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Why are investors turning against US government debt?

Robert Peston | 10:39 UK time, Monday, 13 December 2010

The big financial economy and markets event of the past few days has been a sharp fall in the price of US government debt, whose corollary is a rise in the implicit interest rate on that debt, or the yield on US treasuries.

Wall Street

At the beginning of last week, the price of US treasury bonds fell more than at any time since the collapse of Lehman in 2008. By the close on Friday, when prices had recovered a tiny bit, the yield at 3.3% on the bench market 10-year bond was still 39% above the low touched in October.

Now it is important to put this into perspective. The yield on US government bonds is still incredibly low by historical standards - the US government can still borrow remarkably cheaply.

Some investors, largely banks and pension funds, will be nursing a bit of pain from the fall in prices. But the uber bears can't yet claim that this is the beginning of a devastating implosion of a great bubble in US treasuries, which was pumped up by the Federal Reserve's creation of all that cheap money to ward off deep recession.

So what has been going on?

Well there is no little debate about what all this means. And what's particularly unhelpful is that the competing explanations are the difference between economic heaven and hell for most of the rest of us.

The fashionable explanation is that the rise in yields should be seen as good news, because it shows that investors are becoming more confident in the US economic recovery - which is a combination of slightly better data on trade and growth in the US, combined with optimism about the impact of President Obama's decision to extend his predecessor's middle-class tax cut.

On this view, investors are prepared to buy riskier assets - shares for example - and are therefore minded to reduce their relative exposure to those assets perceived to be free of risk, viz the sovereign obligation of the US.

The competing explanation may appear to be based on an almost diametrically opposite view of the prospects for the US. It is that the tax cut shows a US administration utterly incapable of getting to grips with public-sector deficit and debt as unsustainably large as anything the fringe of the eurozone can boast - which proves that the quality of US sovereign debt ain't what it was, so you sell.

On this interpretation, the US economic recovery won't accelerate enough to generate a sufficiently big increase in tax revenues, to make a sizeable dent in an annual deficit running at around $1.5 trillion or well over 10% of GDP.

If you click on Stephanie Flander's blog in the next day or so, you'll find a more detailed analysis of the quality of US government debt.

But the big question is whether what's happening to US treasury bonds shows that those who control the vast pools of money are becoming more or less confident about the outlook for the biggest economy in the world and for growth prospects in general.

It is certainly relevant that there has been a smaller but corresponding fall in the price of German government bonds - which probably stems in part from the fear that the German state balance sheet is being infected by insidious migration on to this balance sheet of the debts of Greece, Ireland, Portugal, Spain, Italy and so on.

On that view, there has been impairment of the quality of all the best western sovereign debt.

The other important development last week was the fairly abundant evidence that the Chinese economy is close to overheating: inflation at more than 5% is high and rising, fixed asset investment is growing at an annual rate of almost 25%, industrial production is increasing at more than 13% per annum, and nominal retails sales growth is almost 19%.

Which rather implies that, whatever their public posture, the Chinese authorities will try to choke off the dangerous part of this boom by allowing a further rise in the yuan and increasing interest rates - although they know, and fear, that to do so would suck in more so-called hot money from the rest of the world (which would tend, I suppose, to reinforce a fall in the price of US and German sovereign debt).

Anyway, when I put all this together I am left with a slight uneasy feeling.

What's clear is that investors are no longer as enamoured as they were with the public-sector debts of the US and Germany.

What is less clear is whether that's a good thing, reflecting the growing confidence of investors that it has become safer to put their money elsewhere, or whether it shows creeping fears about incipient inflation and the recognition that even the world's best credits have been tainted by the leverage virus.

Comments

Page 1 of 2

  • Comment number 1.

    Robert, there can't be a problem The Ben Bernanke said QE would keep interest rates down and reflate the bubble, OK he didn't say the last bit out loud. The fact he has been wrong so many times should just be ignored, he's like the man behind the curtain, pay no attention to the rising yields, equities are rising so don't you just feel wealthier.

    Never mind that unemployment is rising and it's a jobless recovery good times are just around the corner. Never mind that the newly printed money is not going into the general economy and commodities are inflating. Never mind that the Wall Street banksters will pay themsleves $144bn in bonuses (which I think GDP wise ranks as the 44th largest country). Never mind the US politicians have all sold themsleves to the highest bidders. Never mind there are 40 million on food stamps. Never mind many states are broke.....

    Just keep watching dancing with stars or whatever cr*p is being used to keep the sheeple clueless.

  • Comment number 2.

    Tony made the key point. Jobless recovery. What kind of recovery is that?
    Same will apply in the UK but its ok. Unemployment is voluntary right and these people need to make themselves employable before they can get their self respect back. The yields are meaningless. They will be dropping again soon enough.

  • Comment number 3.

    What it does not mean is as No. 1 eloquently states is that everything is going to 'plan'. Coming out of a serious recession one would expect higher than average growth rates and initially no worsening of unemployment (a later increase is a lag based effect). The old adage stills applies that when USA sneezes Europe catches a cold but some in the EU have a nasty touch of pneumonia.

  • Comment number 4.

    Probably the answer is that both possibilities are true! Confidence is still more art than science whatever we might want to believe about the dismal science.

    A fascinating debate on Radio 4 last night on "Americana" looked back to Alexander Hamilton for the start of the 'National Debt' (1791) who in turn borrowed the idea from the Bank of England (1694). The UK's publicly traded debt allowed it to borrow more cheaply than the French and contributed to our ability to wage and win the many wars across the Channel. Ironically, the original American National Debt was to pay off the French...

    In the "Long Now" of finance, the fluctuations of bond yields represent little more than augurs of the future (with as much ability to affect or know it as watching the flight of birds). It was debt that enabled the "United" bit of the States to exist - "we are all in this together" - but rather like any other consumer of credit it is all too easy to take it for granted that we can forever borrow from the future to pay for the now.

    The traders of bonds are gamblers on the future and like many gamblers display remarkable swings of optimism and pessimism but that doesn't mean they know which horse is going to win the race.

  • Comment number 5.

    Why are investors turning against US government debt?

    Come on R.P.:
    Could it be because they're printing money perhaps?



  • Comment number 6.

    Perhaps the ECB has bored bond vigilantes into submission and it's more fun to have a shot at the US. There isn't a bigger turkey out there for Christmas.

  • Comment number 7.

    ....I don't want to sound all radical and that but.....do you think it might be because they're BROKE?

    Bond holders don't like Governments who print money and risk inflation (which is bad for Bondholders) rather than take the hit of low growth or deflation (which is good for bond holders)

    My only surprise is that it's taken this long to realise - still there is no shortage of people who believe they can 'beat the system' - although sadly very few of them have the wit to realise the fundamentals are broken and that we're heading for a rather large problem.

    ALl that US army, Navy and Air force isn't cheap to keep going you know - and as the US is no longer growing, well the only way of financing it all is through further debt issuance.

    ...laws of supply and demand take you on to the fall in bond prices....

  • Comment number 8.

    The market seems to view the East as politically stable as the West. To my mind there is always a greater risk in the emerging economies. Is China politically stable?

    (Sorry - that's more for Nick Robinson's blog than this one!)

    Another "head in the sand" aspect of the monetary system. As WOTW says, we're all broke so it don't matter much anyway.

  • Comment number 9.

    "The fashionable explanation is that the rise in yields should be seen as good news, because it shows that investors are becoming more confident in the US economic recovery"

    ...or maybe it's showing that investors think corporations are more likely to get bailed out than Governments. I wonder why they would think that???

  • Comment number 10.

    How about better yeilds can be found elsewhere with less risk. It really is a no brainer.

  • Comment number 11.

    AN answer to the conumdrum might lie in an informed report on where bond outflows are going - does anyone know : equities, commodities, other tangible assets, emerging market assets/ debt ? Would not an answer then present itself. I see Liam Halligan thinks the "economic uplands" camp are kidding themselves.

    Either way I would be worried by equity rallies in an era of artificially cheap money and inflated large corporate margins.

  • Comment number 12.

    There will always be debate as to what causes anything in economics. Robert has attempted to give both sides of the argument but I noticed the following on notayesmanseconomics blog about new figures for America's budget deficit which is likely to trouble bond investors.

