Greece gloom doesn't necessarily mean a downside risk for the euro

Outlook:

Until we get retail sales tomorrow, we have the same themes as before—is the Fed serious about June, and what about the showdown between the Eurogroup and Greece? The headlines are tiring and tiresome—showdown, brinkmanship, etc. This is not a sporting event.

The latest word on The First Rate Hike comes from San Francisco Fed Pres Williams in a FT interview. He says wage growth is trending toward 2.5%, but this is still below the 3.5% associated with full recov-ery. Wages will reach the normal recovery level by the end of this year or early next year—they lag. When we do get unemployment at around 5%, inflation pressures will start to appear. The Phillips curve relationship is historically valid, on the whole. But Summers is wrong to wait until you see the whites of inflation eyes—by then we will have overshot. “Say middle of 2015 you started just removing accom-modation, well the effects of that on inflation really wouldn’t be felt until mostly until the middle of 2016 or maybe 2017 given the lags in monetary policy. So when thinking about these decisions the ‘white of their eyes argument’ is wait until inflation gets close to 2 per cent. The problem with that is you are going to significantly overshoot your target and then have to reverse course much more dramati-cally than if you were to start raising interest rates gradually in advance.”

Williams also says that if the Fed removes the word “patient” at the March meeting, the market would be wrong to interpret it as meaning “June for sure.” The market needs to stop believing the Fed ever says anything today about decisions to be made later on. As for the US going in one direction while the world is going in the opposite direction, the Fed is paying attention. Williams then rambles on some more but never comes right out and says anything substantive.

About Greece—it’s funny that Greece is trying to link up with the OECD, which doesn’t actually have any money to lend or give, as a rebuke to other institutions that failed to produce a real recovery plan. He wants to drive home the point that the troika failed. The troika is the European Commission, the ECB and the IMF. Tsipras is absolutely correct—the troika failed in every respect except its primary goal—minimizing the losses of banks and other investors in Greek assets.

It was never the goal of the troika to devise reforms that would be fair or even acceptable to Greek citi-zens. This makes the eurozone elitist and corporatist, as critics have charged all along. What good is it to the average Joe? It’s one thing for Greeks to feel aggrieved, but the message is clear in Spain and else-where—obey the boss, who doesn’t give a hoot about you, no matter how unreasonable, or get kicked out. Whatever your political interpretations, it’s undeniable the current system is deeply un-democratic.

Concern for the citizens should have been one of the troika goals, or perhaps the overriding guiding principle, but it was not. The OECD sets itself up as a “system-tending” institution that has vast knowledge about how things work, or should work, but it doesn’t actually make loans, although some-times it prods lenders and borrowers in certain directions. So, maybe the OECD has some kind of moral authority and a seemingly solid analytical capability, but in practice, OECD economists are a bunch of idealistic ivory-tower pinkos who have never worked in banking or private industry and don’t have a clue about taxation or the intersection of politics and policy.

And to cap it all off, the existing troika doesn’t like being outed as both heartless and incompetent. Schaeuble is defending the existing institutions, two of which are new enough to need defending. Even if Tsipras backs down today and is willing to pretend to respect the failed institutions (assuming that is politically possible), it’s not clear that bringing in a new coach in the form of the OECD is going to make the Greek team play any better. The OECD might be useful in firing up the privatization effort again, but it can’t make Greeks pay their taxes.

Gloom is probably the right attitude, but that doesn’t necessarily mean the euro heads straight down. For one thing, the market is already up to its eyeballs in short euro positions. Any short-covering could set off a rally-ette that could break to the upside. It wouldn’t last, probably, but it’s a legitimate fear. The Eurogroup is holding a press conference scheduled for 2 pm ET this afternoon. This may be one of those days (like FOMC days) when the action isn’t over by 11 am.