Fiscal Cliff MEGATHREAD: Wile E. Economy falls off, lands in cloud at bottom

[Sheilbh]

History is replete with examples of issuers of fiat currency which have defaulted.

It's a matter of choice.
A country can either inflate its way out of the debt or impose losses directly on the bondholders.
The main difference is distributional consequences.  Inflation spreads the pain more widely, but also harms vulnerable yet politically powerful groups like pensioners.
For a country like the US or UK, I would expect them to avoid the default route; smaller countries might prefer default.

I remember one of the investment banks did a study and ended up arguing that inflation risk is never really adequately priced into bond yields.  The UK has a very good record on defaults, but a dreadful record on inflating our debt away but that's not reflected in the price we pay to borrow.  If inflation's somewhat expected and not historically terribly high then that has far less impact than defaults.

Both choices are similar in that they lead to an inability to borrow at nonpunative rates.

Not true.  See above.  The UK's one of the worst offenders in Europe of inflating debt away and yet we've got one of the lowest bond yields and have for a very long time.

A Greek, a Spaniard, an Italian, a Portuguese, a Cypriot, or an Irishman could have said the exact same thing (and probably did) just before the shit hit the fan.

What?  The Spaniard, the Irishman and the Cypriot would have been looking at the glowing praise of the EU, their record low national debt and significant surpluses. 

And in two and half years of  the status quo we will be Italy.

But who's arguing for the status quo?  From what I can see the options from both parties (as much as has been leaked) are roughly the same amount of fiscal consolidation but distributed differently.  The status quo is renewing everything.

MY point is simply that the Dems don't seem to do more than pay passing lip service to the idea of ever cutting spending, or even just not increasing it.

But inflation matters, as does growth, the numbers themselves are far, far less important.

[Admiral Yi]

Not true.  See above.  The UK's one of the worst offenders in Europe of inflating debt away and yet we've got one of the lowest bond yields and have for a very long time.

I'm not sure what you're talking about.  When did the UK experience very high inflation?  And what were bond yields in the following years?

What?  The Spaniard, the Irishman and the Cypriot would have been looking at the glowing praise of the EU, their record low national debt and significant surpluses. 

You're arguing a technicality.  Spanish banks needed recapitalization and Spanish regional governments did and still do have large debts that are assumed to be guaranteed by the national government.

But who's arguing for the status quo?  From what I can see the options from both parties (as much as has been leaked) are roughly the same amount of fiscal consolidation but distributed differently.  The status quo is renewing everything.

Point conceded.  Expectations are that with the offers on the table, it will take three years before we aree Italy.  Satisfied?

[Sheilbh]

I'm not sure what you're talking about.  When did the UK experience very high inflation?  And what were bond yields in the following years?

As I said above it's not necessarily historically very high inflation that has an effect.  The bank's paper found that if the inflation was expected and higher than average but not too historically high it could have a significant effect inflating debt away and very little impact on bond yields. 

You're arguing a technicality.  Spanish banks needed recapitalization and Spanish regional governments did and still do have large debts that are assumed to be guaranteed by the national government.

Eurozone comparisons don't work with the US - Spain, Portugal, Ireland, Greece, Italy and Cyprus all have lower deficits than the US, many of them still have lower national debts than the US.  But within the Eurozone there were a number of different situations, you're too smart to generalise off handy acronyms.

Point conceded.  Expectations are that with the offers on the table, it will take three years before we aree Italy.  Satisfied?

No.  That assumes their won't be further rounds of austerity and further growth.  It's a medium term problem that's going to take many years to solve.  In my view we will still have austerity politics in a decades time.  Because of that, what matters most is the credibility of the political system's ability to negotiate deals and their commitment to reform.

[Razgovory]

I think that was dps Raz.

I sometimes confuse the two.

[Fate]

This table is illustrative:  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP  Not a lot of countries below US on this list that you would really want to emulate.

Half of the Republican party wouldn't mind emulating the religious government Saudi Arabia. The other half of the party would be willing sign away their freedoms to a friendly looking gestapo so as long as their tax rates went down to 5.3%.

Somehow, I doubt that 50% of Republicans want a Wahhabist government.

