Provisional GDP numbers for eurozone countries in the first quarter are out today. The German economy surprisingly bounces back, whilst Italy is now officially in recession after two quarters of contraction. Also worthy of note is that the Dutch economy contracted slightly in the first quarter, which may have some implications for the forthcoming constitution referendum there.
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Tag Archives: interest
ECB: Plus ?a Change?
The ECB met earlier today to conduct the monthly review of interest rate policy. It came as a surprise to noone that the outcome was to leave everything just as it is. Surprisingly though the decision this month is surrounded by a little more controversy than has been the case of late since Italy’s Berlusconi and economic opinion in Germany have been suggesting that some reduction of rates might be no bad thing, whilst Spain’s economy minister (and former EU commisioner) Pedro Solbes is reported to have been pushing for an increase. Why the difference?
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Scary Stuff
In a post which appeared earlier this week Tobias asks us whether, given some of the possible consequences of a French “non”, it might not be reasonable to ‘scare’ voters a little by spelling out some of the potential fallout which might follow a French rejection of the Constitution Treaty.
Perhaps the phrasing is unfortunate, but undoubtedly voters in Eurozone countries need to think long and hard about one especially sensitive area of impact: the future of the euro itself.
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Venice Commission on Bosnia-Herzegovina
Teekay was looking forward to the Venice Commission’s report on Bosnia-Herzegovina last week. (The Venice Commission, for those of you who don’t lie awake at nights in excited anticipation of its next publication, is the constitutional reform advisory body of the Council of Europe, which in turn is not to be condused with the European Council.)
Well, the report’s out – not yet on their website but they’ve sent me a copy. It’s not as radical as some in Bosnia-Herzegovina might have liked, but given the Venice Commission’s normally relatively anodyne pronouncements it’s pretty strong stuff.
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Some kind of collision
Excerpt from Kevin Drum’s 2003 interview with Paul Krugman.
Train wreck is a way overused metaphor, but we’re headed for some kind of collision, and there are three things that can happen. Just by the arithmetic, you can either have big tax increases, roll back the whole Bush program plus some; or you can sharply cut Medicare and Social Security, because that’s where the money is; or the U.S. just tootles along until we actually have a financial crisis where the marginal buyer of U.S. treasury bills, which is actually the Reserve Bank of China, says, we don’t trust these guys anymore ? and we turn into Argentina. All three of those are clearly impossible, and yet one of them has to happen, so, your choice. Which one?
Well, how about your choice? What’s your best guess?
I think financial crisis, and then how it falls out is 50-50, either New New Deal or back to McKinley, and I think it’s anybody’s guess which one of those it is. It’s crazy stuff, but think about where I am on this. My take on the numbers is no different from Brad DeLong’s, it’s no different from CBO’s now, and we all look at this and we all see this curve that marches steadily upwards and then heads for the sky after the baby boomers start retiring. I don’t know what Brad thinks, I think he’s open-minded [actually, it turns out he’s optimistic that voters will eventually come to their senses and raise taxes on the rich. ?ed.], but the general view is: yes, but this is America, it can’t happen, so something will come up. And I’m just willing to say I don’t see any noncatastrophic solution to this, I don’t see an incremental stepwise resolution. I think something drastic is really going to happen.
How does all this feed in to the current account deficit? Will China keep financing that forever?
They’re financing both the current account deficit, and, as it turns out, directly financing the government deficit. We were running a big current account deficit that accelerated through the late 90s, but there you could say that it was due to the strength of the U.S. economy, it was all this investment demand, technological revolution, and after all, the government was in surplus.
Now, we’re back in twin deficits territory, and there are two related issues, the solvency of the federal government and the solvency of the United States per se, and both of them are now somewhat in question.
Maybe I’m a captive of my own model, but I think that what happens when the world loses faith in the U.S. as a place to invest is that the dollar plunges, but that in itself is not so bad because the lucky thing is our foreign debts are in dollars, so we don’t do an Indonesia or an Argentina. But the federal government’s solvency is a much more critical thing because it needs to keep on borrowing more and more just to pay its bills.
What happens if these foreign countries do stop buying U.S. bonds? Is this a real concern, or a tinfoil hat kind of thing?
Oh, I don’t think China is going to do it to pressure us. You can just barely conceive of a situation where they’re mad at us because we’re keeping them from invading Taiwan or something, but more likely they just start to wonder if this is really a good place to be putting their money.
So what happens is a plunge in the dollar when they decide to stop buying and start cashing in, and a spike in U.S. interest rates. But you might also get in a situation where the interest rates the government has to pay to roll over its debt become so high that you get an accelerating problem, which is what happened in Argentina. What happened was that suddenly no one would buy Argentine debt unless they paid a twenty something percent interest rate, and everybody says, but if they have to roll over their debt at a twenty percent interest rate, there’s no way they can pay that back. So the whole thing grinds to a halt and the cash flow just dries up.
And do you think that’s a serious possibility for the United States?
Yeah, just take the numbers as they now look, and that’s where it heads. And you might say, OK, we can easily handle it. U.S. taxes are 26 percent of GDP in the U.S., in Canada they’re 38 percent of GDP. If you raise U.S. taxes to Canadian levels there’s plenty of money to cope with all of this. But politically we’ve got a deadlock, and it’s hard to imagine that happening.
