Baseball91's Weblog

August 5, 2012

Persons of Interest: The Reason for the Fiscal Mess Of Western Governments As Well As Japan

Filed under: European Union,Japan — baseball91 @ 1:48 AM

 Dependent on sales to other EMU nations, Germany’s economy is weakening. In Germany, the nation’s highest court is expected to rule on September 12th whether the European Stability Mechanism —the main financial rescue fund for countries in the European Monetary Union — is permitted under Germany’s constitution, which is a matter of concern in both the euro zone and to the world.

 Spain’s borrowing costs for a ten-year bond closed this week at 6.672 percent, while Italy’s 10-year bond rose above 6 percent. “Bond vigilantes” who trade as rational players in the bond market have been accused of undermining Europe’s recovery and its welfare state. It has always been the bond market which imposes budget discipline on pie-in-the-sky politicians. The collective day-to-day judgments of “bond vigilantes” can now topple governments and hold the key to the survival of a currency. And it would happen this fall, unless Germany decides to leave the European Monetary Union.

 The cause of the crisis would be poor leadership in Europe, if there was any leadership at all. If politicians expected the bond market to speak with one voice, traders commonly complained, it would help if politicians did too. The deceit has been revealed by the markets.

 When a nation-state owes too much money, bond investors raise the borrowing cost of that nation with the risk of default. Italy needs to raise 100 billion euros in bond offerings before 2012 concludes. And Spain with their already existing debt, does require 35 billion euros before 2012 concludes, though another bond offering is not due until October. This was on top of the indebtedness of Spain’s banks and regions, in a shrinking economy. When it had been bond investors who were forced to take buzzcuts on the Greek government bonds held — had it been 50 cents on the dollar? (Read about the reaction of those who ran the Norwegian national pension fund about what they thought of the EU’s forced buzzcuts.)

 Monetary wars. The exchange rate stood at 123 yen to the dollar just before the first tremors of the American housing crisis appeared in 2007, as the Bank of Japan kept interest rates low to stimulate growth, and money flowed out of Japan in search of higher returns. In February 2012, the yen hit a postwar high of 76 yen to the dollar, remaining around 78 to the dollar on Wednesday of this week. The worldwide macroeconomic trends currently favor a strong value of Japan’s currency, to the harm of its competitive stance in global markets.

 Poor leadership in Japan, as the Japanese can trace the start of the yen’s latest rise to the worldwide economic panic that — according to the official spin told over and over until most people believed it — began in the United States and spread to Europe. ‘The crisis’ began raising doubts about the soundness of American and European banks and the ability of governments to stand behind them. The tide of money did reverse. Japan with its huge number of domestic savers soon became a haven for investors, driving the currency value of yen up. Have you followed the comments of the US Treasury Secretary on US policy over the past four years concerning the yen? In the top story in November 2009, Timothy Geithner insisted that the US Treasury has a strong dollar policy. In November 2009, he said the Obama administration was committed to a strong dollar and to actions aimed at bolstering its value, giving reassurances to Asian nations in November 2009. Coming from the world of central banks where expressions in bankspeak are neither normal nor clear, it never has been clear if the strategy between the Fed and the European Central Bank is coordinated or not, or to what extent. In November 2009, lectures were given to President Obama and Timothy Geithner by top Chinese officials about the risks posed to the global economy by America’s ultra-low interest rates and soaring government deficit. So three years later, the pegged level of the yen to the dollar this past Wednesday was around 78. This strong dollar policy has resulted in a drop from around 90 yen to the dollar since Timothy Geithner’s remark about the “strong” dollar. Maybe Japanese leaders actually believed Mr. Geithner.

 Poor leadership in the United States, under both the Bush and Obama Administrations. In these monetary wars used to fund the wars in Iraq and Afghanistan without tax increases. Everyone who held US currency in reserves would fund the War on Terror. In Japan, a high yen benefits Japan’s rapidly expanding elderly population, even if it hurts the younger Japanese. One reason, analysts say, of the vicious cycle of a strong yen and deflation, is generally left unsaid: politics which is pitting one generation against the other. By speeding the flood of cheaper imported products into Japan, the strong yen is contributing to deflation. Doing almost nothing to rein in the yen lets young people suffer, increasing the purchasing power of those with money. Despite alarm that the record-high currency is dealing crippling blows to the country’s once all-important export machine – partly within the government’s power to control – retirees from the baby boom, who make up more than a quarter of the population, tend to vote in high numbers. Even though the long-awaited plan released this week identifies the heart of the problem as Japan’s aging population and declining export ability in a competitive Asai, analysts said the government’s modest approach fails to take on the entrenched interests in monetary wars, including the elderly who have long stood in the way of fundamental change.

 It was another election year, with nominated candidates with such poor leadership skills to manage this Promise Land — but such nice hair. In the televised world, there was that shrinking universe without good leadership which has resulted in a shrinking universe of safe assets. In the way of homeland security, Norway was one nation which looked to be safe. The upward-demand pressures to place assets in a place of safety is now my personal crisis, wth negative implications when there was no financial stability anywhere. With such a projected scenario of the collapse of the euro, how soon would vigilantes follow the bond vigilantes.


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1 Comment »


  1. It is on October 8, 2012 that finance ministers of the European Monetary Union plan to to ratify the European Stability Mechanism(ESM). The Euro-area governments will start paying into the ESM in October with the goal to raise capital of €80 billion by midyear 2014. Bloomberg News today reports that there are draft investment guidelines for the European Stability Mechanism, set to go into operation, which must be voted on reportedly keeping at least 15 percent of its maximum lending volume — or €75 billion out of an ultimate €500 billion — in “assets of the highest creditworthiness.”

    The first €75 billion of investments by the fully capitalized fund will be restricted to a “general eligible assets list,”
    reports Bloomberg News, with amounts beyond that available to purchase securities from an “enlarged” list that includes bank bonds. In addition to the €80 billion cash component, euro- zone governments have agreed to provide the ESM with €620 billion in “callable” capital. This ultimately will leave the European Stability Mechanism with €700 billion to draw on, which includes a buffer that would not be lent to distressed countries. As it grows, the European Stability Mechanism will have the option to take on more risk, though it was set up by the eurozone permanent bail-out fund “to fund the core of its assets by efficient and flexible portfolio management.”

    Comment by baseball91 — September 25, 2012 @ 8:58 PM | Reply


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