For inflation, where the money supply goes, matters a lot too

Sir, I refer to Martin Wolf’s “The monetarist dog is having its day”, FT February 23.

Yes, the money supply impacts inflation, no doubts but, when it comes to how much, that also depends on where that money supply goes.

If central banks inject liquidity through a system where, because of risk weighted capital requirements, banks can leverage more, meaning easier obtain higher risk adjusted returns on equity with Treasuries and residential mortgages, than with loans to small businesses and entrepreneurs, does that not favor demand over supply?

It does, and you should not have to be a Milton Friedman to understand that sooner or later that can only help inflate any inflation.

Wolf holds that “Central banks must be humble and prudent” Yes, and that goes for bank regulators too.

“Humble” in accepting there are huge limits to their knowing what the real risks in an uncertain world are; and “prudent” as in knowing bank capital requirements are mainly needed as a buffer against the certainty of misperceived credit risks and unexpected events, and not like now, mostly based on the certainty of perceived credit risks.

@PerKurowski

Before aiming at any target, central banks must cure their shortsightedness

Sir, I refer to Martin Wolf’s “What central banks ought to target” FT, March 3.

With risk weighted bank capital requirements, the regulators are targeting what’s perceived as risky, thereby de facto fostering the creation of the excessive exposures to what’s perceived as safe, but that could end up being risky, which is precisely what all major bank crises are made off. In other words, they are putting future Minsky moments on steroids.

And if to the distortions in the allocation of credit to the economy that produces, you add the QEs, then you end up with such a mish-mash of monetary policy that no one, not even Mr. Wolf, should be able to make heads and tails out of it.

Wolf writes, “Central banking is art, not science… it must be coupled to deep awareness of uncertainty”. Sir, I ask, can you think of anything that evidences such lack of awareness of uncertainty than the risk weighted bank capital requirements?

So, before discussing what else to target, it is essential that central banks and regulators get their shortsightedness corrected.

Of course, “the central bank [should] set a rate that is consistent with a macroeconomic equilibrium” but, what would those rates be if banks needed to hold as much money when lending to the sovereign (the King) than when lending to citizens?

And when Wolf reports that “the New Zealand government has told its central bank to target house prices”, that makes me ask: Is anyone aware of the implications of having a central banks placed in the middle of that real, though not named, class war between those who have houses as investment assets and those who just want affordable homes?

Finally, as so many do, Wolf also signs up on that: “If people want less wealth inequality, they should argue for wealth and inheritance taxes”. But just as most do, he does so without explaining what assets, and to whom, the wealthy should sell, in order to reacquire that cash/purchase power needed to pay the tax that they handed over to the economy when they bought these. Not doing so, leaves one quite often a sort of populist aftertaste.

PS. Inflation? Just the same old confusion

@PerKurowski

Inflation has already returned

Sir, I refer to your editorial “The economy is too weak for inflation to return” August 14, 2020.

No! The inflation has already returned, it is just not being measured yet. 

The Consumer Price Index (CPI) market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought, and there is a time lag between the expenditure survey and its use in the CPI.

The consumption basket in a weak economy differs considerably from that of a strong economy. Ask anyone who on a tight budget has recently gone to the grocery store, and you can be sure he will complain about rampant inflation. 

PS. TIPS (Treasury Inflation-Protected Securities) are based on CPI while the Fed targets PCE. Does this have any implications?

PS. In these in real time information times, I am amazed there’s still a long time lag between the expenditure survey and its use in the CPI.

PS. What if the CPI market basket was developed from detailed information provided by families and individuals about what they would have wanted to be able to buy if its prices had not gone up?

Not the first time I have questioned CPI/Inflation

PS. The truth, in theory and in practice, is that everybody's inflation, might be nobody's inflation.

@PerKurowski

As a consequence of too much regulatory subsidized credit, whether by deflation or inflation, both houses and sovereign debts will be worth much less.

Sir, Martin Wolf writes: “monetary policy fosters risk-taking, while regulation discourages it — a recipe for instability.” “How the long debt cycle might end” May 15

Over the last decade I have written hundreds of letters to Wolf and other at FT about the dangerous waste of any stimuli package when you simultaneously distort the allocation of bank credit to the real economy, as is currently done with the credit risk weighted capital requirements for banks.

