Tag Archives: Euro

CNBC’s John Carney on Krugman and MMT

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>   
>   (email exchange)
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>   On Sat, Nov 12, 2011 at 2:19 PM, Stephanie wrote:
>   
>   John Carney loving on us again

Yes!

Paul Krugman Goes MMT on Italy

By John Carney

November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.

As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.

“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”

But today’s column is basically right out of MMT.

“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

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Merkel comments

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*DJ Merkel: “Euro Zone Solidarity Must Be Combined With Sound Budget Measures”

To make sure unemployment never comes down and unit labor costs stay down.

*DJ Merkel: Italy Will Put Through Planned Austerity Measures Soon

Also to make sure unemployment never comes down and unit labor costs stay down.

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Talk still cheap – ECB writes the check again

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Lots of talk, particularly from Germany about the ECB not writing the check, due to (errant) inflation concerns.

But to no avail. In fact, with the Rubicon crossing decision to haircut Greek bonds 50% for the private sector’s holdings, expect the check writing to continue to intensify.

And expect economies to continue to slow under the pressure of continuing austerity demands that also work to make their deficits higher.

From today’s headlines:

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen
A Successor, Picked by a Tainted Hand
EU Lowers Euro-Region Growth Forecasts
Italy’s Senate Speeds Austerity Vote
Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says
Greek President to Meet Party Leaders as Unity Aim in Disarray

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen

By Paul Dobson

November 10 (Bloomberg) — Italian government bonds rose as the European Central Bank was said to purchase the securities and after the nation sold the maximum amount of one-year bills on offer at an auction.

The advance pushed the yield on 10-year securities below 7 percent. Italy’s senate is set to vote tomorrow on a package of austerity measures designed to clear the way for establishing a new government and restore confidence in Europe’s second-biggest debtor. The nation sold 5 billion euros ($6.8 billion) of bills at an average yield of 6.087 percent, up from 3.570 percent on similar-maturity securities sold last month.

“Together with reported ECB buying, this auction result should support further Italy outperformance,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate and Investment Bank in London.

The yield on two-year Italian government notes slid 55 basis points to 6.66 percent at 9:43 a.m. London time. The 2.25 percent securities due November 2013 rose 0.915, or 9.15 euros per 1,000-euro face amount, to 92.205.

The ECB bought Italian government bonds, according to five people familiar with the transactions, who declined to be identified because the deals are confidential. It also bought Spanish securities, two of the people added. The ECB was not immediately available for comment when contacted by telephone.

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Noda Makes Consumption Tax Hike Pledge At G-20 Summit

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The world’s poster child for losing decades looks to stay a step ahead:

(Nikkei)–Prime Minister Yoshihiko Noda vowed Thursday to gradually raise the nation’s consumption tax to 10% by mid the 2010s during a summit meeting of the Group of 20 leading economies in Cannes, France.

The announcement at the summit has effectively made the tax hike an international pledge, and is expected to be included in an action program due out Friday.

Noda stressed the importance of rebuilding debt-ridden Japanese finances and told G-20 leaders that fiscal consolidation is a must “for Japan to be put back on a sound economic growth path, regardless of the debt crisis in the euro zone.”

He also spoke to reporters that a Diet dissolution should be carried out before implementing the tax hike. “If we go to the people in a general election (to seek a mandate on the consumption tax hike), we should do so after passing related bills but before implementing them,” he said.

As to Japan’s participation in the Trans-Pacific Partnership free trade pact, Noda told reporters he will accelerate efforts to iron out differences within the Democratic Party of Japan, which he leads. “We have to close ranks and shouldn’t be split,” he said.

Noda showed his flexibility in making concessions to a controversial redemption period of reconstruction bonds aimed at funding rebuilding efforts of the March 11 disaster, in hopes of enlisting support from the Liberal Democratic Party and New Komeito, the main opposition parties.

“Our policy chief said that we envisage a 15-year period (for the redemption of reconstruction bonds), but there’s room for concessions,” he said.

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Blog Comment on Italy

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This was recently posted by a reader:

I’m from Italy so I can answer your question. The general and most accepted ideas in Italy are:

  • “The problem is president Berlusconi.”
  • “We need structural reforms!” (In every pub people love to say that, to feel themselves intelligent, the same that are in precarious financial conditions.)
  • “We are not credible.”
  • “We live beyond our means.”


And the best:

  • “Without the Euro it would be a catastrophe, fortunately, we have a strong currency.”

