Dutch, Austrian and Finnish bonds start to sell off.

[Beet]

Trading of anything but German bunds—seen as safe securities akin to U.S. Treasurys—became difficult. Investors sold bonds issued by triple-A rated France and Austria. Even prices of bonds issued by fiscally upright Northern European triple-A nations such as Finland and the Netherlands fell.

Mr. Geithner, choosing his words carefully, suggested the European Central Bank should be doing more. "There are lots of ways for the central bank to play a more effective supportive role…It's not rocket science."

...Eurostat said gross domestic product in the 17-nation euro zone grew 0.6% at an annualized rate during the third quarter, the weakest expansion since the region came out of a recession more than two years ago.

The dour report showed fewer economies expanding. While Germany and France recovered, Austria barely grew and the Dutch economy contracted.

...Yields on bonds of the Netherlands rose 0.09 percentage point on Tuesday, rising to 0.626 percentage point above bunds. Finland jumped 0.107 percentage point to 0.707 percentage point above bunds and Austria rose to a spread of 1.80 percentage points.

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http://online.wsj.com/article/SB10001424052970204323904577039490200567620.html?mod=googlenews_wsj

Color me surprised. This is the first time that the bond market dislocation has hit countries running a current account surplus. It appears that economic fundamentals are becoming less and less important to the bond markets, or they are reacting to the latest GDP reports. Comments?

[Beet]

Wonkish, it's a self fulfilling prophecy. The more countries come under attack, the less their bonds are worth, the more trouble the banks are in, et cetera et cetera et cetera. The risk hasn't been shifted to the core-- that would imply that there's the same amount of risk now as there was 6 months ago or a year ago. The credit markets are not saying that. They're saying there's more risk. The risk has been allowed to grow into the core. Plus, no one, least of all the European authorities, has yet to articulate what the precise quantitative criteria of a solvent country is. The main worry is that the markets themselves are treated as 'perfectly rational' and allowed to determine whether a nation is solvent by themselves, thereby obliterating the dividing line between a liquidity crisis and a solvency crisis.

[Beet]

Mr. Geithner, choosing his words carefully, suggested the European Central Bank should be doing more. "There are lots of ways for the central bank to play a more effective supportive role…It's not rocket science."

Duh.  They can type 10,000,000,000,000 into the computer just as easily as I can.

I thought computers confused you?

Well, they bore me, Gustaf.  But either way, precisely the point was you don't need to understand anything other than where the ones and zeros and commas are on the keyboard:

Just type ten trillion or so in to the ECB computer, and buy up all the bonds.  Problem solved.

That's not true, opebo. The ECB, believe it or not, is aware of that possibility. However, there are enough German concerns of redistribution that they must be addressed.

Recently, Mervyn King did speak out in defense of the ECB. You should respect his opinion on this matter because he was educated at Cambridge, and given his role as Governor of the Bank of England, and given the Bank of England's actions in the past couple of years, you cannot say that he has Freiburg-school or Weimar-paranoia blinders on. He drew a key distinction between the BoE's bond buys and the kind of being asked of the ECB- the former, he said, was for the purpose of stimulating demand, whereas the latter, is being asked to finance government spending.

Of course, Germany was subsidizing other countries before in two ways. First, the market interest rates charged other countries fell dramatically in the 1990s as they approached euro-membership. It was Germany that was subsidizing these lower borrowing costs, which in some countries enabled quite a binge. Secondly, as Germany began to run large surpluses after 2005, it exerted upward pressure on the value of the euro, and hence allowed other countries to buy foreign-made goods and services at a lower price than they otherwise would have been charged. This financed the current account deficits of many other euro-area nations, encouraging consumption and disincentivizing production in these countries.

However, these subsidies were implicit. I believe that the German politicians either deceived the German people, or the latter deceived themselves, into believing that these were not real subsidies. Now, the market is demanding a shift from implicit to explicit subsidy. For better or worse, Germans are unwilling to finance these things in an explicit way.

Basically, Germany deserves something in return if the ECB is going to be asked to step in in a massive and asymmetric way. Some possibilities are for recipient countries to enact balanced budget amendments, or some other form of mandated fiscal targeting. It is obvious from Greece that piecemeal austerity measures enacted one-step-at-a-time have failed, so there must be measures that are enacted once, and once enacted, adjust themselves based on future circumstances.

Note that redistribution is less of a problem if the ECB intervenes symmetrically. That is, if it buys a proportionate amount of bonds from each country as each country holds in euro wealth. So if Germany has 20% of all euro wealth, then 20% of all bond buys under a symmetric bond buying program would be German. However, this would necessitate a much higher quantity of buys to defend the particular markets under the most trouble, and so has too much of an inflationary bias.

