This morning’s key headlines from GenerationalDynamics.com

Europe enters a dangerous period after Greece’s Tsipras wins overwhelming victory


German Finance Minister Wolfgang Schäuble has suggested Greece could leave the Eurozone ‘temporarily’

Greece’s far left prime minister Alexis Tsipras won an overwhelming referendum victory on Sunday, with 61% of the voters favoring his position. No one knows what this means, except that it represents a major political victory for Tsipras, and a major humiliation for Merkel and the Eurogroup.

Tsipras’s Syriza party won the victory in a campaign where he called the Germans “terrorists,” and where promised that his victory would make the Eurogroup of eurozone finance ministers bend to his will and immediately give him a new bailout deal. He also promised that the banks would open on Tuesday.

The relations between Tsipras and other European leaders is now vitriolic, and it will be necessary for German Chancellor Angela Merkel and the others to swallow hard to force themselves not to shut out Tsipras completely. On the other hand, it may be politically impossible for Tsipras to compromise, after the overwhelming referendum victory. At the very least, the communists in his own governing coalition will not tolerate compromise.

Jeroen Dijsselbloem, head of the Eurogroup, said: “I take note of the outcome of the Greek referendum. This result is very regrettable for the future of Greece.”

Germany’s Economy Minister Sigmar Gabriel said:

With the rejection of the rules of the euro zone… negotiations about a program worth billions are barely conceivable. […]

Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness. […] [Tsipras has] torn down the last bridges on which Greece and Europe could have moved towards a compromise.

Germany’s Finance Minister Wolfgang Schäuble said:

Greece is a member of the eurozone. There’s no doubt about that.

Whether with the euro or temporarily without it: only the Greeks can answer this question. And it is clear that we will not leave the people in the lurch.

As this suggests, EU leaders have drawn up emergency plans in cases Greece becomes insolvent, and the country is forced to leave the euro currency.

One part of this would be “humanitarian assistance,” to help the Greek people survive.

The most important part of this would be a parallel currency, such as government IOUs. Unlike the euro, a parallel currency could be depreciated by Greece. According to Dr Jörg Krämer, Chief Economist at Commerzbank:

If the Greek state were to become insolvent, it could pay its employees, pensioners and suppliers by means of promissory notes (IOUs) — as the US state of California did in 2009. Banks would credit the recipients of these promissory notes with the equivalent value on separate accounts.

This parallel currency would allow the Greeks to pay their taxes. Moreover, the value of this parallel currency would depreciate significantly versus the euro, which would improve the price competiveness of goods produced in Greece.

A parallel currency would be legally possible if the Greek state avoided giving it the status of legal tender, prohibited by Article 128 of the Treaty on the Functioning of the European Union. But even without this status, a parallel currency could circulate if the state offered the possibility of using it to pay taxes.

Once the currency had become stable, Greece could return to the euro.

As I have said several times in the past, my expectation is that, one way or another, Greece is going to remain in the euro currency. But whether Greece stays in the euro or not, it’s only going to be after multiple crises. Daily Mail and FxStreet and Reuters

China takes emergency measures to stem stock market panic

China appears to be in or close to a state of panic over the accelerating collapse of the stock market bubble since June 12, resulting in a 30% fall in the Shanghai Composite Index.

The “market stabilization fund” is tiny compared to the more than $3 trillion worth of market capitalization that the Chinese markets have lost in the past two weeks. Reuters and Business Times (Singapore) and Reuters

China’s ‘Market Stabilization Fund’ mimics America’s ‘Organized Support’ in 1929

A close reading of the classic book “The Great Crash – 1929” by John Kenneth Galbraith reveals that China is following the same path as America’s 1929 panic.

