The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[muppet]

So when will this come to a head? Just wondering.

Could happen quickly if this guys gets in:

http://edition.cnn.com/2016/05/09/politics/donald-trump-national-debt-strategy/

He thinks they don't have to default because they can just 'keep printing money'. He also thinks of interest rates go up, he will save money by buying back bonds (older debt). As I understand the US rolls over an incredible amount of its debt yearly, so if interest rates go up, the cost of servicing the debt rises with it.

Can anyone point out the flaw(s) in my thinking please?

[seafoid]

So when will this come to a head? Just wondering.

Could happen quickly if this guys gets in:

http://edition.cnn.com/2016/05/09/politics/donald-trump-national-debt-strategy/

He thinks they don't have to default because they can just 'keep printing money'. He also thinks of interest rates go up, he will save money by buying back bonds (older debt). As I understand the US rolls over an incredible amount of its debt yearly, so if interest rates go up, the cost of servicing the debt rises with it.

Can anyone point out the flaw(s) in my thinking please?

If rates go up the price of debt falls. A lot of debt is priced above issue price now cos rates are so low. If rates go up price comes down closer to issue price. So he can buy more of it.  Cost of coupons increases but price decreases.

[muppet]

So when will this come to a head? Just wondering.

Could happen quickly if this guys gets in:

http://edition.cnn.com/2016/05/09/politics/donald-trump-national-debt-strategy/

He thinks they don't have to default because they can just 'keep printing money'. He also thinks of interest rates go up, he will save money by buying back bonds (older debt). As I understand the US rolls over an incredible amount of its debt yearly, so if interest rates go up, the cost of servicing the debt rises with it.

Can anyone point out the flaw(s) in my thinking please?

If rates go up the price of debt falls. A lot of debt is priced above issue price now cos rates are so low. If rates go up price comes down closer to issue price. So he can buy more of it.  Cost of coupons increases but price decreases.

Yes, but he needs to issue more debt (at the new higher rates) to buy the old bonds.

Here is the average maturity of US debt:



I understand that the old bonds can be bought back cheaper, but surely the cost of issuing the new debt, which he must continue to do, rises with the rising interest rates?

[seafoid]

Say 20 year stuff priced originally at 5% is now trading at 130 cos rates are so low.
Trump wants to buy 650 bn.of it.
if he can get interest back to 4.5% he can buy it for 100 or a total of 500bn. He can issue 500bn in new debt at 100 for a price of 500bn to buy it.
He saves 130 bn.

[muppet]

Say 20 year stuff priced originally at 5% is now trading at 130 cos rates are so low.
Trump wants to buy 650 bn.of it.
if he can get interest back to 4.5% he can buy it for 100 or a total of 500bn. He can issue 500bn in new debt at 100 for a price of 500bn to buy it.
He saves 130 bn.

If I bought Government backed debt for 100 @ 5%, why would I sell it back at 100 when interest rates are only 4.5%? Added to that, if the US, led by a vocal Trump, announces that it is buying back bonds, wouldn't that drive the price up anyway?

And while he can issue new debt at 100, he still has to issue it at 4.5%. I can see where a straight swap of 5% debt for 4.5% debt would save money, but why would the market go along with it?

But aside from that, if Trump drives interest rates up to 4.5% in the next 4 years, how will that work out for us?

Regardless though, my comments are the guesswork of a complete amateur. I really don't have a clue how bonds work and would love if someone could really nail it for me.

[Rossfan]

ur. I really don't have a clue how bonds work and would love if someone could really nail it for me.

Ask Micky Martin.
Anyone that's so full of cuteness that he can be simultaneously leader of the opposition and in charge of the Government at the same time would have no trouble with them bond yokes.

[seafoid]

Say 20 year stuff priced originally at 5% is now trading at 130 cos rates are so low.
Trump wants to buy 650 bn.of it.
if he can get interest back to 4.5% he can buy it for 100 or a total of 500bn. He can issue 500bn in new debt at 100 for a price of 500bn to buy it.
He saves 130 bn.

If I bought Government backed debt for 100 @ 5%, why would I sell it back at 100 when interest rates are only 4.5%? Added to that, if the US, led by a vocal Trump, announces that it is buying back bonds, wouldn't that drive the price up anyway?

And while he can issue new debt at 100, he still has to issue it at 4.5%. I can see where a straight swap of 5% debt for 4.5% debt would save money, but why would the market go along with it?

But aside from that, if Trump drives interest rates up to 4.5% in the next 4 years, how will that work out for us?

Regardless though, my comments are the guesswork of a complete amateur. I really don't have a clue how bonds work and would love if someone could really nail it for me.

If inflation is generated bond prices fall. Prices move inverse to interest rate movements . Rates go down, bonds go up. Rates go up bonds go down.
higher rates are better for pensions cos they make pensions affordable

Lower rates are better for 1% ers cos they drive up asset values

[muppet]

Say 20 year stuff priced originally at 5% is now trading at 130 cos rates are so low.
Trump wants to buy 650 bn.of it.
if he can get interest back to 4.5% he can buy it for 100 or a total of 500bn. He can issue 500bn in new debt at 100 for a price of 500bn to buy it.
He saves 130 bn.