[Beet]

1) Although a lower exchange rate helped Germany export, by itself, exporting is not a good. It means you are working more for the sake of others. The countries' whose exchange rates are lifted up are the ones receiving subsidy.

2) The euro is not overvalued, the dollar is overvalued. The dollar is the most oversubsidized currency in history on account of the several trillion dollars held by non-dollar economies as official reserves. That is why China can help by diversifying its reserves.

3) Let me clarify that I do support ECB intervention and disagree with Jens Weidmann about Article 123-- it clearly prohibits specifically only direct buying from governments, there is no legal prohibition against buying on secondary markets (e.g., 'monetary financing').

4) All I am saying is that, this is a form of [continued] internal transfer, and Germany deserves some quid pro quo if it so demands, which by all appearances it does.

[Beet]

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Absolutely not true, it would fix the problem. The entire world's economy is based on the premise that debts will get paid off. Abandon that principle, and the entire world economy and world capitalism will collapse. It is worth any economic price to prevent that from happening. And if it does happen, urged on by the likes of people like you, Wonkish, we will know exactly who to blame in the Armageddon.

[Beet]

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Absolutely not true, it would fix the problem. The entire world's economy is based on the premise that debts will get paid off. Abandon that principle, and the entire world economy and world capitalism will collapse. It is worth any economic price to prevent that from happening. And if it does happen, urged on by the likes of people like you, Wonkish, we will know exactly who to blame in the Armageddon.

Look I always laugh a little at the Armageddon folks. As I have pointed out on here before, Argentina has defaulted recently. Russia defaulted recently. Iceland kind of defaulted recently. A ton of people holding mortgages defaulted recently.

Tons of countries have defaulted in the last 500 years and yet human progress, innovation, trade, etc. continue to march on and not to long after these large defaults the populations most affected are doing fine. Now that is a far cry from me saying there wont be pain. There will be enormous pain felt by average people. It will be heart wrenching in every degree imaginable. The difference is that I'm living in reality where reality says that the decision to put yourself at more than 100% of GDP in debt is what baked that pain in not those that are pointing out the inevitable correction is better sooner rather than later.

Now I'm not naive enough to think that you can solve a debt crisis by issuing more debt or adding galloping hyper inflation. For the former all we have to look at is the last couple years to show that adding more debt doesn't work. And for the latter all we have to do is look at the Weimar republic or more recently the galloping hyper inflation several Latin American countries experienced a few decades ago(and even those countries didn't print to the level that Europeans would have to in order to substantially bring down the debt load). It doesn't solve the problem.


The fact is that there is no easy way out and when the hard truth finally gets slapped into these countries then maybe we might be looking at severe problems for these countries and these people, but trade will not cease. And they'll bounce back without the huge debt burdens they have now.

This is not going to be anything like the Russia, Argentina defaults. Those economies were marginal. This is NOTHING like them. If all of Europe defaults, it will be massive.

If on the other hand the ECB massively intervenes, there will be no hyper-inflation. Things will be much better.

[Beet]

I used to hold the view that unleashing the powers of inflation a bit would substantially bring down a country's debt, but now I'm not so sure.

What are interest rates like in the Eurozone nations?

You're really going to have to be specific because in Germany they are relatively close to what they are in the US. In Greece the 1 year is currently over 200% (yeah you read that right). Italy is over 7% on 10 year.


When it comes to printing some countries will engage in a little to try to counter deflationary pressures(I don't agree with it, but they do). The inflation doesn't materialize right away so many people are fooled by that one. But when you are trying to reduce the total debt out standing by printing it just never works. As soon as you stop the galloping inflation that has been growing will just materialize in the interest rates and your cost of capital will skyrocket. Furthermore, it blows a whole in your budget because of how many things are tied to inflation. And if you don't monetize existing bonds and only monetize new issues then value of existing bonds collapse and your pension and banking system go with it.

Once you start printing a decent amount your not going to be able to stop easily because the cost of capital(interest rate) on whats left will just be to extremely high to deal with.

Not true. You combine printing to deal with a liquidity crisis and fiscal austerity. Galloping inflation will not materialize. And if it does, society can choose between inflation and unemployment. But it will not be hyperinflation in any sense.

[Beet]

You must be logged in to read this quote.

Absolutely not true, it would fix the problem. The entire world's economy is based on the premise that debts will get paid off. Abandon that principle, and the entire world economy and world capitalism will collapse. It is worth any economic price to prevent that from happening. And if it does happen, urged on by the likes of people like you, Wonkish, we will know exactly who to blame in the Armageddon.

Look I always laugh a little at the Armageddon folks. As I have pointed out on here before, Argentina has defaulted recently. Russia defaulted recently. Iceland kind of defaulted recently. A ton of people holding mortgages defaulted recently.

