The key policy maker who raised the issue of the fiscal cliff back in April 2012 has been missing in action from the discussion. It is widely understood that the FED is not supposed to involve itself with fiscal policy, but that proposition was violated when the FED chairman voiced great concern about the failure of Congress to halt the potential drag on the economy. The FED has continually supplied the liquidity as the “only game in town” but it seems obvious that the great enabler of Congressional “benign neglect” should offer some guidance while not overstepping its mandate. More members of the G-20 were out over the weekend warning about the potential disastrous effects of a fiscal calamity in the U.S. on a very fragile global economy. What will it be Ben? I say yes, you say no. Bonds say buy and stocks say sell. Congress says goodbye. Will the FED say hello?
***In an editorial in the recent Economist magazine, “How to end the agony,” the piece raises the issue that “Greece will remain a disaster until it gets the treatment given to heavily indebted poor countries in the past.” This is a very important op-ed for it relates to how heavily indebted poor countries were provided with a massive restructuring so as to lengthen the payment schedules. Doing some amount of debt forgiveness and lowering the interest rates will allow creditors to recoup the principal … eventually. The Club of Paris and other debt relief mechanisms were all the rage as the HIPC ‘s worked out of the short term problem of too much debt. The Germans have feared that ECB debt forgiveness would be a violation of the Lisbon treaty, which forbids sovereign bailouts.
Presently, the ECB owns about 70% of Greek outstanding public debt so a program of more time and lower rates will allow the Greeks some latitude in meeting the promises of austerity. The near-term cash need should not be a problem if some genuine restructuring takes place .The Economist raises the issue that the IMF sold gold to finance its share of previous actions of debt relief, but the IMF would not have to sell GOLD but rather bend its rules and create a GOLD-BACKED BOND. The IMF could raise a great deal of money by leveraging its GOLD hoard into a globally accepted collateralized debt instrument. WHY ARE THE WORLD’S ECONOMIC POLICYMAKERS AFRAID OF SECURITIZING THEIR GOLD? I guess it seems too obvious.
***Last week I stressed the importance of the divergence between the French and German economies and why a socialist French president was going to have problems getting the labor reforms in place to make France a more dynamic economy. On Friday, Reuters News ran an exclusive story: “Worried Germany Seeks Study on French Economy.” It seems that GERMAN FM Wolfgang Schaeuble has asked the German council of economic advisors to a comprehensive study on the problems in the French economy. This is the first time that the Council of Wise Men has been asked to analyze another country, other than Germany. Lars Feld, an economist on the Council, was quoted as saying: “The biggest problem at the moment in the euro zone is no longer Greece, Spain or Italy, instead it is France, because it has not undertaken anything to truly re-establish its competitiveness and is even heading in the opposite direction. France needs labor reforms, it is the country among euro zone countries that works the least each year, so how do you expect any results from that? Things won’t work unless more efforts are made.”
The German/French core of Europe is beginning to exhibit some signs of fraying. As of now the markets are being very patient with President Hollande and the French sovereign debt markets. The two-year French note is presently yielding a very low 9 basis points and the 10-year 2.12%. The TWO-YEAR FRENCH NOTE WILL BE AN INDICATOR OF MARKET UNEASE. This is the easiest way to ascertain rising uncertainty in France.
Tags: Bernanke, ECB, Fed, fiscal cliff, France, Germany, Gold, Greece, Hollande, IMF, Italy, Spain
November 12, 2012 at 8:45 am |
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November 12, 2012 at 8:26 pm |
Securitizing gold is obviously good for gold investors in the short to medium term. In the long term, however, what is to keep the banksters in check, pertaining to leveraging these securities in much the same fashion they did with MBS, and prevent the same disastrous results to the underlying asset and the overall economy? Is this not a precursor to an eventual bubble in gold with an ineveitable collapse a few years from now?
November 12, 2012 at 5:44 pm |
Wise men ? What wise men ? Would wise men ever forget the gifts of the Magi ???
November 12, 2012 at 8:52 pm |
Steve and Debra—you raise a very good question.To my mind the GOLD trend will come to an end when the world’s key banks move an interest rate policy in which there is a positive real yield on money—historically in the U.S. a real yield of 2%-would indicate problems for GOLD but it would have started as the market sensed the BOJ,ECB and FED will not being the catalyst for debt relief—but GOLD backed bonds may be the link to restore some sanity to a world of fiat monetary madness.
November 12, 2012 at 8:53 pm |
Rooster–policymakers in Europe certainly have nothing to crow about