Perverse noordzuidstromen

De Duitse centrale bank heeft ongeveer 500 miljard euro vorderingen uitstaan ten aanzien van de perifere eurolanden. Duitsland financiert immers het tekort op de lopende rekening van die landen. Het eigen overschot op de lopende rekening wordt weerspiegeld in de activa die de Bundesbank tegoed heeft van de overige centrale banken in Europa. Als de periferie de boot in gaat, blijft Duitsland met al die onbetaalde schulden opgescheept. Omdat de Europese Centrale Bank de Bundesbank gebruikt om geld te lenen aan de Grieken e tutti quanti, dreigt de Buba bovendien te weinig geld in de financiering van de eigen KMO’s te kunnen pompen. → Read More

Will the true lender-of-last-resort stand up?

The classical notion of lender-of-last-resort derives from Henry Thornton (1760–1815) and Walter Bagehot (1826-1877). The phrase “lender-of-last-resort” has been ‘bandied around’ recently by people with an entirely different definition of the term. → Read More

ECB: lender-of-next-to-last-resort

Maybe you would like to see the European Central Bank engage in large-scale euro sovereign debt purchases. Maybe you do not.

But it cannot.

“To make large-scale open market operations in long bonds credible, the Treasury must idemnify the central bank against unexpected capital losses. Fortifying the central bank against capital losses would commit the Treasury to expand the public debt, perhaps substantially, in support of monetary policy. That fiscal commitment might require legislation.”

Or a eurozone Treasury to start with. → Read More

Reservations on bank reserves

Bank reserves in the United States have exploded from twenty billion before the crisis to close to a trillion now, in an effort by the Federal Reserve to mitigate the disruption in the interbank market. Lending evidently has not risen fifty-fold. What is wrong with the textbook multiplier of fractional banking? → Read More

BS on sovereign credit risk

Today, Lorenzo Bini Smaghi is delivering a speech at the Forum for EU-US Legal-Economic Affairs in Rome. The main subject of Policy rules and institutions in times of crisis is “the risk of a confusion of roles, which may generate moral hazard and ultimately delegitimise the institutions and undermine their credibility.”

The stability of public finances in particular, Bini Smaghi maintains, is based on two mechanisms: the credibility of the fiscal authorities, and the ability of the markets to accurately assess sovereign credit risk. Therein lies the rub… → Read More

Seven faces of the peril: Japanese event studies

Source: Société Générale Cross Asset Research, Global Research Alert, 29 August 2011

→ Read More

The fog of currency war

In his antimanual Vom Kriege, the great Carl von Clausewitz introduced friction in the theory of war. The imminent threat of bodily harm, the soldiers’ mental state (fear) and problems of information (uncertainty) all represent noncalculables which tend to infuse information with noise, and amplify or degrade signals.  These frictions render any straightforward military plan utterly useless. → Read More

Money is debt

The traditional story of the genesis of money you know from Adam Smith is simply not true. Commodity money did not emerge as a convenient medium of exchange when barter became too complex. A standardised weight of gold or silver in the form of a coin did not supersede other commodities as unit of account. Credit is not a modern invention to economise on the use of precious metals.

Debt precedes “money” by millennia. → Read More

When you are being financially repressed

If economic growth, austerity, inflation or default do not suffice, there is a politically correct way to liquidate (domestic) government debt: “persuade” people to invest in government debt instruments at negative real rates – or  at least below the real rate of growth. It worked like a charm in the early years of Bretton Woods. Think of these telltale signs: → Read More

Master of debt

De Italiaanse opflakkering is géén remake van de bankencrisis. Een remake veronderstelt dat het origineel al ingeblikt is, de oorspronkelijke versie weggedeemsterd. Hier wordt nog altijd dezelfde hete aardappel doorgegeven, van de Amerikaanse huizenmarkt in 2006 naar verstrekkers van consumentenkrediet, van de banken die voor hen kredietlijnen openden naar de Europese banken die in de onderliggende hypotheken belegden, en van die banken naar onze potverterende landen. De lynchpin op dit ogenblik is de ECB zelf; we redden nu geeneens meer “de” banken, maar de Europese centrale bank. → Read More