The safe-haven is always in the eyes of the beholder
Sir you conclude “Dollar worries” May 23 with “currency traders are pricing in the tail risk that the US will be forced to resort to the printing press”. Sir whether forced or not the fact is that with the Fed’s quantitative easing they are already using the printing press, a lot.
Do you have any idea where the rates would be if it had not been for the quantitative easing? It sure puts a big question mark when it needs to recur to quantitative easing in order to sell itself as a safe-haven. The greatest mistake made by the US government and Congress in their current handling of the crisis is that they might have taken the world’s wish for a temporary safe-haven as a wish for a permanent home.
Behind our backs bank regulators in Basel decided that lending to a triple-A rated government required zero bank equity while lending to an ordinary non-rated private company required 8 percent... and the governments loved it... wouldn’t they? The markets though requires x percent return for lending 100 to triple-A rated governments and y percent return for lending exactly the same 100 to a non-rated private company all without any reference to capital requirements.
Therefore though you can subsidize governments and temporarily confuse the market by means of arbitrary regulations in the long term you cannot simply instruct markets to behave as if a dollar lent to the government is any different than a dollar lent to a private company. Having then to reduce the current implicit subsidy to the governments contained in the minimum requirements for banks will also put further pressure to increase the interest rates on public debt... just when the world seems least to afford it.
The gorilla is there in the room roaring and pounding his chest... let’s pray we’ll never have to pay him off, informally, over the counter, with some gold coins.
Do you have any idea where the rates would be if it had not been for the quantitative easing? It sure puts a big question mark when it needs to recur to quantitative easing in order to sell itself as a safe-haven. The greatest mistake made by the US government and Congress in their current handling of the crisis is that they might have taken the world’s wish for a temporary safe-haven as a wish for a permanent home.
Behind our backs bank regulators in Basel decided that lending to a triple-A rated government required zero bank equity while lending to an ordinary non-rated private company required 8 percent... and the governments loved it... wouldn’t they? The markets though requires x percent return for lending 100 to triple-A rated governments and y percent return for lending exactly the same 100 to a non-rated private company all without any reference to capital requirements.
Therefore though you can subsidize governments and temporarily confuse the market by means of arbitrary regulations in the long term you cannot simply instruct markets to behave as if a dollar lent to the government is any different than a dollar lent to a private company. Having then to reduce the current implicit subsidy to the governments contained in the minimum requirements for banks will also put further pressure to increase the interest rates on public debt... just when the world seems least to afford it.
The gorilla is there in the room roaring and pounding his chest... let’s pray we’ll never have to pay him off, informally, over the counter, with some gold coins.
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