"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Monday, June 14, 2010

Really great links - Krugman - Eurozone breakup - Haircuts - Scott Sumner - Gold

Paul Krugman - Strange Arguments For Higher Rates - "Rajan’s argument boils down to two assertions:
        1. Raising rates a bit wouldn’t significantly deter investment.
        2. “Unnaturally low” interest rates are distorting asset prices.
        The first thing to say about these two assertions is that they are essentially contradictory. If the difference between current rates and the rates Rajan wants is trivial — just a wafer thin mint — how can that same difference be leading to a major distortion in financial markets? Are we to believe that an interest rate change that matters not at all to firms making real investments somehow has huge effects on speculators? And actually, don’t asset prices themselves matter for real investment?"

Dino Kos - German bonds aren’t the havens they appear to be - - "One compelling reason to hold Bunds (or German bank deposits) is if investors believe a euro break-up is likely and wish to position themselves to have holdings converted into Deutschemarks. That scenario cannot be ruled out. However, euro area officials have been clear: monetary union will be defended and defaults are not on the agenda. That suggests peripheral countries will remain in the euro area and taxpayers in the core are susceptible to additional “calls” for cash in the future."

John Dizard - Euro bondholder haircuts would help - "After the Lehman collapse, only Kazakhstan systematically resorted to bondholder haircuts to pay part of the cost of bank restructuring. I believe they’ll be followed by other authorities."

Scott Sumner - Post-modern macroeconomics - "So why does The Economist imply that a policy of “price stability” failed to ensure economic stability? I think there are two reasons. First, they think the financial crisis (not falling inflation) caused the recession. And second, they don’t think monetary policy could have done much to prevent the fall in inflation."

James Hamilton - Gold and inflation - "There's a common thread to all the above figures, and it's not fears about inflation. Instead it's worries about the level of real economic activity, showing up in a flight to safety. U.S. Treasuries remain the instrument of choice for investors who think nothing looks safe.
        But with the long-run fiscal challenges facing the United States, are 10-year Treasuries really the safest place to put your money? The yellow metal seems to be one way some people are hedging that bet."

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