Monthly Archive for August, 2010

Improving the Euro

On BBC Radio 4, Jonathan Charles — the BBC’s European correspondent in the 1990s — has done a special on the Euro and the trouble it’s experiencing.  It’s well worth a listen if you have 40 minutes to spare.

It reminded me that I’d meant to write a post on two things I think ought to be done in improving the long-term outlook for the single currency.  None of this is particularly innovative, but I needed to put it down somewhere, so here it is.

First, a European Fiscal Institution (EFI)

At the start of February, when Greece and her public debt was dominating the news, I wrote:

Ultimately, what the EU needs is individual states to be long-term fiscally stable and to have pan-Europe automatic stabilisers so that areas with low unemployment essentially subsidise those with high unemployment. Ideally it would avoid straight inter-government transfers and instead take the form of either encouraging businesses to locate themselves in the areas with high unemployment, or encouraging individuals to move to areas of low unemployment. The latter is difficult in Europe with it’s multitude of languages, but not impossible.

Let me hang some meat on those not-even-bones.  I like the idea of a partially shared, European Fiscal Institution (EFI) that can conduct counter-cyclical spending, subject to strict limits on its mandate.  I am deliberately avoiding calling it an “authority” because that implies a certain freedom of action, which I oppose.  Instead, I think that an EFI should:

  • be limited to implementing commonly-agreed automatic stabilisers (in particular, a universally-agreed-upon minimum level of unemployment benefits);
  • be able to issue its own “Euro bonds”;
  • have a mandate to retain the very highest regard for the safety of its borrowing; and
  • be funded (and its bonds be guaranteed) by member countries in a manner part way between proportionate to population and proportionate to GDP.

I do not think that membership of such an institution should be required of any European country.  If a non-Euro country wants to be in it, fine.  If a Euro country wants to not be in it, fine.

The unemployment benefits provided would be the absolute minimum that everyone could agree on.  I want to emphasise that this should be extremely conservative.  If it ends up being just €100/week for the first month of unemployment, so be it; so long as it is something.  Member countries would provide additional support above the minimum as they see fit.

This will have several benefits:

  • It will help provide pan-European automatic stabilisation in fiscal policy.
  • It will provide crucial intra-European stabilisation.
  • It will increase the supply of long-dated AAA-rated securities at a time when demand for them is incredibly high.
  • It will decrease the ability of Euro member countries to argue that they should be able to violate the terms of the Maastricht Treaty at times of economic hardship as at least some of the heavy lifting in counter-cyclical policy will be done for them.

Second, country-specific lending standards

A crucial problem with a single currency is that it imposes a one-size-fits-all monetary policy on all member states, even when those states’ economies are not perfectly synchronised.  Synchronisation was, and is, one of the requirements for accession to the Euro, but perfect synchronisation is impossible.  In particular, inflation rates have varied significantly across the Euro-area, meaning that the common-to-all interest rates set by the ECB have been, by necessity, too low for those economies with the highest rates of inflation (e.g. Spain) and too high for those with the lowest rates of inflation (e.g. Germany).

But the (causal) link from interest rates to inflation travels via the extension of credit to the private sector, and the level of credit is determined not just from the demand side (with agents responding to changes in interest rates), but also from the supply side (with banks deciding to whom and under what conditions they will grant credit).  Monetary authorities in individual member countries therefore retain the ability to influence the level of credit through regulatory influence on the supply of the same.

Altering reserve requirements for banks operating in one’s country would be the crudest version of this mechanism. A more modern equivalent would be changes to the minimum level for banks’ capital adequacy ratios.  Imagine if the Spanish banking regulators had imposed a requirement of 10% deposits on all mortgages from 2005.

I suspect that the new “macro-prudential” role of the Bank of England, in addition to its role of more conventional — and, with Q.E., unconventional — monetary policy will grant them the ability to engage this sort of control.  I think it will become more important over time, too, as the British economy continues its (to my mind inevitable) decline relative to the Euro-area, the UK moves closer to the textbook definition of a “small, open economy” and the BoE thus finds itself more constricted in their choice of interest rates.

Update 13 September 2010:

The new Basel III capital adequacy requirements are out and they appear to enable exactly this second idea.  Good!

The Australian Election: Explaining the result

Less than a year ago, the Labor government in Australia, then led by Kevin Rudd, seemed unassailable.  Now we are stuck with a hung parliament.  What happened?