Just looking at some of the risk weights: like 0% for the sovereign, 20% for anything rated AAA to AA, 35% or less for residential mortgages and 100% for loans to unrated entrepreneurs, should have sufficed to know where we would end up, namely:

A banking sector abandoning much of its traditional “risky” lending in favor of what is perceived, decreed or concocted as safe; forcing most of those that used to keep to what was perceived as safe, like individual private savers, pension funds and even insurance companies, to get into the world of what’s risky, something for which they are much less prepared than banks.

And excessive bank exposures, as usual, morph what is very safe into being very risky. Having, with too much financing, pushed houses from being homes into being investment assets, have made households house-rich and money poor. Just wait till many of current owners, out of need must convert houses into main-street purchased power at any cost. Whether by deflation or inflation, those houses will be worth much less.

Of course, lower bank capital requirements for loans to sovereigns than for loans to citizens, translates, de facto, into a belief that bureaucrats know better and are more responsible than citizens about how to use bank credit, and will therefore cause excessive sovereign debts. 

With respect to it Wolf writes: “Those in emerging countries are particularly vulnerable, because much of their borrowing is in foreign currencies”. That is so but let me also add to that the Eurozone nations who, de facto, do not take on debt denominated in a domestic printable currency. 

But, let us be clear, a nation printing itself out of excessive public debt, does also expose itself to inflationary pressures and so again, whether by deflation or inflation, in real terms, that sovereign debt will be worth much less than what its buyers’ paid for it.

Sir, finally, Martin Wolf opines that those who recommended another route of adjusting than with the stimuli package to the 2008 crisis were “fools”.

That could be but, as a consequence of taking “the smart way”, the world just kicked the crisis can forward and renounced to the long-term benefits of a hard landing. There will come a time when too many will regret not having taken the fools’ way.

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

If the inflation-measured basket used house prices instead of rental costs, the story would be different.

Sir, Rana Foroohar points to “The latest Consumer Price Index figures show that almost all core inflation… was in rent or the owner’s equivalent of rent (up 0.3 per cent) [while] Core goods inflation, meanwhile, was down 0.2 per cent” and argues “that the housing market is once again completely out of sync with the rest of the economy.” “America’s new housing bubble” March 18.

Yes and no! No! “Rent” in much is a laggard response to the price of houses, and so it would be more precise for the arguments made by Foroohar to compare core goods inflation to what is happening to those prices.

Yes! “Hyman Minsky would have had a field day [more precisely many field years] with his Financial Instability Hypothesis that [argues] two kinds of prices — prices for goods and services, and asset prices.”

And yes, Daniel Alpert is correct: “What we have now is a form of inflation that’s never been seen before — it’s all concentrated in housing.”

To explain that with as “something the US Federal Reserve has actually exacerbated (albeit unintentionally) via low interest rates and quantitative easing that boosted housing prices in the very cities where the best paying jobs are located”, is correct but quite incomplete.

If banks needed to hold as much capital against residential mortgages as against for instance loans to entrepreneurs, something that was the case before the Basel Committee got creative, that would be happening much less.

As is, the resulting abundant easy financing when purchasing a house has helped morph houses from being homes into being investment assets. 

PS. In a letter I wrote and that FT published in 2006 (before it stopped doing so) titled “The information Mr Market receives could also be neurotic” I argued:

“Inflation as they, our monetary authorities, know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. 

For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

@PerKurowski

When the tide that turned safe homes into risky investment assets goes out, the wreckage will be horrific

Sir, Paul Mortimer-Lee in his letter “The tide that floated all ships is going out”, October 12, commenting on Martin Wolf’s “How to avoid the next financial crisis” (October 10), writes:“easy money has been pushing on a string as far as inflation is concerned”.

Not really, the problem is that, as I answered Martin Wolf in a letter published by FT 2006, is that when measuring inflation in housing, what is registered on the string is the cost of rental, not the prices of houses.

With low interest rates and especially low capital requirements for banks when financing the purchase of houses; unelected authorities have transformed houses from being safe homes into risky investment assets. When the tide goes out on that, the wreckage will be indeed absolutely horrific.

@PerKurowski

If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.

Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.

