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

Monday, January 31, 2011

Really good links - Deficit - Ireland - China - Schuldenbegrenzungsregelung - Netherlands - A cross of rubber - Germany - Carry trade

Karl Smith - Federal deficit - "If the government takes out a loan and then gives that proceeds of that loan to taxpayers, the balance sheet of the US as a whole has not deteriorated. The government owes more, the people owe less.
        So increasing the supply of US debt in and of itself doesn’t hurt the US’s asset position. It does, however, arbitrage the difference between private borrowing costs and public borrowing costs.
        Performing this type of credit arbitrage is one the main functions of a financial system, however, ours is still working its kinks out and building back up its capital base. Thus, its helpful for the Feds to step in and do the arbitrage for us."

Ralph Atkins - ECB tells Ireland to avoid bank run - "The European Central Bank still faces a stand-off with Dublin. The FT reports today the warning by Lorenzo Bini Smaghi, an ECB executive board member, that Ireland cannot expect to renegotiate the terms of its bail-out. The matter has become an issue in the country’s election campaign.<..>
        Diplomatically but firmly, Mr Bini Smaghi warns Ireland’s politicians that if they imposed losses (a “haircut”) on Irish senior bank bondholders, “immediately you would have a run on the banks”. Irish account holders themselves would worry about the security of their savings. The end result could be a collapse of the banking system – and the Irish taxpayers would face an even larger bill."

Scott Sumner - China and us - "For China to blame the US for its inflation, when they refused to cut back on the number of Treasury bonds they bought as a way of tightening monetary policy and boosting the yuan, would be like the US blaming China for high unemployment, when we refused to buy more Treasury bonds to weaken the dollar and boost the prices of commodities, stocks, TIPS and foreign currencies. Bernanke and company showed in November that they are quite capable of taking affirmative steps to solve our own problems (although I’d like to see even bigger steps.) Now China needs to show the same can-do spirit, and stop blaming foreigners for its problems."

EurActiv - Schuldenbegrenzungsregelung - "Interestingly, the Brussels lawyers are reportedly working on a draft policy to replicate the 2009 German debt brake across the EU, something sources say is also being touted by the Swedish government.
        If member states want to increase the size or scope of the fund, then the German government will expect them to imitate the German brake, the 'Schuldenbegrenzungsregelung', which writes deficit limits into the country's constitution, according to an EU diplomat.
        French President Nicolas Sarkozy came out in favour of an EU-wide adoption of constitutionally-bound debt brakes in June last year."

Robert Shiller - Are Dutch thrifty? - "I bet it’s not true. Because if the Dutch had been conspicuous savers for centuries, they would be vastly richer than any of us. It would accumulate over centuries. I like to use another example from Holland, which is that home prices in Amsterdam, according to Piet Eichholtz at Maastricht University, haven’t gone up – they’re no higher in real terms today than they were 300 years ago. So, I’m sorry, but you can’t be right.
        The amazing thing about saving is that if you really save a lot and you do it for a hundred years, reinvesting interest, you will get awfully rich, and that’s a fact. The best example of that is not Holland, it’s Singapore, which has had a government imposed saving plan. In Singapore, they have a mandatory saving plan that has propelled that nation up rapidly. It’s just arithmetic. If you save and invest, it adds up, because of the power of compound interest."

Kantoos - What do Germans hate more, inflation or bailouts?

Paul Krugman - A cross of rubber - "What about commodity prices? The Fed normally focuses on “core” inflation, which excludes food and energy, rather than “headline” inflation, because experience shows that while some prices fluctuate widely from month to month, others have a lot of inertia — and it’s the ones with inertia you want to worry about, because once either inflation or deflation gets built into these prices, it’s hard to get rid of.
        And this focus has served the Fed well in the past. In particular, the Fed was right not to raise rates in 2007-8, when commodity prices soared — briefly pushing headline inflation above 5 percent — only to plunge right back to earth. It’s hard to see why the Fed should behave differently this time, with inflation nowhere near as high as it was during the last commodity boom.
        So why the demand for higher rates? Well, bankers have a long history of getting fixated on commodity prices. Traditionally, that meant insisting that any rise in the price of gold would mean the end of Western civilization. These days it means demanding that interest rates be raised because the prices of copper, rubber, cotton and tin have gone up, even though underlying inflation is on the decline.
        Ben Bernanke clearly understands that raising rates now would be a huge mistake. But Jean-Claude Trichet, his European counterpart, is making hawkish noises — and both the Fed and the European Central Bank are under a lot of external pressure to do the wrong thing.
        They need to resist this pressure. Yes, commodity prices are up — but that’s no reason to perpetuate mass unemployment. To paraphrase William Jennings Bryan, we must not crucify our economies upon a cross of rubber."

Pasquale Della Corte, Lucio Sarno, Ilias Tsiakas - Carry trade and forward volatility trade - "The standard “carry trade” is a popular currency speculation strategy that invests in high-interest currencies by borrowing in low-interest currencies. This strategy works well if, for example, spot exchange rates are unpredictable. There is ample empirical evidence pointing in that direction or, in academic jargon, showing that exchange rates follow a random walk (Meese and Rogoff 1983). In this case, investors engaging in carry trading will on average earn the difference in interest rates without having to worry about movements in exchange rates. The return to currency speculation can be substantial over time. It should be no surprise, therefore, that the carry trade has attracted considerable attention from academics and practitioners over the years.
        In recent years, investors have been able to speculate not only on the value of currencies but also on the level of volatility of these currencies."

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