. This indicates that a 30% to 50% rally in the SP 500 is typical and can be supported by the substantial drop we have recently experienced in State UI claims reduction - especially if seen in a historical context (detrended).

Source of data is the amazing FRED from the St Louis Fed.

Read of Cameron's Veto and the Merkel Initiative and Unavoidable Outcome for the EZ

Cameron's veto has been not a negative but an additive evolution to the remedy for the EZ sovereign debt crisis.

First, Cameron's veto should in the end deepen the UK involvement with the EU if not end with swift membership in the EZ and the UK adoption of the Euro. The UK will quickly find itself unbearably isolated. Scotland will take this opportunity to sue for secession, seeking to stay in the EU, for their ties to the EU have deepened as shown by the recent appointment of Scotland's Anne Glover to Chief Science Advisor for the EC to the recent August 2011 "Scottish Bill - EU Involvement" http://www.scotland.gov.uk/Resource/Doc/1124/0120113.pdf where Scotland is using the direct repesentation at the EU as a lever to further devolution to also reasonable concern to have a voice in Scottish fisheries and offshore natural resources. Cameron's actions will further encourage the use of this strategy to where now a case can be made that Scotland must secede from the UK so as to be directly represented in the EU. The continued EZ membership of Ireland and now the risk the City of London is exposed to losing significant market share to Frankfort, Milan, and Paris - all will seriously pressure the UK.

The UK will now have two possible choices. One is to deepen and refresh the "special relationship" with the USA to the point of considering leaving the EU altogether and joining NAFTA. The irony that would have for still incarcerated Conrad Black.... Or the other path, so as to maintain the dominant position of London in the financial community, the UK will now discuss adopting the Euro and joining the EZ, but the interest and strategic need for the UK to do so and how they will do so will be of immense value to the EZ crisis resolution. I do not think the USA path will be taken but that Cameron's veto will result in the UK joining the EZ, but after changing the EZ so it is compatible with the UK democratic legacy.

The USA has shown an extraordinary tin-ear towards the EZ crisis which might in hindsight be perceived as a significant foreign policy failure. The US has a most bizarre mis-perception of both their power in the EZ and also their "right" to be a full partner in designing the remedy. The US is without a doubt the most powerful voice in the EZ and to now understand this has the US contributing greatly to the confusion and also raising significantly the risk in what events develop as the road to remedy is set. Also the US has unquestionably full partnership rights to being a voice in the EZ resolution. This crisis should be scene as the last act of WW II, where the obvious US designed European common initiative was first (and Merkel still states this is the case today) to contain and force Germany to pursue long term peaceful co-operation and integration with all of Europe and to form a security force to contain Russia. The USA until recently invested immense treasure towards the success of this effort, with up to 300,000 men providing substantially all the hard power for Europe's defense, and with still less than 100,000 men in Europe now. It is impossible for Europe to have any defensive capability until they form a federation, a 'United States of Europe", and until that status is reached they mist be partnered with the USA. but, the terrible USA policy response to date both startles Europe in terms of their long range security as well as provide opportunists to expand their portfolio at the seemingly weakness of the USA. The best example of this error is that Sec Geithner is the main USA voice in Europe now, and Sec Clinton is not involved - showing the USA does not understand this is a constitutional crisis but perceives it as a financial crisis. The most important positive impact the USA could have on Europe is that if this were in the portfolio of Sec Clinton, the Bush Doctrine values would be foremost and this would mean important counter to the "democracy deficit" now in the EZ along with prodding a remedy which will honor democratic values. But these topics are, by definition, not areas of expertise or power in the Department of the Treasury.

Which brings us back to the UK. Of all the countries in Europe, the UK has the most solid and pristine record, the longest record, of a constitutionally based democratic government. This is the completely correct underpinnings for Cameron's decision as the current situation coudl not allow him to act as the elected head of state of a democracy. He cannot join in with Merkel and others in accepting the current "post-democracy" technocratic approach which shows not only a democracy deficit but a cynicism in regards to the hoi polloi's ability to be responsible and thoughful, a way of thinking of the electorate that is a throwback to the age of absolutism, be it corporatist or authoritarian or monarchist governments which have done so much damage to Europe in the last 200 years.