In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “Who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions. 

How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.

The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”

Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.

A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.

PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?

@PerKurowski

Ex ante expected real rates of return and ex post real rates of return are apples and oranges

Gillian Tett referring to “The Rate of Return on Everything, 1870-2015” authored by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan Taylor writes: “real rates are very low today compared with the peacetime years in the 20th century. But real returns on bonds and bills were much lower during the first and second world wars, tumbling to about minus 4 per cent (compared with 3 per cent for bonds in 2015, and zero for bills).” "Take the very long view on asset prices", December 22.

Sir, we cannot know the ex post real rates of return for bonds yet, and it must be very hard to gauge the ex ante expected real rates of return during the first and second world. Therefore it is not clear to me whether Ms. Tett refers in both cases to ex ante expected real rates or to ex post finally obtained real rates? If not she is comparing apples to oranges. Frankly, no matter how high patriotic willingness to contribute with war efforts could stimulate lending to it, I truly doubt investors accepted ex ante a minus 4 per cent real rate offer… so they must have expected a much lower inflation rate.

Sir, there is a lot of confusing ex post with ex ante going on. For instance, the Basel Committee regulators, when setting their risk weighted capital requirements for banks, used the ex ante perceived risk of bank assets as proxies for the ex post risks to banks… a horrible mistake that distorted the allocation of bank credit and that has not been corrected during soon 30 years.

PS. And now having read the paper I must also observe that risk free rates, and rates of returns on what is considered by regulators a safe assets, like houses, must be separated into those before the risk weighted capital requirement for banks and those thereafter, since the regulatory subsidy to the “safe” again makes apples and oranges of these.

@PerKurowski

We sure have a major problem with central bankers that seemingly haven’t the faintest about what they’re doing.

Sir, Matthew C Klein writes “Rightly or wrongly, most central bankers think their mission is to keep the growth rate of consumer prices slow and stable. Even in places, such as America, that also ask the central bank to promote “maximum employment”, the inflation mandate is paramount.” “Central bankers have one job and they don’t know how to do it”, Alphaville October 18.

And the Klein proceeds to describe the existing confusion with respect to how to measure inflation, how to generate it if it is so good, and how to fight it if it is so bad. 

But equally, when central bankers have anything to do with bank regulations, they think their mission is solely to keep banks from failing, without giving a single thought to the fact that banks are supposed to allocate credit efficiently to the real economy.

And even in this their silly limited objective they fail; that because they have not understood that what is really dangerous to the bank system, is not what is ex ante perceived as risky, but what is ex ante perceived as very safe and which therefore can generate dangerous excessive exposures to what might ex post turn out to be very risky… all this currently aggravated by the fact that regulators allow banks to hold especially very little capital (equity) against what is perceived as safe.

Sir, do we have a problem!

@PerKurowski

What extraordinary things since the crisis have central banks achieved? Having kicked the can down the road?

Sir, Alan Beattie writes: “By being prepared to embrace the radical in the face of ill-informed criticism… — central banks have achieved extraordinary things since the global financial crisis. It would be most peculiar if now, when the pressure on them has abated, they mistakenly returned to a model of monetary policy rooted in the pre-crisis era.” “Central banks have a duty to come clean about inflation” September 23.

Sir, since the global financial crisis have really central banks achieved extraordinary things for most? I am not so sure. In many ways it seems they have only dangerously kicked the crisis can forward, while leaving in place the regulatory distortions that caused the crisis

But indeed let’s come clean about inflation. What would the inflation be if:

Most stimuli had not gone to increase the value of what is not on the Consumer Price Index

If there had not been so much credit overhang resulting from anticipating demand for such a long time.

If there had not been an ongoing reduction in the costs of retailing much of what is recorded on CPI.

If non-taxed robots and other automations had not put a squeeze on costs

Then the inflation could have been huge… so what are central bankers so fixated on the CPI?

PS. What would the inflation be, if the I-phone was in the CPI? J

@PerKurowski

Basel Committees’ risk weighted capital requirements for banks attempts against all dreamers’ dreams of opportunities

Sir, Xavier Rolet rightly refers to the pro-debt bias that makes it harder for small business to access the capital they need to grow. “Europe’s debt bias chokes small business and job creation” September 8.