They don't call it Wahhabism, they call it Evangelicalism. 

[Razgovory]

Shouldn't you be in the GOP now?  You are doctor aren't you?

[dps]

I think that was dps Raz.

Yes, it was me, and yes, I'll still defend the statement.

Do I have a link?  No, it was based on newspaper accounts I read at the time--I didn't even have internet access until just before the 2000 election, or even a computer until almost the end of Clinton's 1st term.

[Admiral Yi]

As I said above it's not necessarily historically very high inflation that has an effect.  The bank's paper found that if the inflation was expected and higher than average but not too historically high it could have a significant effect inflating debt away and very little impact on bond yields. 

Inflation has had very little effect on Gilt yields?  I'd like to see a link on that Shelf.

Eurozone comparisons don't work with the US - Spain, Portugal, Ireland, Greece, Italy and Cyprus all have lower deficits than the US, many of them still have lower national debts than the US.  But within the Eurozone there were a number of different situations, you're too smart to generalise off handy acronyms.

I don't recall mentioning any acronyms, handy or otherwise.  I recall pointing out that when investors flee a given countries bonds, it's very sudden.  The bond market is not in the habit of saying "things are dire right now, in 10 to 15 years we will probably all dump US Treasuries."

No.  That assumes their won't be further rounds of austerity and further growth.  It's a medium term problem that's going to take many years to solve.  In my view we will still have austerity politics in a decades time.  Because of that, what matters most is the credibility of the political system's ability to negotiate deals and their commitment to reform.

And in the medium term, while the problem is getting fixed, we will have become Italy.

[Sheilbh]

Inflation has had very little effect on Gilt yields?  I'd like to see a link on that Shelf.

Inflation that isn't historically high and wasn't a surprise hasn't.

I can't remember where I read it.  I think an FT blog link sometime.

I don't recall mentioning any acronyms, handy or otherwise.  I recall pointing out that when investors flee a given countries bonds, it's very sudden.

Frankly it looks endless.  Spain and Italy still have market access.  But again I don't think the Eurozone's a great example given the number of cases involving political pressure to go for a bailout or say changes in ECB policy suddenly causing a far more severe situation. 

An example with an independent central bank, global reserve currency and relatively steady growth would be far more useful for thinking about US policy than Ireland.

And in the medium term, while the problem is getting fixed, we will have become Italy.

Which is fine as long as it's being fixed.  If there are policies in place reducing the deficit, reforming social programs and in, say, 8 years or so seeing debt decline I don't think the markets will go insane because you've crossed some magic number.  As I say it comes back to credibility of the government - whether or not they can negotiate and agree is very important.

[Razgovory]

I think that was dps Raz.

Yes, it was me, and yes, I'll still defend the statement.

Do I have a link?  No, it was based on newspaper accounts I read at the time--I didn't even have internet access until just before the 2000 election, or even a computer until almost the end of Clinton's 1st term.

That's convincing.

[Admiral Yi]

An example with an independent central bank, global reserve currency and relatively steady growth would be far more useful for thinking about US policy than Ireland.

You do realize the euro is an international reserve currency, don't you?   And that the ECB is independent?

[PDH]

And in the medium term, while the problem is getting fixed, we will have become Italy.

We don't elect cool enough presidents to achieve that goal

[dps]

I think that was dps Raz.

Yes, it was me, and yes, I'll still defend the statement.

Do I have a link?  No, it was based on newspaper accounts I read at the time--I didn't even have internet access until just before the 2000 election, or even a computer until almost the end of Clinton's 1st term.

That's convincing.

Nobody's provided any evidence to the contrary.

[Sheilbh]

You do realize the euro is an international reserve currency, don't you?

Yeah, but scale matters.  The Euro's about 25% - roughly the same level as in 2003 after a few years of increases.  The Dollar's at around 60%, it also used to be higher but is about the level it was in the mid-90s.

And that the ECB is independent?

Of course.  In my view too independent - it's sort of like the German courts - they are independent but from a British perspective they look rather too much political actors.

But you're right I meant independent, national central bank.

[Admiral Yi]

Yeah, but scale matters.

How so?