Tons of countries have defaulted in the last 500 years and yet human progress, innovation, trade, etc. continue to march on and not to long after these large defaults the populations most affected are doing fine. Now that is a far cry from me saying there wont be pain. There will be enormous pain felt by average people. It will be heart wrenching in every degree imaginable. The difference is that I'm living in reality where reality says that the decision to put yourself at more than 100% of GDP in debt is what baked that pain in not those that are pointing out the inevitable correction is better sooner rather than later.

Now I'm not naive enough to think that you can solve a debt crisis by issuing more debt or adding galloping hyper inflation. For the former all we have to look at is the last couple years to show that adding more debt doesn't work. And for the latter all we have to do is look at the Weimar republic or more recently the galloping hyper inflation several Latin American countries experienced a few decades ago(and even those countries didn't print to the level that Europeans would have to in order to substantially bring down the debt load). It doesn't solve the problem.


The fact is that there is no easy way out and when the hard truth finally gets slapped into these countries then maybe we might be looking at severe problems for these countries and these people, but trade will not cease. And they'll bounce back without the huge debt burdens they have now.

This is not going to be anything like the Russia, Argentina defaults. Those economies were marginal. This is NOTHING like them. If all of Europe defaults, it will be massive.

If on the other hand the ECB massively intervenes, there will be no hyper-inflation. Things will be much better.

So you think that monetizing an amount equal to lets say 1/3 of your total GDP wont cause hyper inflation or a rise in future cost of capital?

No question it will hurt more. But it wont be the first time in human history a cluster of sovereign defaults has occurred either.

Absolutely not. Inflation also depends on the velocity of money. A rise in nominal interest rates is not a rise in the cost of capital.

And trust me, a cluster of European sovereign defaults would be the worst economic catastrophe since the 1930s (at least), and a repeat of the 1930s is unacceptable.

[Beet]

I used to hold the view that unleashing the powers of inflation a bit would substantially bring down a country's debt, but now I'm not so sure.

What are interest rates like in the Eurozone nations?

You're really going to have to be specific because in Germany they are relatively close to what they are in the US. In Greece the 1 year is currently over 200% (yeah you read that right). Italy is over 7% on 10 year.


When it comes to printing some countries will engage in a little to try to counter deflationary pressures(I don't agree with it, but they do). The inflation doesn't materialize right away so many people are fooled by that one. But when you are trying to reduce the total debt out standing by printing it just never works. As soon as you stop the galloping inflation that has been growing will just materialize in the interest rates and your cost of capital will skyrocket. Furthermore, it blows a whole in your budget because of how many things are tied to inflation. And if you don't monetize existing bonds and only monetize new issues then value of existing bonds collapse and your pension and banking system go with it.

Once you start printing a decent amount your not going to be able to stop easily because the cost of capital(interest rate) on whats left will just be to extremely high to deal with.

Not true. You combine printing to deal with a liquidity crisis and fiscal austerity. Galloping inflation will not materialize. And if it does, society can choose between inflation and unemployment. But it will not be hyperinflation in any sense.

The Phillips Curve doesn't actually exist in real life. The 1970s proved that. You pick inflation and the curve shifts upward immediately. Any model that relies on time being 0 because of the affect of choosing one of the sides of that model on the model itself is useless.

I loved how all of the Keynesians were forced to explain that one in the 70s. "Stagflation is economically impossible" they were so convinced of it. They were positive. Well the 1970s came around and boom their central model in monetary theory was a laughing stock. Its one thing to say a is better than b and never being able to definitely show it because of all of the variables. With the Philips Curve it was a can "never, ever, ever, ever happen" well it happened guess they learned not to take risks like that again.

Except its not the 70s anymore. The problems of the 70s were peanuts, compared to now. Of course the Phillips curve is not a law of nature, as economic laws never are. That does not mean that there is no trade-off between unemployment and inflation in many different scenarios.

[Beet]

Absolutely not. Inflation also depends on the velocity of money. A rise in nominal interest rates is not a rise in the cost of capital.

And trust me, a cluster of European sovereign defaults would be the worst economic catastrophe since the 1930s (at least), and a repeat of the 1930s is unacceptable.

Yeah but if your printing money like crazy you have to rely on the velocity of money to fall by equal amount to keep things stable. Not going to happen. You increase the quantity of money(especially if its fast becoming 'hot' money) the velocity skyrockets too.

Not true. The velocity of money is a simple mathematical identity with quantity in the denominator. So if you create a lot of new money, the velocity of money falls by definition. Its tendency is to fall. It requires positive action for it to rise. The Fed created a ton of money in 2009 and it didn't result in high inflation at all. Inflation is still lower than it was in the 1980s.