    "There was another troubling calculation in the numbers as the deficit was in fact higher than the receipts to the US Treasury ( taxes and the like ) which amounted to some US $148.96 billion. So America had to borrow more than her income in November 2010! I wonder what Mr.Micawber would make of that?"

    With all the talk of tax cuts and stimulus programmes leading to a higher deficit this year and next such numbers showing an increase in the current deficit figures are likely to unsettle bond investors.
    http://notayesmanseconomics.wordpress.com

  • Comment number 13.

    Colour me thick but I just do not understand how on earth anybody can take the positive alternative postulated in this article - that just defeats me.

    I first asked myself a fairly simple question one night over thirty years ago, as I lay in bed drifting off to sleep: "What would happen if all the credit card companies in the world asked for their money back at the same time?" This started as a bit of a joke in the mind of a young accountant, who did not study economics, trying to get a feel for the macro side of the fiscal world of business and banking. While the length of the words and the analysis is now a bit more sophisticated, I believe the fundamental question is even more valid now than it was when I started contemplating my navel all that time ago.

    How on earth can the US economy ever come close to repaying its external debt unless it inflates it out of existence? How can it even think it can sustain ongoing deficits north of 10% of GDP? As a Brit who has lived and worked in the USA (I only returned to Blighty last summer) I see no evidence that the US gu'mment has the gumption, the political will or the insight to do anything other than stand on the accelerator pedal as soon as it sees the edge of the rapidly approaching cliff.

    Consider the challenges of medicare and medicaid because of the Baby Boomer demographic. Consider the challenges of Social Security (pensions, unemployment benefits and, using the term loosely, welfare). Consider the absolutely polluted and chokingly inefficient health care system and the bureaucratic fun to come in 2014. Consider the absolute refusal of US politicians to even discuss, let alone slaughter, sacred cows like subsidies to the US food and farming industries. Consider the infatuation with defence spending (and by the way - I'll digress for a minute - here's a catch question for the Christmas Dinner table - any idea which are the four largest air forces in the world? Think for a while - the answer is: the US Air Force, the US Navy, the US Army and the US Marines).

    The days of milk, honey and plenty, as beautifully described in Bill Bryson's "Thunderbolt Kid" are over - corporate America sold the dream and now someone has to service the nightmare. It is as plain as night follows day that acceptance of the US$ as the world's reserve currency depends wholly on confidence. It also seems to me that the entire edifice is very close to complete collapse if enough people, at the same time, all conclude that the emperor has no clothes. We must be getting close; and I feel that the only thing preventing Armageddon is the realisation that mutually assured destruction awaits if these issues are raised by other, apparently less powerful, nations.

    I used to be a huge supporter of the US in the Reagan/Thatcher era but this once great nation has changed its character since the fall of the wall; and the fact that "something is rotten in the state of Denmark" must surely be obvious to all but the wilfully blind.

    The potential end game of this economic crisis is destruction of value of breathtaking proportions; destruction of pension funds; government credibility; destruction of banks and the global trading village as the system presses Ctrl Alt Del and reboots. Does anybody out there have a credible method of avoiding this doomsday scenario? If so, I have yet to become aware of it.

  • Comment number 14.

    The price rises of the bubble have not been adjusted. In the retail markets deflation is taking place to secure customers yet in the financial sector the bankers continue to scheme with their governmental collaborators to maintain previous levels of greed. There are two economies, the one of governmental/financial services and one of working people. Inflation is simply pushed by the bankers charges on money and debt. this is unjustified but they own the governments and can do what they please. The retailer must make payroll and pay overhead and to do so have lowered prices. The governments have chosen to pretend that the value of homes has only decreased by a small percentage when in reality 30% is reflected in home sale prices. This is because the government wants to maintain the taxes collected regardless of reality.
    When an economic system is based on greed and over-valuation of property and massive debt the future will be more difficult.
    It is disconcerting that economists develop forecasts based on information that is manipulated and based on some projected future growth....growth that is projected without any workable plans and for which there have been no signs of occurring.
    The world financial collapse has forced China to concentrate on developing their internal economy. Because prices and wages were kept artificially low and the currency undervalued, they now face inflation has the middle class competes for products. This will require adjustments in that economy before things will turn around on a global scale. Although China has an abundance of cheap labor the continued use of that labor may result in under-cutting the new middle class and like in every other country, will create political problems.

  • Comment number 15.

    Eh, so that the price actually resembles something that belongs on a supply/demand curve. How the US has got away with the levels of debt it has for so long while others, including UK, have been in the firing line, was a complete mystery.

  • Comment number 16.

    The money flow suggests that money taken out of US Treasurys is mostly going into foreign or corporate bonds, rather than the stock market. That answers one question: investors are increasing risk, so the basic problem is unlikely to be serious concern that the US government will renege on its debt.

    The usual explanation given is that investors, including pension managers and all those long-term unemployed over-fifties with savings, need higher dividends than US government bonds offer after being flooded with newly printed money from the Federal Reserve.

    It also suggests that Asia and other BRIC countries (as well as the western companies that do business there) are no longer seen as extremely high risk, at least as no worse than Europe or the US.

  • Comment number 17.

    "What is less clear is whether that's a good thing, reflecting the growing confidence of investors that it has become safer to put their money elsewhere, or whether it shows creeping fears about incipient inflation and the recognition that even the world's best credits have been tainted by the leverage virus."

    Investors don't all share one extreme view or the other. Even individuals won't have a coherent well-formed view - they are guessing in the absence of definitive data.
    And if opposite assumptions about the state of the economy both lead to the same conclusion, does it matter which is correct anyway?
    Perhaps it represents an 'each-way' bet that is too good to miss, and becomes a self-fulfilling prophesy . . .

  • Comment number 18.

    Don't we all know that the Americans just love the philosophy of positive thinking. It is another faith.
    Unfortunately it has spread to our politicians and business spokespeople as well.

  • Comment number 19.

    "Anyway, when I put all this together I am left with a slight uneasy feeling."

    This fixation on this mystical 'deficit' shows that you do not understand what it is. For a monetarily sovereign nation like the US, Treasuries are little more than savings certificates. It's hardly surprising given that private banks have gone bankrupt that people are placing their savings with the US Treasury.

    As the US spends (which it does out of nothing all the time), that spending is turning more quickly than normal into financial savings in the economy. It is not being cycled round the economy either by normal transactions or recycled via bank lending - both of which would allow taxation to whittle it away to nothing. What isn't spent ends up in US Treasury Saving Certificates. Operationally they could just leave the unspent money on account at the Fed earning the Deposit Rate, but federal legislation insists that Treasuries are issued at a higher interest rate to soak up the money.

    At any point in time the Treasury can buy up Treasury bonds at any given value, and it can do that indefinitely until the yield drops to whatever value it fancies. It can do this at all maturities.

    The US Treasury can set the value whenever it wants to. Why? Because it is the currency issuer in the US.

    Warren Mosler has bet $100 million of his own money that the US can't run out of money. Nobody has taken him up on that yet.

    http://moslereconomics.com/2010/10/22/press-release-3/



  • Comment number 20.

    One may think investors are cranks,
    If the US economy just tanks.
    So who'll you take a bet,
    On all of this debt,
    Perhaps we should turn to the banks....

  • Comment number 21.

    16. At 12:54pm on 13th Dec 2010, JurgenV wrote:

    "The money flow suggests that money taken out of US Treasurys is mostly going into foreign or corporate bonds, rather than the stock market. That answers one question: investors are increasing risk, so the basic problem is unlikely to be serious concern that the US government will renege on its debt. "

    ...you could believe this analysis - or this could quite easily be a sign that even equities at the moment are more reliable than Government debt.
    If the move was really to a more risk acceptable environment, then why is most of the money pouring into the giant corporations? Could it be their too big to fail status?
    I mean you'll have to be pretty scared of US treasuries to move into equities at the moment with dividend payouts not looking good - or are you presuming a capital gain? - exactly the type of attitude which gets us here in the first place!

    http://3.bp.blogspot.com/_i47TEqZoAbw/S66zgp5AaGI/AAAAAAAAAig/THmyuCYJOfY/s1600/Dow+Price-Dividend+Ratio+History.jpg

    Still - I suppose your point of view is often tarnished by the emotions around your own investments. I have none which means I am not injecting 'hope' into my analysis.

