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Wednesday, May 05, 2010

Up For Air

Treasury yields continued their slide today. Nice if you have 'em. The six-month yield is significantly below its 2009 starting range (the low value of the 2009 start was 28 basis points), and today we closed at 22. The one and two years are right about where they started 2009 although the one year is a bit lower.

Thankfully, there is then a big ramp up at three years. We will not start whimpering and running in circles sticking pins in the Trichet doll unless the three and fives fall out. Right now people are just parking funds, and there is a relative shortage of shorter-term T-bills which is driving prices higher and yields lower. I imagine there is a run on all sorts of debt instruments insulated from the Euro. Such a sharp relative ramp between the 2 and 3 indicates that there is indeed an event horizon here, and everyone should be aware of that fact. Otherwise people would go with the longer terms and think they would sell them.

The Spanish problem is generating some internal political action in the form of bringing the opposition and Zap together, also the merger of a couple of a bad Galician savings banks. I am sorry, I don't have any English links on that. Spain has a much lower cumulative debt load than the other PIIGS - the problem is that the RE boom is busted, and no one quite knows where they go from here. High energy costs really hurt Spain, and unfortunately their ventures into green energy have done quite a bit of damage to their economy, especially manufacturing. Mark took a look at Spain as only Mark's mind could.

After looking at pictures of the riots in Greece, I think they will have a tough time cutting police salaries or positions. If I were a Greek policeman, I think I'd want a raise. The parliament wouldn't go for the plan, except that Greece is completely dependent on borrowing for its current expenditures. So in fact the plan as laid out allows the cuts to happen more slowly than if Greece just were to default on its debts. Thus, the protests are probably utterly futile at best, and people are dying for nothing.

In the meantime, France is talking a blue streak about the terrible, destructive and completely unfair activities of traders and ratings firms with regard to Spain and Greece. This is because France has high public debt itself, and worries that people will start talking about PFIIGS, or perhaps GIIPFS, or that its bond prices will be affected.

Trichet's recent proposal to set up new ratings firms kind of misses the point, and I think he is making things worse rather than better. Greece is going to default no matter what, and any country that builds its debt too high will also. Setting up a ratings unit that pretends differently won't inspire confidence when the debts default, and probably will just spook investors. Unfortunately, the real problem with the ratings firms is that they have not been vigilant enough. They ought to have warned a lot earlier.

The reason usually given for the lack of concern over the debtloaded economies is that at the end of WWII, many countries had huge debts and gradually improved their position nonetheless. And that is true, but the fact is, a one-time burden is very different from a structural, ongoing deficit. The problem for the fiscally reckless western countries is that they have high debtloads AND structural deficits AND an ever-increasing social burden from the demographic shift.

In the meantime, I suppose Argentines ought to be complaining about something, because their bond prices are falling, almost certainly as a consequence of the current European flap.

I think in the end the strongest impact in the US will arise from heightened risk concerns over state and local risks, and consequently higher borrowing costs, and consequently deeper cuts. The jig is kind of up. Once complacency bubbles are busted, they just don't magically reinflate.

I know a lot of Americans are unhappy about the IMF exposure to Greece, but hey, it is less than 20 billion. Every quarter Fannie and Freddie show up with their hands out asking for about 10-15 billion.
And then, of course, there are whatever giveaways a gracious Congress grants the GM, GMACs, etc. The big holes in our economy have nothing to do with Greece.


Mark took a look at Spain as only Mark's mind could.


I figure my choices are... laughter, anger, and/or depression. I'd go insane if I didn't at least attempt to keep them balanced.

Here's some bonus material from 2007. I do think this is just a continuation of the previous problems.

David Taguas vs. Vizzini

Spain's Pain?

I think you'll really get a kick out of that last link and to the article it refers to. In hindsight, Elizabeth Smith absolutely nailed it. Her "One Interest Rate, 13 Economies" article is definitely worth a reread.

Unfortunately, she only got 3 stars out of 5 for it. Figures.
I should add that I think hindsight is also going to be especially kind to the things you are writing these days.

Unfortunately, I'm sure both of us would wish you were wrong.
This is the relevant PDF on Spain's green energy foolishness. Somehow, I think when the choice comes between subsidizing green energy, and buying off the rioters, I think they are going to end up cutting the green energy subsidies. Especially once someone spells out to the average Spanish worker that they are paying more and have fewer jobs because of those subsidies.

Hat tip to a commenter at Coyote Blog who posted the link.
I think in the end the strongest impact in the US will arise from heightened risk concerns over state and local risks, and consequently higher borrowing costs, and consequently deeper cuts.

You said it. The biggest political fight in front of us is what to do with all the retirement benefits we're committed to at all levels of government, including civil service, medicare, and medicaid.

You can't just axe them all--people planned their lives around this stuff. But at the same time, it's simply not possible to pay for everything that was promised. If we don't make some changes, that's the same thing as just canceling all the benefits--it'll destroy the dollar and the benefits won't be worth anything by the time people get them.

There's going to have to be some compromise, and I don't see much willingness to do that yet. You seem to be saying we've only got a couple of years to do so, M_O_M, and I think you're right.
The free air at gas stations, can fill up air in my basketball?
So, the free air machines at gas stations for tires, do they work for basketballs too?
I had the pleasure? of dealing with a corrupt and incompetent part of the city of oakland's bureaucracy yesterday and later read mish's post on that city.It is a failed city and the county is not far behind.Considering the port,railroad terminals and climate it should be a wonderful town but the corruption has always hindered it and seems to be choking it to death now.
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