WHILE ROME BURNS….
In one of the great modern day ironies, the Rome of yesteryear is burning while everyone is keenly focused on the modern day Rome. The politicians in Washington DC appear to be doing everything they can to worry the markets. Of course, this political charade is nothing more than a failure in politics. But a potentially more dangerous (and real) default is brewing elsewhere. In the real Rome, yields are continuing to run higher. The latest band-aid from the EMU has clearly not taught the European bond vigilantes a lesson as Italian bond yields approach their recent highs. The markets are faster to realize that this aid package doesn’t fix the actual problem….
As the modern day Rome appears to be burning, the real Rome is burning. Unfortunately, no one is fixated on the Rome that matters. And the markets are well aware of the fact that the European leaders have not created a workable solution to the problem of the single currency system….
I wonder about one thing. Members of congress are actually exempt from insider trading restrictions based on passage of legislation. Given that an election year is coming up, would it not be in their best interests to drive the market down artificially and then go long to raise funds for what will be an antagonistic (expensive) battle next year?
It is true that they are “exempt” from insider trading. However, from all the data I have been able to gather, they do not use insider information to increase their political war chests, they use it to increase their personal wealth. If they actually used if for good, they could really begin to bring down the national deficit and debt pretty quickly. You are more likely to see the NY Islanders win the next 5 Stanley Cups before you see a Congressman use insider trading to benefit the country!
Check out the bond exchange proposal from the IIF: http://www.iif.com/download.php?id=rPiz9R7SVQ4=
In 3/4 of the proposed exchanges Greece will provide EFSF zero coupon 30yr bonds as collateral. The mean interest rate for the exchange instruments is around 5,33%. Presuming that EFSF funding costs will be around the euribor 30yr swap rate then Greece will also have to cover a 3,5% funding cost for 75% of the exchange, increasing the total interest to 8,8-9%!! (at least for the 75%, the rest will also require some funds as collateral).
Furthermore 65% of Greek government bonds maturing within the next 10 years are held by Greek banks and another 9% by Cyprus banks (which are branches of Greek banks basically). France and Germany hold positions of 10% and 7%. So 3/4o f private sector participation envisioned by Merkel will be taken by the Greek banking system. If ECB (which is supposed to have acquired it’s 50-55 billion euro Greek bond portfolio with a 10 billion discount) does not participate in exchanges/buybacks then the burden will fall on the Greek banks. That will mean that the Greek government will also have to borrow in order to re-capitalize it’s banks.
Who in their right mind could have thought of all this?
cullen, can you explain me this phrase?
http://www.zerohedge.com/news/italy-cancels-august-bond-auction
- Italy will cancel its mid-month auction for medium and long-term bonds, known as BTPs, “considering the large cash availability and the limited borrowing requirement,” the Treasury said in a statement Monday –
they consider this hilarious.
why? It seems a normal choice. (normal is a big word talkin about EMU, I know)
Is there something wrong with Unicredit ?
I don’t know really , just asking – also the Libyan situation is still ongoing……….
It seems to have well managed fiances – it just can’t deal with this new wall of dollars without the ECB increasing its base (PS I noticed it has increased slightly over the last few weeks and is now over 2 trillion)
When the Winter comes Italy could be in a bit of a pickle though …. its that stupid physical economy constraints thingy.
Tax revenues, calculated by the Bank of Italy, net of collection of special funds, amounted to 111.056 million euros, compared with 104.794 million of the thick period of 2010, an increase of nearly 6% (5, 97%) … We can not afford to give up 20,000 million euros at auction rather than give satisfaction to a handful of enthusiasts speculators backed by credit rating agencies …if Rome burns, Washington…
Asking to MMTers, just trying to find meaning to this “political mess”, but not really due failure than clear economic objective.
If we stop the US debt, we stop create USD.. we are not going for a EUR devaluation?
In September – November 2010, the rate was 3.8%, then 4.8% from January – July, and now 5.8% – an increase of 2% in less than one year. What if the rate moves to 6.8% and 7.8% next year? Would that be the tipping point for the Euro?
Not even a rate of 7% on the year BTP for a long time is a concern for Fitch, considering it “sustainable” in contrast to the calculations of the market would bring the cost of funding by about 4% to 5.5% for 2015 with charges on the debt at an altitude of 110 billion (6.1% of GDP is not far away on the forecasts of the government) against the 75 billion (4.8% of GDP) expected in 2011 (Il Sole 24 Ore).