  • Comment number 22.

    "How on earth can the US economy ever come close to repaying its external debt unless it inflates it out of existence?"

    Because it never has to. The US is monetarily sovereign and that means the US effectively has a credit card (The Treasury) with no limit and no repayment terms. (Unlike the Irish, who effectively have a national credit card issued by the Germans).

    It also has another credit card (Treasury Bonds) that has no limit, but with repayment periods. However it can just balance transfer whatever it wants to the standard Treasury credit card whenever it feels like it. There's never a problem handling the interest payments or repayment.

    Of course what you forget is that the Treasury Credit Card has the best cashback deal on the planet - called Taxation. Whenever the Credit Card is used, not only do they get cashback on the first transaction but on every transaction in the economy that uses the same money. Every one, until the money is finally taxed away to nothing.

    So what you find is that for $100 the Treasury spends on its Credit Card, it will always get $100 back in taxation for any positive tax rate. Spending truly is income at the macro level.

    So the question then is, why is there a balance on the Credit Card? And that's because the cashback only triggers when people spend. If people save, then the taxation doesn't happen and it appears that the Credit Card has a 'deficit'.

    So the 'deficit' is just people saving currency rather than spending it.

    And if they are saving, they're not spending. And if they're not spending it then it can't be inflationary, so you can ignore it.

    The public sector net-financial debt is just the other side of the national balance sheet from private sector net-financial assets. It's basic sector accounting - everything in the US dollar currency area must sum to zero.

    So if you even try to reduce the public 'debt', you must simultaneously reduce the private sector's net-financial assets.

    What we are in here is a propaganda game to fox those who are 'hard of accounting' for ideological ends. After all it is easier than having to justify the real reason you are putting and keeping people out of work.



  • Comment number 23.

    Of course another possibility is that people see that investing in US bonds yields them a fixed 3.3% over 10 years. Then they can see commodities like gold up nearly 100% in two years and 40% in one year. They can see essentials like heating oil up 12% in one year and food rising faster than 3%.

    Why would anyone in their right mind lock in at such a low rate for such a long time when it's clear their money will be losing spending power every single year?

  • Comment number 24.

    Albuquirky #13 - Great post.

    Must say that I share the general feeling. Enjoy the Xmas season, will be rough next year.

  • Comment number 25.

    But surely the reason the USA has any problem at all is because it allowed its finance industry to become, in my personal opinion, institutionally crooked and flood the market with bonds of no more value than toilet paper. Having, in my view, connived at fraud,when the Ponzi effect ran out politicians were left with the threat of the collapse of the economy and, to my mind wetting their trousers with cowardice, decided to pay the blackmailer. It is very easy to spend other people's money and they decided that they would appropriate taxpayers funds and pay. They could have bitten the bullet and put funds into the economy directly but by funding the banks they made it impossible for there to be any punishment-so the blackmailer will be back to pickpocket the funds of the taxpayer again and again. We have seen it already in Ireland. To restore confidence and credibility about debt everywhere Govt's need to stipulate that nothing is too big to fail-it would be a big short term problem but payments to the blackmailer would cease.

  • Comment number 26.

    Bond yields are slightly up because lately there have been some positive surprises on economic figures, so that raises expectations that federal reserve will start rising interest rates sooner rather than later, and that raises the expected return of alternative risk-free investment to government bonds, i.e. lending the same funds at the interbank market over the same period.

    Government bond yields are nothing but expectations of average fed funds rate over that same period. There is no pricing for default risk, because U.S. government is sovereign issuer of it's own currency and can not go broke.

    Oh, and Peston, ever heard of "capital controls"? Hot money flows do not effect China.

  • Comment number 27.

    22. At 13:18pm on 13th Dec 2010, Neil Wilson

    Nicely put!

  • Comment number 28.

    26. At 13:47pm on 13th Dec 2010, zfvr wrote:

    "Government bond yields are nothing but expectations of average fed funds rate over that same period. There is no pricing for default risk, because U.S. government is sovereign issuer of it's own currency and can not go broke."

    Oh really - and what about when nobody want Dollars anymore? - I mean lets say it can no longer buy you oil....

    http://www.theinsider.org/news/article.asp?id=0243

    Oh dear - the concept of 'not going broke' has been broken I'm afraid.

  • Comment number 29.

    26. At 13:47pm on 13th Dec 2010, zfvr wrote:
    'Oh, and Peston, ever heard of "capital controls"? Hot money flows do not effect China.'

    http://www.economist.com/node/11639442?story_id=11639442

    http://www.ipe.com/asia/hot-money-stokes-china-inflation-pressure_38216.php

    etc. etc.

  • Comment number 30.

    The USA (nor can the UK!) can not repay its debt today or possibly ever. Its salvation is to continue to roll it over only when this is not true can it be considered broke.

    When I make investments in buying debts I look at both the return I can get anywhere in the World and increasing the certainty of non-default. Chinese inflation is on the up so this suggest that Chinese interest rates will rise, possibly sharply. The Fed has, very unwisely to my mind firmly, stated that it will keep rates at zero. Now, which would you invest in real Chinese interest returns of very much lower returns from US bonds? This attitude to US bonds forces the bond price down in the resale market this pushing up the return.

    The US (and UK) economy are still in the headlights of the on-coming economic train - the idiots in change (Ben and Merve)are still obsessed by a totally flawed economic model stemming from their duff economic training and education - they are still working on a Reagan/Thatcher economic model and they have not yet taken on board that their model is wrong and actually caused the bubble/crash. (Both need firing.)

    The World has moved on. We need to get back to understanding that both Governments need to rehabilitate money and pay a proper rate of return - that is what the markets are saying by putting downward pressure on the resale price of Government debt. Both countries are in the grips of the beginning of a terrible long term depression in the case of the UK or half way through in the case of the USA. [The USA is deflating its overblown loan book - but the UK is still in denial.]

  • Comment number 31.

    23. At 13:19pm on 13th Dec 2010, ThoughtCrime wrote:

    "Why would anyone in their right mind lock in at such a low rate for such a long time when it's clear their money will be losing spending power every single year?"

    Surely this is madness - I mean FOX news told me we're in recovery - and FOX news wouldn't lie - would it?

    I find it surprising that the scent of recovery would ensure a mass exodus from US treasuries - sure if recovery was a dead cert - but otherwise only a fool would remove their hedge so quickly after such a relatively short period of 'not crashing'

  • Comment number 32.

    ...and dare I miss this opportunity to laugh at one of the 'masters of the universe' coming unstuck?

    http://www.cityam.com/news-and-analysis/hands-lose-control-emi-christmas

    What a shame, maybe these capitalists can only 'assess risk' correctly in rising markets....all their theories and 'talent' no longer seem to be working....

  • Comment number 33.

    Fascinating blog article.
    Great comment from #1 tony_was_here and many others, new and regulars.
    Keep up the good work.

  • Comment number 34.

    Swings up & down are normal on any market - its is impossible to rationise why.

    BUT what is certain is that markets do not go up or down indefinately. Currently everone agrees Bond market prices are high -very high -so there is a very high risk that they will fall in the future. It is very unlikely that they will rise greatly. A number of things could trigger the coming fall -a) a rise in Bank rate b) debt problems in europe-Brown's high noon theory c) US economic data turning negative etc etc. All these things are quite likely so selling at least some bonds would probably be wise. I do not see any future in holding bonds and think cash may be better -the latest decision by europe to say bondholders will need to take losses in the future is enough to know the time has come to be out of bonds.
    That said investors will need to decide whether to go into equity or cash. Equity has some value but the chances are a serious fall in bonds will also be a trigger for a fall in equity prices.(Higher yields in bonds will produce higher yields in equity) A strategic position of holding equity & cash is needed to create a two way bet.

  • Comment number 35.

    The end of an era and US advantage on the back of the global status of the dollar. It is about time the Kronor became the World's reserve currency!

    On the other hand, spivs might have found somewhere else to make a fast buck...

