A Whimper


With the whole financial world seeming bracing for the Greek elections this weekend, the results so far have seemed thankfully anticlimactic. There was talk late last week about a plan for coordinated central bank intervention in the event that the “wrong” party won in Greece. Dealers sent around lists of weekend contact numbers for back office personnel, and phone numbers for the overnight trading desk in Japan. Analysts circulated scorecards and “what-if” outcomes so that non-Greeks could tell who won, and whether the victory meant anything.

In the event, the pro-bailout party won. Believe it or not, that’s not the end of that – now, since they don’t have an outright majority, they must form a governing coalition with enough of the other parties that they have a majority of the elected representatives committed. So before anyone gets too excited, remember that that’s exactly what happened last time. Same winner, but no government. No coalition was in the offing, and so new elections were ordered. In theory, this new election was a referendum on whether to stay in the Euro or leave the Euro, or stay but with drastically renegotiated terms for the “aid” received so far. If that’s the case, then the referendum produced no clear answer. Are we expecting a government simply because everything is a little more desperate?

Forget the fuss: it isn’t clear to me what all the calm is about.

Greece will still leave the Euro. Government or no government, austerity or no austerity – the fiscal math simply doesn’t make sense unless Europe wants to pay for Greece forever. In principle, the Greeks can dig themselves out of trouble if they work harder, retire later, pay more taxes, and receive fewer government services. I do believe that people can change, and a society can change, under pressure of crisis. Remember Rosie the Riveter? But the question is whether they can change, whether they will change, do they even want to change, if the benefit of the change flows not to Greece’s people but to the behemoth European institutions that have lent money to Greece?

If a person declares bankruptcy, and the judge declares that he must pay all of his wages for the next thirty years, after deducting enough for food and shelter, to the creditors…do you think that person is going to go looking for a 60-hour workweek?

I hope they do, but I don’t see it.

Now, while we were busy ignoring economic data on Friday since Greece was so much more important, some more weak data came out. The Empire Manufacturing index fell to 2.29 from 17.09, reaching its lowest level of the year. Industrial Production fell -0.1% rather than rising +0.1% as had been expected. The University of Michigan confidence figure dropped to 74.1 from 79.3 – also the lowest level of the year. If you believe in government statistics conspiracy theories, then these government workers, and their cohorts in New York and Michigan, must really dislike Obama. The Citi Economic Surprise Index fell to its lowest level of the year, and the second-deepest trough since the 2008 crisis (last year’s Japanese-tsunami-induced plunge was quite a bit worse).

Now we wait until Wednesday’s FOMC meeting, with quite a bit of uncertainty about what the Fed may do, and cross our fingers that the Greeks will form a government. (Again, I don’t think that changes the size of the crater, just the trajectory we take before impact.) With 10-year yields at 1.57% and 10-year real yields at -0.58%, I can’t imagine what the Fed could possibly do to justify those levels. Further Twist would be limited in size by the size of the central bank’s short-end balance sheet, but a failure to extend the Twist program would be terrible for the supply/demand dynamic at the long end of the yield curve. Several dealers have pointed out that the Fed doesn’t even own many short TIPS, so the purchases of longer TIPS would be financed by sales of shorter nominal bonds, or left out of the equation entirely – which would also have the side effect of lowering inflation breakevens. Twist doesn’t really do very much for the economy, it seems, other than signal that the Fed cares. It isn’t the first time that I’ve said this, but I see more potential for higher yields than for lower yields. And, like with Greece, I don’t think there’s anything the Fed can do about it in the long run – it’s just math.

It is a tragic fact that this short column represents my 500th online post in this forum – tragic because the 499th was, I thought, one of my best. You can find that comment here. Remember that you can (and should) follow me on Twitter @inflation_guy and receive my articles as they are distributed along with occasional other tidbits. And you can contact me directly via our company website.

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  1. Lee Goodin
    June 18, 2012 at 11:49 pm

    On the occasion of your 500th post, let me say thanks for all the hard work and effort. Your insights and perspectives are very much appreciated. A daily must-read.

  2. Jim H.
    June 19, 2012 at 6:08 am

    Agreed, ‘Side Bet With Ben’ is a keeper — duly saved! It’s only ‘tragic’ that there’s so much confusion out there about inflation. Among the crowd of blind economists tapping at the inflationary elephant with their white canes, some cry ‘It’s caused by growth!’ while others shout, ‘No, it’s caused by fiscal deficits.’ Jeez, why don’t they just consult Mike Ashton’s charts and cut the crap? But if they’re blind, they can’t read charts anyway!

    Here’s a little tidbit regarding money growth and inflation — specifically, the question of why inflation never receded after WW II, as it did after previous wars. With a brief exception during the [highly inflationary] WW I, until 1945 gold reserves constituted the majority of the Federal Reserve’s assets. But after 1945, an ever-growing quantity of government securities (presumably related to the Fed’s pegging of long bond yields during 1942-1951) supplanted dwindling gold reserves as the Fed’s majority holding.

    In effect, though the dollar was still exchangeable for gold by foreign central banks during 1945-1971, the Federal Reserve had freed itself from the limits that would have been imposed by maintaining gold as the principal component of its assets. The Fed’s buying of government bonds morphed from an occasional indulgence during prewar recessions to a consuming addiction that now obsesses it day and night, as it contemplates ever more heroic and even life-threatening doses of monetary heroin to dull the ennui of its misbegotten existence.

    Some excellent charts of Federal Reserve assets by decade can be found here:

    http://greshams-law.com/2012/02/13/charting-the-federal-reserves-assets-from-1915-to-2012/

    So the Fed unshackled itself from Barry Eichengreen’s golden fetters, and inflation became chronic. Who woulda thunk it?

    • June 19, 2012 at 6:44 am

      Ha! Jim, you need to be writing a commentary yourself! Your comments are often better than the article!

  3. BLSHC
    June 19, 2012 at 10:19 am

    Congratulations to your 500th post. Too bad, that I red only the last 20 to 50. But I have a question concerning your remark: “Twist doesn’t really do very much for the economy, it seems, other than signal that the Fed cares.” I think it is more than a signal: By signalling and keeping long rates down, the Fed can assure that homeowners will refinance with lower rates and therefore longer term housing prices will start to climb stronger and reignite inflation (“solving” the public deficit problem). What do you think about that ? Thanks.

    • June 19, 2012 at 10:37 am

      Thanks for posting! There may be something to what you say, although it isn’t even really clear that Twist has lowered interest rates very much (in the absence of a cataclysm in Europe, that is). I doubt that lowering interest rates, say, 1% would cause housing prices to rise aggressively (at most, a 1% lower payment on a 30-year mortgage is worth say 10% of the price of a home, right?) but it probably helped keep home prices from falling further than they did.

      The thing is that Twist doesn’t change the amount of money in the system, so if home prices are rising faster then some other price must be rising less-fast. That’s probably a good thing if we’re unwinding a bubble and trying to keep the damage contained! Again, thanks for the post.

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