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the euro zone in transition

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As previously discussed since inception, operationally the euro zone, much like every other nation with its own currency, will, one way or another, wind up with the ECB, the issuer of the currency,
‘funding’ fiscal deficits sufficient to meet any net savings desires in that currency, as well as funding the banking system’s liabilities.

The open question has always been is how it gets from here to there, and the answer to that has never been clear.

So far it’s doing it with great reluctance, with the ECB funding the banking system and select national govts only as a last resort, and not yet in the normal course of business.

A weakening global economy now seems to be forcing the next move towards the ultimate expected outcome.

We may have reached that point where their austerity measures, rather than bringing national govt deficits down, will instead make those deficit go up, as they induce macro economic weakness which ‘automatically’ increases transfer payments and decreases tax revenues.

This is a highly unstable equilibrium condition that can accelerate into a variety of forms of oblivion, which ultimately reaches the core as default risk premiums move down the line, much like a multi car pile up as one car after another crashes into the lead pack of wrecked cars.

And as the core is threatened, holders of euro financial assets, including foreign govts that hold various forms of euro financial assets as foreign currency reserves, feel the walls closing in, as one credit after another falls by the wayside.

Only a sudden increase in world aggregate demand, or a sudden change of policy that includes pro active ECB funding, is likely to be able to reverse what’s been happening

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Angry Irish Voters Ready to Exact Revenge

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Notice that they are angry at the government, not the currency arrangements, as previously discussed.

What’s saving the euro is that it’s not intuitively obvious that the currency arrangements could possibly be part of the problem.

Rates are low, there’s relatively little inflation, and and the foreign exchange value is reasonably strong and stable.

And it makes perfect sense that they are now paying for past govt abuses and policy blunders.

So the widespread dissatisfaction is directed at the national govts in question.

And there is little or no inclination to abandon the euro.

Angry Irish Voters Ready to Exact Revenge

January 21 (Reuters) — Irish Prime Minister Brian Cowen’s government, called “The Muppet Show” by one newspaper on Friday, can’t die soon enough for most voters.

espair has turned to fury among Irish people over an economic meltdown that has forced them to swallow ever deeper cutbacks and tax increases, while ministers emerge from their luxury state cars to speak of the country having turned a corner.

Ireland has witnessed no Greek-style riots but voters are impatient for the March 11 election, called by Cowen on Thursday, to exact revenge on the political class.

“We need to hurt them,” said Bernadette, a mother of four and owner of a wine importing business that has cut its staff to three from 15, “Unless you hurt them they won’t pay any attention to you.”

Voters regard the political class as at best complacent and at worst complicit in the nation’s transformation from economic star to euro zone basket case.

Cowen’s Fianna Fail party is set for a record rout in March, according to opinion polls.

While voters are likely to elect the mainstream opposition, some will opt for independents or the hard-left nationalist Sinn Fein party.

“They should all be gone. There should be an immediate general election. Everyone is sick of it, said postal worker Gerard Williams, 43.

“I’ll be voting for independent candidates. The big parties have lost the run of themselves,” Williams said as he walked through St Stephen’s Green in central Dublin.

Outside Cowen’s home county of Offaly, it is difficult to find anyone with a good word to say about him.

In an editorial The Irish Times newspaper despaired: “God Almighty, no one thought it could have got worse! The Government is staggering like a drunken sailor towards collapse.”

The Irish Independent said previous comparisons between Cowen and the captain of the Titanic had been unfair: “Even the captain of the Titanic was able to rearrange the deck chairs.”

Cosy Culture

A botched attempt at a cabinet reshuffle forced Cowen to call the early election following scandals over his drinking habits and questionable choice of golf buddies.

Polls suggest the two main opposition parties – centre-right Fine Gael and centre-left Labour – will form the next coalition government.

But with Fianna Fail set for a hammering the field is also open for independent candidates and Sinn Fein.

Ireland’s crisis has its roots in reckless lending and lax oversight of bankers and property developers, groups actively courted by politicians for donations during the boom years.

Revelations that Cowen played golf with the former chairman of Anglo Irish Bank months before it was taken into state care cemented for many people their view that business and politics enjoyed a cosy culture.

The spectacle of ministers and parliamentarians resigning before the election with large pensions and reports of developers and bankers living well overseas have infuriated those who didn’t buy into the Prada bag culture during the boom years when Ireland was called the “Celtic Tiger” economy.

“It’s the ordinary man in the street, the middle classes, those in the private sector that are paying,” said Marion, 57, who worked in a multinational firm for 30 years.

“I didn’t benefit from the Celtic Tiger. I lived within my means. Will I even get a pension now?”