    Move along. Nothing to see here.

  • Comment number 36.

    I still think 'Project Mayhem' from Fight Club is the way to go. Destroy the current financial institutions and everyones Credit records. Apparently, that could cause the price of Bread to rise to £100 a loaf...but that is based on the assumption that i need to buy more than one loaf of bread a week (and am allowed to).

  • Comment number 37.

    Good article! I even liked your uncertainty.
    The turn away from US Government debt says to me that the economic crisis that started in the United States (with its nefarious financial instruments and the repeal of the Glass-Steagall Act) is not over.
    In fact, I believe, we have only seen Act 1, Scene 1.
    Economic downturns, different forms:
    1. Too many unemployed. Limited paychecks. Low consumption = low demand for goods and services, which infests other businesses because now their goods and serrvices are no longer in demand. And so the recession cycles...
    2. The United States' could think of no other solution except to "prime the pump"
    - to increase consumption artifically, to print or borrow money and hope that Americans would go spend crazy.
    This was called “stimulus".
    Big mistake because the Americans did not get stimulated into spending frenzy. They hoarded.
    On January 10 2009, Christina Romer, Chairman of President Obama’s Council of Economic Advisors, had predicted that, if the so-called “stimulus bill” would save 3.5 million jobs, that unemployment would stay below 8%, and that joblessness would quickly decline.
    Oops, how time flies!
    Since the famed Romer Prediction,
    - 3.5M jobs gone
    - unemployment at about 10%, and apparently inching higher!
    The United States has moved from recession rooted in the business cycle to recession rooted in printing money (Q.E.)
    The fact is that the United Should should have learned its lesson from 1929.
    The 1929 receision was preceded by an extended period in which the Federal Reserve Board printed and printed and printed. You could smell the ink from the east coast to the west coast.
    Interest was low; home-buyers and consumers took out loans they could not afford; and investors with borrowed money themselves, took great risks.
    "Double, double toil and trouble
    Fire burn, and cauldron bubble."
    (Macbeth Act 4, scene 1, 10–11)
    What burned actually was the stock market.
    Policies meant to turn the economy around will backfire because the downturn is caused by excess indebtedness, including credit cards.
    Secretaries of the Treasury are running easy money. Home-owners, investors, states, consumers as well as municipalities are running up massive debts.
    Under Barack Obama, the federal government has run easy money on a scale never seen before.
    - @ 2.5M houses are in foreclosure.
    - States like Illinois, New York, and California are literally bankrupt.
    - The powers that be have connived, colluded, & convinced themselves that there will be no day of reckoning. American banks have not yet fully recognized their losses; the real estate market is a mess...
    The future:
    In the next couple of years (sooner if Julian Assange has his way), the financial institutiotns will have to bite the bullet (Crunch!), more houses will get dumped on the market; housing values will dive.
    In the next couple of years, Illinois, New York, and California will go bankrupt, give their bondholders a haircut (actually shave them bald)...
    And here's the real cruncher: THE UNITED STATES FEDERAL GOVERNMENT WILL NOT BE ABLE TO SERVICE ITS DEBT.
    Look for
    - 2cd housing crash,
    - state insolvency, and
    - a fiscal crisis beyong imagination.
    As for investors turning away from US Government debt, how much would you invest in the United States of America? Don't you think that financially astute countries like Canada & China realize the American emperor has no clothes?

  • Comment number 38.

    "13. At 12:49pm on 13th Dec 2010, Albuquirky wrote:

    .....Does anybody out there have a credible method of avoiding this doomsday scenario?....."

    Clearly not. But I suggest that focusing a little thought and attention on the consequences of not finding a 'credible method' might (at the risk of sounding alarmist) prove valuable.

    As Robert understated "...the Chinese economy is close to overheating.....". Yes, and I suppose he could have added 'for about a year'. Food, energy, wages. Oh yes....and let's not forget Hong Kong property. Or the 2.4 billion people of China and India (another small inflationary difficulty), many of whom have not benefitted from this 'gold rush' but who will nevertheless shoulder the burden.

    "......the Chinese authorities will try to choke off the dangerous part of this boom by allowing a further rise in the yuan and increasing interest rates- although they know, and fear, that to do so would suck in more so-called hot money from the rest of the world (which would tend, I suppose, to reinforce a fall in the price of US and German sovereign debt)."

    Nope. They won't:

    http://www.bbc.co.uk/news/business-11984937

    That's got the markets sorted then. Gold up. Oil up. Someone's making a killing.
    Maybe the same someone who has just broken the record for a HK apartment:

    http://www.smh.com.au/executive-style/luxury/hong-kong-apartment-sells-for-whopping-63m-20091015-gxri.html

    "Anyway, when I put all this together I am left with a slight uneasy feeling."

    Yep. Me to Robert. Me to...... A tenner says that in a few short years from now, we’ll look back and say "I wish we’d done something about all this a few years ago....."

    Anyway.....have a relaxing and happy festive season. There'll be plenty to keep you busy around mid-2011.

  • Comment number 39.

    C'mon you lot, it'll soon be Christmas!

    Eat, drink and be merry for tomorrow..



  • Comment number 40.

    '39. At 15:27pm on 13th Dec 2010, inacasino wrote:
    C'mon you lot, it'll soon be Christmas!

    Eat, drink and be merry for tomorrow..'


    Errm...The Buildings and Contents Insurance is due?

  • Comment number 41.

    13. At 12:49pm on 13th Dec 2010, Albuquirky wrote:

    Colour me thick but I just do not understand how on earth anybody can take the positive alternative postulated in this article - that just defeats me. etc ...etc ...

    =====================================================

    Thanks for sharing your thoughts - I completely agree with you.

    Whilst it can only be a guess, I suspect that the bond outflows are mainly going into blue-chips and commodities. Given the western economic landscape and the ridiculous levels of sovereign debt, is it feasible to believe that things are back on track and significant growth is on hand to justify another bout of speculation?

    I haven't thought so for some time, and I cannot identify anything that would give me pause now.

    One thing I am certain of. When Robert Peston, with all his knowledge and contacts expresses concern, you can bet that things may well get a lot worse before this debacle is resolved.

  • Comment number 42.

    36. At 15:02pm on 13th Dec 2010, ukblahblahblacksheep wrote:
    I still think 'Project Mayhem' from Fight Club is the way to go.



    Now what was the first rule about Project Mayhem? :)

  • Comment number 43.

    37. At 15:14pm on 13th Dec 2010, BluesBerry wrote:
    'Don't you think that financially astute countries like Canada & China realize the American emperor has no clothes?'

    Financially astute.... Seems like they are on the road to making the same mistakes....

    http://www.china.org.cn/english/business/242112.htm

    http://www.thejakartaglobe.com/business/after-cautious-start-china-futures-market-grabs-investors-attention/372179


  • Comment number 44.

    AN ALTERNATIVE REASON

    Two articles written just before the Credit Crunch with the recommendation that they be read together:
    http://www.jewishworldreview.com/joe/aaron101007.php3 http://www.wsws.org/articles/2007/oct2007/usa-o16.shtml
    The suggestion is that most of us dismally fail to put things together which we should, and that we make completely the wrong inferences instead.

  • Comment number 45.

    The people are finally seeing that Emperor Keynes has no clothes on.

  • Comment number 46.

    "38. At 15:17pm on 13th Dec 2010, Dungtuxstu wrote:

    That's got the markets sorted then. Gold up. Oil up. Someone's making a killing.
    Maybe the same someone who has just broken the record for a HK apartment...."

    Nope. I'm wrong again. But maybe it was the chap who recently bought that porcelain vase. He'd need a few nicknacks for the apartment:

    http://www.bbc.co.uk/news/uk-england-london-11739781

  • Comment number 47.

    '42. At 15:52pm on 13th Dec 2010, Leviticus wrote:
    36. At 15:02pm on 13th Dec 2010, ukblahblahblacksheep wrote:
    I still think 'Project Mayhem' from Fight Club is the way to go.


    Now what was the first rule about Project Mayhem? :)'


    Damn.....

  • Comment number 48.

  • Comment number 49.

