Few thoughts for Monday morning

There are strange things happening in the economic world these days.

When it comes to Greece’s problems apparently a default is inferior to a bailout. Of course we are not told from who’s perspective is this proposition. Somehow default leads to contagion but a bailout does not lead to moral hazard.  Why wouldn’t Portugal demand the same treatment as Greece for example?

Another issue I have is that all of the sudden inflation is good. The more the better and central banks should do everything they could to inflate in order to put economies on growth paths again. There is no regard for people that do not have access to saving instruments that protect them from inflation. There is no concern anymore that inflating will lower the real burden on government debt and thus giving governments the incentive to borrow more.

Related to the previous one, government intervention is good these days. It seems that the way out of the current crisis is more government intervention disguised under the “public investment” label. How come lowering taxes has become such a bad solution? It is even opposed by private citizens and corporations. This is very strange indeed.




23 thoughts on “Few thoughts for Monday morning

  1. I don’t know about anyone else, but to me Greece is in a default, and contagion has taken place (all over the eurozone perifery). Bailouts do not imply accepting a loss.

    On the other hand I’m not sure what to make of “all of the sudden inflation is good”. If Spain and Germany have the same currency, salaries in Spain are out of line when it comes to productivity, and inflation in Germany is at 1-2%, then how many years of deflation must the spanish economy face in order to get wages back in line with productivity since it no longer has the posibility to devaluate? In this case higher inflation in the core (Germany) is required in order to help both the perifery and the Eurozone. Inflation, as all other man made concepts is good or bad depending on how you use it.

    The lower taxes thing is however tricky. Lowering some taxes might help, lowering other taxes could prove a catastrophe. Again, it is all about percepetion, and how companies and households view those tax cuts (temporary or long term).

    1. @ddr
      In both cases, inflation and lower taxes, I refer to the general view that is dominating the public debate. It is my feeling that people are accepting too complacent solutions that few years ago would have sent a country for early elections.

      1. Agree, but I have the feeling that people have always been complacent. If you are an engineer you will probably not have enough time to deal with economic issues. What you can do is elect a politician you consider fit to take care of such issue for you.
        On the other hand, if you’re not into economics and don’t trust politicians you can look for hand-outs, fliers, educational stuff from the institutions (private, NGO’s or government) in charge with economic affairs.

        So, if politicians and institutions have failled us, what will normal people make of what is currently happening in the world?
        The answer is, they will not understand anything since everything looks like a blur to the untrained eye. Therefore the sudden swing in opinion (and such swings will continue).

        Btw, do you know that the ECB has on its website a video for kids with the main star the inflation monster?

  2. “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford

  3. I have to look at this things from a trader point of view. Greece is not yet in a default, which for me means Greece to leave euro area and CDS market to blow up. Otherwise, we still face many bailout scenarios that could bring more waves of irrational exuberance in markets. Briefly, if Greece dont fails to reach an agreement with private creditors and ECB decides to engage in some form in this deal then the markets will keep rising. Since the default option is not seen as a primal solution for debt crisis we might expect strange things to become normal. As El-Erian said, we have a “new normal” environment. By the way, Italy faces a key auction at 5y and 10y today, guess who will send the yields lower and its own balance sheet up? 🙂

    1. @Sergiu
      It depends if ISDA and the rating agencies declare it a default. I think they will.
      The default option may not be seen as the main solution but that is why it is the one with the most impact and potential to solve the crisis. In the words of Monty Python : No one expects the Spanish inquisition.

      1. Ok, but it has to be a “real default”, a default that is not priced in by markets. A default with a severe and promptly contagion and substantialy downside moves of markets. Not a default that only delays a same resolution for Portugal & Co. The debt burden is an exponential function of time elapsed to solve the crisis. 🙂
        Update: Italy saw borrowing costs fall Monday as the government sold 7.5 billion euros ($9.9 billion) of government bonds, including benchmark 10-year BTPs and a new five-year issue. The Treasury sold 2 billion euros of 10-year bonds at a yield of 6.08%, down from 6.98% in a sale on Dec. 29. A sale of 3.57 billion euros of new five-year bonds produced a yield of 5.39%, down from 6.47% in a previous sale of five-year securities last month.
        However, the italian MIB seems to not be very impressed by this auction. The effect of succesful auctions in the eurozone may fade as ECB’s BS soars.