The downturn has forced Irish people, particularly young graduates, to seek work abroad, a bitter development for people who thought they had seen the back of mass emigration.

“There are no jobs; all of my son’s friends have left,” said Bernadette. “They are leaving because this is not a country to live in anymore. The government looked after the banks. For them, it’s like we don’t exist.”

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ECB’s Trichet Says European Economy Showing ‘Encouraging’ Signs

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The ECB has ‘written the check’ by buying national govt bonds in the secondary market in sufficient size to allow the national govs to fund themselves, and equities are coming back as solvency fears abate.

There is still solvency risk, but now that risk is the risk of the ECB cutting off any nation in question.

And with exports firming the same forces are causing the currency to strengthen to the point where net exports remain relatively stable.

The ECB is also in full control of the banking system liquidity, as it too is dependent on ECB funding, and dictates terms and conditions there as well, where there need be no failures (even a bank with negative capital can be sustained by liquidity provision) unless the ECB decides to let a bank fail.

EU Headlines:

ECB’s Trichet Says European Economy Showing ‘Encouraging’ Signs

Trichet dismisses fears over eurozone

Trichet Says European Capacity to Decide Always Underestimated

Trichet Says Bond Market Developments ‘Going in Right Direction’

Trichet Calls for ‘Appropriate’ Action on Stress Tests

Banks Will Need More Cash After Stress Tests

EU ‘Stress’ Tests Shrouded in Secrecy

EU Commission’s Barroso Says Bank Stress Tests Are ‘Credible’

ECB’s Bini Smaghi Says Greece Must Maintain Consolidation Effort

Bini Smaghi Says Market Rate Increase Won’t Affect Bank Loans

Stark Says ECB’s Monetary Analysis Enforces Discipline

Annual German Inflation Slows in June to 0.9 Per Cent

German Upper House Approves Naked Short-Selling Ban

French Manufacturing Rose in May, Lifted by Exports, Car Output

Italian Production Climbs as Weak Euro, Recovery Lifts Exports

Spain to allow cajas to sell 50% of equity

Greece Approves Austerity Plan Amid Outcry

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EU Daily | European Industrial Orders Increase for Third Month

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As previously discussed, it is possible their deficits already got high enough and the euro low enough to support very modest growth when market forces intervened to stop further fiscal expansion.

One problem now is proactive cuts can set them back if a combination of private sector credit and exports doesn’t expand at the same time.

And expanding exports remains problematic as that would tend to strengthen the currency to the point where net exports remain relatively low, and there is nothing they can do to keep the euro down should that happen.

Another problem is the market forces that are working to limit their fiscal expansion will continue to hamper their ability to fund themselves, especially with continuing talk of ‘restructuring’ which, functionally, is a form of default.

I’ve read the ECB is now buying about 10 billion euro/week of national govt bonds in the secondary markets and ‘learning and demonstrating’ that it is not inflationary, doesn’t cause a currency collapse, and poses no operational risk to the ECB as some feared it might. As they all become ‘comfortable’ with this look for market forces to ‘force’ them to expand the buying geometrically as happened with their funding of their banking system, where much of the ‘risk’ is now at the ECB as they accept collateral for funding from their member banks that no one else will.

Operationally the ECB can fund the whole shooting match. And if they can address the moral hazard the usual way via the growth and stability pact, this time with the leverage of being able to threaten to cut off ECB funding to punish non compliance.

This ‘solution’ of the ECB buying national govt debt in the secondary markets is conceptually/functionally nearly identical to my proposal of per capita distributions to the national govts by the ECB. The difference is my proposal would not have ‘rewarded bad behavior’ as theirs does, but that’s a relatively minor consideration for them at the moment, and if they continue doing what they are doing, they have ‘saved the euro,’ even though having the ECB fund all the banks and national govts wasn’t their original idea of how it all would end up.

European Industrial Orders Increase for Third Month

Trichet Says Current Situation Requires ‘Credible Measures’

ECB’s Trichet Says Italian Budget Cuts Go in ‘Right Direction’

German debt agency asked to issue bonds

Schäuble defends German austerity

German Government Won’t Turn to Tax Cuts Amid Deficit Reduction

S&P’s Kraemer Sees No ‘Serious Risk’ of Euro Break Up

Merkel Defends Spending Cuts, Gets Backing From Trichet

Germany Sees Jobless Numbers at Under 3 Million

French Consumer Spending Gains on Signs Job Market Is Improving

French Economy to Expand 1.4% This Year on Exports, Insee Says

Zapatero Says Not Cutting Deficit Would Raise Interest Costs

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