    OK...mushroom is still puzzled about how and why Govt. bonds can be bought and sold at other than their face value. That, I freely admit, makes me unqualified to offer an opinion.

    So, a question instead...

    How much of the current madness would be stopped and/or fixed if there was a global agreement to ban the trading of financial instruments? (I mean, like people feel about slave-trading) What would actually happen if the G20 agreed to close down all Forex, Derivatives, Bonds, etc within their jurisdiction?

    Most of us here have argued that the people/organisations/computer-programs trading these things are not wealth-creators, but act to cream off the productivity of others. Most of us can see that by taking the value represented by earned money out of circulation and putting it into their own private pockets they are creating inequality and disrupting the value of money...so would a ban on trading be such a bad thing?

    one puzzled mushroom.

  • Comment number 50.

    "Now it is important to put this into perspective. The yield on US government bonds is still incredibly low by historical standards - the US government can still borrow remarkably cheaply."

    You quite rightly made the qualification Robert. Few have taken it onboard.

    http://www.tradingeconomics.com/Economics/Government-Bond-Yield.aspx?Symbol=USD

    Still turing Japanesy in my book

  • Comment number 51.

    The doom-mongers really will latch onto anything to peddle their hackneyed theories, even a modest backing up in US Govvie yields. If they'd bothered to actually listen to the markets, rather than use any price movement in anything as prima facie evidence that the world as we know it is about to end, they would know that in the summer months the chat in the bond markets was all about whether US treasuries was at the fag-end of a huge bubble such was the yield compression, therefore a modest sell-off would be expected at some point (all other things being equal)

    What we can observe is that the modest sell-off in treasuries is working in tandem with a rise in stocks. All that is therefore happening is that investors have looked at the relationship between US Treasury purchases by the Fed in the past and concluded that stocks rise. They are just trying to get ahead of the price movement i.e. this is all short term noise and has very little to do with long term fundamentals.

    On the fundamentals, they are undeniably horrible and it is all down to global imbalances that aren't going to get fixed any time soon. In the meantime, China will continue to buy US treasuries because they still need the US consumer to buy Chinese products. They're certainly not about to enrich the Chinese masses, so what else are they going to do with the cash?

  • Comment number 52.

    49. At 16:39pm on 13th Dec 2010, stillpuzzled wrote:

    "OK...mushroom is still puzzled about how and why Govt. bonds can be bought and sold at other than their face value. That, I freely admit, makes me unqualified to offer an opinion."

    That's how they make the yield - the interest rate and maturity are fixed so the only way to improve the yield (or not) is to alter the price.

    The price is dictated by the likelihood of getting paid that interest (default risk) or how much that interest rate will be worth in various inflationary environments (inflation risk).

    Bond holders dislike inflation and growth - it devalues their income. That is why treasuries are used to hedge against recessions.

  • Comment number 53.

    48. At 16:30pm on 13th Dec 2010, 24law wrote:

    a nice clear link and some awesome figures...

    ==============================

    Thanks for the link.

    Total US obligations $65 TRILLION and rising!!

    That's unmanageable.

  • Comment number 54.

    48. At 16:30pm on 13th Dec 2010, 24law

    I like these bits - so much for republicans being the party of low taxation and low spending!

    # When Ronald Reagan took office, the U.S. national debt was just under $1 trillion. When he left office it was $2.6 trillion. During the eight Regan years, the US moved from being the world’s largest international creditor to the largest debtor nation.
    # The U.S. national debt has more than doubled since the year 2000

    * Under President Bush: at the end of calendar year 2000, the debt stood at $5.629 trillion. Eight years later, the federal debt stood at $9.986 trillion.

    ...and how many jobs were created under that Bush presidency?

    700,000

    testament to the failed economics of the United states - they actually thought outsourcing jobs would produce more US jobs!

    Sadly all they produced is more wealth for the rich.

  • Comment number 55.

    51. At 16:51pm on 13th Dec 2010, a_sensible_comment wrote:

    "The doom-mongers really will latch onto anything to peddle their hackneyed theories,"

    Is 3 years in the doldrums not good enough for you? - well it's not over yet, that bubble was created through fear, and it's not confidence that will burst it - it's more fear.

    "On the fundamentals, they are undeniably horrible and it is all down to global imbalances that aren't going to get fixed any time soon. In the meantime, China will continue to buy US treasuries because they still need the US consumer to buy Chinese products. They're certainly not about to enrich the Chinese masses, so what else are they going to do with the cash?"

    ...well will they be so keen to buy US treasuries when the US are potentially going to get involved in a conflict on their doorstep?
    Whilst there is an element of one clinging to the other - the Chinese can do without US debt more than the US can do without the Chinese buying it.

    Why? - because the chinese hold other nations treasuries - and these will increase in value if they pull the plug on the US. It will be painful but I suspect not catastrophic.

    I'm expecting that once oil is priced in the new currency of choice for OPEC - suddenly the dollar won't be as much in demand as it has been....and who will want US treasuries then?

    Bernanke is gambling that a strong recovery reaches the world before the change happens - then everyone might just forget about their QE and currency devaluation.

  • Comment number 56.

    But it's alright, don't you see. I just can't understand all the negativity.

    Sarah Palin will win the next election, shoot a few moose, invade North Korea (or will it be South Korea?), reverse everything Obama has tried to do and it'll be fine.

    Really.

  • Comment number 57.

    22. At 13:18pm on 13th Dec 2010, Neil Wilson wrote:

    "The public sector net-financial debt is just the other side of the national balance sheet from private sector net-financial assets. It's basic sector accounting - everything in the US dollar currency area must sum to zero.

    So if you even try to reduce the public 'debt', you must simultaneously reduce the private sector's net-financial assets.

    What we are in here is a propaganda game to fox those who are 'hard of accounting' for ideological ends. After all it is easier than having to justify the real reason you are putting and keeping people out of work."

    Intriguing argument and I confess you've lost me in this first paragraph. Can you elaborate on this point?
    Does this apply to the UK?
    The final paragraph here suggests to me that the creation of a mass of unemployed people is a deliberate attempt to make the US (and the UK?) more competitive with regards to wage rates vis a vis China etc?

    Is this correct?

  • Comment number 58.

    18. At 12:58pm on 13th Dec 2010, Kit Green wrote:

    Ah, that's the means to deny the economic decline over the past few decades - soundly rebuffed in Smile or Die: How Positive Thinking Fooled America and the World by Barbara Ehrenreich


    I always knew it was suspect. When I was a kid, no matter how hard I tried, thinking positive never seemed to help me grow wings so I could fly like a bird.

    It's what will be used to blame the victims of deluded government policies and hide business failures. Once 90% of the workforce is out of work, they'll still say you aren't trying hard enough, you aren't thinking positively enough so go on, defy gravity by pulling yourself up by the bootstraps and stop being a lazy sponger!

  • Comment number 59.

    22. At 13:18pm on 13th Dec 2010, Neil Wilson wrote:

    "The public sector net-financial debt is just the other side of the national balance sheet from private sector net-financial assets. It's basic sector accounting - everything in the US dollar currency area must sum to zero.

    So if you even try to reduce the public 'debt', you must simultaneously reduce the private sector's net-financial assets."

    Excellent point. One question of course is that of cause and effect. Perhaps the primary problem is the size of the private sector's net-financial assets, and the public sector debt is just the inevitable and necessary response to this.

    Taking this a step further. you can split the private sector part of the equation into debtors and creditors. The creditors have a huge amount of financial assets. Prior to 2008, more and more of this got lent to private sector debtors (largely to buy overpriced housing), until the bubble burst and the private sector debtors could borrow no more. So to stop the economy imploding into deflation (and/or to prevent the banks from going bust), the public sector had to take on the excess debt instead. It's all kind of necessary.

    The UK Government just seems intent on trying to push the debt back onto the private sector debtors (take the tuition fee business as a case in point). Stupid. The private sector debtors are already overstretched. The only answer is to take (a lot of) money away from the private sector creditors.

  • Comment number 60.

    '54. At 17:09pm on 13th Dec 2010, writingsonthewall wrote:
    testament to the failed economics of the United states - they actually thought outsourcing jobs would produce more US jobs!

    Sadly all they produced is more wealth for the rich.'