Chronologically, here’s my (fairly long, if not actually detailed) take on what when wrong for the Labor Party:

The Global Financial Crisis (GFC) and Australia’s response

Australia was perfectly placed to weather the storm of the GFC.  Thanks partly to the now-shown-to-be-enlightened banking policies of Paul Keating and partly to the swift and innovative actions of the RBA in the crux of the crisis, Australia’s big four banks were not overly exposed and the fall of some minor banks did not seriously threaten the Australian financial system.  The economic downturn that was triggered by the crisis took some time in coming for every country and Australia was granted an extra delay in its attachment to China.  As a result, the Australian authorities knew well in advance what was coming and even, roughly, how bad it was going to be.  Furthermore, both fiscal and monetary policy were perfectly positioned to act, and act dramatically, to lessen the pain:  Interest rates were already quite high (to avoid inflation in the pre-crisis boom) so there was plenty of room to lower them and, thanks to Australia’s booming mining exports, the government was in surplus with little-to-no debt so there was plenty of capacity to temporarily increase debt-funded government spending.  The RBA performed their role admirably, cutting interest rates early, hard and deep.  The Federal government also deployed a near-perfect fiscal stimulus, with large cash hand-outs to almost every household (with a focus on the low-income households with a higher marginal propensity to consume and a lower propensity to buy imports) and the acceleration of longer-term spending.

The result was only a single quarter of economic contraction in Australia and therefore the avoidance of a “technical” recession (typically, but not formally, defined as two consecutive quarters of negative growth).  Ironically, this spectacular feat made the authorities in general, and the government in particular, into victims of their own success.  Since they never saw a real downturn in the economy, the Australian people questioned the need for all the stimulus in the first place.  The Coalition opposition, cynically in my opinion, jumped on this and told tall tales of looming mountains of government debt, all since shown to be wildly overblown scare mongering.

Home insulation and libraries

Some of spending of the stimulus money was poorly managed.  For example, new money for schools to construct new buildings was not permitted to go towards any building on a school’s long-term plan.  If a building isn’t already on the school’s long-term plan, why do they need it?  But the big kick in the teeth for Labor, and more particularly, Rudd, came in the handling of problems that came from the subsidies for home insulation.  The surge in demand for insulation lead to new installation companies emerging, not all of them run by people with years of experience.  Some of the roof insulation, which included a thin metal layer, was occasionally accidentally stapled to electrical wires.  Some electrocutions occurred.  That was a tragedy and should have been treated as such.  Rudd ought to have deplored the dodgy operators and come out with a crack-down on safety standards in the construction industry.  Instead, it appears very much as though there was an attempt to sweep it under the carpet.

Climate Change, the ETS and Copenhagen

One of the major 2007-election policies of the Labor party was legislation to fight climate change.  The Rudd government signed the Kyoto protocol very quickly once it came to power.  An Emission Trading Scheme (ETS) was devised and passed in the House of Representatives, but rejected in the Coalition-controlled Senate.  In an attempt to get it through, Rudd watered down the ETS, much to the frustration of the Greens and green-leaning supporters of the Labor Party.  It was still not successful.

The Coalition, by this point, was in complete disarray.  It’s then-overall leader, Malcom Turnbull, fully supported the ETS and believed the matter of climate change to be above party politics, but the leader of the Coalition in the Senate, Nick Minchin, is a climate change skeptic (to say the least).  This turned into a leadership contest and although he won an initial spill, Turnbull was defeated on the 1st of December, 2009 and replaced with Tony Abbott, nicknamed “the mad monk” for his socially conservative views and his earlier start in training to the Catholic priesthood.

The anti-ETS side of the Coalition thus won a debate on whether Australia should pass the ETS before the Copenhagen conference on climate change — we would wait and, it was felt, only pass a law to the extent that we were obliged to under any agreement reached.

As it happens, Copenhagen was a debacle, with China and, to a lesser extent, India sabotaging the negotiations.  With the momentum lost, the Rudd government put climate change into the too-hard basket.

Many (many!) people in the green-leaning side of the Labor party had thought that Rudd should use the ETS as a double dissolution trigger prior to the Copenhagen summit, with the idea being that a) public support at the time was in favour of action against climate change; and b) with the Coalition in such disarray, a Labor victory would be (almost) assured.  For my own part, I believe that Rudd was genuinely scared of running a campaign entirely on this one issue and had hoped to use Copenhagen as the definitive, externally-supplied, moral argument.

