Sovereign debt bubble thread

[DGuller]

Very bad: Rambo might no last a day where we are headed. Immediately reallocate all savings into taco bell and die in an epic binge of gluttony.

Sounds like a horrible way to die.

[Ideologue]

There's an interesting article suggesting that the Fed could buy Eurozone bonds in order to prevent a collapse and a subsequent deflationary effect it would have on the US.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

I don't know why that would be deflationary; I would think it would be inflationary.

I read somewhere (forget where) that it could be deflationary.  I actually have no idea.  All I know is that a serious deflationary turn for the U.S. dollar would not help me/ruin me, whereas moderate-to-hyperinflation could, conceivably, get me out of a jam.  So should I root for the collapse of the Euro or not?  (I guess on principle I don't but these aren't principled times and it's not like I can wish European integration into being anyway.)

[PJL]

There's an interesting article suggesting that the Fed could buy Eurozone bonds in order to prevent a collapse and a subsequent deflationary effect it would have on the US.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

I don't know why that would be deflationary; I would think it would be inflationary.

No, you read it wrong,  I mean the move would be counter-deflationary.

[Admiral Yi]

Firing a Paulson-Bernanke sized bazooka and committing $1 trillion in real money to the stability fund.  Biting the bullet on the eurobond concept.  Earlier and more aggressive provision of liquidity from ECB to the banking sector.  Shock and awe the market and convince them that Eurozone institutions and member states put the integrity of the single currency as the top priority - even over inflation risks or other particular national concerns.

Instead the member states have convinced the markets that they will rather see the euro fall apart over compromising other principles.  The market reacts accordingly and the prophecy becomes self-fulfilling.

Seems to me like you would still have the same credibility issue that exists now.  If the market decides that all the PIIGS (and friends) are at risk, then the credit worthy countries don't have enough resources to back them up.

BTW, I don't see why continuation of the single currency should be the highest priority.  I think the highest priorities should be the continued solvency of those countries with manageable fiscal positions and the continued existence of the banking system.

[alfred russel]

There's an interesting article suggesting that the Fed could buy Eurozone bonds in order to prevent a collapse and a subsequent deflationary effect it would have on the US.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

I don't know why that would be deflationary; I would think it would be inflationary.

I read somewhere (forget where) that it could be deflationary.  I actually have no idea.  All I know is that a serious deflationary turn for the U.S. dollar would not help me/ruin me, whereas moderate-to-hyperinflation could, conceivably, get me out of a jam.  So should I root for the collapse of the Euro or not?  (I guess on principle I don't but these aren't principled times and it's not like I can wish European integration into being anyway.)

If they buy the bonds without sterilizing them it would be inflationary. They would be creating the money to buy the bonds.

You shouldn't root for the euro to collapse because it isn't going to be easier for you to find a job in a worse economy. Offsetting that, you could probably get a better exchange rate on a european vacation.

[alfred russel]

There's an interesting article suggesting that the Fed could buy Eurozone bonds in order to prevent a collapse and a subsequent deflationary effect it would have on the US.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

I don't know why that would be deflationary; I would think it would be inflationary.

No, you read it wrong,  I mean the move would be counter-deflationary.

Gotcha.

[Jacob]

JR, so how bad do you think things will be? I'm trying to decide between 3 options: not so bad, bad, and very bad.

Not so bad: Plan is to reallocate into canned goods and basic medical supplies.

Bad: society violently collapses. Stores of value will be of little use and will only leave you a target. Plan is to reallocate in guns and ammunition.

Very bad: Rambo might no last a day where we are headed. Immediately reallocate all savings into taco bell and die in an epic binge of gluttony.

Buy real estate in the wilderness and retire to a fortress?

[Ideologue]

There's an interesting article suggesting that the Fed could buy Eurozone bonds in order to prevent a collapse and a subsequent deflationary effect it would have on the US.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

I don't know why that would be deflationary; I would think it would be inflationary.

I read somewhere (forget where) that it could be deflationary.  I actually have no idea.  All I know is that a serious deflationary turn for the U.S. dollar would not help me/ruin me, whereas moderate-to-hyperinflation could, conceivably, get me out of a jam.  So should I root for the collapse of the Euro or not?  (I guess on principle I don't but these aren't principled times and it's not like I can wish European integration into being anyway.)