(…) Deutsche Bank stated that “an increase in interest on short-term debt does not send the Italian public finances out of control, despite the high debt / GDP.” Historically, it is the thesis DB, Italy has supported much higher debt burden as a percentage of GDP and revenue ….(…) analysts at Goldman Sachs argue that an increase in the cost of debt by 4 % to 5.5% for 2017, with growth outlook unchanged, even allowing Italy to bring the debt / GDP ratio below the threshold of 100% around 2026. The cost of borrowing can go up to 6.7% on a permanent basis without splashing upwards the debt / GDP. Even with a real growth of 1, 8%, with a cost of debt jumped to 7% for GS, you can avoid the explosion of the debt / GDP. (…)). “
Its business as usual in politics. Worry about that which does not matter since they have been doing it for so long, they know not what else to do.
http://www.truth-out.org/when-super-rich-cry-class-warfare/1311945868
God Bless and Help America!
(From Chapter 1, “Kosher Hooks” by S.I. Fishgal, http://stores.lulu.com/fishgal)KshrHksFrntPrv
Amerikakers are fabulously rich, awfully wasteful and corrupt… (In case that Russian, Yiddish or German languages are not your forte, kaka and kaker mean feces and its appropriate derivative.)
…Amerikakers believe to and cram all, but understand zilch. The unabated consumerisms, incompetence, currency debasing and keeping up appearances indebt their offspring, enrich their enemies and turn capitalism to kaput-alism.
Amerikakers are above Marx’s and Lenin’s teaching that such deeds ruined even Rome and will the US Empire of debt and “useful idiots” (Lenin’s term). They borrow money they do not have on the stuff they do not need. Yet, Amerikakers do not own their useless stuff. It owns them and is not loaded on a hearse anymore. It was quite liberating not to keep up appearances during the American Revolution. Then the troops lined worthless bills called shinplasters in the knee-length boots.
Amerikakers convert the capitalist society to the capital-less one and vote for the like sullied, overpaid brain-dead public serpents, sham debt peddlers, bigots, cranks, hustlers, and pulpit artists franchising race or faith into a fat living and political career. For the world revolution, Lenin, Trotsky, and, for the corrupted democracy, some US presidents ruined countries regardless of the people acceptance even after the capitalists’ capital capitulated.
Since universities develop one’s entire abilities, especially the idiocy, the educated idiots are most dangerous. A Nobel laureate for his math exercises on options (left nameless here for his own sake) applied that in his hedge fund, and did not ruin the entire financial system just by accident. Of course, Sir Isaac Newton failed to gauge “the madness of the crowd” (his term) too, but he ruined fiscally only self and became famous not just for that.
…God bless and help America, the country of best brightest politicians (i.e. masterly liars), incompetents, useful idiots, and great opportunities, especially for fraud! Welcome to Amerikaka, Comrades!
Amen!”
I see 2 major headwinds. EU & austerity here. Both scare me greatly. This debt ceiling issue is simply annoying. (Irrational fear)
Now Clinton (he) came out recently with some intelligent comments about deficits and now so does Shiller (in a NYT article of course), but it made the conservative rags too, check it out:
http://www.moneynews.com/StreetTalk/Shiller-Stimulus-Spending-bad/2011/07/29/id/405278
But I still repeat. Watching the bond vigilantes circle up their wagons on Spain and Italy – is watching a great big train wreck in slo-mo. This is bad…
We all know what happened to the Roman Empire. And that WILL be the fate of the American empire as well. And the american bond vigilantes are asleep at the switch.
I don’t think so. Bond vigilantes aren’t that stupid. They certainly didn’t go after Japan for over 20 yrs.
These guys know stuff even MMTers don’t. We should be humble in terms of their wisdom…
1. I still have to read the first explanation of MMT that makes me a MMT believer.
2. My best take is that the bond vigilantes will show up:
a. when the (US) muni bond markets is going down the drain or
b. when interest rates are going up (significantly) like in september 2010 or
c. when (and this will baffle a lot of US folks) commodity prices are going down the drain again like in the second half of 2008.
d. when (not if) the US reduces military related spending (about $ 1 trillion) by say 10%, 20%, 30% or even 40% or
e. when the FED stops monetizing US government debt. The FED has become the second largest holder of T-bonds.
f. bondspreads are blowing out between the 10 year T-bond and the 30 year T-bond.
g. bondspreads are blowing out between the 10 year T-bond and corporate bonds.
