Noted for your Monday morning ruminations or procrastinations – take you pick. Here are some of the interesting things that I read over the weekend and Monday morning that you may also find thought provoking.
- Anxiety and Interest Rates: How Uncertainty Is Weighing on Us – One puzzle is that many people are willing to lock up their savings at these paltry rates for decades. When rates are this low, there may seem to be very little incentive for people to save. Yet according to the Bureau of Economic Analysis, personal saving as a fraction of disposable personal income stood at 4.9 percent for the United States in December. That may not be an impressive level, but it’s not particularly low by historical standards. The answer may be that all this uncertainty impels them to do that.
- Syriza and the French indemnity of 1871-73 – If the restructuring is well designed, within a year of the restructuring I think we could easily see Greek growth surprise us with its vigor. I was delighted to see that Greece’s new Finance minister agrees. An article in Monday’s Financial Times starts with the claim that “Greece’s radical new government revealed proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders.” Today’s Financial Times has an article by Martin Wolf that mentions the benefits of “a growth linked bond”.
- Hedge Funds Most Bearish on Crude in 4 Years After Rally: Energy -Global supply will exceed demand by 2 million barrels a day in the first half of 2015, Iranian Oil Minister Bijan Namdar Zanganeh said in an interview on state TV Feb. 4. “The bears are looking at where inventories are and what OPEC has been doing,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Feb. 6.
- Conquering China’s Mountain of Debt – China’s officially stated deficit is about 2 percent of its gross domestic product. That’s a fiction, says Chen Long, China economist at researcher GavekalDragonomics in Beijing, because it doesn’t include any of this indirect local borrowing. Add it in and the deficit rises to about 5 percent of GDP, Chen estimates. The National Audit Office found that as of 18 months ago, local debt—including indirect borrowing—totaled 17.9 trillion yuan ($2.86 trillion), up 63 percent since the end of 2010, much more than the 40 percent expansion of the economy.
- Bond Danger Compounded by U.S. Extending Treasury Maturities -The U.S. pays less in interest now than it did in 2008, even after the amount of U.S. debt outstanding more than doubled to $12.5 trillion. Instead, it’s bond investors who are being exposed to the brunt of the risk as the Fed looks to end its six-year-long policy of holding benchmark rates close to zero. Based on a bond-market metric known as duration, Treasuries are more vulnerable to losses when yields rise than at any time since at least 1997, according to Bank of America. The potential losses are the greatest for 30-year bonds.
- Japan Sold All But Bunds as German Yields Were Turning Japanese – “Japanese investors may have sold other assets to focus on German bonds, and reduced their holdings of other European bonds in anticipation of the euro’s further decline,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “Overall, I think this is just seasonal, taking profits ahead of the year-end. In months other than December, Japanese were big buyers of overseas securities.”
- America’s energy industry is undergoing a big switch – The weak oil price has clouded this sunny landscape. Investment decisions made a year ago now look questionable. The once-juicy price gap between a barrel of West Texas Intermediate (America’s benchmark) and Brent (the closest the industry has to a world oil price) has shriveled (see chart), along with the scale of the incentive to sell American oil abroad.
- Only raise US rates when whites of inflation’s eyes are visible – The Fed has rightly made clear that its decisions will be data dependent. The further key point is that it should allow the flow of information on inflation rather than on real economic activity to determine its timing in adjusting interest rates. And it should not raise rates until there is clear evidence that inflation, and inflation expectations, are in danger of exceeding its 2 per cent target. Here are four important reasons why.
- Nobody Understands Debt – This was a prescription for slow-motion disaster. European debtors did, in fact, need to tighten their belts — but the austerity they were actually forced to impose was incredibly savage. Meanwhile, Germany and other core economies — which needed to spend more, to offset belt-tightening in the periphery — also tried to spend less. The result was to create an environment in which reducing debt ratios was impossible: Real growth slowed to a crawl, inflation fell to almost nothing and outright deflation has taken hold in the worst-hit nations.