And this is of course why the Merkel initiative will fail. It is not democratic, it is authoritarian without checks and balances and the debate that democracy requires. This will mean that even if the initiative accomplishes in whole what Merkel hopes, any dis-enfranchised people in Europe will consider themselves and perhaps actually be within their rights to revert to violence or civil strife or pursue secession to find remedy. Merkel's approach will lead to violence and chaos. It is not democratic.

This is where the UK, given the strange absence of the USA in assisting or guiding Europe, can be of great historical relevance. As the Merkel initiative flounders - and it will - the UK can enter into the fray as the "honest broker" and do much to define the remedy. The interlocking non-democratic form of governance of the EZ now with three Presidents and the Franco-German cabal and then the almost independent Brussels plutocracy has to be eliminated and a constitutionally designed federalism implemented to replace this current structure. There can be no other way. With as much "credentials" in terms of democratic structure as the USA, and perhaps more if one remembers the works of the like of Bagehot and Macaulay, is the UK. Driven to re-engage Europe, but on terms that are acceptable to a democracy, the UK will be the deciding input on the new EZ form, Europe will need the UK as Germany and France exhaust their credibility and also will want to keep the UK from joining NAFTA. also the UK will wish to do this to slow the devolution of Scotland.

The UK solution for the EZ, the price for them surrendering the pound and adopting the Euro will be startling and perhaps one fo the most important historical markers in the history of democracies.

Just as Hamilton and Washington agreed to the capital of the newly created USA to be moved to Washington DC so as to placate the South, the UK will gain the dominant geographic positioning of the EZ financial markets and its regulation and most importantly the site of the ECB. The ECB will be redesigned, yet maintaining the almost the identical independence and federal powers that it now has (the ECB is the only federalist and empowered institution in the EZ), but immediately adopting the philosophy of the Bank of England as outlined over 160 years ago by Bagehot, eliminating the BUBA legacy and the crippling pseudo-gold standard of the current ethos of the ECB. In addition the EZ will immediately become a federal construct. the current heads of state will devolve to either a senator like "house of lords" type of structure with equal voting power per country, or to become like the USA state governors or more likely the Canadian premiers. They will continue to be directly elected. The EC will be disbanded as will as the EU presidency and the attached bureaucracies and powers they enjoy. The EP will now become the popularly elected legislative capability and assume power of budget and taxation. Either the senior legislative body, the senate, has a Prime Minister, or a French/American type of executive is popularly elected.

I feel the UK will have the ability to persuade and lead the EZ towards this event - or the UK will become irrelevant and the ward or the USA - or even worse, Germany.

I do not think the Merkel technical initiative can work, nor should it work given the massive insecurity it will present the EZ as well as the massive civil strife that will without a doubt develop otherwise. A weak confederate structure permanently a ward of the ECJ rules based with a permanent austerity of always balanced budgets will fail and will not be able to provide the hard power security for Europe nor allow it to be of significance on a global basis going forward.

Note the above does not mention the sovereign debt crisis. This is because if the EZ is seen correctly through the lense of a constitutional crisis the dent crisis is appropriately placed as a minor and temporary symptom of the true problem. If the sovereign debt crisis is perceived as the main problem then it becomes extremely hard to remedy, if not impossible to remedy, via any series of technical solutions offered - including the Merkel initiative now. If the EZ is dealt with as a historical constitutional crisis then it becomes easily and near immediately resolved as the appropriate constitutional remedy is applied. it is very interesting and I think this will be a direct precedent for the EZ, that Hamilton from 1787 to 1790 had the new federal government pay up to par for all of the newly created states debt. Massachusetts debt traded from 15 to 100 in this process. as the correct constitutional fix is applied, this will be what happens to Greek debt.

There really is no other path available to the EZ but the formation of a democratic federalist government. No other but strife ruination chaos and likely civil war.

The UK will be the surprising "actor" who will be critical to bring about the Untied States of Europe's birth. And it would be even better if the USA would realize their role, their righteous say in the EZ, and start to act within the pattern fo the great historical moment that Europe has arrived upon.