LATEST POSTS ON THIS PAGE Survival crisis? A newspaper seller in Dublin on Monday The entire European Project is now at risk of disintegration, with strategic and economic consequences that are very hard to predict. In a speech this morning, EU President Herman Van Rompuy (poet, and writer of Japanese and Latin verse) warned that if Europe’s leaders mishandle the current crisis and allow the eurozone to break up, they will destroy the European Union itself. “We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union,” he said. Well, well. This theme is all too familiar to… Read More The uber-strong euro does not help (Photo: PA) Ireland has been desperately unlucky. The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue. Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc. Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke. Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish… Read More OK, I’ve calmed down after a week of Jamon Iberico and Rioja in Granada’s Albaycin, so I will try to be polite about the US Federal Reserve. Try, that is, not necessarily succeed. For a good insight into the thinking of the New Keynesian priesthood that rules our money and our lives, it is worth reading “QE2: How Much is Needed?” by Jan Hatzius from Goldman Sachs. His argument – crudely – is that US interest rates at zero are 7pc too high given the Taylor Rule on output gaps, et cetera (not that Professor Taylor himself happens to agree, but let us not quibble). Since rates cannot be minus 7pc, the Fed would need to launch a $4 trillion blitz of fresh bond purchases to fully compensate, such is the mess that America’s leadership has inflicted on the Great Republic. I have over-simplified: Goldman… Read More Here are two little nuggets sent to me worth sharing. Anthony Chan from Alliance Bernstein says Chinese order of semi-manufactures from Taiwan have been in “sharp decline”. This is usually a warning signal for the health of China’s economy. “The indicator – which tends to anticipate China’s overall import growth quite accurately by about two months – has been decelerating for five consecutive months, from close to 60pc (y-on-y) in March to just 8.8pc in August. The product mix shows a sharp decline in China’s orders for electronics and IT products as well as other light manufacturing items such as precision instruments, clocks, and watches,” he said. Separately, Melissa Kidd from Lombard Street Research has sent a note suggesting that world steel production over the three months to August has been falling at rates comparable to the onset of the Great Recession. The drops are 7pc global,… Read More I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing. My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America. We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.” NO, NO, NO, this cannot possibly be true. Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can… Read More Here is a back-of-an-envelope guess by David Greenlaw at Morgan Stanley on what the Fed can expect from a second blitz of bond purchases, or `Shock & Awe’ as he calls it. If Ben Bernanke does a further $2 trillion (on top of the $1.7 trillion already in the bag) the yield on 10-year US Treasuries will drop 50 basis points to around 2.2pc. GDP growth will be 0.3pc higher than otherwise in 2011 and 0.4pc higher in 2012. The unemployment rate will be 0.3pc lower in 2011 and 0.5pc lower in 2012 — (in other words drop from 9.6pc to 9.1pc, ceteris paribus). That looks like trivial returns for a collosal adventure into the unknown, with risks of dollar flight and mounting Chinese suspicions that the US intends to default on its external debts by debasement. I had dinner recently with a former Goldman Sachs hedge fund guru, and while I can’t remember the… Read More Vietnam and the United States staged a demonstration of their military ties last month amid mounting tensions with China over the South China Sea. I try to remain optimistic that the US and China will work out a more or less amicable way to run the world for the next half century, a “Chimerica” of interwoven superpowers. But it was slightly disturbing to hear the warnings of a distinguished China-watcher at a closed-door session of the annual Ambrosetti conference on Lake Como. (This gathering of the global policy elites at Villa D’Este is a hardship assignment for Telegraph hacks. It fell to me again this year, but somebody has to do it.) “China’s military spending is growing so fast that… Read More Ireland must now pay more than Greece to borrow. Dublin has played by the book. It has taken pre-emptive steps to please the markets and the EU. It has done an IMF job without the IMF. Indeed, is has gone further than the IMF would have dared to go. It has imposed draconian austerity measures. The solidarity of the country has been remarkable. There have no riots, and no terrorist threats. Protesters attack riot police in Athens over harsh austerity measures Yet as of today it is paying 5.48pc to borrow for ten years, or near 8pc in real terms once deflation is factored in. This is crippling and puts the country on an unsustainable debt trajectory if it lasts for long. Yet Greece is able to borrow from… Read More Spain is putting all its eggs into one basket, and if it carries on like this, we may start to see a lot of Basques and Catalans crowding into one exit. The state pension fund – the €64bn Fondo de Reserva, known as the ‘hucha de las pensiones’ – is buying Spanish sovereign debt at a vertiginous pace. The financial daily Cinco Dias reports that the share of the Fondo’s total portfolio invested in Spanish government bonds rose from below 50pc in 2007 to 76pc in 2009. The Social Security minister Octavio Granado said it will rise to 90pc by the end of this year. It is clear from an analysis of the data that the Fondo is not just investing fresh revenues in Spanish bonds, but also rotating out of Dutch, French, and German bonds into Spanish debt. The Spanish government is also funnelling 90pc of its sickness fund into state bonds. Evidently,… Read More Once and for all, let us nail the lie that the global credit crisis was basically a US sub-prime property bubble that went wrong, and that Europe was merely an innocent bystander hit by shrapnel. This is the property bubble chart on Page 12 of the IMF’s latest report (Article IV) on France. If you read the whole report – (click “Staff Report” here) – note the horrendous decline in French export share. But that is another story. As you can see, France had the most extreme price rises from 1997 to 2009, followed by Spain and Italy some way below. The Anglo-Saxons were more moderate. The US bubble was tame by comparison (measured by price: inventory overhang is another matter) and has largely corrected. This the American way, a short sharp purge. The Club Med bubbles have not corrected, by a long shot. The… Read MoreThe horrible truth starts to dawn on Europe's leaders
Ireland is running out of time
The Fed's impending blunder
Little warning flags from China
Shut Down the Fed (Part II)
QE2 in round trillions
China’s young officers and the 1930s syndrome
It pays to riot in Europe
Spain uses social security fund to prop up the bond market
Reckless Europe beats reckless America at property bubbles
Sunday 21 November 2010
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