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A decision-tree framework for thinking about the Greek – Troika negotiations

This is a short post to update you on Greece. I continue to believe a deal can get done. Recent events demonstrate this is so. Nevertheless, the potential for policy error remains high. Brief thoughts below using a decision tree model framework

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Tax Anticipation Notes: A Timely Alternative Financing Instrument for Greece

Tax Anticipation Notes: A Timely Alternative Financing Instrument for Greece

The recent election of an explicitly anti-austerity party in Greece has upset the prevailing policy consensus in the eurozone, and raised a number of issues that have remained ignored or suppressed in policy circles. Expansionary fiscal consolidations have proven largely elusive. The difficulty of achieving GDP growth while reaching primary fiscal surplus targets is very evident in Greece. Avoiding rapidly escalating government debt to GDP ratios has consequently proven very challenging. Even if the arithmetic of avoiding a debt trap can be made to work, the rise of opposition parties in the eurozone suggests there are indeed political limits to fiscal consolidation. The Ponzi like nature of requesting new loans in order to service prior debt obligations, especially while nominal incomes are falling, is a third issue that Syriza has raised, and it is one that informed their opening position of rejecting any extension of the current bailout program.

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Syriza and the French indemnity of 1871-73

Syriza and the French indemnity of 1871-73

The euro crisis is a crisis of Europe, not of European countries. It is not a conflict between Germany and Spain (and I use these two countries to represent every European country on one side or the other of the boom) about who should be deemed irresponsible, and so should absorb the enormous costs of nearly a decade of mismanagement. There was plenty of irresponsible behavior in every country, and it is absurd to think that if German and Spanish banks were pouring nearly unlimited amounts of money into countries at extremely low or even negative real interest rates, especially once these initial inflows had set off stock market and real estate booms, that there was any chance that these countries would not respond in the way every country in history, including Germany in the 1870s and in the 1920s, had responded under similar conditions.

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Gauging the financial crisis end game

Gauging the financial crisis end game

It is quite possible that more than one end game will unfold in the months and years to come. For example, we could see a Greek Eurozone exit. Simultaneously, we could have a crisis unfolding across emerging markets, as the strong U.S. dollar begins to do damage to borrowers in those countries, of which there are many. Quite how it will all pan out is very difficult to predict. If I were a betting man, my money would be on the ‘permanent condition’ becoming the generally accepted view of the future economic environment.

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Why quantitative easing and negative interest rates will fail

Why quantitative easing and negative interest rates will fail

This is going to be a short thought piece. But the takeaway should be that the convergence to zero will continue unabated as the threat of inflation is muted given the combination of excess capacity, high private debt and unfavourable demographics. The subject is monetary policy.

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Pie in the Sky

Pie in the Sky

We are still in a post-crisis environment, and enough people are still negative on equities, and interest rates are low enough, to provide plenty of purchasing power. We therefore expect it to be an ok period for equities over the next year or two – not outstanding given our modest growth expectations but ok. The trick is to be careful on emerging markets. If the U.S. dollar continues to be strong, it is an accident waiting to happen.

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Yanis Varoufakis on fiscal waterboarding and Ponzi austerity

Yanis Varoufakis had a long interview on RT’s Boom Bust yesterday going into detail behind his political candidacy and what he expects SYRIZA to do regarding the unsustainable debt burden that the Greek government now has. Overall, despite his problems with the eurozone’s institutional structure, Yanis believes Greece leaving the eurozone would be a catastrophe for the simple fact that it does not have a currency and any attempt to leave would be seen as a prelude to a massive devaluation, inviting capital flight on a grand scale. This would be a catastrophe for the Greek banking system and wider economy.

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The convergence of safe asset yields toward zero

The convergence of safe asset yields toward zero

As low nominal GDP growth takes hold, we should expect short-term interest rates to remain low and for the yield curve to flatten. There are three main reasons this is so. First, low nominal growth rates imply low inflation. Second, to the degree market volatility produces risk-off sentiment, the bid for safe assets will further suppress yields. And third and most importantly, the natural rate of interest on a zero-day fiat currency liability is zero. I expect that the safe asset class in lowflation currency areas will be dominated by these trends, causing yields to stay low or even shrink. This convergence to zero makes the highest yielding safe assets attractive and thus favours New Zealand and Australia, as well as the the US, UK and Canada to some degree. Comments below

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Interview on Chinese CPI and PPI data for December

Interview on Chinese CPI and PPI data for December

Deflationary pressures in China indicates that we probably need monetary tightening, not loosening. I know this sounds extremely counterintuitive, and so violates what we have learned about the world by assuming that the world looks a lot like the US, but there is both a logical argument behind it and what I think is overwhelming historical evidence. The convention that any economic variable that works one way in the US must work the same way in China is one of those assumptions that is implicit in so much that is written about the Chinese economy, and yet is made by foreign and Chinese economists who would indignantly reject the assumption were it ever made explicitly.

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Russia, Oil, China and the Dollar

Russia, Oil, China and the Dollar

By Marc Chandler As the year winds down, a Gordian knot tying Russia, oil prices and China together is receiving a great deal of attention.  Let’s see if we can unravel some of the confusing twists and turns. We turn first to China’s offer of assistance to Russia.  The idea that Russia could activate its CNY150 bln (~$24 bln) currency […]

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A Brave New World

A Brave New World

By Niels Jensen The Absolute Return Letter, December 2014 “The deepest sin against the human mind is to believe things without evidence.” Aldous HuxleyIn the the last two Absolute Return Letters I have argued why one should expect global GDP growth to be below average over the next decade or so, why interest rates should, as a consequence, remain low […]

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My reading of the FT on China’s “turning away from the dollar”

My reading of the FT on China’s “turning away from the dollar”

By Michael Pettis The Financial Times ran a very interesting article last week called “China: Turning away from the dollar”. It got a lot of attention, at least among China analysts, and I was asked several times by friends and clients for my response. The authors, James Kynge and Josh Noble, begin their article by noting that we are going […]

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