Or a combination of the above.
My best bet (!!) this moment is that option c WILL be the trigger. But we’ll have to wait and see.
BTW: did you notice that the 3-month T-bill went up in the last 3 days ? The CME does not consider T-bill as “”riskfree”" any more ? Will be interesting to see what happens in the next days.
Interesting take.
I think a) is already happening. Not that I agree w/ Whitney, but having them go after munis is not the same thing as going after Tsrys. They don’t own their currency and behave more like a HH balance sheet.
I was, however, truly intrigued by your takes c) & d) above. Should you have the time, could you indicate why either c) or d) would lead to debtors circling up their wagon trains on US debt obligations. I am baffled by the connection.
In terms of d) (not a bad thing imho – we don’t need to be the world’s policeman, and we could spend money on other things that are much more productive), it seems that the money “saved” (not spent) would lead to a deficit reduction which, on the surface, would appear to strengthen the Trsys not weaken them. (In reality however, one wonders about the productivity of spending down that avenue, war costs are almost water under the bridge – talk about digging a hole and then filling it up! It seems a sectoral balances method even fails here)
Sorry, confused here.
PS Not a true MMTer. Fiscal conservative. I have analyzed Bill Mitchell’s ATAMs and dual accounting methods (still a rookie), but as an applied mathematician, I can’t find any logic errors. I believe MMT has nailed the fiat currency system and how money works in that system. In combination w/ sectoral balances, it seems to produce an adequate model of how money works. I, however, do NOT believe that MMT is a complete economic model. It accurately models the monetary system, it does not (seem to) make more general conclusions of economic theory necessarily (stuff like supply & demand, or marginal propensity to consume (I am still going to take Stephanie K to task on that one post she made on that – it did not add up!)). With that said, I am an integrationist by nature – an engineer. I add tools to my arsenal that seem to work well in order to solve a problem. I am pretty agnostic about it too. The only litmus test that matters is whether or not the damn tool works or not. It is a pretty simple approach. But I am simple, so that paradigm works well for me.
Lastly? Where I start to get REAL nervous, is when MMTers start talking about the Job Guarantee (Scott Fullwiler, et. al.). This reeks of (even more) socialism, as if we needed even more. I would like to take a much more balanced approach trying to stimulate by not taxing and let the CORP sector make the capitalistic decisions instead of the GOV. But that’s me.
Furthermore, have you not seen the effects of socialism in the USA and Europe? Trust me on this one, FDR is NO here of mine. He forced through major unconstitutional laws and strong-armed the Justice Dept getting it done. He opened the door (wide open) to a socialistic form of GOV. Do you not see what pitfalls this has led to (a slippery slope IF I could make ANY claim to being a Libertarian)? We have observed a decline in independence-mindedness over the past 80 years. We have been dumbed-down and now we are there – truly stupid idiots with our hands held out for the hand-outs as if they were our RIGHT!
Man, you truly get what you pay for…
PPS A little more on d) above. I should be definitively clear on this (and this would bust Mish’s chops in a heartbeat too – `cause he is a loose gun on this and needs to be spanked – badly). I agree w/ some Libertarians on this point in that I don’t agree w/ having a military presence in 160 ROW countries. How would you feel if North Korean soldiers were marching down your Main St.? Huh? Wouldn’t your natural reaction be one of “What are you guys doing here????” Well, it’s no different from any other sovereign state. Their reaction is the same. And the cost? Dude!@ (and the societal/political ramifications???) Now let’s take war costs. Is that productive (in terms of the GOV spending)?? I think not. Now let’s check out Article II, Section 8 of the US Constitution. This is a little thingie that is supposed to give guidance on how the US spends its bucks. See anything in there on warring against other sovereign states that are of NO immediate threat to the borders of the US of A? Qwik answer: NO! To top it off, war costs are funded by a little trick in the OSD (the Office of the Secretary of Defens) by STEALING from the R&D side to fund the OPS side (the wars). So guess who suffers in that regard? Defense companies engaged in building BETTER systems for defense. Guess who wins? Defense companies that build bullets and buttons! Terrific! Reason I know this? `Cause I had to help folks in OSD (Pentagon) raid R&D budgets to fund war activities about 20 years ago. Point is, our military systems are ageing pieces of junk and we misdirect our spending on wars instead further placing us down into Cro-Magnon land. Do you realize that your desktop PC had about 100-1000 times the compute power of processors on fighter aircraft today???? Damn, you crash the system just trying to take a square root of a number! That’s totally pitiful. So while I totally disagree w/ the wars and all the military presence in ROW countries, it does not mean I do NOT want a strong defensive system. Quite the contrary.