During the year prior to June 12, China’s stock market shares increased by 250%. Here’s what happened in 1928, according to Galbraith:

Brokers’ loans reached four billion on the first of June 1928, five billion on the first of November, and by the end of the year they were well along to six billion. Never had there been anything like it before. … People were swarming to buy stocks on margin — in other words, to have the increase in price without the costs of ownership. This cost was being assumed, in the first instance, by the New York banks, but they, in turn, were rapidly becoming the agents for lenders the country over the and even the world around. …

Never had there been a better time to get rich, and people knew it. 1928, indeed, was the last year in which Americans were buoyant, uninhibited, and utterly happy. It wasn’t that 1928 was too good to last; it was only that it didn’t last. … As Walter Begehot once observed: ‘all people are most credulous when they are most happy.’

As in recent months in China, people were getting worried about a bubble and a recession by mid-1929, but everyone was optimistic:

The official optimists were many and articulate. Thus in June, Bernard Baruch told Bruce Barton, in a famous interview published in The American Magazine [[June 1929]] that “the economic condition of the world seems on the verge of a great forward movement.” He pointed out that no bears had houses on Fifth Avenue. Numerous college professors also exuded scientific confidence. In light of later developments, the record of the Ivy League was especially unfortunate. In a statement which achieved minor notoriety, Lawrence of Princeton said that “the consensus of Judgment of the millions whose valuations function on that admirable market, the Stock Exchange, is that stocks are not at present over-valued.” He added: “Where is that group of men with the all-embracing wisdom which will entitle them to veto the judgment of this intelligent multitude?” [[WSJ, mid-1929]]

That autumn [1929] Professor Irving Fisher of Yale made his immortal estimate: ‘Stock prices have reached what looks like a permanently high plateau.’ [Fisher added: ‘I expect to see the stock market a good deal higher than it is today within a few months’]

Until September or October of 1929, the decline in economic activity was very modest. But on Friday, October 18, the market fell 2.5%, and on Sunday, the NY Times headline read, “Stocks driven down as wave of selling engulfs the market.”

That was the day of the announcement of “organized support” or, as the Chinese are calling it, a “market stabilization fund.” According to Galbraith:

Never was there a phrase with more magic than “organized support.” Almost immediately it was on every tongue and in every news story about the market. Organized support meant that powerful people would organize to keep prices of stocks at a reasonable level.

Opinions differed as to who would organize this support. Some had in mind the big operators like Cutten, Durant and Raskob. They, of all people, couldn’t afford a collapse. Some thought of the bankers — Charles Mitchell had acted once before, and certainly if things got bad, he would act again. Some had in mind the investment trusts.

They held huge portfolios of common stocks, and obviously they could not afford to have them become cheap. Also, they had cash. So if stocks did become cheap, the investment trusts would be in the market picking up bargains. This would mean that the bargains wouldn’t last. With so many people wanting to avoid a further fall, a further fall would clearly be avoided.

So that brings us to where China is today. Four days following the announcement of “organized support,” the market began a full-scale panic.

So officials in China are going to be very nervously watching the market in the days to come, following the creation of the “market stabilization fund.”

In lavish ceremony, the new King of Tonga is crowned — by an Australian

The newly minted 56-year-old King Tupou VI of Tonga, Polynesia’s only constitutional monarchy, was crowned on Saturday in a lavish ceremony costing $1.9 million. Tens of thousands of Tongans were in the streets chanting, “Long live his majesty, long live the queen.”

What I found interesting about this story is that the crown was placed on his head by an Australian, not by a Tongan. By tradition, Tongans are forbidden to touch the head of the king. So a retired Methodist minister D’Arcy Wood, of Gisborne, Victoria, in Australia, placed the crown on his head.

News stories don’t indicate whether or not Queen Nanasipau’u is allowed to touch her husband’s head. Beyond that, I guess they’re going to have to import a barber from Australia as well, whenever the King needs a haircut. Sydney Morning Herald

KEYS: Generational Dynamics, Greece, Alexis Tsipras, Syriza, Germany, Sigmar Gabriel, Wolfgang Schäuble, Angela Merkel, Jörg Krämer, China, Shanghai, Market stabilization fund, John Kenneth Galbraith, Tonga, King Tupou VI, D’Arcy Wood, Queen Nanasipau’u
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