Warren Mosler argues that either way the debt ceiling debate goes, the economy remains vulnerable to looming external shocks. And that is bullish for bonds.
Author: Guest Author
What happens on August 3rd if no debt ceiling negotiation is reached in the US. This column argues that Treasury could go around, not over the debt ceiling limit by using its constitutional authority to mint money.
Europe is in a dire situation. If it doesn’t address the underlying causes of the Greek crisis quickly, Europe’s political project will face the same fate as communism and the US Confederacy, writes James K. Galbraith.
The S&P has gone from 2 standard deviations below the 20-day moving average on the 16th June to 2 standard deviations above it now, something it did prior to the 87 crash when it rallied 6.4% in the week prior to the crash. It has been doing this more and more frequently recently although not of the scale of swing we have just seen. Our economists have already said that a single payroll figure is not sufficient to cause QE3 to which I agree. Commodity prices are telling us that further Asian stimulus is not going to happen unless offset by demand destruction elsewhere in the world. The risks are clearly mounting up.
Most analysts agree that Greece is insolvent. This column argues that the issue is whether Greece’s troubles are contagious.
The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms. The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government.
Nouriel Roubini writes that the current “muddle through” approach to the eurozone (EZ) crisis is not a stable disequilibrium; rather, it is an unstable disequilibrium. Either the member states move from this disequilibrium toward a broader fiscal, economic and political union that resolves the fundamental problems of divergence (both economic, fiscal and in terms of competitiveness) within the union or the system will move first toward disorderly debt workouts and eventually even break-up, with weaker members departing. Over a five-year horizon, the odds of a break-up are at least one-third.
Stephanie Kelton demonstrates that as long as unemployment remains high, the deficit will remain high. Here’s the formula: Spending creates income. Income creates sales. Sales create jobs. If you think you can cut the deficit without destroying jobs, dream on. She argues that instead of dreaming about ways to pull off the impossible, it’s time get to work on a plan to increase employment.
The primary difference for Euroland to sovereign issuers is that the Euro can only be created by the ECB – it is the issuer of the currency. The governments of Ireland, Greece, Spain, Germany, etc. are the USERS of the currency. The implications of this distinction cannot be overstated. Members of the Eurozone are like individual states in the US. Like California, Ireland must go out and ‘get’ the currency – either by taxing or borrowing – before it can spend. It must pay whatever financial markets demand, and it can be priced out of the market. It can become insolvent, and it can be forced to default on its debt.
In a recent column at VoxEU , Hans Werner Sinn of the prestigious Institute for Economic Research claims that the German Bundesbank is effectively propping up banks across the Eurozone’s periphery. He adds that doing this risks a major crisis. Here, Karl Whelan of University College Dublin argues that Professor Sinn’s analysis is incorrect and that his policy prescriptions are extremely unhelpful and even dangerous.
This chart is for year over year ‘real’ GDP growth. Note the recurring first quarter spikes followed by dips, presumably due to front loading annual state spending and lending.
The global crisis has brought many countries to their knees, none more so than the small island of Iceland whose losses amount to seven times its GDP. Yet while Iceland’s recovery has in many ways been remarkable, this column argues that the country’s capital controls stand in the way of further progress.