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Friday, November 25, 2011

Good Golly

Portugal and Hungary got cut to junk. Mr. Market has apparently thought it all over and Italy paid 6.% on six month bonds this morning, with 2 year Italian bonds yielding 7.82%? I think I'm not hallucinating - read the article yourself. Long Italian bonds are lower, although not by much. That implies hard recession in Italy and a near term debt instability.

I have been reading a bunch of German angst, and they really don't know where to go. Eurobonds (limited) could work for the rest of this, but Italy is just too large - if they try to Eurobond out of the Italian sinkhole, every country is going to become uncreditworthy.

I think Mr. Market expects ECB to print and so is now figuring in Euro currency risk pretty strongly. Hungary's forint has fallen hard and isn't rebounding, and its ten-year yields are nearing 10%. Portugal, in the Euro, is seeing 10 year yields over 11%. German yields are slowly rising as well, and that's going to be mostly due to currency risk causing a dearth of extra-Euro buyers. It's not as if Germans have been buying this instruments - Germans appear to be buying houses.

Sooner or later, people are going to start saying the world "Japan". I expect that to happen this coming year. Right after the Japan phase, the US gets the spotlight.

We are on a train and we cannot get off. Soundtrack.

Update: Regarding Eurobonds, from the ECB statistical warehouse, aggregate European government debt/GDP

Okay, maybe we won't force the private bondholders to take all the losses. Maybe that wasn't such a good idea. Suddenly, the Euro mood brightens. It was the move to force the entire Greek writedown onto private holders that produced this cartwheel into disaster in the first place.

Here's something I'm curious about. One of the contributing factors that lead to the Great Depression was England's gold standard. It limited their response to the crisis. Doesn't the Euro limit Germany's response in a similar manner?

(if there's one thing I know about the Great Depression, it's that it was much too complex an event to simplify. I just get worried anytime I see similarities between then and now.)
Teri - there was a vast shortage of money as lending chains collapsed, and the hard standard prevented a compensation by central banks.

Germany, on its own, does not need to compensate. Both its finances and its economy are in pretty good shape, and although a weakening Euro will cause higher inflation in Germany, it will also boost the competitiveness of German goods on the world market, thus stimulating its economy.

But higher inflation does mean that Germany will pay higher interest rates.
The song is Good Golly Miss Molly. It was first done by Little Richard and later by Creedence Clearwater Revival.

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