If they buy the bonds without sterilizing them it would be inflationary. They would be creating the money to buy the bonds.

You shouldn't root for the euro to collapse because it isn't going to be easier for you to find a job in a worse economy. Offsetting that, you could probably get a better exchange rate on a european vacation.

Ok, I thought you meant the collapse itself would be inflationary and I was like "huh?"

Well, it's not easy for me to find a job now.  I don't think it's a linear relationship.  But I suppose the point is well made.

[The Minsky Moment]

Seems to me like you would still have the same credibility issue that exists now.  If the market decides that all the PIIGS (and friends) are at risk, then the credit worthy countries don't have enough resources to back them up.

If decisive action had been taken at the Greek stage of the crisis, and a clear message sent that others would have full liquidity action, the contagion wouldn't have spread.  Take Italy - the spread of the 10yr over bunds was under 2% as late as June this year (as opposed to over 5% now).  There has been no adverse change in Italy's fiscal fundamentals in the intervening period - to the contary, the fall of Silviocracy is a net plus. 

BTW, I don't see why continuation of the single currency should be the highest priority.  I think the highest priorities should be the continued solvency of those countries with manageable fiscal positions and the continued existence of the banking system. 

The banking system is a euro-based system.  Sovereigns have viable options if a currency union breaks up, but the private banking system will bear the brunt of any adjustment.

[Iormlund]

Firing a Paulson-Bernanke sized bazooka and committing $1 trillion in real money to the stability fund.  Biting the bullet on the eurobond concept.  Earlier and more aggressive provision of liquidity from ECB to the banking sector.  Shock and awe the market and convince them that Eurozone institutions and member states put the integrity of the single currency as the top priority - even over inflation risks or other particular national concerns.

Instead the member states have convinced the markets that they will rather see the euro fall apart over compromising other principles.  The market reacts accordingly and the prophecy becomes self-fulfilling.

Seems to me like you would still have the same credibility issue that exists now.  If the market decides that all the PIIGS (and friends) are at risk, then the credit worthy countries don't have enough resources to back them up.

BTW, I don't see why continuation of the single currency should be the highest priority.  I think the highest priorities should be the continued solvency of those countries with manageable fiscal positions and the continued existence of the banking system.

You are starting from the conclusion and going backwards. Italy and Spain had no solvency problem. Spain was coming along relatively well for months, after enacting painful measures without noticeable unrest. And there was still plenty of room to maneuver.

Our spreads didn't skyrocket until very recently, when investors were convinced by Merkel and the ECB that the Euro was in actual danger, something most would have thought crazy talk a few months ago.

[Admiral Yi]

If decisive action had been taken at the Greek stage of the crisis, and a clear message sent that others would have full liquidity action, the contagion wouldn't have spread.  Take Italy - the spread of the 10yr over bunds was under 2% as late as June this year (as opposed to over 5% now).  There has been no adverse change in Italy's fiscal fundamentals in the intervening period - to the contary, the fall of Silviocracy is a net plus. 

You're making the assumption that <2% over Bunds is the "right" spread for Italian debt.

Also, what was the change in Greece's fundamentals in the period leading up to their meltdown?

[Iormlund]

Also, what was the change in Greece's fundamentals in the period leading up to their meltdown?

The incoming government revealed their books were cooked. Pretty fundamental change, if you ask me.

[Admiral Yi]

Kay.

[The Minsky Moment]

You're making the assumption that <2% over Bunds is the "right" spread for Italian debt.

It is just as right then as the current spread is now.  The only that has changed is the market perception that in a pinch Eurozone institutions and fellow member state governments would let Italy go down the drain before doing what needs to be done to prevent that outcome.

At the low yields the Italian debt burden is managable; thus there is only a solvency problem for Italy if there is a perception of a solvency problem.

[Admiral Yi]

It is just as right then as the current spread is now.  The only that has changed is the market perception that in a pinch Eurozone institutions and fellow member state governments would let Italy go down the drain before doing what needs to be done to prevent that outcome.

At the low yields the Italian debt burden is managable; thus there is only a solvency problem for Italy if there is a perception of a solvency problem.

I agree with you.  The only thing that can possibly justify the pre-crisis yields is belief in a de facto guarantee.