I think I am out of stamps on this one…
How utterly, totally and completely insane US military spending has become can be illustrated by the nuclear weapons of the US. The US has some 6000 atomic/nuclear warheads in all sizes and shapes. The US could turn the entire planet into one giant radioactive hell hole, if they want to.
But no, that wasn’t enough. In march 2007 the US commisioned to develop and build a new generation of hydrogen bombs.
http://www.commondreams.org/headlines07/0302-02.htm
The US can use those atomic bombs to downblend them and turn them into nuclear fuel for nuclear reactors to generate electricity. Like the russians have done in the past 20 years with their atom bombs. What is the US waiting for ?
And read this as well:
http://www.globalresearch.ca/index.php?context=va&aid=7894
Foreign purchases of Agency paper peaked in the 2nd quarter of 2008 and have been dropping ever since. That was precisely the moment when the commodity markets (all priced in USD) peaked as well. To be able to buy the same amount of oil or other commodities at rising prices countries must increase their currency reserves (in USD) as well. But when commodity prices started to drop then those “”evil”" foreigners could start to sell that toxic Agency paper as well. Folks from abroad can and DO read american newspapers !!! They knew very well of what was going on in the US and acted like investors: sell Agency paper as soon as they could. And that selling of USD denominated paper is a force pushing the USD(X) up. And a USD(x) going up is toxic for speculation in A LOT OF or ALL commodities.
Foreign demand turned into foreign supply of Agency paper. Lehman Bros. made BIG money by selling those mortgage bonds to foreigners but when that demand disappeared Lehman Bros. was “”up to its eyeballs”" in mortgages (on leverage !!!) they couldn’t sell. And that’s why – IMO – Lehman Bros. went belly up.
The US military related spending is about $ 1 trillion. Too many folks in the US profit from all that money. The Pentagon, the arms manufacturers, Congress (“”campaign contributions”" or bribes from e.g. Boeing, Raytheon). Military spending is a MAJOR reason why the US Current Account is so deep in the red.
1. US imports of commodities needed for arms,
2. US bases around the world. The Pentagon transfers money to an account in e.g. Germany and the US military base over there uses that money to buy locally food, gas, energy, paper, toothpicks etc.
But the US Current Account Deficit means that the amount of USD abroad increases. And those foreigners can use those USD to buy USD denominated securities e.g. US T-bonds or Agency paper. So, when (not if, the US citizens are already demanding cuts in military spending as well) the US decreases its military spending abroad then demand for US securities will drop as well. Precisely when US deficits continue to be (very) high. And this is consistent with what TPC has said about savings and government spending.
So, it’s a matter of “”damned if you do, damned if you don’t”". Either accept spending cuts or face the truth down the road with higher interest rates. There’s no painless way out any more, for no one. In spite of what TPC would like us to believe.
Willy 2
Thanks for taking the time to explain your take. While I hate what we are doing, e.g.: militarily w/ wars, etc., I also noticed that the withdrawal from those wars and the concommitant collapse of spending from a sectoral balances view could have some drawbacks to the HH & CORP sector.
But I still am of the opinion that wars and ROW military bases are “wasted” money & feel very strongly that there are better ways to burn one’s Fiat.
Thank-you for your time.
Best/.
Reply to Willy 2
Russia may not be as big a worry as previous but now perhaps because of North Korea and Iran.
what if Italy decides to not pay debt? Or better, to exit EMU?
Had the Senate approved the Ryan bill which Jaime voted for, the S&P would not have downgraded the US.
Blame Progressives for the downgrade.
America has over $8 trillion of assets Democrats have blocked us from tapping. There’s $1 trillion accessible just from 400 acres on the frozen wasteland of Alaska. Progressives have pulled all the stops to prevent America from using this asset in creating tens of thousands of union jobs and lowering the cost of fuel.
Now we find that a new thermal in situ extraction technology opens up the possibility of tapping $40 trillion in shale oil from 3 states. (@$50/barrel). Dicks has been a prime blocker of developing shale oil, just like he helped Clinton put $400 billion of clean coal from Staircase Escalante off limits so Clinton could reward his Indonesian financial backer who controlled a competing clean anthracite field.