But is so much worse than that. When it comes to bank credit there is also the pro-perceived safety bias that hinders the SMEs’ access to bank credit. That “over-leverage in the banking system” Rolet writes of, does absolutely not include loans to “risky” SMEs and entrepreneurs, those” best positioned to drive economic growth and create new jobs”

Basel II allowed banks to multiply their capital 62.5 times with the net risk adjusted margins obtained from the AAA rated but only 12.5 times if that same margin was obtained from unrated SMEs. Anyone who cannot understand how that must distort, has never left his desk and walked down Main Street.

And on the same page appears Gillian Tett’s “Treasury bill jitters lay bare investor angst”. Even when it relates to “the curse of living in an Alice-in-Wonderland world, a place where it is increasingly hard to price risk and uncertainty because the normal rules are being torn up”, it does not refer to that abnormal rule of bank regulators considering, ever since Basel I of 1988, the (friendly and good) sovereigns to be worthy of a zero risk weight. That weight usually defended with the argument that sovereigns can always repay since they print their own money… blithely ignoring the Weimar Republics, Zimbabwes, Venezuelas and many other experiences.

And does not a below zero interest rate on some public debt by sheer definition state that it cannot be zero risk weighted? Or will the fact that some are willing to lose in order to hold it suggest a minus 20% risk weight? What a loony world!

To allow a bank to leverage more with a sovereign than with an SME signifies, de facto, from the perspective of how the allocation of credit is distorted, believing in that government bureaucrats are more capable to use credit they are not personally liable for, than those entrepreneurs who put themselves on the line. Sir, you’ve got to be a full-fledged fool or a runaway statist to believe nonsense like that.

In November 2004 FT published a letter in which I wrote: “We also wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector… access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Sir, I am all for “dreamers” being allowed to remain in America, but I must remind you that, all around the world, there are many dreaming of an opportunity to access a bank credit in order to realize their dreams… and those dreams have been made unrealizable, thanks to inept regulators… and you Sir are shamefully keeping mum on this.

@PerKurowski

Professor Summers, more than unions representing the have-jobs, we need someone, anyone, representing the have-not!

Sir, Lawrence Summers, acting more like a union lobbyist, writes that "America needs its labour unions more than ever" September 4.

He does so blithely ignoring that “The shrinking of the union movement to the point where today only 6.4 per cent of private sector workers — a decline of nearly two-thirds since the late 1970s” sort of evidences an irrelevance of the unions. Does he want to make them relevant by force?

Also, when Summers writes “Consumers also appear more likely now to have to purchase from monopolies rather than from companies engaged in fierce price competition meaning that pay checks do not go as far” that squares little with the current low inflation.

Years ago, I wrote an Op-Ed titled “We need decent and worthy un-employments”. In it I argued that politicians are giving too much relative importance, and spending too many tax dollars, on creating jobs, and that it is high time to start thinking about what to do with those who will never ever have access to what we now consider is a job.

So in that respect I am certainly not too much keen on having unions fighting for those blessed by jobs, if that hurts in any way shape or form those who would want to have jobs but cannot get jobs.

Universal basic income seems to represent one alternative of how to face the challenge of structural unemployment. Finance professors would be much more useful thinking about smart ways how to fund an UBI than getting teary eyed nostalgic about union power.

Summers also writes: “The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children”

Sir, anyone who keeps mum about how current risk weighted capital requirements give banks incentives to not finance the riskier future, but only to refinance the safer past has, as I see it, no right to speak about our children’s opportunities.

@PerKurowski

Current central bankers are just as lost as Greenspan and friends were lost before 2008, for exactly the same reason

Sir, Sebastian Mallaby when discussing the “alarming froth” in asset prices like shares, bonds and houses, due to “extraordinarily loose monetary policy”, but yet producing “low growth and low inflation” writes: “A … troubling echo concerns the role of regulation. If financiers seem to be taking too much risk, today’s doctrine holds that regulation should restrain them.” “Bubbly finance and low inflation cause alarm” October 8.

NO! NO! NO! Today’s regulations hold that banks should be taking on too much safety. Banks are not allowed to build up dangerous exposures to what is perceived as “risky”, like for example the below BB- rated, which has been assigned a risk weight of 150%; but banks are sure allowed to leverage immensely their capital, and the support they receive from society, with assets rated AAA to AA, risk weighted a mere 20%.

