Wednesday, 4 June 2008

Some cheap laughs

Today's financial times read like a comic; it was one laugh after another; a litany of foolishness.

The front page set the tone. In an effort to put a floor under the dollar, Bernanke spoke out. The Fed chairman does not want to see any further weakness in the dollar. Unfortunately for the dollar, he does not want to protect the dollar enough to raise US interest rates. If only talking was enough. As we all know, problems invariably need more than words.

The front page also signalled the end of the most ridiculous car in human history - the Hummer. With $130 oil, General Motors have just got the message. The world doesn't need gas-guzzling SUVS. Now they want to sell off the brand. Well, good luck with that, I say.

Turning to page 9, we have Mugabe accusing "the west" of manipulating commodity prices and plotting his downfall. So when exactly did "the west" close down Zimbabwe's agricultural sector and force the central bank to hyperinflate the currency?

Page 14 has another cracking story. This time it is the Nordic central banks who are providing the entertainment. They are warning of the threat from the credit crunch. This is just a tad ironic, since in the early 1990s the Nordic countries had their very own housing bubble and crash. At the time, it nearly brought down the Northern European financial system. Now their banks are again over-exposed to a real estate bubble. Yes, they are right, the credit crunch does pose a few problems up north and they didn't see it coming.

Then we come to page 17 - where we find a wonderful full page spread on Freddie Mac and Fannie Mae, the US government sponsored mortgage institutions. Both are loaded with debt and their balance sheets are cracking up. However, the Fed and others would still like the two failing institutions to support the crashing US housing market. This is the old "solve one problem by creating another" routine.

There is a common theme running through all these stories. It is that the world is led by idiots, who talk rather than act, who blame others for their mistakes, who make others pay for their bad decisions, who repeat mistakes repeatedly, and who avoid facing up to problems by misusing and abusing public institutions.

We will see the same theme in the FT tomorrow.


aSteve said...

So, Alice, when do you see the next move in central bank interest rates, and in which direction? Do you think that, from here, the answer can be different for US$, Sterling and Euros?

Alice Cook said...

Asteve, it is up, up and up, but with a damaging and unnecessary delay.


Anonymous said...


Agreed on all substantive points you raised. But isn't it interesting that the FT is the best newspaper in THE ENTIRE WORLD for reporting these things. The others are even worse.

That said, I think you were laughing more at the subjects of the stories than the journalism on display, which is usually of a pretty high standard.

As for interest rates, well they are now headed up despite the usual medicine being to lower them through a recession. The bond vigilantes are out in force.

Here's the point I'm ruminating on right now:
- The Fed has pulled out of the US Treasuries market;
- China, Japan and OPEC have really limited involvement in the US Treasuries market;
- The US still needs to sell treasuries to fund its daily $2bn deficit;
- The average maturity of US goverment debt is 5 years, i.e. short term and needs to be rolled over in addition to any INCREASES in the cumulative deficit

Hmmm. What could that mean for long term interest rates?

I've been picking deflation for a while, and I see this as deflationary.


aSteve said...

Well, 3/3 of us think that the "risk with interest rates is to the up-side". The next question, of course, is by how much and when. I'm not sure - but, for the UK, at least, when CPI breaches 3% this month, I think there will be a lot of pressure on the MPC to raise - but I think they will resist.

Retail interest rates are obviously going to soar, independent on central bank rates, as defaults increase... but that is a separate effect.

I can hardly believe this isn't being discussed more widely.

CWS said...

Ah yes, the Hummer - a car made in hell.

Vodka drinker said...

Mugabe - a leader spawned from hell.

roy said...

The US mortgage industry have been pushing for some time to use Freddie and Fannie to support the mortgage market. The two institutions are rotten and stuffing them with more housing crap could push them over the edge. If they did fail, it would be the mother of all bank failures.

VADO said...

asteve, you are right. Retail rates are creeping up, and this will put the stop to any "housing recovery" which our mate London estate agent is hoping to see this year.

Also, I wonder whether we would see the increase in the data. Many people will see it when their teaser rates reset. The headline mortgage rates would be unchanged, but people will end up paying more.

Anonymous said...

"There is a common theme running through all these stories. It is that the world is led by idiots, who talk rather than act, who blame others for their mistakes, who make others pay for their bad decisions, who repeat mistakes repeatedly, and who avoid facing up to problems by misusing and abusing public institutions."


Alice, will you marry me?

aSteve said...

LOL, anonymous. Sherlocking, I anticipate that Alice is already spoken for.

powerman said...

I think the Eurozone and Asian economies have room to move up, because they aren't generally burdened with debt.

The UK and US are walking a tightrope.

powerman said...

I am coming to believe that the US wants to devalue its currency to inflate away their debts and long-term commitments to retirees.

I don't think the UK is so minded.

Budvar said...

powerman said...
I don't think the UK is so minded.

Oh I beg to differ, it's politically expedient to join the euro. Lisbon treaty, eurogendfor etc. When the euro exchange rate was £1:€1.50 any referendum would be met with a resounding *NO*, with a (short term)exchange rate of £1:€0.80 which I see on the cards, people will be squealing to join just to bring some financial stability.

Using a bit of economic "jiggery-pokery", to get exchange rates to around parity and "Viola" wages are cut by a third but prices still stay the same. No more "Booze and Bacca" runs to the continent etc etc.

aSteve said...

Budvar, I can't help thinking you've a point that there are sensible political motives for joining the Euro... but I don't think it will happen - at least not in the near future. The vast majority of British people have no understanding of currency at all... but they do understand cheap foreign goods; cheap holidays and cheap bootleg boose-n-fags. Old-school national politics will raise the question about keeping or dumping sterling... and the vote will be decided not on the merits of a single currency, but on which one offers the best pocket-promise to the typically uninformed.

Barry said...

ASteve, joining the Euro may become the final act of nulabour. Bequeathing its successor with even less scope to deal with the problems it helped create.

aSteve said...

Barry: During late 2007 I considered your suggestion entirely plausible... I'd even gone so far as to ask friends resident in Germany how their government managed the phasing out of the Mark and adoption of the Euro. I watched political news intently - especially as Blair's last act was negotiation of some little-publicised European treaty.

Now I'm fairly sure Labour couldn't pull of a change of that scale... they're far too politically weak.