    I disagree with you here WOTW.

    I think some people knew exactly what they were doing. Ensuring there were a few rich pals and the rest of the population destitute, so desperate, so deep in debt they'd work for a dollar a day is a way to drive the costs of production down. As the west declines, Asia will rise creating a new focus for consumerism for the cheap trash produced by western debt slaves.

  • Comment number 61.

    57. At 17:48pm on 13th Dec 2010, i

    There are various way of looking at it. Here's one way.
    Take that most basic of macro-economics theories that I think everyone agrees on.. The circular flow of income for the UK and sterling.

    In any one year
    Firms pay for and produce output of goods and sevices.
    Those goods and services are consumed largely with the money used to produce the output.
    If people decide to save instead of consume, there is a build up of stocks at the end of the year as all output wont be consumed. This is initially classed as Investment by the firms but if stocks get too high and if spending doesn't pick up then they will cut back on production and jobs.

    Savings are a leakage from the flow and Investment an injection.
    Govt spending is another injection and taxation a leakage.
    Exports are another injection and imports a leakage.
    Further Investment using previous years' savings are a further injection and can be added to the stock build up.

    2 ways you can measure GDP are

    C + I + G + (X-M)

    and

    C + S + T

    Where
    C = private consumption on final goods and services
    I = Private Investment and stock build up /down
    G = Govt spending
    T = Taxation
    X = Exports
    M = Imports

    If you put the 2 GDP equations together

    G -T = S-I + M-X

    In other words, if there is a trade deficit (which the UK has) and a desire in the non-government sector to net save it has to be 'financed' by a budget deficit (G-T)

    Accumlated budget deficits, the public debt, is equivalent to total savings in the non-government sector including any sterling held by foreign residents/ businesses etc

    The real question is why does Govt choose to borrow i.e. issue gilts to 'finance' deficit spending. It could merely spend but neo-liberal propaganda insists that instead of Govt spending to compensate for the non-government sector reducing private debt and reduced spending , it will instead allow output and jobs to go to the wall in the interest of controlling non-existent demand pull inflation.

    The current Govt argues that the reduced Govt spending and higher taxes will be compensated for by increased exports and increased investment.
    No sign of that happening in the Uk yet.

  • Comment number 62.

    55. At 17:15pm on 13th Dec 2010, writingsonthewall wrote:
    51. At 16:51pm on 13th Dec 2010, a_sensible_comment wrote:

    "The doom-mongers really will latch onto anything to peddle their hackneyed theories,"

    Is 3 years in the doldrums not good enough for you? - well it's not over yet, that bubble was created through fear, and it's not confidence that will burst it - it's more fear. etc ...

    and:-

    Bernanke is gambling that a strong recovery reaches the world before the change happens - then everyone might just forget about their QE and currency devaluation.

    ===================================================

    Thanks to post No.48 24law, I am informed that total US obligations are currently $65 TRILLION (forgive the capitals, but I believe they are justified).

    Forget politics for a second and help me out here ...

    Would I be right in thinking that the US faces four possible scenarios.

    1. Unlikely as it appears, the world economy grows at a rapid pace and US productivity improves, thereby eliminating the structural deficit and progressively reducing the total debt. In the absence of austerity measures, this could take a very long time. Low probability.

    2. The US deliberately pursues a policy of $ devaluation thereby reducing the impact of total debt whilst boosting exports. Holders of Treasuries and sovereign debt would not be pleased. There may well be some counter-measures by China and other debt holders. Given the scale of US debt, this option would take a considerable time to resolve the problem because of low world trade growth. Highly desirable but unlikely.

    3. The US continues with it's apparently reckless behavior, deluding itself that the dollar will continue to be the currency of last reserve. That presumes that the Reminbi or Euro (unlikely) do not take over that role. Probable.

    4. Worldwide economic collapse and major sovereign debt write-offs. Possible but unlikely.

    So, number 3 it is!

    Am I missing something? Are my assessments correct?

  • Comment number 63.

    When it comes to debt the Americans are making Gordo look like a rank amateur. He must be gutted that he didn't borrow more to win the last election.

  • Comment number 64.

    The latest Billy Blog (http://bilbo.economicoutlook.net/blog/?p=12754%29 is very relevant to this discussion.

    Even though about half of the blogs are Australia specific, the economic principles are the same and a lot of space is given to the current UK, USA, EU issues.

    And QE is NOT money printing or "fresh money". Even Ben Bernanke says so! http://pragcap.com/bernanke-explains-why-qe2-is-not-money-printing-again

    Another very good source of information!

  • Comment number 65.

  • Comment number 66.

    No.65 24law:-

    Don't you know how to cheer someone up on a cold Monday night!

    I'm off to open another bottle of Red - I kid you not.

  • Comment number 67.

    http://www.bbc.co.uk/news/business-11987147

    would you buy a used car from this man?

  • Comment number 68.

    Very interesting and informative blogs so congratualtions to the participants.

    Now could somone tell me what this has to do with Business which is I think is part of Mr Pestons job title? I know one can buy and sell bond, gilts, treasuries et al and I suppose that could be called a trade but isn't this really all about economics?

  • Comment number 69.

    Couldn't we have some articles on how companies and markets are doing and particularly SMEs as most of us mere mortals can relate to such things? Movements of vast amounts of capital or around the world may be great fun for the economic theorists but surely that isn't business as most people know it?

  • Comment number 70.

    Well colour me purple and call me a blackberry (I was going to say blueberry but someone might mistake me for the poster Bluesberry) I think I am about to agree with WOTW

    The bond price fall is blindingly obvious from simple market economics. The US govt has created an over supply of bonds so the price goes down - economics primary grade. The over supply creates confidence issues - how does the US govt repay all this debt which gives investors another reason to move money into safer assets.

    Some point soon (this also applies to UK) the US govt has to revert to sound money policies and withdraw the stimulus

  • Comment number 71.

    No.67 truths33k3r:-

    There's an old saying which goes something like "Never judge someone else unless you've walked a mile in their shoes!"

    From what I understand, we weren't so clever either. For the time being, we appear to be OK - but I'm not holding my breath. For the sake of the Portuguese people, I hope he is very successful.

    It was the incompetence of politicians and bankers that visited this crisis on taxpayers. For their sake, I wish him well.

  • Comment number 72.

    Higher inflation reduces the attractiveness of non-indexed bonds. Hence their price tends to fall when inflation is expected to rise.

    Stocks are seen as a partial hedge against inflation. Hence their price tends to rise when inflation is expected to be higher.

    Ben Bernanke has made clear (clear for a central banker at least) that he wants inflation to go higher than it is.

    Hence the simplest explanation of rising stock prices and falling bond prices is that investors think that Ben may succeed in raising inflation. (Or at least they think that other investors think he will succeed).

    Am I missing something?

  • Comment number 73.

    62. At 19:01pm on 13th Dec 2010, TonyH wrote:
    ==============================================================

    Well the US government and Fed are pursuing option 2 but as has been stated elsewhere everyone can do that. Japan, Eurozone, UK, China, Canada etc... and that will lead to 4 possibly.

    However prior to this domesday the US will create the latest Saddam-style-boogeyman figure (called Iran or North Korea) and start a war to obfuscate the real issues and then blame said war on economic ills of US.
    The banks have taken over UK government in all but name - yep it is called economic fascism. However no doubt the puppets in NuLabour and ConDem will slavishly back said war otherwise - they will argue - we'll all be mincemeat in 45 mins.
    Or maybe just maybe people will wake up to these scenarios and in the words of Abe 'you can't fool all of the people all of the time'

  • Comment number 74.

    71 - Tony, I hate to break it to you but............he is a politician. Instead of cutting spending they are trying to hawk their worthless paper around the globe. I hope they send him packing. The Chinese are smarter than that and should buy gold, silver and commodities.

    70 - Justin150 wrote: "Some point soon (this also applies to UK) the US govt has to revert to sound money policies and withdraw the stimulus"

    I do not think that it will be soon. Bernanke is already talking about QE3 and the coalition are not cutting spending. When you see the rioting over students having to pay their own way, why would politicians risk losing voters by raising rates and crashing housing. Better to extend and pretend.

