Looks like my story is unfolding. OK Spanish auction as well. Assuming equity markets were down say 20% from the highs pricing in half the risk of default, they should adjust upward by most of that as default risk fades:

The European Central Bank bought €4bn ($5bn) in eurozone bonds last week, the same as in the previous two weeks, indicating it had fallen into a pattern of low-level intervention in sovereign debt markets, the FT reports.

7 Responses

  1. Off-topic – Krugman’s latest LITERALLY cries out for an explicit MMT response:

    “Lincoln, McClellan, and Stimulus

    There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.

    Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).

    Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).

    So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.

    I have never seen a coherent objection to this line of argument.”

    While he’s OK on the stimulus, his logic is wrong on the funds flow, and he’s inviting somebody to prove him wrong. Maybe Mosler, Mitchell, Auerback, Parenteau, or somebody can respond formally with a sector financial balances approach.


    1. The objection of course is that deficits create financial surpluses; they don’t “use” them.

  2. Anon, your loose word of the word “LITERALLY” means I have to say Brad Delong LITERALLY LITERALLY cries out for an explicit MMT response. :o)

    But the situation does leave me feeling like one crying in the wilderness…. I cry out to boost aggregate demand — by banking policy, by monetary policy, by fiscal policy, by spending increases, by tax cuts, by anything — I don’t care what! (Well, I do, but not by much)… Dropping money out of helicopters, which would surely require Congressional authorization at some level, is likewise politically difficult… So what is the administration’s Plan B? And who is drawing it up? As I await answers, I’ll dine on a simple meal of locusts and wild honey, and wash my spare goatskin.

    I commented at Brad’s site that there’s no need to go back to Congress, the Administration already has the fiscal authority it needs. President could use BP oil spill to declare a nationwide federal disaster. This, in turn, authorizes the Secretary to waive any tax liabilities he chooses (say, payroll taxes) for any affected taxpayer (that is, everybody) for a year at a time. Tsy could fund the deficit with seigniorage income and wouldn’t need to go back to Congress for authorization for any of the above nor to raise the debt ceiling (I quote the relevant US Code sections over on Brad’s comment page).

      1. Yup, it would be nice if Congress took the leading oar and either abolished the debt ceiling, allowed Tsy reserve account overdrafts or dropped the limitations on Tsy issuance of Greenbacks. But since they won’t, might as well melt down all those Michael Jackson platinum records (though perhaps there are other domestic stockpiles). :o)

  3. Can we get the long version of the scenario you think will play out in the Euro – and put on a sticky so it is on the side or something?

    My thinking is that we’re going to see a huge rally in the Euro – career defining for some people.

    All the Euro needs to do is keep all of the members in the Eurozone. If they can do this by buying a little bit of the debt at a time over the next 2 years, they can extend the life of the group past the crisis time.

    In practical terms, they are treating each auction individually, where they will step in at the extreme margins to make sure that rates don’t get too high for any member state. This is the old “showing up is 80% of life” approach to restoring market confidence in the debt of each country. Yeah, “prohibited from participating in the Primary markets” is well, you know…not that much of a problem if you have a very willing buyer who makes it clear they will buy it a few days later.

    Then, the world has huge short positions in the Euro. What happens if we have a stop hunt in the Euro – like I see happening already?

    After a few months of large gains in the 50 and DAX, and if the Euro posts a gain for the month, and if the ECB looks like it has tamed the crisis for at least the short run, people are going to start to wonder if they can get a few % from getting in.

    Now I don’t think a strong Euro helps many of the Eurozone countries, but it will give people confidence in their capital markets.

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