Wednesday, 5 January 2011
David Beckwith on why rising USTs aren't a sign that QE2 has failed
If QE2 is successful, then we would expect treasury yields to rise! A successful QE will first raise inflation expectations. This alone will put upward pressure on nominal yields. However, expectations of higher inflation are in effect expectations of higher nominal spending. And higher expected nominal spending in an economy with sticky prices and excess capacity will lead to increases in expected real economic growth. The expected real economic growth should in turn increase the real yields. It is that simple.
Sunday, 26 December 2010
Alex Ross on Bob Dylan
In the verbal jungle of rock criticism, Dylan is seldom talked about in musical terms. His work is analysed instead as poetry, punditry, or mystification.
Joan Didion said that Joan Baez was a personality before she was a person and the same could be said of Dylan.
Joan Didion said that Joan Baez was a personality before she was a person and the same could be said of Dylan.
Tuesday, 30 November 2010
John Steinbeck on the decline of the USA
....made me think of the current political situation and the anger of the tea-baggers:
"Americans, over invested in material toys and saddled with debt are bored, anguished and discontented and no longer capable of the heroism which rescued them from the terrifying poverty of the Great Depression. And underneath it all, building energies like gases in a corpse. When that explodes, I tremble to think what will be the result." John Steinbeck to his editor Pascal Covici, 1960.
"Americans, over invested in material toys and saddled with debt are bored, anguished and discontented and no longer capable of the heroism which rescued them from the terrifying poverty of the Great Depression. And underneath it all, building energies like gases in a corpse. When that explodes, I tremble to think what will be the result." John Steinbeck to his editor Pascal Covici, 1960.
Buiter on MCM
He may be the chief economist of Citigroup but that doesn’t mean he can’t speak his mind as his latest essay for the bank’s clients proves. In it, Buiter claims Ireland is insolvent, Portugal is quietly insolvent, Greece is de facto insolvent and Spain will be insolvent once the problems in its banking sector are recognised. At which point things get really interesting. Buiter predicts the ECB could be forced to buy Spanish government paper and fund its banking system by purchasing the debt from the European Financial Stability Facility if things get really bad.
From Buiter’s Sovereign Debt Crisis Update
Portugal and Greece:
After an Irish agreement with the EU/IMF, the market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates, is less dramatically, but quietly, insolvent, in our view. We consider it likely that it will need to access the EFSF soon.
Greece is de facto insolvent, in our view, all the more so after the recent debt and deficit revisions. As long as Greece remains sufficiently compliant with the conditionality of its EU/IMF program, sovereign debt restructuring is likely to be postponed at least until mid-2013, when its EU/IMF programme expires. At that point, it likely will be transferred to the EFSF or its successor. Whether its debt will be restructured at that stage, including haircuts, will depend on factors beyond the sustainability of its debt.
Spain:
For now, the markets have put Spain in Italy’s sovereign risk class when, in our view, it should be closer to Portugal and Ireland once its banking sector problems are recognised. We argued before that the EFSF should be much larger (€2trn). Should Spain need assistance, it will stretch the resources of the EFSF, perhaps beyond its current limits. There may be some room to expand the size of the EFSF. But, in our view, once Spain needs assistance, the support of the ECB will be critical (by purchasing Spanish sovereign debt through its Securities Markets Program — SMP — and funding Spanish banks using Spanish sovereign debt or sovereign-guaranteed financial instruments as collateral or by making loans to or purchasing the debt of the EFSF, legally a limited liability company that could even be made an eligible counterparty of the Eurosystem for this purpose).
In the longer term, there may be a need for large-scale restructuring of the debt of the Spanish banking sector and possibly the sovereign. At longer horizons, high debt levels and political instability in Italy and Belgium may yet give rise to fundamentally warranted sovereign debt crises, while self-justifying crises are possible even in the near term, despite roughly balanced structural primary budgets.
And if you thought that the EU/IMF bailout marked the end of Ireland’s troubles, think again says Buiter:
Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.
From Buiter’s Sovereign Debt Crisis Update
Portugal and Greece:
After an Irish agreement with the EU/IMF, the market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates, is less dramatically, but quietly, insolvent, in our view. We consider it likely that it will need to access the EFSF soon.
Greece is de facto insolvent, in our view, all the more so after the recent debt and deficit revisions. As long as Greece remains sufficiently compliant with the conditionality of its EU/IMF program, sovereign debt restructuring is likely to be postponed at least until mid-2013, when its EU/IMF programme expires. At that point, it likely will be transferred to the EFSF or its successor. Whether its debt will be restructured at that stage, including haircuts, will depend on factors beyond the sustainability of its debt.
Spain:
For now, the markets have put Spain in Italy’s sovereign risk class when, in our view, it should be closer to Portugal and Ireland once its banking sector problems are recognised. We argued before that the EFSF should be much larger (€2trn). Should Spain need assistance, it will stretch the resources of the EFSF, perhaps beyond its current limits. There may be some room to expand the size of the EFSF. But, in our view, once Spain needs assistance, the support of the ECB will be critical (by purchasing Spanish sovereign debt through its Securities Markets Program — SMP — and funding Spanish banks using Spanish sovereign debt or sovereign-guaranteed financial instruments as collateral or by making loans to or purchasing the debt of the EFSF, legally a limited liability company that could even be made an eligible counterparty of the Eurosystem for this purpose).
In the longer term, there may be a need for large-scale restructuring of the debt of the Spanish banking sector and possibly the sovereign. At longer horizons, high debt levels and political instability in Italy and Belgium may yet give rise to fundamentally warranted sovereign debt crises, while self-justifying crises are possible even in the near term, despite roughly balanced structural primary budgets.