  • Comment number 75.

    64. At 19:12pm on 13th Dec 2010, EmEmTeeEr

    I have just read through the links and I found myself saying: I love me because I’m Mr finance and I love everybody who agrees! Especially because they know I’m correct?

    I am a simple bod who boils things down into their simplest form so as to understand them.

    1.The system is not working for me, therefore either I am out of step or the system is?
    2.If you cannot afford it you cannot have it, by borrowing you only increase the number of things you cannot have in the future, because sooner or later you have to pay it back and be in a worse position
    3.By devaluing (keeping the value but increasing the number ‘of coins’) you cannot get out of debt because it benefits the recipient not the donor.
    4.If you continue to make mistakes sooner or later there are no other mistakes to make, so why listen to someone who admits to making mistakes and refuses to amend their belief.

    Old Chinese proverb say:

    Man who brings in 20 and spends 20 is happy, whereas man who brings in 20 and spends 21 is sad.

  • Comment number 76.

    I'm sorry to have to go off-topic but it's the only way to notify the BBC about a serious software bug. I intended to post a comment at BBC's http://www.bbc.co.uk/blogs/haveyoursay/2010/12/should_koran-protest_pastor_be.html?s_contact=1 page. I was warned as follows: "You are a registered user but we need to check some details with you. Please click here to complete your registration." ...I did click, read the next screen and declared I agreed with the House rules, as I was urbanely requested. Thereupon I was led back to the previous warning and have been in a loop ever since. If I "click here to complete my registration" I get taken back to the same request to click there to complete my registration, with no end in sight. Please do something.





    You are a registered user but we need to check some details with you. Please click here to complete your registration.

  • Comment number 77.

    No.74 truths33k3r:-

    Yes ... you are right! He is a politician, complete with the baggage of his office. No argument.

    But please, do not denigrate a people because of the actions of dimwits. However stupidly you believe the politicians/bankers have behaved, surely you do not wish to condemn the taxpayers of Portugal to mediocrity - they're no different to you or I!

    We may think that we can congratulate ourselves on a crisis avoided - but it is early days yet. This crisis has legs, and I for one am not convinced that everything will turn out just fine.

    PS: I'm not having a go - I just feel so damn angry!

  • Comment number 78.

    61. At 18:51pm on 13th Dec 2010, EconomicsStudent wrote:

    "There are various way of looking at it....etc."

    Thanks for the lucid explanation. I don't think the trade delegation visiting China is going to work either. Is it cynical to suggest that the creation of unemployment is intended to encourage investment by lowering wage costs?

    Again, much appreciated!


  • Comment number 79.

    77. At 21:43pm on 13th Dec 2010, TonyH wrote:
    No.74 truths33k3r:-

    But please, do not denigrate a people because of the actions of dimwits. However stupidly you believe the politicians/bankers have behaved, surely you do not wish to condemn the taxpayers of Portugal to mediocrity - they're no different to you or I!

    We may think that we can congratulate ourselves on a crisis avoided - but it is early days yet. This crisis has legs, and I for one am not convinced that everything will turn out just fine.

    PS: I'm not having a go - I just feel so damn angry!

    ================================================================

    Not at all - Portugal (in my limted experience) is a nice country with incredibly friendly, genuine people.
    I think the reason they are begging 'communist' China is because this is a least bad option compared to what fate befalls Greece and Ireland and how they are beholden to the IMF economic fascists.
    We (UK) are not out of the woods by any means. No congratulations here. It's nil points for Portugal and nil points for UK. Oh and many others.

  • Comment number 80.

    Morning Robert,
    I think one point that is being missed here by most is how will the stimulus injected by the FED, the BOE and the EU to be unwound?
    The answer is that it can't and it won't. Therefore the treasury bonds purchased by the central banks will just be held to maturity and allowed to lapse.
    China is now experiencing what Britain experienced during early Thatcher years, namely that their $568 Billion domestic stimulus leads to inflation and then hyper-inflation! It has taken two years for this to show up in the Chinese economy whereas it took about 18months here.
    This relationship between stimulus and inflation is well recognised by economists, but politicians are just for Christmas and not for life so they don't care.
    Be aware that strong inflation is on the way to the US and to the UK it is only a matter of when, not if.
    As China is finding out, with all of their financial muscle, they cannot put the inflation genie back into the bottle no matter how hard they try.
    An object lesson for us all?

  • Comment number 81.

    13. At 12:49pm on 13th Dec 2010, Albuquirky wrote:
    "The potential end game of this economic crisis is destruction of value of breathtaking proportions; destruction of pension funds; government credibility; destruction of banks and the global trading village as the system presses Ctrl Alt Del and reboots. Does anybody out there have a credible method of avoiding this doomsday scenario? If so, I have yet to become aware of it."

    ===================

    On an individual level, "death" is the credible method you're looking for. (Use "mortality" if you're squeamish.)

    Keep those balls in the air for another decade*, max, and those of us that really -matter- are out of here, hopefully leaving the REST of you holding the bag!

    * Or maybe less. The current economy has already produced the first drop in U.S. life expectancy in decades.

  • Comment number 82.

    78. At 22:14pm on 13th Dec 2010, i wrote:
    " Is it cynical to suggest that the creation of unemployment is intended to encourage investment by lowering wage costs?"

    Not at all. The way Economics is taught these days, that is considered a logical approach and is rarely challenged by commentators or bloggers.

    Employment, with its material and mental benefits, is no longer a human right and full employment policies are not expected by citizens of their governments.

    The unemployed and welfare dependents are villified and are expected to make themselves employable but governments do not need ensure there are any jobs available.

    You can see from these blogs that the agenda is firmly rooted in inflation and the money supply even though many posters have highlighted that 'wealth' is not money. Jobs, security and consuming real output is what makes a country wealthy but we seem happy to accept massive levels of unemployment, under-employment, and incapacity levels and the insecurity that goes with that based on an obsesssion with inflation.

    I think it has to do with oil shock in the 70s and the inflation that was experienced as a result of that. As the oil price rises again you can hear cries "Oh it must be because there is too much sterling floating around. We must embrace austerity to make everything ok" Of course every individual is thinking they won't be affected "As long as its the other guy, thats ok"

    Its tragic and unnecessary.

  • Comment number 83.

    Print money = get inflation = lower bond prices.

    This isn't news, its totally predicatable. As they print more dollars the bond price will fall further still.

    Time to short US bonds?!?!

  • Comment number 84.

    52. At 16:58pm on 13th Dec 2010, writingsonthewall wrote:

    49. At 16:39pm on 13th Dec 2010, stillpuzzled wrote:

    "OK...mushroom is still puzzled about how and why Govt. bonds can be bought and sold at other than their face value. That, I freely admit, makes me unqualified to offer an opinion."

    That's how they make the yield - the interest rate and maturity are fixed so the only way to improve the yield (or not) is to alter the price.

    The price is dictated by the likelihood of getting paid that interest (default risk) or how much that interest rate will be worth in various inflationary environments (inflation risk).
    ~~~~~~~~~~~~~~~~~~
    Thanks for trying...I presume that means that people who's job it is to assess those risks come to different conclusions, otherwise there would be no desire to trade. Further that their conclusions are different again to the people who issued the bonds in the first place, or the bonds would retain their face value.

    Which brings me back to the stupid question. Why not ban trading? Been thinking about it overnight, and cannot see a fundamental reason why it would be a "bad thing".

    Foreclosuregate already shows some of the minefield associated with selling debt.

    The "speculators" that drive currencies to the wall are known to be a destabilising influence.

    And pricing bonds on "perceived risk" has no stable rational basis. A word in the right ear and you can make a killing. To what extent is RP (and his ilk) involved in manufacturing "perceived risk"?

    Presumably there are secondary reasons for currency transactions such as international co-operation...but that sort of thing could be done at a government level, like development funding?

    Would the world really come to an end if the G20 closed down the secondary bond markets, forex and derivatives?

    Or would it bring stability to the value of money and keep us from lurching from perceived crisis to perceived crisis?

  • Comment number 85.

    This all goes to show that there is so much debt around nobody wants it as it is far too volatile to be seen as a commodity. This really blows up the opposition policy that we can pay down our deficit more slowly.