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There will be no Weimar Republic. The Weimar Republic is a boogeyman and what people dont understand is that, that was a deliberate situation and there were all kinds of complications involving reparations and the Ruhr and French invasion. No comparison.

I mean, first of all if you are admitting it will be worse than the 1930s then you already have admitted surrender. In the 1930s there were kids starving in the streets. The consequences of the 1930s were unacceptable... even the consequences of 1 year of that would be unacceptable. And it wouldn't just last one year.

As for Argentina it is running super high inflation and suffered an 80% currency devaluation.

[Beet]

I'm starting to feel like the guy that went around pointing out that things are really, really bad and people are like oh don't worry will have a managed default and everything will be fine and I said no that's not how it works. Then one day I wake up and everybody is freaking out with their hair on fire screaming about how particularly important central bank needs to print 100s of billions of dollars if not trillions of dollars otherwise we're all going back to the stone age. And now I'm forced to tell them don't worry it will suck, but its not the end of the world. Its not Armageddon. Just relax take a breath and realize that nothing has never been able to derail human progress for tens of thousands of years(yeah even the cavemen trading hooks for beads were trading), nothing has derailed us for the last 500 years. We'll be okay! But your not going to be able avoid the reality of whats about to happen. You can't. There is no easy way out as much as people want there to be.

You can say all that about the ECB buying bonds.

As for EU sovereign default of all the nations it would be utter catastrophe. You already admitted it would be worse than the Great Depression.

[Beet]

Absolutely not. Inflation also depends on the velocity of money. A rise in nominal interest rates is not a rise in the cost of capital.

And trust me, a cluster of European sovereign defaults would be the worst economic catastrophe since the 1930s (at least), and a repeat of the 1930s is unacceptable.

Yeah but if your printing money like crazy you have to rely on the velocity of money to fall by equal amount to keep things stable. Not going to happen. You increase the quantity of money(especially if its fast becoming 'hot' money) the velocity skyrockets too.

Not true. The velocity of money is a simple mathematical identity with quantity in the denominator. So if you create a lot of new money, the velocity of money falls by definition. Its tendency is to fall. It requires positive action for it to rise. The Fed created a ton of money in 2009 and it didn't result in high inflation at all. Inflation is still lower than it was in the 1980s.

You must be logged in to read this quote.

There will be no Weimar Republic. The Weimar Republic is a boogeyman and what people dont understand is that, that was a deliberate situation and there were all kinds of complications involving reparations and the Ruhr and French invasion. No comparison.

I mean, first of all if you are admitting it will be worse than the 1930s then you already have admitted surrender. In the 1930s there were kids starving in the streets. The consequences of the 1930s were unacceptable... even the consequences of 1 year of that would be unacceptable. And it wouldn't just last one year.

As for Argentina it is running super high inflation and suffered an 80% currency devaluation.

That is not the definition of the velocity of money. Its the rate at which money transfers through the economy.


Its not a boogeyman. The reparations was spending they couldn't afford and they decided to monetize it. If you read back to the initial decisions back then they were firmly convinced that a small amount of printing wasn't going to do anything. And then a little more wasn't going to hurt. And all of sudden it was like, BOOM! You're choosing to ignore economic reality. The Weimar had everything to do with money printing. Over the course of a couple years they printed almost exactly the amount of their entire GDP and they had thousands of percent inflation. So you think that printing 1/3 of GDP for example will be just peachy with stable pricing? Please!

I didn't admit surrender at all. And the 1930s it was prolonged. I'm trying to make it clear that there is no reason to see this as prolonged as the 1930s were for the Europeans. What I'm saying is that its hit that point no matter what you do. You refuse to acknowledge that. By the way Argentina is the best example just because its a modern case. But yeah there were people bartering furniture out of their homes for a stockpile of food. There were people picking up scaps off the street. White collar workers woke up one day and their home was worth 1/20 of what it did before the default. You act like I haven't been saying over and over and over again that we are talking about real human tragedy here. And this is serious. A lot of people are going to be hurt by this and you think they can just escape it with a quick fix. Well if you want to add to the problems so that the future fall in standard of living is even bigger and more profound because you can't deal with its consequences than fine, but I'm not advocating making an already dire situation worse.

Not true at all. Hyperinflation is always a choice, as it was with Weimar. That is a complete red herring and trust me, there will be NO Weimar with the ECB. They are not that stupid. We are not anything CLOSE to that. Even when the inflation rate reaches 10% annually, come back and we'll talk. Even then I won't agree with you.

There are ways to avoid crisis. It's not the end of the world if policy makers act smart. You are going to take a problem that is serious but not a historical disaster and turn it into one.