And if you thought that the EU/IMF bailout marked the end of Ireland’s troubles, think again says Buiter:
Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.
FT Alphaville on the Merkel Crash Mechanism
BNP Paribas agrees, it’s the Merkel crash
Posted by Izabella Kaminska on Nov 30 11:15.
It was first highlighted by economist Paul de Grauwe.
But, dare we say, the so-called ‘Merkel crash’ is quickly becoming analyst consensus for what really triggered this latest European debt rout.
As BNP Paribas points out on Tuesday:
Yesterday did see EMU spreads widening further despite the release of a credible Irish rescue package. The reason for continued peripheral selling pressure may be related to the funding needs of banks as highlighted in the stability report of the BoP. It was last Tuesday when Germany showed a blueprint for the further regulation of the private bond market. Germany aims introducing this law in 2011 and would like to harmonise this law EU wide. The blue print suggested that next to creditors and debtors it would be the regulator to decide if and when there would be hair cuts or maturity lengthening on outstanding bonds announced. Hence, last Tuesday set the starting point for bank CDS’s moving sharply up as markets assumed that bonds which such kind of clause (regulator deciding) would be difficult to sell. Spanish banks will have come to the capital market in the first half of 2011 and will have to issue more bonds than the Spanish sovereign. The stability report of the BoP highlighting this problematic will keep investors concerned and the EUR offered.
And thus the European Stability Mechanism is transforms ever more officially into the European Instability Mechanism (EIM), alternatively to be known as Merkel’s Crash Mechanism (MCM).
Vorsprung durch mechanismen.
Posted by Izabella Kaminska on Nov 30 11:15.
It was first highlighted by economist Paul de Grauwe.
But, dare we say, the so-called ‘Merkel crash’ is quickly becoming analyst consensus for what really triggered this latest European debt rout.
As BNP Paribas points out on Tuesday:
Yesterday did see EMU spreads widening further despite the release of a credible Irish rescue package. The reason for continued peripheral selling pressure may be related to the funding needs of banks as highlighted in the stability report of the BoP. It was last Tuesday when Germany showed a blueprint for the further regulation of the private bond market. Germany aims introducing this law in 2011 and would like to harmonise this law EU wide. The blue print suggested that next to creditors and debtors it would be the regulator to decide if and when there would be hair cuts or maturity lengthening on outstanding bonds announced. Hence, last Tuesday set the starting point for bank CDS’s moving sharply up as markets assumed that bonds which such kind of clause (regulator deciding) would be difficult to sell. Spanish banks will have come to the capital market in the first half of 2011 and will have to issue more bonds than the Spanish sovereign. The stability report of the BoP highlighting this problematic will keep investors concerned and the EUR offered.
And thus the European Stability Mechanism is transforms ever more officially into the European Instability Mechanism (EIM), alternatively to be known as Merkel’s Crash Mechanism (MCM).
Vorsprung durch mechanismen.
Saturday, 20 November 2010
Michael Dirda on John Banville
Chekhov used to say that one had to be a god to distinguish between success and failure. While John Banville has won Britain’s major literary awards—the James Tait Black Memorial Prize for Doctor Copernicus in 1976 and the Guardian Fiction Prize for Kepler in 1981, as well as the real plum, the Man Booker for The Sea (2005)—and while he has been widely (and rightly) acclaimed for his linguistic inventiveness and artistic intelligence, his novels have tended to be more admired than loved. My impression from reading reviews and talking to readers is that his books, for all their virtuosity and precision, are seen by many as slightly forbidding and emotionally cold, their tone arch, their humor nastily black.
William Easterly on Foreign Aid for Scoundrels in the NYRB
....A more important political motive for aid is independent of cold wars or wars on terror. Aid agencies exist to give aid, so they must keep the money flowing. The department of an aid agency assigned to help a country may not get a budget next year if its officials don’t disburse to the country’s ruler this year; so they hand out funds no matter how autocratic he is.....
...The concept of development helps rationalize the position of autocrats by postulating an unstoppable transition toward a bright future. This is why donors call all poor countries “developing.” Once the donors started paying lip service to democracy, they could label undemocratic aid recipients as “democratizing.” Let’s call this the Gerund Defense for supporting dictators....
...The Gerund Defense has the attraction of being irrefutable. We don’t know the future, so we don’t know whether a particular event is a “setback” to “building institutions,” or whether the “building” is a myth. We could of course observe the actual trend in “democratizing”—but this has been discouraging in Ethiopia, where parties and politicians that seriously challenge the government risk prison. Donors could conceivably overlook anything, even the 1994 Rwanda genocide, as a temporary “setback” to an “innate tendency.” Such a view is not as easily dismissed as you might think.
...The concept of development helps rationalize the position of autocrats by postulating an unstoppable transition toward a bright future. This is why donors call all poor countries “developing.” Once the donors started paying lip service to democracy, they could label undemocratic aid recipients as “democratizing.” Let’s call this the Gerund Defense for supporting dictators....
...The Gerund Defense has the attraction of being irrefutable. We don’t know the future, so we don’t know whether a particular event is a “setback” to “building institutions,” or whether the “building” is a myth. We could of course observe the actual trend in “democratizing”—but this has been discouraging in Ethiopia, where parties and politicians that seriously challenge the government risk prison. Donors could conceivably overlook anything, even the 1994 Rwanda genocide, as a temporary “setback” to an “innate tendency.” Such a view is not as easily dismissed as you might think.
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