Protest in Spain over high youth unemployment and a downgrade warning on Italy's debt highlight political problems in the eurozone. Lex's Edward Hadas and Vincent Boland discuss whether the lack of strong leaders (in Germany and Spain now, and soon in Italy) is pushing the sovereign debt crisis into a more dangerous phase.
Keywords: Eurozone Crisis, Eurozone Governance,
Looking at current economic circumstances in the US (mediocre growth, high unemployment, tremendous sovereign debt) Berkeley's Christina Romer sees positive elements in a weakening dollar:
She concludes in her NYT article:
"STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues."
Keywords: US Dollar, Dollar versus Renminbi Value of US Dollar
A bigger problem for entrepreneurs and investors can be short-term oriented actions of politicians.
Consequently, consistent institutions, defining "the rule of the game", are a key success factor for a society, as Peter J. Boettke and Alexander Fink point out in a paper:
Keywords: Private Property Rights, Institutions
"THE fear that Greece's sovereign-debt crisis might presage similar episodes elsewhere in the euro zone has been borne out. In November, Ireland joined Greece in intensive care, becoming the first euro-zone country to apply for funds from the rescue scheme agreed in May 2010 in concert with the IMF, and in April this year Portugal followed suit. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) are now much higher in all three of the bailed-out countries then they were in May 2010. Promises to tackle budget deficits through public spending cuts and tax increases have offered little reassurance to bondholders, who know that austerity will take its toll on growth." Source: The Economist
Keywords: European Crisis, European Periphery
Keywords: Portugal, Portuguese Crisis, Austerity
For a long time analysts have been arguing about whether Greece will default on part of its debt – leaving its creditors to take a “haircut”. This column argues that this prospect is becoming more and more likely. read more on Vox
Keywords: Greek Crisis, Greek Debt Level
Two good articles - though from last year - which deal with the subject:
Keywords: Japanese Economic Problems, US' Economic Problems
May 19, 2011
Keywords: IMF, Global Economy, Global Recovery, Challenges to the World Economy
John Taylor, Senior Fellow in Economics at the Hoover Institution and Professor of Economics at Stanford University, notes that we need a link between the debt ceiling and spending cuts. Taylor explains that raising the debt limit and reducing spending will decrease the long-term risk of default.
Keywords: US Debt Limit, Spending Cuts
The Swiss Cantonal Bank of Zoug has invited the former UBS chief economist Klaus Wellershoff in April to present an economic outlook. We have lately received the slides of the insightful presentation and post here two of them:
Following slide shows the development of the sovereign debt of the US, the Eurozone and the PIGS countries over time:
Following slide shows the development of trade weighted exchange rates. The pictures shows that the Euro has not done particularly bad:
Once more we like to set a link to an article to Mohamed A. El-Erian of Pimco:
Colleagues from around the world recently gathered at PIMCO’s headquarters in California for our annual Secular Forum, when we leave behind high-frequency issues for a few days and, instead, debate what the next 3-5 years hold for the global economy. The perspective is global, informed by the insights of outside speakers, and the focus is on what is likely to happen, as opposed to what should happen. read more
Keywords: Global Economy, Emerging Markets, Advanced Economies
We following interview with globally reputed Swiss hedge fund manager Felix Zulauf on Financial Sense. The interview is dated April 30, 2011. As we are not mainly in the business of posting news but providing links to thought leadership, we decided to post the interview:
Keywords: Global Economy, Currencies, Monetary Policy, Felix Zulauf
Storm clouds over markets
"May 19 2011 Felix Zulauf, former head of asset management at UBS, warns that storm clouds are gathering over the markets. He discusses with John Authers, head of Lex, his grim outlook: that Europe faces a double dip, China is slowing, bonds "look awful" and an overheating commodities sector will be hurt badly. He was interviewed at the CFA Institute Annual Conference in Edinburgh."
Keywords: Globalization, Emerging Market Growth, India, China
Once more a top financial experts who explains that a suboptimal design of the Eurozone has contributed heavily to the crisis.
Guillermo de la Dehesa, Chairman of CEPR and member of the Group of Thirty points to following weaknesses:
"•First, the Eurozone is not an optimum currency area, because it lacks two necessary requisites, i.e. price and wage flexibility and labour and capital mobility.
As the Eurozone does not comply fully with either of the two, it needs to have a very large common or single budget to face potential asymmetric shocks affecting some of its members, as has happened now.
•Second, a single monetary policy requires a single or common fiscal policy, because if one or several members increases its spending and debt disproportionably, it produces negative externalities on the others, who tend to buy their debt without exchange-rate risk.
Achieving such a single fiscal policy implies a progressive political union.
•Third, a single monetary policy may have perverse effects when applied to members with divergent growth and inflation rates by becoming simultaneously too strict for members with low rates of growth and inflation and too lax for members with higher rates of growth and inflation."
Domestic debt has to be put into the equation:
"The literature on domestic debt default is sparse, as are the data. We compile a database on public debt that spans the nineteenth century to 2010. Our findings are as follows. First, domestic debt accounts for almost two-thirds of public debt. Second, the data help to explain the puzzle of why countries default on external debts at seemingly low debt thresholds. Third, domestic debt (which is often larger than the monetary base in the run-up to high inflation) has largely been ignored in the inflation literature. Last, the view that domestic residents are junior to external creditors does not find broad support."
Keywords: Domestic Debt, Debt Default, Inflation
May 18, 2011
Keywords: US Sovereign Debt, US Deficit, David Stockman
Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.
Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop. read more
Keywords: Japanese Economy, Recession in Japan
Menzie Chinn about the "bubble announcement hype" in the blogosphere and elsewhere:
Keywords: Monetary Policy, Quantitative Easing, US Dollar, Value of US Dollar
The US has officially reached its debt ceiling of US$ 14.3 trillion. The government is now discussing "extraordinary measures", such as raising the debt ceiling (proposed by the president). This has triggered heavy reactions from mostly Republican politicians and economists. Here are thoughts from two good thinkers, economists Tyler Cowen and Megan McArdle:
Keywords: US Sovereign Debt, Debt Ceiling, Raising Debt Ceiling, Sovereign Default
Freedom Watch with Judge Napolitano on Fox Business:
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