Sovereign debt bubble thread

[Iormlund]

In happier news Spain will likely post in 2012 its best trade balance figures in 40 years, only 2% in the red, down from a pre-crisis 10%.

The good part is that most of the change this year is down to yet another robust increase in exports. Despite all the stupidity in the Eurozone if the US manages to avoid a meltdown and the BRICs continue growing we might still export our way out of this.

[MadImmortalMan]

Such a correction was inevitable, since pre-crash GDP was a mirage. Shackling themselves to debts for decades to come, as the Irish did, seems far worse a choice than what they did.

Yeah and if pre-crash GDP was a mirage, then so was pre-crash debt-to-GDP ratio.

[Iormlund]

It was actually quite low (by Western standards) before the financial bubble.

[Legbiter]

Iormlund has the right of it even if it felt rather painful when the crash happened. The Icelandic banks had built up liabilities to the tune of 10-12 times the annual GDP of Iceland when they went bust. All mostly in the space of 5 years. It wasn't an inspired genius that led Iceland to torch the bank's bondholders, it was literally the only option left.

If Icelandic politicians at the time could have secured the funding to bail out the banks, they'd have done so in a heartbeat, no matter the cost.

If Iceland was fortunate, it was only so by being too dumb to save by conventional means.

[Admiral Yi]

A long time ago i heard on NPR that Iceland was holding a referendum (or maybe just debating in the Icestag) whether to pay back the various countries whose depositors had been left high and dry.  But i never heard how that turned out.  You know Leg?

[mongers]

With all due respect, is Iceland's experience much of a guide, it does after all have barely one thousandth of the US population.

[The Larch]

A long time ago i heard on NPR that Iceland was holding a referendum (or maybe just debating in the Icestag) whether to pay back the various countries whose depositors had been left high and dry.  But i never heard how that turned out.  You know Leg?

Two referendums on that were held, in 2010 and 2011, and both rejected the terms of the state guarantees for the repayments to the UK and the Netherlands.

http://en.wikipedia.org/wiki/Icelandic_loan_guarantees_referendum,_2010

http://en.wikipedia.org/wiki/Icelandic_loan_guarantees_referendum,_2011

[The Larch]

In case anyone is interested, this has been making the rounds in the social networks lately. It's an Icelander's rebuke of Iceland being some sort of poster child for lefties and occupy-ers on how to beat the economic crisis while giving the fat cats the finger:

http://studiotendra.com/2012/12/29/what-is-actually-going-on-in-iceland/

Maybe Legbiter or Viking can shed some additional light, but his point is that Iceland is still quite fucked.

[Iormlund]

The part about inflation-indexed mortgages is quite interesting (though a reader later points out he is mistaking real for nominal growth).

[MadImmortalMan]

BoJ is gonna do a QEternity too. I think this is the tenth round for them. That place is like a black hole.



http://www.reuters.com/article/2013/01/17/japan-economy-boj-idUSL4N0AM82220130117

TOKYO Jan 18 (Reuters) - The Bank of Japan will next week mull scrapping its 0.1 percent floor on short-term interest rates and pledging to buy assets open-endedly until 2 percent inflation is foreseen, sources familiar with the central bank's thinking said.

Such steps would surprise the markets, which have been expecting the central bank to settle on the more conventional step of topping up its asset-buying and lending programme by another 10 trillion yen ($113 billion).

Under relentless pressure from Prime Minister Shinzo Abe for bolder steps to beat deflation, the central bank is likely to double its inflation target to 2 percent and consider expanding monetary stimulus again at its two-day rate review that ends next Tuesday, sources told Reuters last week.

Instead of topping up the asset-buying and lending programme again, the BOJ may pledge to buy assets open-endedly until 2 percent inflation is in sight, without setting a specific date for completing the purchases, the sources said.

Another idea being floated is for the central bank to pledge that it will keep the balance of its asset-buying and lending programme intact even beyond its end-2013 deadline, they said.

The BOJ will also consider scrapping the 0.1 percent interest it pays on excess reserves that financial institutions park at the central bank, according to the sources, who spoke on condition of anonymity due to the sensitivity of the matter. That rate has effectively served as a floor to money market rates and kept them from falling to zero.