So you say, but this can’t happen, this is America, and I guess my answer is, is it? Is this the same country that we had in 1970? I think we have a much more polarized political system, a much more polarized social climate. We certainly aren’t the country of Franklin Roosevelt, and we’re probably not the country of Richard Nixon either, so I think we have to take seriously the possibility that things won’t work out this time.
Inflection Point?
Earlier this month, when Edward wrote
The alarm shot was given by Dalls Federal Reserve President Robert McTeer when he declared in a speech in New York last week that whilst overseas investors now ?finance? the US current account gap, ?theoretically some day that process will come to an end, the flows will turn against us and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar.? This prospect, which currently seems remote, should not be taken lightly. It is real, and it is there.
I noted that this prospect had been around for a long time (close to ten years at least) and asked what would constitute a sign that this time might be different.
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Euro-zone: A Default-free Area?
This is the interesting question that Morgan Stanley’s Vicenzo Guzzo asked a couple of weeks back. The key background details in question are what are known as the cross-country risk spreads. Now this may seem like a piece of technical obfuscation, so what exactly does he mean?
Well, one of the main consequences of the introduction of the euro has been the dramatic reduction in what are known as the ‘interest rate spreads’ on sovereign debt.
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Housing Review
My out-of-consensus speculation that the Bank of England’s round of interest rate rises may be pretty much done looks sounder by the day. There may be one more rate increase, but it wouldn’t surprise me at all if they were pretty much over with it, and even if the next move (the end of this year?) wasn’t downwards. The reason? Growing evidence that the UK housing boom is bottoming out, and with this, UK consumption starting to take a hit.
U.K. mortgage lending growth probably slowed in August and consumer confidence may have weakened in September, suggesting economic growth peaked in the second quarter amid rising interest rates, surveys of economists showed……
House prices fell 0.6 percent in August from July, the first drop since August 2002, according to Edinburgh-based HBOS Plc, the U.K.’s largest mortgage lender. It was the biggest decline since December 2000.
Bank of England Governor Mervyn King and his rate-setting committee said they may have underestimated the effect of any decline in home values on consumer spending, according to minutes of the Bank of England’s Sept. 8-9 meeting.
“We’ve just come through a very slow holiday period and there is a general agreement that September is no improvement,” said Richard Hair, president of the National Association of Estate Agents. “We’re getting geared up for what may be a difficult market in the autumn.”
Source: Bloomberg
Metis, Bie and Kerdos: Some Thoughts On Defeating Terrorism
Maybe it’s the presence of Talos in the comments section, or maybe it’s the arrival of the Athens Olympics on my personal horizon, but something this morning is carrying me back to the world of the Greeks, and to some early ideas of how best to secure objectives in the face of adversity.
First metis and bie:
What Does Metis Mean?
The history of the word goes back more than 28 centuries to the time of Homer around, 850BC. To the ancient Greeks, metis represented a particular type of cunning intelligence used if success was to be won in the most diverse fields of action. In the Iliad and the Odyssey, Odysseus is the hero most commonly associated with metis. The most famous strategem (metis) is the Trojan Horse, by which the Greeks finally managed to conquer Troy. This is a good example of metis for it represents a solution to a problem not resolvable by conventional means.
Metis is often contrasted with the word, bie, which means brute force. All through the Iliad, the big question is, will Troy fall by metis or bie – by wiliness or brute strength? The answer is by metis.
In the intellectual world of the Greek philosopher, there was a radical dichotomy between being and becoming, between the intelligible and the sensible. On the one hand there is the sphere of being, of the one, the unchanging, of the limited, of true and definite knowledge; on the other hand, the sphere of becoming, of the multiple, the unstable and the unlimited, of oblique and changeable opinion. Metis is characterised by the way it operates by continuously oscillating between the two opposite poles. Within a changing reality with limitless possibilities, a person with metis can achieve.
So metis is a type if intelligence and of thought, a way of knowing; it implies a complex but coherent body of mental attitudes and intellectual behaviour which combine flair, forethought, resourcefulness, vigilance, pragmatism, opportunism and the wisdom of experience.
When art and science unite, extra possibilities and opportunities are made resulting in innovation that can be driven by creativity. Metis is about finding elegant solutions to difficult problems instead of relying on brute force.
Now are you with me? What is lacking in our war with terrorism today, and all too often woefully lacking, is the component of metis. It is as if 2,000 years or more of history did not lie behind us, as if we had to learn every day anew the painful lessons of yesterday. Why am I saying this now? Well look what happened in Spain yesterday, what is happening today, and what will happen in the elections tomorrow.
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What’s It All About Alfie?
Well I suppose it’s better to end the week on a bang rather than a whimper, so here I go with another of those posts. What really ended the week on a high note (or should I say a low one) was the US labour market. And since I am arguing that the euro-dollar parity is being driven at the moment by US labour market data, this news can only mean one thing: more upward pressure on the euro. Which makes me only want to re-iterate, and even more strongly, that an important opportunity was wasted yesterday to take some remedial action by lowering the interest rate. Remedial action which would also have supplied a much needed lifeline to Germany’s beleagured economy. But this, like so many things, was not to be.
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