  4. “However, the italian MIB seems to not be very impressed by this auction. The effect of succesful auctions in the eurozone may fade as ECB’s BS soars.” – this part should not appear with italics 😀

  5. “Another issue I have is that all of the sudden inflation is good.”

    I don’t think anybody in their right mind (and who isn’t a complete ignorant) thinks that.

    In an economy functioning at capacity, inflation does no do any good.
    However, the US and the Eurozone (among others) are not AT CAPACITY.

    The choices are to

    a) tough it out and wait for things to return to equilibrium


    b) a one-shot bout of inflation

    I, for one, favour b)

    1. @Daniel,
      I agree with you that the immediate response in 2007 should have been loose monetary policy. But I do not agree with you that after three years of zero policy rates, QE1, QE2, buying bonds in the private sector, increasing the public debt etc you still want more from monetary policy. Maybe the problem is somewhere else not with monetary policy.

      1. Do you think that government responses to the “crisis” have done that much harm to economic output ?

      2. Now we are getting somewhere :). I think they did not have a clue of how to solve the problem and just pored money at markets.look at the EU conundrum, they are just mocking around with crazy plans while governments increase their public debt and ECB breaks every rule in the book that they have written.

      3. Wait, I just thought of another thing.

        In 2008, when central banks fucked up big time and allowed NGDP to drop – monetary policy should have been eased, in order to get back to “normal”.

        But since it’s been more than 3 years … no point in trying to get back to the “old normal”, we just have to wait for the (very painful) internal devaluation and de-leveraging to finish running its course.

        Am I correct ?

      4. @Daniel,
        Yes in 2008 central banks were very slow to react And yes while the FED keeps rates at 0 the hope is the economy will de-leverage and start growing. This is my view. De-levaraging would be helped by higher purchasing power from the consumer via lower taxes and public expenditures.

      5. And here’s another one. Have a look at this

        Is this “the new normal” or just the effect of “tight money” ?

      6. @Daniel
        I think EU is suffering from structural issues in its labor market. It has never been as flexible as in US and the incentives are there for people to stay unemployed for a long period of time. Tight money has helped but my fear is that EU will remain with high structural unemployment even after the crisis period is over.

      7. “FED keeps rates at 0”

        Is there some 11th commandment that says “Thou shalt conduct monetary policy solely through the interest rate ?”

        Because if there is, I totally missed the memo.

        “EU is suffering from structural issues in its labor market.”

        I agree. But look at the graph. Things were pretty steady (not in a good way, but steady nonetheless) until 2008 … when everything blew up.

        Isn’t that another clue that money is still TOO TIGHT in the Eurozone (and for everyone pegged to the Euro) ?

      8. As I said, monetary policy in EU has been too tight until now. I am not sure it is the case anymore.

        Unemployment has been higher in Europe relative to US before the crisis and it will remain higher by historocal standarda after the crisis.

        No monteray policy has no single solution. The centrak bank can choose the instrument which does the best job in bringing the ojective to target.

        What is interesting to me is the energy devoted to the NGDP targeting today. It reminds me of the energy devoted ti inflation targeting in the 80s when inflation was high. The best way to destroy target/rule is to implement it.

        Sent from my iPhone

      9. Well, yeah – Mario Draghi seems to be conducting a stealthy easing … obviously, he can’t be open about – the Germans would lose the sh*t.

        “The centrak bank can choose the instrument which does the best job in bringing the ojective to target. ”

        And it is very unfortunate that they have chosen an instrument which can’t go below zero precisely when it needs to !

        “What is interesting to me is the energy devoted to the NGDP targeting today.”

        Like all things human, it will be flawed.
        But we will have our day in the sun, mwahahaha (twirls moustache 😛 )

      10. As I said , I hope some central bank will adopt NGDP targeting so I can see how/if it works in practice. I mainly want to se the excuses to bring the NGDP to target after it has overshot.

        Sent from my iPhone

  6. Ok, not gonna argue with that. But how exactly does that restrict output, and why do you think the natural rate of employment is considerably higher ?

    Have labour markets on the EU and the US gotten that much more imperfect than they were before ?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s