Tony Abbot’s budgie smugglers and Kevin Rudd’s desperate attempts to appear true blue

Not many people I know agree with me on this one, but I believe that this event is when many Australian people stopped just being queasy with Rudd and started actually liking Abbott.  Tony Abbott, you see, at the age of 53, is a sports nut.  He is incredibly fit.  He does Ironman triathlons.  He’s a surf lifesaver, which in Australia is only two steps to the side of sainthood.  We love our lifesavers in Australia; they’re all volunteers, perform an essential role and are very, very, very much part of our collective self-image.

Nevertheless, Australia also has a strong spirit of being wary of politicians that try to grandstand on a national icon for their own purposes. The former leader of the NSW Liberal party, Peter Debnam, was ridiculed for donning a pair of budgie smugglers (hey, we used to call them DTs —  d**k togs — but that wasn’t allowed by the PC brigade) and swanning around for a “completely casual, not at all staged” photograph or 20 as he ran up and down on the beach.  Here’s Tony Wright describing the affair:

It was disastrous; his appearance was roundly declared “disturbing” and poor Debnam found himself hobbled with the moniker Deadman. His obsession with budgie smugglers prompted Deputy Premier John Watkins to accuse the unfortunate fellow of offending common decency.

So when Tony Abbott was photographed emerging from the water in his own DTs, Kevin Rudd couldn’t help making a few snide little comments:

“You know something. If there was a referendum tomorrow between budgie smugglers and boardies, I think I’d be voting for boardies,” Mr Rudd said on Thursday.  “I think there are certain things the Australian people should be protected from and one of those things is national political leaders so attired.  “What is it about the Libs and swimming gear, it seem to be a bit of a pattern,” he said, referring to former NSW Liberal leader Peter Debnam before his defeat in the 2007 state election.

This backfired massively against Rudd, for reasons that seem obvious to me looking back, but apparently weren’t to him at the time.  He was the Prime Minister.  To stoop to this sort of criticism is below the dignity of the station.  Australian’s will accept it if it’s done well (i.e. it’s funny), but when it’s just a cheap shot, we see it for what it is.  And since the subject of the cheap shot was actually (and not cynically) doing something that we, as a people, truly admire, then we were always going to side with the dude with his wang on display.  It’s just the way we are.  This whole thing made Rudd look petty and out of touch.

Actually, I think this episode was just emblematic for Rudd’s rather pathetic attempts to present a persona that the “average Australian” could relate to.  He never seemed more out of touch, more awkward, than when he was exaggerating his accent, and trying to shoe-horn a string of Australianisms into his speeches.  I’m hardly the most Australian of Australians, but if I could tell he was faking it so badly, you may assured that everyone else did too.  In a way, I think this was his greatest failing.

The mining tax

This was the final nail in Rudd’s political coffin.  In May this year, Kevin Rudd announced the Resource Super Profits Tax, based on one of the recommendations from the Henry Review.  The particular details of the proposal aren’t important here (although, for the record, I support the mechanism in general, but I’m not tied to any particular headline tax rate and I think the money should not go into general government revenue but instead into a sovereign wealth fund).  Instead, what I want to focus on is the spectacularly ham-fisted way that the proposal was introduced.

It was atrociously sold to the Australian public.  The scheme, as originally envisaged, would amount to a subsidy relative to the current framework for small mining companies.  Why didn’t Rudd have 50 CEOs standing beside him when he made the announcement?  The mining companies claimed, falsely (although that is counterintuitive), that it would lead to job losses in the mining industry and were never successfully rebutted in the public sphere.

Instead of recognising the errors made in introducing the proposal and attempting to correct them, Rudd doubled-down.  In response to the (perfectly predictable) advertising campaign by the mining companies against the proposal, he broke one of his own campaign pledges and started spending government money to run advertisements in favour of it.  Instead of speaking about the essential role that mining plays in the Australian economy and how the proposal would actually increase the mining output of the country, he derided mining CEOs as rich fat cats that need to be taxed down to the same level as everybody else.  That is old, old, old school Labor and Australia has moved beyond that sort of thinking now, although apparently not all politicians seem to have realised it.

Rhetorically, the mining companies and the Coalition (that naturally sided with them) won easily, and the Labor Party knew it.  There were negotiations between the government and the mining companies on a compromise, but they were happening very, very quietly behind closed doors while the shouting went on outside.