If I bought Government backed debt for 100 @ 5%, why would I sell it back at 100 when interest rates are only 4.5%? Added to that, if the US, led by a vocal Trump, announces that it is buying back bonds, wouldn't that drive the price up anyway?

And while he can issue new debt at 100, he still has to issue it at 4.5%. I can see where a straight swap of 5% debt for 4.5% debt would save money, but why would the market go along with it?

But aside from that, if Trump drives interest rates up to 4.5% in the next 4 years, how will that work out for us?

Regardless though, my comments are the guesswork of a complete amateur. I really don't have a clue how bonds work and would love if someone could really nail it for me.

If inflation is generated bond prices fall. Prices move inverse to interest rate movements . Rates go down, bonds go up. Rates go up bonds go down.
higher rates are better for pensions cos they make pensions affordable

Lower rates are better for 1% ers cos they drive up asset values

That's fine, but Trump appears to be talking about raising interest rates. If he does that to reduce the debt, surely there will be lots of other consequences? For example, there will be very little inflation and thus growth?

[armaghniac]

Say 20 year stuff priced originally at 5% is now trading at 130 cos rates are so low.
Trump wants to buy 650 bn.of it.
if he can get interest back to 4.5% he can buy it for 100 or a total of 500bn. He can issue 500bn in new debt at 100 for a price of 500bn to buy it.
He saves 130 bn.

If I bought Government backed debt for 100 @ 5%, why would I sell it back at 100 when interest rates are only 4.5%? Added to that, if the US, led by a vocal Trump, announces that it is buying back bonds, wouldn't that drive the price up anyway?

And while he can issue new debt at 100, he still has to issue it at 4.5%. I can see where a straight swap of 5% debt for 4.5% debt would save money, but why would the market go along with it?

But aside from that, if Trump drives interest rates up to 4.5% in the next 4 years, how will that work out for us?

Regardless though, my comments are the guesswork of a complete amateur. I really don't have a clue how bonds work and would love if someone could really nail it for me.

Bonds on the market have a redemption yield, if interest rates are currently low then a 5% bond will be priced well above par, making it's effective return over its remaining life about what interest rates currently are.

Say a bond pays 5% is in due in 2026 then it might be now 130% of its redemption value. The price would decline 3% a year, but you get 5% so your "real" interest rate is 2%.

Say this replaced with a 2% bond, at par. People holding the bond might well go for the change as it removes the capital loss on the bond.

[seafoid]

There is no growth anyway. Bit of inflation would generate pay rises for the 99% and generate economic growth. Losers would be the 1%. They do nothing with their money at the moment.

[muppet]

There is no growth anyway. Bit of inflation would generate pay rises for the 99% and generate economic growth. Losers would be the 1%. They do nothing with their money at the moment.

The winners would be the 1% if interest rates rise. They are the ones with the money to buy bonds.

Can you explain how raising interest rates would increase inflation?

[seafoid]

There is no growth anyway. Bit of inflation would generate pay rises for the 99% and generate economic growth. Losers would be the 1%. They do nothing with their money at the moment.

The winners would be the 1% if interest rates rise. They are the ones with the money to buy bonds.

Can you explain how raising interest rates would increase inflation?

inflation would be the way to raise ratesbut debt issuance would have to stop cos debt is driving rates down.

[muppet]

There is no growth anyway. Bit of inflation would generate pay rises for the 99% and generate economic growth. Losers would be the 1%. They do nothing with their money at the moment.

The winners would be the 1% if interest rates rise. They are the ones with the money to buy bonds.

Can you explain how raising interest rates would increase inflation?

inflation would be the way to raise ratesbut debt issuance would have to stop cos debt is driving rates down.

You are not making sense to me.

How can Trump raise interest rates without decreasing inflation and without further debt issuance, which as you say drives the rates he is trying to raise, down?

[seafoid]

http://www.ft.com/cms/s/0/7fcb38e8-15f5-11e6-9d98-00386a18e39d.html



May 10, 2016 6:40 pm


Germany is the eurozone's biggest problem

Martin WolfMartin Wolf


The monetary union will fail if it is run for the benefit of creditors alone



Why is conventional German thinking on macroeconomics so peculiar? And does it matter?

The answer to the second question is that it matters a great deal. A part of the answer to the first is that Germany is a creditor. The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditors' interests are important. But they are partial, not general, interests.

Recent complaints have focused on the European Central Bank's monetary policies, especially negative interest rates and quantitative easing. Wolfgang Schäuble, Germany's finance minister, even claimed that the ECB bore half of the responsibility for the rise of the Alternative for Germany, an anti-euro party. This is an extraordinary attack.