    Why don't all the powers of the world devote their energies to adding value and generating cash? When I use the term cash I mean real money not the funny money printed in a large town allegedly to be located somewhere on the plain of Lombardy.

  • Comment number 86.

    55. At 17:15pm on 13th Dec 2010, writingsonthewall wrote:
    51. At 16:51pm on 13th Dec 2010, a_sensible_comment wrote:

    "The doom-mongers really will latch onto anything to peddle their hackneyed theories,"

    Is 3 years in the doldrums not good enough for you? - well it's not over yet, that bubble was created through fear, and it's not confidence that will burst it - it's more fear.
    ...................
    All I see is finger in the ears and “la la la” I’m afraid WOTW. That’s fear for you, fear of change. You can view life as being a series of challenges that can be met, and changes made to fix the problems, or you can simply hope the challenges will go away and everything can return to “normal”. I would have liked to have seen the video you referred to on the other blog, but the link was removed. The young seem happy to rise to the challenge, and find a better way forward, there is hope yet. They may need a little steering of course, but that’s a skill you learn raising children. The Government are ignoring the young at their peril, they are intelligent, and its always the young that make change happen, because they are not scared of change.

  • Comment number 87.

    It may just be that the bond market - traders are human after all :-P - are more realistic than the US body politique. Sovereign debt? Refusal from a large proportion of public opinion, admittedly confused to the extreme by a corrupt media and vile demagogic politicians, and above all Congress to accept reality, an unwinnable war, an over-extended military, and the inexorable if slow shift in the balance of economic power must be sufficient reasons for an evolving market sentiment. Is the question really about China's, rather than US', political stability?
    Of course this may be a glitch in market confidence. Nonetheless we are living through the dying decades of US finance capital glory (and yes it started with Reagan all those years back...). It may take time but ultimately a serious readjustment is unavoidable. Not solely in terms of the US national debt and credit, but also in terms of USD as global reserve currency. Sad but logical, notwithstanding the apparent erratic behavior of "investors".

  • Comment number 88.

    Everyone should turn against the US debt for a number of reasons:

    + A jobless recovery
    + High inflation which is being used to decrease the real debt levels
    + Uneccesary QE
    + Politicians who want it both ways - tax breaks and increased services

    The US debt will continue to come under pressure until the US Government and politicians realise the realities of their desperate situation.

  • Comment number 89.

    # 86 Average Joe wrote - "All I see is finger in the ears and “la la la” I’m afraid WOTW. That’s fear for you, fear of change"

    Sorry, but you are confusing me with somebody else. I have no doubt at all that the next 5 to 10 years will be fairly miserable. I full expect a double dip and am suprised that the data is holding up as well as it is so far. Where we differ is that I am not expecting the end of capitalism, just low growth and higher unemployment. To my mind, all that is happening is an inevitable painful adjustment after years of fiscal mismanagement. In the UK this has been best exemplified by the Blair / Brown years. In the US, Bush and now Obama.

    Its interesting by the way that everyone who slammed Cameron for his spending cuts are also laughing at the US's combination of a refusal to reduce their 10% per annum fiscal deficit and a jobless recovery. Selective use of data methinks.....

  • Comment number 90.

    Hmmm. I'd hazard a wild guess (not being an economist) that investors are turning away from US government debt for several reasons... and they are doing themselves no favours in so doing.

    In order for the situation to improve the markets need to rise. What these investors haven't apparently realised is that this is in their hands. By showing confidence, they actually can generate it. Their negativity is exacerbating the problems that were caused by the financial institutions in the first place.

    They're also running scared. They know there's deep anger amongst citizens in the US - and other nations with similar problems - who perceive their governments as ignoring their duty and obligations to their citizens in favour of paying off loans IN FULL... and it is entirely possible that the citizens will eventually wake up enough to demand that governments prioritise their obligations to the citizens that they are paid to serve... and hence lenders might, in the quaint term, get a haircut.

  • Comment number 91.

    RBS SHAREHOLDERS - TAKE NOTE

    WikiLeaks cables: RBS chairman said directors 'failed to live up to their duties'
    http://www.guardian.co.uk/business/2010/dec/13/wikileaks-rbs-chairman-philip-hampton

    Sir Philip Hampton's reported claim of breach in 'fiduciary responsibilities' will raise pressure on FSA over RBS inquiry.
    Lawyers said Hampton's reported remarks could be crucial for any shareholders trying to bring legal action for the losses they sustained on their shares during the £12bn cash call made on shareholders in the spring of 2008 – and should be of interest to the FSA.

  • Comment number 92.

    Failing to Prosecute Wall Street Fraud Is Extending Our Economic Problems.

    Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that the U.S. economy is a giant Ponzi scheme. Many economists and financial experts say that rampant fraud was largely responsible for the financial crisis.

    But many on Wall Street and in D.C. - and many investors - believe that we should just "go with the flow". They hope that we can restart our economy and make some more money if we just let things continue the way they are.

    But the assumption that a system built on fraud can continue without crashing is false. Unless fraud is prosecuted - the economy cannot recover.

  • Comment number 93.

    oops, forgot to acknowledge my post just above was excerpted from zerohedge.

  • Comment number 94.

    How come little old Ireland can order its bankers not to pay bonuses but the UK Govt seemingly can't or won't?

  • Comment number 95.

    #92

    I think you can add a few more notable names to that list:

    Joseph Stiglitz
    Michael Hudson
    William K Black

    http://www.dailyfinance.com/story/investing/joseph-stiglitz-corporate-crooks-to-jail/19684353/

    Unfortunately, white collar Fraud is not treated as Fraud:

    http://forensicstatistician.wordpress.com/2010/12/02/when-is-a-fraud-not-a-fraud/

  • Comment number 96.

    41 percent of US householders are reported as considering throwing the keys to their houses over the counter due to negative equity. Due to 1930s US law there is no comeback for doing this. There is a risk of further spoiling. Its no surprise anybody sits back rather than rushing forward.

  • Comment number 97.

    #61 & #82 EconomicsStudent

    If I knew who you were I'd sign you up, two excellent posts, although I doubt you'd get much credo if you joined our ranks. Everything you've posted aligns with our economic thinking, I guess it depends on what you do with that knowledge that dictates your political agenda.

  • Comment number 98.

    Can anyone tell me why Nick Leeson went to prison but as yet no one has for the 2008 banking collapse? Shouldn't the prisons be filling up nicley or are we too skint to put these crooks away.

  • Comment number 99.

    1) Yields are back to where they were in June and are still lower than at the start of the year.

    2) Yields started rising when US QE2 was announced

    3) They have risen again following extension of Bush tax cuts

    4) I'd want a higher yield when I consider what I might get if I could take a punt on spanish debt today.

    5) I'd take a punt that my low offer price would be accepted and accept that if it weren't I'd buy something else with my cash, temporarily or otherwise.

  • Comment number 100.

    #96. At 11:35am on 14th Dec 2010, Not Buzz Windrip:

    Mass repossessions will happen here when rates rise and the cuts kick in over the next four years; I'm stating the obvious because I would also like to add it is a popular misconception that in the UK you can't just throw your keys back at your lender. There is a thing called voluntary repossession whereby the borrower hands back the property to the lender with written notice they can no longer pay and walks away. Lenders have a right to refuse but would be on sticky ground trying to enforce possession orders later should they wish to given the borrower has previously provided notice of their intention not to pay and offered the property up. The debt is still legally payable by the borrower and any shortfall from disposal of the asset is still legally the borrowers responsibilty but there are two problems here; One - you have to find the borrower, Two - bankruptcy. Many people will simply opt to default and take the consequences of going into financial hiding/obscurity or forced bankruptcy, hell who wants more debt in the future after this debacle.

    Once the public are aware they are pretty much in control of the situation, there is no problem being "Credit dead" if there is no credit we will see mass defaults and bank losses. Like the banks and government they are kicking their cans down the road - waiting. I foresee legislation being introduced making debt default a crime once again, we would return to the days of debtors prisons and maybe, cynically, a ready labour force. Only flaw I see is prison? Will we have room for debt defaulters and bankers.

    I no ships only hardships.

 

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