The removal of Rudd and the rise of Gillard

The Australian Labor Party has long had some brutal factional politics happening behind (and sometimes not-so-behind) the scenes.  Throughout the knock-down fight with the mining companies, Australia’s then-Deputy Prime Minister, Julia Gillard, repeatedly stated that she was not interested in challenging Kevin Rudd for leadership of the Labor Party (and hence the Prime Ministership of Australia).  However, in late June 2010, the internal factions swung massively against Rudd and he was replaced by Gillard in a move that was whiplash-inducingly fast.

Gillard immediately ceased the government’s advertising campaign and promptly announced a compromise agreement with the mining companies, which granted her something of a honeymoon period in an electorate that was highly skeptical of the way that Rudd was deposed.  Rudd’s supporters in the Labor party felt particularly gypped by the action, and view Gillard as something of a careerist rather than an idealist.

For my own part, I am led to believe that the compromise with the mining companies was settled in the week prior to the leadership challenge and the Labor party power brokers made a decision along the lines of “Rudd is toxic.  If he announces the compromise, it’ll look like a back down.  He will absolutely have to go before the next election and Gillard will absolutely be his replacement.  Far better to have Gillard announce the compromise so as to look like she’s magnanimous, give her a honeymoon period and then have the fastest possible election to ride through on that wave.”

The election in general

Speaking purely tactically, I think that Labor made the right decision.  Whether he was any good as a technocrat or not, Rudd was politically toxic as the face of the party.  There was a genuine bump to Labor from the compromise and a rapid-fire election was the morally correct thing to do following such a sudden leadership change.  Had that been all there was to it, I believe that Labor would have narrowly won.

Many people were angry that it was such a dull election, with no new policies being advocated.  I think that is silly.  The policies were clear:  Labor was for the compromise mining tax, the NBN and (albeit with the stupid citizen’s committee thing) eventually the ETS.  The Coalition was against all three.  The Greens were supported stronger, more forceful versions of all three.  That was the election.  All three are major policy decisions.

The leaks

In the second week of the campaign, somebody from within the Labor cabinet (i.e. not just a Labor MP, but a cabinet member) leaked some very damaging information about Gillard, showing her to have taken positions contrary to the ideals of most Labor party supporters.  To my mind they just reinforced my belief that Gillard believes far more in real politik than do most people, but I very much appreciate the harm they did to her image.  But there’s an obvious question here:  Why?  Why would a Labor Party insider do such a thing?  To my mind, there are only two options:

  1. They were so offended by the removal of Rudd and his replacement by Gillard that they didn’t care what effect the leaks would have on the election so long as Gillard was hurt.  Even to a cynic like me, this sounds implausible.
  2. They were confident that Labor would win the election and wanted to rough Gillard up a bit so that in the post-election aftermath she’d be forced to rely on the pro-Rudd factions instead of sidelining them (as would be traditional).

If it was the latter, as I believe, the person made a terrible error and dramatically underestimated the harm the leaks would do, not just to Gillard, but to the Labor party as a whole.  Still, the effect of the leaks on the polls was rather short-lived, and it appeared in the last week of the campaign that Labor were back in the lead, albeit barely.  I suspect that had the campaign gone on for another week or two, the effect of the leaks would have faded further and Labor would have (just barely) fallen over the line.

The state Labor Parties

Finally, we come to the topic du jour in the Labor Party soul-searching:  it looks very much as though, unlike in previous federal elections, people’s opinions of state labor parties had a strong influence in how they voted for the national labor party.  Simon Jackman, an Australian professor of Political Science at Stanford University, has produced this breakdown of seat-specific swings, grouped by state.  See how the swings really do seem to group together by state?  Labor suffered large swings against them in NSW and QLD, a moderate swing against them in WA, and moderate swings towards them in VIC, SA and TAS.

Possum has taken this further, pointing out that the state-specific swing correlates very nicely with people’s views of the Labor party in that state.  Here’s his diagram:

He’s put the axes around the wrong way for my liking, but it doesn’t matter.  The horizontal axis shows the swing toward or away from the Labor Party in the federal election, while the vertical axis shows the two-party-preferred margin enjoyed by the state Labor parties in their respective states.  As you might expect, Anna Bligh and Kristina Keneally (the premiers of Queensland and New South Wales respectively) are not particularly popular in the broader Labor Party right now, and are mounting a vigorous internal defence of their political performances.