And, if the banks are big and “sophisticated” enough, then they are even allowed to use their own risk models even if, by definition, banks are always interested in minimizing their capital requirements so as to allow them to maximize their expected returns on equity.

There must be something in the air that stops expert central bankers from reaching out to their inner common sense and be able to understand how loony current bank regulations are.

The risk-weighting completely distort the allocation of bank credit to the real economy, making banks ignore their vital role in financing the “riskier” future, and having them to concentrate solely in refinancing the “safer” past. That dooms the world to gloom and doom or as they prefer to call it, to secular stagnation.

And all for nothing! Major bank crises never ever result from excessive exposures to what is ex ante perceived as risky; these always result from unexpected events or from excessive exposures to what was ex ante erroneously thought to be very safe.

@PerKurowski ©

Does anyone see the grey showing on the roots of Lucy Kellaway’s hair or the smear of icing sugar on her leg? Not me!

Sir, you know I am usually a great admirer of Lucy Kellaway’s writings, but, this time, I think she’s got it wrong. “High heels and boxing gloves: a portrait of women at work” March 21

Kellaway writes: “If a company wants to show that it really values women and wants to prioritise action in the gender equality landscape, it will show pictures of them in which they don’t always look cool or gorgeous. They just look like professional women at work.”

Hold it there, my wife is a great lawyer, and she has never ever expressed to me any concerns about any type of discrimination based on gender; if anything she has lately felt, ever so slightly, more burdened by age. But, no matter how she looked at work (always gorgeous of course), she would always, no exceptions, prefer to be depicted as if not at work.

And we men are instinctive survivors. We know perfectly well we should never ever take photos of any woman, including Lucy Kellaway, with “grey showing on the roots of hair and a smear of icing sugar on leg”.

PS. The following is absolutely no opinion, especially not mine; its just a question:

Is there anything as deflationary as women willing to work for less? If women did not work, and stayed home to binge on over 100 episodes shows, then unemployment rate would be lower, salaries higher, and so central banks would get the higher inflation they desire and so allow us higher interest rates, and so we could all have a chance to earn a bit on our savings to cover for our retirements. Matching life styles with the economies is always challenging… so they say.

@PerKurowski ©

Compared to the misallocation of bank credit in Europe, Brobdingnagian inflation concerns sounds truly Lilliputian

Sir, Wolfgang Münchau writes: “Central bankers are conservative types. But they should have a rational interest in preventing a loss of their credibility.” I ask, should not Wolfgang Münchau also have a rational interest in that? “Draghi must be more unconventional to boost the euro” October 26.

This data is found on the web:

The fatality rate per 100 million vehicle miles traveled in motorcycles is 21.45

The fatality rate per 100 million vehicle miles traveled in cars is 1.14

In 2011 in the US, 4,612 persons died in motorcycle accidents

In 2011 in the US, 32,479 persons died in vehicle accidents

And so, even though travelling by motorcycle is about 20 times riskier than cars, cars cause about 7 times more deaths than motorcyclists. That is of course because the riskier something is perceived, the more care is taken to avoid the risk.

And yet Wolfgang Münchau, finds nothing wrong with bank regulators having decided on higher capital requirements for banks when lending “the risky” motorcyclist of the economy, SMEs and entrepreneurs, than when lending to “the safe” car drivers, sovereigns and corporations with high ratings… even though clearly dangerous excessive lending to the latter is much more likely to occur.

Sincerely, against the fact that Europe’s bank are not allocating credit efficiently, and this is murdering Europe’s chances for a strong economic revival; Münchau’s and Draghi’s 0.63 per cent, 0.88 percent, 0.9 per cent and 2 percent Brobdingnagian inflation worries, sounds as Lilliputian as it comes.

@PerKurowski ©

Since it can always pay back through inflation, I bank regulator, decree sovereign debt to have a zero risk-weight.

Sir, Diane Coyle begins “A history of inflation – and a future of deflation” April 7 with describing high inflation as “socially and economically corrosive, redistributing purchasing power away from small savers and those on low wages that do not keep up, and also degrading trust in long-term bargains”. In other words a truly public bad.