[citizen k]

    During the 1990s I spent much of my time focusing on economic crises around the world — in particular, on currency crises like those that struck Southeast Asia in 1997 and Argentina in 2001. The timing of such crises is hard to predict. But there are warning signs, like big trade and budget deficits and rising debt burdens.

    And there's one thing I can't help noticing: a third world country with America's recent numbers — its huge budget and trade deficits, its growing reliance on short-term borrowing from the rest of the world — would definitely be on the watch list.

    I'm not the only one thinking that. Lehman Brothers has a mathematical model known as Damocles that it calls "an early warning system to identify the likelihood of countries entering into financial crises." Developing nations are looking pretty safe these days. But applying the same model to some advanced countries "would set Damocles' alarm bells ringing." Lehman's press release adds, "Most conspicuous of these threats is the United States."

    O.K., let's run through some reassuring counterarguments.

    First, economists are very good at devising models that would have predicted past crises, but each new crisis tends to happen where and when they didn't expect it. So even though our budget deficit is bigger relative to the economy than Argentina's in 2000, and our trade deficit is bigger relative to the economy than Indonesia's in 1996, our experience needn't be the same.

    Second, nasty crises in third world countries have a lot to do with the fact that their debt is in foreign currency, usually dollars. As a result, when the peso or the rupiah plunges, debts explode while assets don't, and balance sheets collapse. By contrast, thanks to the special international role of the dollar, America's burgeoning foreign debt is in our own currency.

    Finally, financial markets are generally willing to give advanced countries the benefit of the doubt. Even when an advanced country seems to be deep in a financial hole, lenders usually assume that it will somehow find the resources and political will to climb back out.

    So is America safe, despite its scary numbers?

    Third world countries typically suffer from institutional weaknesses. They have poor corporate governance: you can't trust business accounting, and insiders often enrich themselves at stockholders' expense. Meanwhile, cronyism is rampant, with close personal and financial links between powerful politicians and the very companies that benefit from public largesse.

    The crisis won't come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.

    But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.

    What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.

    I know: it all sounds unbelievable. But would you have believed, three years ago, that the U.S. budget would plunge so quickly from a record surplus to a record deficit? And would you have believed that, confronted with that plunge, our leaders would offer excuses rather than solutions?

Paul Krugman, 2003

[citizen k]

BoJ is gonna do a QEternity too. I think this is the tenth round for them. That place is like a black hole.

http://www.scmp.com/news/asia/article/1133350/aso-says-japanese-elderly-should-hurry-and-die

[Richard Hakluyt]

In any science textbook you will find simple diagrams of various cycles, such as the carbon or water cycles. These will include sinks that lead to the loss of carbon (or whatever) more or less permanently from the cycle. It seems to me that the money cycle has two major sinks that are causing much of our problems. Firstly there is the apparent inability to tax the seriously wealthy, there are many trillions of dollars held in various offshore accounts and more money is drained from the cycle every year. Secondly we have the ageing population, in order to make provision for their pensions either vast sums are put aside in various investments or huge unfunded liabilities are created. The productive part of the economy, meanwhile, is chronically short of money and faces unfavourable tax arrangements; governments try and square this circle with QE.

I suspect we are buggered until we can either tax the wealth of the ultra-rich or get them to spend it on stuff. We also need to redefine and extend working lives so that older people are tempted to continue making some contribution rather than living off their rents (pensions paid for by tax, bonds, shares etc).

[mongers]

In any science textbook you will find simple diagrams of various cycles, such as the carbon or water cycles. These will include sinks that lead to the loss of carbon (or whatever) more or less permanently from the cycle. It seems to me that the money cycle has two major sinks that are causing much of our problems. Firstly there is the apparent inability to tax the seriously wealthy, there are many trillions of dollars held in various offshore accounts and more money is drained from the cycle every year. Secondly we have the ageing population, in order to make provision for their pensions either vast sums are put aside in various investments or huge unfunded liabilities are created. The productive part of the economy, meanwhile, is chronically short of money and faces unfavourable tax arrangements; governments try and square this circle with QE.

I suspect we are buggered until we can either tax the wealth of the ultra-rich or get them to spend it on stuff. We also need to redefine and extend working lives so that older people are tempted to continue making some contribution rather than living off their rents (pensions paid for by tax, bonds, shares etc).

Interesting analysis Tricky.


