Monday, February 16, 2009

Ugly comments from FT

3 articles in the FT comment section this morning each in its own way harbinger of bad news.

1- Obama's lonely quest for consensus

On the one hand the dems are throwing every pet project they had floating around in that bag. On the other the republicans are trying to block based on ideology and size (too big they say! more tax cuts! after years of Bush that one made me chuckle). So they appear as ideological radicals and not ready to compromise. All in all a shameful and a wasteful spectacle for the rest of us. Politicians are failing to raise up to the occasion for lack of pragmatism across the spectrum.

2/ Narrow-minded leadership hurts Europe
In here munchau lambasts the europeans for defaulting to what they can do: regional stimulus packages that beggar thy neighbor. Sarkozy is talking bullshit across the board and appeasing the french voters. The Austrian banking system in imploding the Germans are refusing to bail them out "not our problem" etc etc. Protectionism is a natural consequence of "bail at home, don't bail the neighbor" and a retrenchment to voting constituencies (e.g nations of Europe) makes sense although it maybe what accelerates this crisis. Negative spirals are tough!

3/ Co-ordinated inflation could bail us all out
Although the title of this one is positive, look! an end to this crisis! I find it naive. It assumes that government control inflation with the fine grained degree that is shown here. When I talk of inflation I include all asset prices, not the inflation ex-inflation index governments like to look at. The housing bubble of late was inflation, monetary inflation. Governments do not control monetary levels of private debt anymore. Deregulation made sure they don't anymore and the invisible hand took those levels to dizzying heights, the invisible hand is now deleveraging and monetary levels will reset (minus the money injected) but current consensus is "too little". So yes, the article is right, 4% inflation would be dandy! unfortunately that is not a point of control by the central banks anymore. The invisible hand will do what the invisible hand does, let's hope it doesn't strangle the patient too long. Evolution says the invisible hand should stop strangling before we die, or we would be dead by now. But this evolutionary thinking is akin to someone falling to the floor and thinking "so far I am alive".


Andrew Meyer said...

There was a very interesting event last Thursday that I thought should have sent shivers down European spines.

For the second time this year, Germany failed offering 10-year bonds at 3.38%.

If Germany cannot sell government bonds, what other European country has a hope? If European governments cannot sell bonds to fund stimulus, bank assistance etc., their economic options become very limited.

Compare that to the US, which has no difficulty selling 10 year bonds at 2.75%

I'm starting to understand the theory of relative advantage in a whole new way and becoming considerably more optimistic about the US.

Marcf said...

Thanks the link Andrew,

yes it boggles the mind, although with the $3T coming down the pike I would be surprised if the bonds hold at that rate.

Anonymous said...

fighting recession with inflation supposes that inflation is something that can indeed be controlled. sort of like fighting a fire with a back fire. looks good on paper, but when it gets out of control - things can go very wrong very quickly. and in this case the invisible hand could go berserk.
my thinking is the cause of the problem should be addressed head on and isolated... isolate the "toxic" securities and throw those that created them into the brig. in a very public manner.
the separation will take a big gulp to get down, and the incarceration of the "scoundrels" will help everybody feel better quickly. a venting of the spleen so to speak.
I'm sure there are some "rules" that were broken... even if we have to creatively dig some up... it could be done.
it may even be in the doing now - governments take a very long time preparing their cases.
my 2 cents worth. perhaps over priced.

Andrew Meyer said...

It will be interesting to see. I suspect that the US will be seen as the safest haven for money. Until the threat of deflation is gone, the US will probably be able to sell treasuries at steep discounts to anyone else. Maybe, as the German failure shows, others will not be able to sell at all. What happens to them then?

Someday, it will change and the scent of inflation will over power the concerns of deflation. At that point, interest rates rise dramatically.

The question is, how long will that take and how much damage will the US have wrought?

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