But then, because of “the effect deflation would have on real debt burdens” and how this would be “inhibiting a return to growth”, she ends arguing that “A quick and political painless way to reduce debt burdens, private and public, is a bout of high inflation.” Clearly a case of the damned if you do and damned if you don’t.

But, if what is really needed is a 30 percent inflation to cut all debts back to something livable, why not an Emergency Act that decrees a 30 percent haircut applicable to all debts in the society, including that of banks to its depositors. Would that not be a more transparent, less distortive and, hopefully, a politically more painful solution, so that we can get a little bit more accountability into the system?

I mention this because clearly the concept of inflation not being a haircut, although intellectually very repulsive, must be a prerequisite for allowing bank regulators to argue something so loony as a zero percent risk-weight for sovereign debt.

@PerKurowski

Is ECB's Mario Draghi upbeat because markets believe he can be trusted to be a greater fool?

Sir, I refer to Claire Jones “Upbeat Draghi says landmark €1.1tn ECB bond-buying starts on Monday” March 6.

So what is Draghi upbeat about? “The QE plan… had eased borrowing conditions before a single government bond had been bought”? That to me sounds like the market having been convinced there’s a greater fool behind them. Is that it?

Or is Draghi upbeat because he feels the ECB has been able to fend of the danger that oil prices would trigger a deflationary spiral? That to me seems like strangely indicating that lower oil prices had been a damned nuisance for Europe and for the ECB.

Sir, honestly, I think many, all over Europe, have lost screws.

And I just know that anyone launching a huge QE, without making sure its liquidity can reach where it is most needed, like by means of bank credits to the risky SMEs and entrepreneurs, surely must be one of those missing at least one of those missing screws.

Anyone not denouncing the distortions produced by bank regulations has little right to lecture EU on morals

Wolfgang Münchau writes “Monetary policy mistakes caused a fall in Eurozone wide inflation rates that made it impossible for Greece and other periphery countries to improve competitive they lost in the early years of monetary union”, “By playing it safe for now, Europe puts its future at risk” March 2. 

And so what Münchau seems to suggest that all other European countries should produce high internal inflation, so as to allow Greece to be competitive. Sincerely, if I was a German, and that was the plan my government presented, I would immediate try to fire my government.

It is by playing it silly safe, with credit risk weighted equity requirements for banks, which blocks fair access to future builders like SMEs and entrepreneurs that Europe is putting its future at risk.

Of course “EU should have confronted Greek debt… early on” but, without getting rid of the distortions produced by regulations in the allocation of bank credit to the real economy, that would not have mattered.

PS. Mr. Münchau, give us one single bank crisis resulting from an excessive exposure to something that was perceived as risky when banks placed that asset on their balance sheet.

But our besserwisser bank regulators express no doubts about what banks should do.

Sir, Henny Sender asks: “Which is better - to invest in the debt of lower-rated issuers because they offer more attractive absolute yields; or, to invest in the debt of higher-quality companies but do so with leverage in order to generate acceptable returns?”, “When investing is all about second-guessing the Federal Reserve” February 15.

I don’t know the answer… but bank regulators, with their portfolio invariant credit risk weighted equity requirements, imply they know that very well. They have definitely instructed the banks to go for high-quality-very-high-leverage... like for AAA-rated-securities and sovereigns. 

By the way Sir, with respect to second guessing the Fed: If I now bought a10-year US government bond which pays 1.97%, and the Fed’s declares its inflation target to be 2%, would that imply I am buying a preannounced haircut?

Why are not shares, properties in London, or famous paintings, not included as part of nominal demand?

Sir you hold that “deflation is bad if accompanied by falling nominal demand, and benign otherwise”, “Central bankers steered towards the wrong target” January 14. That sounds about right… (Unless you are an oil supplier of course)

What I cannot understand though is why increasing demand for art, shares and property has nothing to do with increasing nominal demand. In terms of overall purchasing capacity, there is little doubt that the inflation has been much much higher than that reported looking exclusively at a subjectively selected basket of goods.

It is not that I can buy much or any of that luxury, I am no plutocrat… but that does not mean that the distance to my dreams has not increased... dramatically.