Wherever the monkey is, it SAH ain't here. 

[citizen k]

Germany Vs Japan Currency War Heats Up

Germany and Japan have a long tradition of cooperating, at least when it comes to various iterations of world war, generically in the conventional sense (and where they tend to end up on the less than winning side). Which is why it may come as a surprise to some that earlier today German politician Michael Meister launched what is now the third shot across Japan's bow in what is rapidly escalating as the most dramatic case of global currency warfare between the world's net exporters (at least legacy net exporters: thanks to Japan's recent political snafus, it has now become a net importer as it is rapidly losing the Chinese market which accounts for some 20% of its exports) which started as long ago as 2010 when it was quite clear that currency warfare is what the insolvent world can expect, before it devolves into outright protectionism, and finally regular war as Kyle Bass explained recently. To wit: "What can Japan's competitors do?" Meister said today in a telephone interview. "Either we're all smart and do nothing, or we follow suit and create a spiral that hurts us all."

Something tells us the "we will follow suit" is the right answer, as the only option left for the world which has no internal demand (i.e., consumer credit capacity to fund in house purchases of goods and services) and is destined to seek outside trade markets and inbound flows to generate inflation. But then again, none of this should be news, although perhaps it is to the EUR which has seen a rather rapid deterioration now that it is becoming very clear that what we have said, namely that Germany needs a weaker EUR to boost exports, is the only option for Europe.

And, as noted, he is not the first, nor the second, but the third in just one week to warn of what is coming. From Bloomberg: "Meister is the third senior German official to take issue with Abe in a week. Finance Minister Wolfgang Schaeuble attacked Japan's "false understanding" of monetary policy in a Jan. 16 speech to the lower house, saying it will pump "excessive liquidity" into global financial markets. Bundesbank President Jens Weidmann said in a speech in Frankfurt yesterday that Abe risked "politicizing" the yen's exchange rate."

Japan's response: Open-Yended monetization as reported last night. Certainly everyone will just sit there and watch as Japan does all it can to control an even greater portion of the export market and boost its GDP at the expense of all other trade deficit surplus nations. Certainly. This, naturally, ignores the very "GDP boosting" almost real war that Japan and China are increasingly finding themselves in.

From Bloomberg:

    Prime Minister Shinzo Abe's move to invigorate exports by pushing the yen lower against competitors is "very worrying," said Michael Meister, a senior member of Merkel's Christian Democratic Union who is due to meet with government officials in Japan starting on Feb. 7. Germany will probably seek support from fellow G-20 nations to urge Japan to change its course, he said.   

    Meister is the third senior German official to take issue with Abe in a week. Finance Minister Wolfgang Schaeuble attacked Japan's "false understanding" of monetary policy in a Jan. 16 speech to the lower house, saying it will pump "excessive liquidity" into global financial markets. Bundesbank President Jens Weidmann said in a speech in Frankfurt yesterday that Abe risked "politicizing" the yen's exchange rate.

    German discomfort at Japan's monetary policy occurs at a critical juncture in the health of the euro-area economy, including that of its German motor. Merkel, who is seeking a third term at federal elections this fall, may have to fall back on German exports to help bolster economic growth that the government forecasts to be just 0.4 percent this year.   

    Germany, Europe's biggest economy, whose exports are forecast to grow 2.8 percent this year from 4.1 percent in 2012, will probably seek the support of fellow Group of Eight and G-20 states to persuade Japan to rethink manipulating the yen's exchange rate, said Meister.

    Aside from a potential backlash from Japan's G-20 partners, any economic gains from the policy may be short-lived as monetary steps to reflate the economy bring higher import prices, said Meister. "The Japanese economy's real problems are structural and beg structural remedies, not tampering with the exchange rate," he said.   

    Abe, sworn in as Japan's prime minister on Dec. 26, has called on the Bank of Japan to unleash unlimited monetary easing and accept a higher central bank inflation target to help revive the world's third-biggest economy. The yen rallied today after the Bank of Japan said it will wait a year to begin open-ended asset purchases. The yen has declined 12 percent in the past three months, leveraging its competitiveness against its main competitors.

The market's response to what is now a loud and clear piling of German and Japanese FX currency troops? Green.


http://www.zerohedge.com/news/2013-01-22/germany-vs-japan-currency-war-heats