Thursday, February 23, 2012

When the two most indebted governments…

UK and Japan warn Volcker rule poses threat to recovery

When the two most indebted governments -both- complain, something must be up. For the UK and Japan, whether you put your money in a pension fund, a current account or a deposit account, there is a fair chance that your real saving, ie your deferred consumption, is immediately disbursed by your government to some lucky state recipient, and another IOU is recorded. There has never been any net repayment so at this point even holding the level of debt steady is an effective tax increase. This move secures US bank holdings for the sole use of the US government, which would force the UK and Japan to follow suit, given the loss of US money, domestic banks would also have to be restricted to domestic government lending.

Posted by stillthinking @ 04:32 AM (1558 views)
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5 thoughts on “When the two most indebted governments…

  • For Greece, the whole problem is the end of “pretend and extend”, and a cautionary tale it is too. The UK and Japan are in dire straits, the UK being arguably worse.

    Our “extend and pretend” strategy of government debt now includes the tactics of, apart from taxation without service provision, the holdings of the current accounts of the banking system, pension fund holdings, insurance fund holdilngs, direct BoE printed money purchases, an overnight rate at 0.5% (despite a long market rate at 3%) allowing secondary BoE purchases via credit expansion to the banks under “liquidity measures”, pension commitments are abrogated at retirement by the mandated purchase at below market rates……and all of this to hold the cost of money as close to zero as possible with all the attendant economic damage.

    However, the US appears to propose that only the US can filch off US citizens. For the UK immediately and over the short term Japan, this is a funding killer. The UK is hugely indebted and externally dependent already, and Japan while self-funding now is expected to tip soon. At the same time both the UK and Japan have cross-holdings of US debt. If the US rule change forces selling off of UK government holdings….what are the possible defences of the UK against rising yields? I think that the only possibility would be to sell US against UK debt…tit for tat -> rising borrowing costs and credit deflation.

    A house of cards. As the inter-bank market froze, this will freeze inter-government lending or at least clear the smoke.

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  • These pro-Wall Steet spinners have already been chewed up in the spin cycle and hung out to dry in this document:

    http://www.sec.gov/comments/s7-41-11/s74111-230.pdf

    See p.5 section C “The need for a strong Volcker rule” which argues that, contrary to what its opponents say, the V Rule’s separation of commercial and investment banking (rather than not separating them and allowing proprietary trading) promotes real liquidity across markets that benefit the real economy, not the fake “liquidity” in opaque financial instruments and the attendant instability and bank failures. The Rule doesn’t prohibit proprietary trading. It prohibits such trading by banks (“pampered conglomerates”) that have an implicit government guarantee: later the doc. describes how insured deposits are used to bankroll speculative trades, with savers uncompensated for providing this leverage and taxpayers (who insure the deposits) uncompensated for the risk. And how low-paid “internal compliance officers” in banks are afraid to report illegal activity lest they be told to clear their desks.

    The anti V Rule crowd talk about the rule’s restrictions on ‘market making’. If you look at the history of market making by US investment banks you’ll see that they were price-fixing on the Nasdaq market for years in the 1990s and in 2003 the ‘market makers’ were found out recommending that the public buy stocks they knew were ‘dogs’. More recently lawsuits are appearing regarding Wall Steet collusion in rigging LIBOR, which is tied to trillions worth of financial products, including the re-setting of adjustable rate mortgages.

    Another part of the doc identified above points out that there’s no reaon to suppose that smaller competitors to the behemoths couldn’t fill the market making and liquidity provision gap if the V Rule took effect. Smaller firms that try act as market makers and liquidity providers in the OTC markets are regularly strong-armed out of it through anti-competitive arrangements through inter-broker dealers. The big firms want the field to themselves. They have the added advantage of valuable access to real-time information from their other activities (the ones the V Rule takes away from investment banks – broking, fund management etc.). (Philip Augar’s ‘The Greed Merchants’ explains how such information gives big investment banks a decisive advantage over their rivals.)

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  • “the reforms include a carve-out to allow them (big US investment banks) to buy US government securities but not other sovereigns.”

    Is this because the US government has debts of $15 trillion and needs bond brokers and primary dealers with huge balance sheets to enable them to contractually guarantee to buy US Treasuries at every auction? Is this the reason the too big to fail firms have not been broken up. And since government cannot make contracts with financial felons is this why these behemoths have escaped prosecution for all their illegal tricks?

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  • I read about this subsequently, googled etc, and there seems to be some suspicion that the whole foreign antipathy is drummed up by foreigners to weaken the agreement as a whole (the whole agreement being abandoned in the face of foreign government opposition). This sounds a bit unbelievable to me.

    I think the only opinion you can have is that as banks ceased to trust one another, so do the sovereigns. Not great believers in hang together, or we shall certainly hang separately. The banks lost their nerve and in the end so do the governments. If you hold government debt, even if you are cross-holding, then there is vulnerability, and let’s be honest none of the debts look as though they will ever be repaid now and that is across the board.

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  • I like your site generally but this is inaccurate. Britain and Japan are not the two most indebted governments, they are the two most indebted countries – NOT the same thing, and quite an important difference.

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