The Result

So, that’s where we are.  There was still quite a significant aversion to the Coalition in the electorate (the memories of John Howard are still fresh), so it’s entirely fair to say that Labor have lost their position rather than the Coalition having won the improvement in theirs.  Have a look at the total vote counts by party from the Australian Electoral Commission.  Here’s how the swings in first-preferences look:

  • Labor : -4.9%
  • Coalition : +0.6% (a rough average of the Liberals, Nationals and LibNabs in Qld)
  • Greens : +3.6%
  • Informal (i.e. deliberately invalid) : +1.6%

That tells it all, really.  The Coalition was no more appealing to the electorate this time than they were in 2007 (that they picked up seats came via lower preferences).  Labor lost a bunch of supporters.  Most of them went to the Greens, no doubt upset by the perceived failures on the ETS and the mining tax, but a fair whack of people were just sick of politics altogether and deliberately spoiled their vote.

    The Australian Election (3 days past and the ball is still in the air)

    [For any non-Australians, in the absence of Bryan Palmer and his once-magnificent-but-now-absent, John Hempton’s “guide to the Australian election for non-Australians” gives a fair overview]

    [Update 25 Aug 2010: If you’re looking for reasons why the Labor Party did so poorly, I’ve had a go a listing them in my next post.]

    A week and a half before the election, I noted (with no originality) that things weren’t looking good for Labor.  In the days immediately before, with the polls having started to improve again for Labor, I was predicting a narrow Labor win, possibly with the Greens taking the balance of power in the Senate (although I was skeptical on that front — I actually put the higher probability on the Coalition still having control in the upper house).  Perhaps I should have paid more attention to the polls!

    As I type (AEC website updated at 24/08/2010 7:40:18 PM), the Australian Electoral Commission (the fully independent body that decides on electoral boundaries and conducts Australian elections) is estimating the results as:

    • 70 : Australian Labor Party
    • 72 : The Coalition (Liberal Party, Liberal National Party of Queensland, The Nationals, Country Liberals)
    • 1 : The Greens
    • 4 : Independent
    • 3 : Too close to call : Brisbane (QLD), Hasluck (WA) and Corangamite (VIC)

    The ABC’s ever-superb Antony Green (a nerd’s nerd of the highest calibre) is currently making the following prediction for the final result:

    • 72 : Labor
    • 73 : Coalition
    • 1 : Greens
    • 4 : Independent

    The four independents are Bob Katter, Tony Windsor and Rob Oakeshott (all ex-National Party) and Andrew Wilikie, an ex-Military and Intelligence official.

    Tony Abbot has made a claim that since the Coalition got the most primary votes, they should be allowed to form government.  The counter argument is that in Australia’s system of preferential voting, to the extent that national vote tallies matter at all, it should be the two-party preferred total that counts, and on that basis Labor is in front (numbers here).

    At first glance it would seem like the three ex-National Party independents will allow the Coalition to form a minority government, but it is not that simple.  For one thing, infrastructure in general, and telecommunications in particular, have long been issues of key concern to to National MPs.  Labor’s NBN plans would provide greatly improved services to those constituencies, while the Liberal’s policy would largely ignore them.  Farmers are not exactly enamoured of the mining industry, either, and so I suspect wouldn’t have the same opposition to the natural resource tax as the Liberal party.  Rob Oakeshott is also making noises along the lines of reforming parliamentary democracy as we know it in Australia:

    Continuing his call to reinvent the parliamentary system, Mr Oakeshott said his preference was for a cross-party cabinet and indicated he may not support either side of politics if a cross-party cabinet could not be formed.

    When asked if his fellow independents shared his view on “consensus politics” and his example of Kevin Rudd serving as foreign minister in an Abbott government or Malcolm Turnbull serving in a Gillard government – he said he would find out “in detail” today and how hard he would be pushing for the idea.
    Looking ahead to today’s talks, Mr Oakeshott said “if we are just fluffing around, if we are just building a minority government with a bit of plus plus plus from the cross benches I’m not interested”.

    “This is about trying to get to at least 76 and yes, if this doesn’t happen, if it doesn’t fly, if consensus can’t be reached we will go back to the position of three [independents] and Adam Bandt as well, making a decision on red team or blue team getting across the line in that context I’m not interested, I’m not going to play,” he said.

    However, Mr Oakeshott would not rule out a cabinet position if consensus could be found.

    Mr Oakeshott said elevating the role of committees, imposing deadlines on response times to recommendations and allowing private members bills to be brought to vote were critical issues for him.
    Private members bills should be voted on and added he also wanted to see private members business “having some authority within the parliamentary time table”.

    “If there is some sentiment for exploring creative options where this is about not political parties, not a red team or a blue team, this is about 150 members of parliament, building a majority with a focus on being able to get through some of the key national issues in this country, I’d be interested in having a conversation,” he said.

