Daily Archives: July 9, 2010

Lucid and frightening argument from George Soros, courtesy of New York Review of Books:

By insisting on pro-cyclical policies, Germany is endangering the European Union. I realize that this is a grave accusation but I am afraid it is justified.

To be sure, Germany cannot be blamed for wanting a strong currency and a balanced budget. But it can be blamed for imposing its predilection on other countries that have different needs and preferences—like Procrustes, who forced other people to lie in his bed and stretched them or cut off their legs to make them fit. The Procrustes bed being inflicted on the eurozone is called deflation.

Unfortunately Germany does not realize what it is doing. It has no desire to impose its will on Europe; all it wants to do is to maintain its competitiveness and avoid becoming the deep pocket for the rest of Europe. But as the strongest and most creditworthy country, it is in the driver’s seat. As a result Germany objectively determines the financial and macroeconomic policies of the eurozone without being subjectively aware of it. When all the member countries try to be like Germany they are bound to send the eurozone into a deflationary spiral.

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Might the Fed cap long-dated Treasury yields? This suggestion, made by Bernanke himself in 2002, has resurfaced in the blogosphere amid rising fears of deflation.

In recent days, the Washington Post’s Neil Irwin and the New York Times’ Paul Krugman have both asked what the Fed can usefully do if there is another slowdown. The meticulous Bill McBride, the man behind Calculated Risk blog, offers an insight into Bernanke’s ‘roadmap’. The speech might be old, but the thinking seems more relevant than ever.

Over to Bernanke:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities.

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination.

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Ralph Atkins

How is the European Central Bank judging the success of its eurozone government bond purchases? The programme. launched at the height of the eurozone debt crisis in May, has been particularly controversial in Germany, and Jean-Claude Trichet, ECB president, pointed out on Thursday that the scale of purchases – concentrated on the bonds of southern European countries – has been on a downward trend ever since it started.

Mr Trichet made the same point at the ”ECB watchers” conference in Frankfurt this morning (an annual get together in which ECB policymakers are put on the spot by analysts, bankers etc). To me, that suggested the ECB would love to be able to run the programme down even further, and could soon stop buying any bonds at all. Read more

South Korea is the latest Asian country to start raising rates. Following calls from the IMF, the central bank of South Korea has increased the base rate for the first time since late 2008. A cautious increase of 25bp leaves the rate at 2.25 per cent.

An expected rise in inflation was the main reason behind the move, even though current inflation is below the 3 per cent target. Economists at international banks said they expected a further 50bp increase by the end of the year. Korea’s move follows Malaysia’s increase of 25bp yesterday.

The Swiss National Bank may have suffered paper losses of up to SFr10bn (€7.5bn) from huge interventions in the currency markets to restrain the value of the franc.

The central bank is expected by market observers to report a big loss when it publishes second-quarter accounts in mid-August. Economists cannot make a precise forecast, as the SNB does not reveal when, or at what rates, it has sold francs and bought other currencies – mainly euros – in recent months. However, Martin Neff, chief economist of Credit Suisse, said: “It’s certain there will be a big loss.” Read more