I was reading an article in the FT this morning as to how the UK government bonds were being rewarded as "safe haven" status with ultra low yield. I kind of lost it in the comment sections out of disgust.
Of course the tone of article and commentary was all self congratulatory, about, really, how the superior management and responsibility paid off.
What a joke.
Ain't nothing going on but QE
All there is to it is a lot of money printing. Buy enough of your own debt (aka monetizing debt, QE, Printing money) and your yields will go dramatically lower. It is not because they are better or better run or safer it is just the mathematics of demand/offer when one of the players has infinite liquidity at his disposal.
QE as a stabilizer
QE1 in the US has backstopped the negative spiral of depression. Let the records show that much. It can be an effective stabilizer. Those that fret about inflation confuse flow and stock. Yes, printing is of course an inflationary contribution but if your background is one of debt deflation (as is going on massively in the western world since 2007) then you are counteracting the main trend. You have a big negative monetary flow (debt deflation) countered by a positive flow (QE) for a net result that may still be negative (stock). QE1 was started in the midst of financial panic in March 08 when the DOW was at 6,666. (yup)
QE2 as a financial weapon
While I can easily rationalize QE1, I must admit I was taken by surprise when Bernanke announced QE2, even though we were in the midst of a summer panik in 2010. I rationalize it as a competitive devaluation of the money vis a vis trading partners and a further stimulus to your economy via depressed yield curves and low cost of financing.
I am growing increasingly convinced we are in the midst of an all out financial war, with QE as the main nuclear weapon in use. Naked CDS are weapons of mass destruction (really folks? you want to be paid 10x what a sovereign is defaulting on?). Again low cost of financing for a govt in times of crisis is a god sent (minus the tea-party clownery on the debt ceiling it is all blue sky for the US cost of financing compared to the 7% italy is paying). Devaluing your currency is the simplest way to go back to growth.
Maastricht constraints, German attitudes
By constitution, the ECB cannot, in theory, print all the money it needs to buy a targeted sovereign (no preference clause, no bail out clause). This is partly due the germans ingrained distrust of money printing given their history and partly due to the hawkish stance of Mr Trichet and the technocrats in general.
The QE pedal will be pressed
So Miss Market is throwing her weakly tantrum, getting governments toppled and demanding her pound of flesh in fresh money. The moment a sovereign cannot fund itself in the face of sound fundamentals is when the QE pedal must be pressed. I do not buy for a second that Italy is fundamentally insolvent (and not just in the MMT sense that one can print, but in the accounting sense), this is a liquidity crisis that is quickly turning into a solvency one but with reverse causality.
EFSF and QE
Mechanisms like the one in the post below with the put/cds EFSF structure also naturally put QE where and when it is needed, not too soon and not too late. The moment it is put in action, the euro will slid which will help everyone including the germans, the euro stocks will rally, competitiveness will be regained using the same weapon the US/UK are using. The cost of funding governments will go down and this whole non-sense driven by hedge funds will evaporate.
Miss Markets gets her way
Of course, the paranoid analysis (which has been profitable for me in the short term) is that there is a concerted attack by hedge funds on sovereign, picking them one by one as if a sniper, all the while harping on the moral defaults of the greeks and Berlusconi. But what Miss Market wants is 1/ volatility 2/ FREE MONEY. It is about to get free money as she has succeeded in bringing about panic dynamics on Italy. The irony of it all.
A best of both worlds?
In fact I am hoping that the germans come to this view but keep a stiff back. This is not a bailout for profligate governments. While I watched in horror the tea-party debt ceiling self inflicted fiasco, and with contempt the self congratulatory comments in the FT about "low cost of funding is a safe haven status" I do think the EZ is overly socialist and that it cannot continue. France is a point in case, I consider france a proto-communist country in terms of the public employment trends, they always go up, never down.
That compromise will restructure of government through austerity, where a little bit goes a long way and too much will kill your economy in in a simple Keynesian way, while at the same time lowering the cost of funding for the remaining streamlined operations.