    Mr Oakeshott called on the “traditional arch-rivals” to stop “pretending to be fighting to the death over ideology when they are actually more often than not in agreement on most issues”.

    There is no love lost between the Coalition and Andrew Wilkie (who resigned from the Office of National Assessments in 2003 over (alleged) misrepresentations of the case for war in Iraq and Afghanistan), either, so they’re unlikely to be able to count on him.  But with Mr Wilkie’s strong stand against Pokies, he’s not likely to be all that keen on Labor, either.

    Just to make things more interesting, even if Labor does form government, they won’t be able to pass any of their signature pieces of legislation for the better part of 12 months anyway, as even though the Coalition lost the balance of power in the Senate to the Greens, that won’t take effect until 1 July 2011.  If the Coalition forms government, you can therefore expect an absolute flurry of legislation between now and 30 June 2011 as they try to squeeze through everything they want before being forced to negotiate with the Greens in the Senate.

    US treasury interest rates and (disin|de)flation

    This Bloomberg piece from a few days ago caught my eye.  Let me quote a few hefty chunks from the article (highlighting is mine):

    Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit.

    While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at Bank of America Merrill Lynch in New York.

    Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 percent from a year earlier to $8.18 trillion. Last week, the U.S. government auctioned $34 billion of three-year notes at a yield of 0.844 percent, the lowest ever for that maturity.
    Global demand for long-term U.S. financial assets rose in June from a month earlier as investors abroad bought Treasuries and agency debt and sold stocks, the Treasury Department reported today in Washington. Net buying of long-term equities, notes and bonds totaled $44.4 billion for the month, compared with net purchases of $35.3 billion in May. Foreign holdings of Treasuries rose to $33.3 billion.
    A decline in issuance is expected in other sectors of the fixed-income market. Net issuance of asset-backed securities, after taking into account reinvested coupons, will decline by $684 billion this year, according to Bank of America’s Rosenberg. The supply of residential mortgage-backed securities issued by government-sponsored companies such as Fannie Mae and Freddie Mac is projected to be negative $320 billion, while the debt they sell directly will shrink by $164 billion. Investment- grade corporate bonds will decrease $132 billion.

    “The constriction in supply is all about deleveraging,” Rosenberg said.
    “There’s been a collapse in both consumer and business credit demand,” said James Kochan, the chief fixed-income strategist at Menomonee Falls, Wisconsin-based Wells Fargo Fund Management, which oversees $179 billion. “To see both categories so weak for such an extended period of time, you’d probably have to go back to the Depression.”

    Greg Mankiw is clearly right to say:

    “I am neither a supply-side economist nor a demand-side economist. I am a supply-and-demand economist.”

    (although I’m not entirely sure about the ideas of Casey Mulligan that he endorses in that post — I do think that there are supply-side issues at work in the economy at large, but that doesn’t necessarily imply that they are the greater fraction of America’s macroeconomic problems, or that demand-side stimulus wouldn’t help even if they were).

    When it comes to US treasuries, it’s clear that shifts in both demand and supply are at play.  Treasuries are just one of the investment-grade securities on the market that are, as a first approximation, close substitutes for each other.  While the supply of treasuries is increasing, the supply of investment-grade securities as a whole is shrinking (a sure sign that demand is falling in the broader economy) and the demand curve for those same securities is shifting out (if the quantity is rising and the price is going up and supply is shifting back, then demand must also be shifting out).

    Paul Krugman and Brad DeLong have been going on for a while about invisible bond market vigilantes, criticising the critics of US fiscal stimulus by pointing out that if there were genuine fears in the market over government debt, then interest rates on the same (which move inversely to bond prices) should be rising, not falling as they have been.  Why the increased demand for treasuries if everyone’s meant to be so afraid of them?

    They’re right, of course (as they so often are), but that’s not the whole picture.  In the narrowly-defined treasuries market, the increasing demand for US treasuries is driven not only by the increasing demand in the broader market for investment-grade securities, but also by the contraction of supply in the broader market.

    It’s all, in slow motion, the very thing many people were predicting a couple of years ago — the gradual nationalisation of hither-to private debt.  Disinflation (or even deflation) is essentially occurring because the government is not replacing all of the contraction in private credit.

    Upgrades, upgrades

    The world keeps on changing under my feet.  I’ve done a few upgrades on the site — my apologies in advance if anything seems (let alone is!) broken.