Thursday, February 11, 2010

Niall Ferguson: no such thing as a Keynesian free lunch

A Greek crisis is coming to America

"What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did...The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF."

Posted by mountain goat @ 12:51 PM (2526 views)
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15 thoughts on “Niall Ferguson: no such thing as a Keynesian free lunch

  • mountain goat says:

    He also writes about the dollar which I found of interest after a discussion here yesterday.

    For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

    Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

    I would argue that nervous investors don’t so much park their cash in a safe haven, so much as close their leveraged positions. For this you need to raise cash. That is why the dollar rallies. It is the closing of speculative bets, mainly made in US dollars, that drives the apparent safe-haven status. This is why even the safest of money, precious metals, fall against the dollar when there is a panic.

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  • mountain goat says:

    TC not sure if I am answering your question here. I think gold goes down in a crisis because traders have to raise cash in a crisis, so will sell everything, including gold, to meet their margin calls etc. Even though gold is safer than the dollar because it has no counter party risk.

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  • Just wait for the bailout of California, boy, that’ll be a bigun. Will States demand sovereignty, not willing to hand money to California?!

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  • I think gold goes down in a crisis because traders have to raise cash in a crisis, so will sell everything, including gold, to meet their margin calls etc.

    Yes, the price of Gold will be definitely be affected as positions are liquidated. However, it’s what happens afterwards when there is little appetite for risk, that’s usually when the rises will be seen.

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  • mountain goat says:

    Freemanphil check yesterdays Bloomberg report on US municipal bankruptcy (municipality similar to our councils I think) Bankruptcy Bloodbath May Hit Muni Owners: Joe Mysak

    Hpwatcher – yes I think it is worth having a strategy for switching quickly into gold (being a tin hat soldier myself). But I was only using gold as an example to try understand why a rotten currency like the dollar still manages to act as a safe haven.

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  • mg @1 – I think you’re right about the dollar. That’s what happened to the yen when the carry trade was unwound in 2008. The foreign currency assets bought with borrowed yen started to tank and speculators sold (deleveraged) to pay back yen loans. That, and the increase in Japanese IRs, caused the yen to rise and Japanese exporters were hit hard. When the $ carry trade unwinds and the dollar goes up it will be US consumers that are hit.

    freemanphil @5 – could be that part of the reason all the talk is about Greece and not California is that the latter is part of a fiscal and political union rather than just a currency union – Greece’s debt is small compared with the GDP of the eurozone and wouldn’t be much of a problem (though admittedly you couldn’t say that of the PIIGS as a whole). (This isn’t a suggestion for political and fiscal union – just pointing to a problem of currency union without the other kinds of union.) Anyway, California should start its own state bank (a proposal put by many to the governator) and put two fingers up to Wall Street.

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  • I think the speculators are just testing the water and gearing up for the real target.

    Darling said that the UK was not in a similar position to Greece becuse the UK debt doesn’t need to be rolled over as frequently – who is he kidding we are rolling OUT £200bn a year!

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  • sold 2 rent 1 says:

    TC,

    It is not too late to get into gold. In fact after the hammering it has had it is a real bargain now at $1075

    I still stand by my FINAL PREDICTION for GOLD.
    Gold: $2,200 by mid-late May (with 19 May 2010 being the most likely date)
    I have switched mainly to silver as I think it could hit $200 if colloidal silver ever goes public.

    Also, I checked out your preacher Barry Smith
    http://en.wikipedia.org/wiki/Barry_Smith_(New_Zealand)

    Interesting fellow but he was no prophet, but someone who read lots of books and met many different people.

    Smith was a big fan of Bruce Cathie who is a very colorful man indeed
    http://en.wikipedia.org/wiki/Bruce_Cathie

    From wiki:
    “Bruce Cathie (Born in New Zealand in 1930) is a retired airline pilot who has written seven books related to flying saucers and a “World energy grid”.

    His central thesis is that unknown laws of mathematics describe a grid-like pattern on the earth that powers flying saucers and controls the dates and places where nuclear bombs can function. He claims to have successfully predicted the detonation time of an early French nuclear test using his harmonic “mathematics”, which is based around trigonometry and geophysical latitude/longitude coordinates.”

    He now sells Gridpoint Atlas® software, which basically allows you to overlay his “energy grid“ onto a town near you.
    http://www.worldgrid.net/

    Fantastic stuff.

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  • All this talk of sovereign debt can easily overlook the much bigger problem of private sector debt plus financial sector debt. Keynes? Too much public money went into bank bailouts to leave much left for traditional Keynesian work-creating (or make-work, if you prefer) projects.

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  • mountain goat says:

    S2R1 you are a brave man to still be backing silver after such a fall! But then maybe as Techieman wrote about stocks, things may have come too far, too fast. So there may be a strong snap back rally in prices to surprise the bears.

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  • sold 2 rent 1 says:

    MG,

    Gold breaking up now to $1090. This is fantastic news.
    Anyone follow the fractalgoldreport.com.
    Fractal “Dave” is close but no cigar for him yet. He only follows Armstrong. Never heard of Calleman.

    This is day 22 of the timing cycle and we have a big upswing. Roll on 19 May 2011.

    I am expecting silver to hit $26.90 before performing a 38.2% retracement (from $8.88) down to $20.
    Then when “colloidal silver” goes mainstream it will rocket 10-fold to $200

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  • There are some pretty hefty legal hurdles to the EU providing a bailout or loan with condition to The Hellenic Republic – See the Maastricht treaty. I think it’s pretty much all political air rather than any real backing. If there is a loan with conditions an experienced body (The IMF) will handle it almost certainly IMO.

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  • sold 2 rent 1 says:

    The yield on the 10 year US T-bond has jumped from 3.54 to 3.73 in a week.

    http://finance.yahoo.com/echarts?s=%5ETNX#chart6:symbol=^tnx;range=2y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

    Once we go over 4.0 the head and shoulders pattern would have broken down (or up in this case)

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  • It is not too late to get into gold. In fact after the hammering it has had it is a real bargain now at $1075

    Yes, it’s still a great market for gold and not too late to get in. Though probably when gold is $1,800 there will be people on these boards kicking themselves they did not get in now!

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  • STR1 – hope you are right!

    Though you may find your estimates too conservative!

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