June 03, 2009

Hurrah! We managed to get out of the garage!

Sir Martin Wolf sounds like someone who taking a very long car trip reassures his wife with a “Honey we´re doing fine” after being able to manoeuvre out of his garage, “Rising government bond rates prove policy is working” June 3. There are thousands of treacherous miles left to drive in a used car that does not seem too trustworthy and we have recently been given evidence that we can’t even trust the GPS or the petrol meter or for that matter the mechanics or the traffic signs.

Does Wolf need an example of one of the trolls awaiting him round the bend? If a bank lends to a car company then the government requires it to have 8 percent of bank equity but if it lends to the government so that the government can lend to the car company then it is not required to have any equity at all.

Does Martin Wolf really have any idea of where the 10 year US bond rate would be without the quantitative easing of the Fed or the subsidies implied in the zero capital requirement for the banks when they hold such paper? I don’t think so, and so even for a fierce anti-deflationist like him it is much too early to shout out any type of Hurrah!

“Sharp tightening, but not yet”… that is indeed the battle cry of the baby-boomers “Après nous le deluge”