Criticism of ECB policies is wide-ranging: they make it unnecessary for recalcitrant members to reform; they have failed to reduce indebtedness; they undermine the solvency of insurance companies, pension funds and savings banks; they have barely kept inflation above zero; and they foment anger with the European project. In brief, ECB policy has become a big threat to stability.

All this accords with a conventional German view. As Peter Bofinger, an heretical member of Germany's council of economic experts argues, the tradition goes back to Walter Eucken, the influential father of postwar ordoliberalism. In this approach, ideal macro­economics has three elements: a balanced budget at (almost) all times; price stability (with an asymmetric preference for deflation); and price flexibility.

This is a reasonable approach for a small, open economy. It is workable for a larger country, such as Germany, with highly competitive tradeable industries. But it cannot be generalised to a continental economy, such as the eurozone. What works for Germany cannot work for an economy three times as large and far more closed to external trade.

Note that in the last quarter of 2015, real demand in the eurozone was 2 per cent lower than in the first quarter of 2008, while US demand was 10 per cent higher. This severe weakness in demand is missing from most of the German complaints. The ECB is rightly trying to prevent a spiral into deflation in an economy suffering from chronically weak demand. As Mario Draghi, ECB president, insists, the low interest rates set by the bank are not the problem. They are instead "the symptom" of insufficient investment demand.


The history of the German economy since its labour market reforms of the early 2000s demonstrates that "structural reform" is most unlikely to solve this problem. The most important macroeconomic fact about the country is that it is unable to absorb almost a third of its domestic savings at home, despite ultra-low interest rates. In 2000, before the reforms — which cut labour costs and workers' incomes — German corporations invested substantially more than their retained earnings. The opposite is now true. With households in surplus and the government in balance, a vast external surplus has duly emerged. (See charts.)

Why should others be able to make productive use of savings Germans cannot apparently use? Why should structural reforms elsewhere, as advocated by Germany, generate the investment surge lacking at home? Why, not least, should one expect indebtedness to have fallen when demand and overall growth is so weak in the eurozone as a whole?

Martin Wolf
What has happened, instead, is the conversion of the eurozone into a weaker Germany. The current account balance of the eurozone is expected to shift towards surplus by close to 5 per cent of gross domestic product between 2008 and 2016. Every member is forecast to be in balance or surplus. The eurozone is dependent on the willingness of others to indulge in the spending and borrowing it now eschews.

Yet the rest of the world is cautious, too. The ECB has adopted negative real (and nominal) rates because additional savings are now worth so little. It has also learnt from the dire results of the rise in interest rates in 2011. The easing it has adopted since 2012 is at least bearing fruit in a meaningful, if inadequate, recovery: real demand has risen by 4 per cent since its nadir in the first quarter of 2013; and core inflation, albeit only about 1 per cent, has at last stabilised. This is not failure. It is success.

Martin Wolf
Inevitably, such policies are unpopular in creditor countries. But the argument that the threat is excessively loose monetary policy ignores the dangers posed by excessive tightening. It assumes that deflation would pose no problem. Yet it would raise real indebtedness, undermine the flexibility of real wages and even impair the effectiveness of monetary policy, since it would be far harder to generate negative real interest rates when needed. A deflationary spiral would be a much bigger threat than negative interest rates.

Above all, the eurozone will fail if it is run for the benefit of creditors alone. Policy must be balanced. The ECB's determination to avoid deflation is an important part of that aim. Achieving better balanced demand at the national level is another. A huge deficiency of demand (relative to aggregate supply) in the eurozone's biggest economy is highly problematic. The EU's "excessive imbalance procedure" should be far more critical of Germany's surpluses.

Germany's ideas and interests are of huge importance to the eurozone. But they should not determine everything. If Germans believe this fatally weakens the legitimacy of the European project, they should use their exit option. To do so would also entail accepting great short-term disruption. But, so long as the country stays in the euro, it must also accept that the ECB has a job to do. If the latter does so, it will not make the eurozone work well. But it is surely a vital contribution to that end.

[seafoid]

There is no growth anyway. Bit of inflation would generate pay rises for the 99% and generate economic growth. Losers would be the 1%. They do nothing with their money at the moment.

The winners would be the 1% if interest rates rise. They are the ones with the money to buy bonds.

Can you explain how raising interest rates would increase inflation?

inflation would be the way to raise ratesbut debt issuance would have to stop cos debt is driving rates down.

You are not making sense to me.

How can Trump raise interest rates without decreasing inflation and without further debt issuance, which as you say drives the rates he is trying to raise, down?

Trump can implement inflationary policies like loosening fiscal constraints and spending government money with abandon or giving all public employees a 10% pay rise.
If inflation rises rates go up.
The Fed is trying to raise rates without success cos there is no inflation....

Think about the debt in terms of heifers. Heifer prices are very high at the moment. FG farmers are making a lot of money at the mart.
Trump comes along and implements policies that favour sheep farmers. Heifer prices fall. FG farmers lose money.

If inflation turns up bond prices fall and that will hit the 1%
no financial asset  has an intrinsic price. Bond prices can fall back to 100. Nobody will die