‘Knowledge is not simply another commodity. On the contrary.
Knowledge is never used up. It increases by diffusion and grows by dispersion.’
Mixed news on the credit front!
To start off, just a quick word on the ongoing Greco-European story, given the proposal put forward this morning by several poltical officials (Sarkozy, Schaeuble), and backed EU spokesman, Amadeu Altafaj, for a European Monetary Fund (NYSE:EMF).
This measure, which aims to resolve what Paul Volcker calls the structural crack, has yet to take sufficient form for us to examin in detail. The proposal is expected at the end of June.
Such a move would be perfectly consistent with the ideas presented so often in these lines. The Great Financial Crisis, of which the Greek debt crisis represents a mere blip on the sovereign debt screen, will not go to waste, to borrrow the now renowned term used by White House Chief of Staff, Rham Emanuel, in the NY Times artile of 10 November 2008:
This assertive and optimistic conception of politics in which otherwise difficult-to-pass political reforms are pushed through during periods of crisis was first advanced by Saj-Nicole A. Joni, the Chief Executive of Cambridge International Group and author of "The Third Opinion: How Successful Leaders Use Outside Insight to Create Superior Results".
Check out his article in Forbes, ‘Never Waste A Crisis’, of 24 November 2008, which I briefly summarise below:
First, figure out how to survive à The political aid granted Greece at the height of the crisis when the spread between Greek and German bonds widened to nearly 4%!
Second, ask yourself what you can do now that you couldn't do before. à Set up the tools needed to take action (secret agreements and establishment of an EMF).
Finally, no whining. à Boldly present the measures taken as a great step forward toward member-state solidarity and European governmental convergence.
As Paul Volcker justement emphasised in his Berlin talk:
This is not the time to take aggressive tightening action, either fiscally or monetary-wise.
So I think we have to, as best as we can, maintain the expectation that it will be taken care of in a timely way.
If this renowned champion inflation slayer is taking such an accommodating view of monetary and fiscal policy, that should tamper the fears of the printing press/hyper-inflation paranoids. What can they do now: accuse him of switching camps?
As for our favourite variable, credit, a number of interesting stats came out Frince.
United States: Unexpected rebound in January consumer credit
Consumer credit increased $5bn (- $4.57bn in December), beating US forecasts of a $4.5bn contraction!
This was the first hike in the past year and, thus, good news, although revolving credit contracted by -$1.67bn, following -$9.43bn in December, for the sixth consecutive monthly decline.
It would appear that the items, student loans (given lack of jobs, students return to university pushing up federal loans by $10.3bn!) and auto loans (although January figures were hardly fantastic) drove this rebound in consumer credit.
This statistic augurs well for retail sales, since it indicates the the American consumer has not lost his appetite for spending, as shown by the latest statistics published by Retail Metrics Inc.
Comparable-store sales climbed 4.1 percent (in February). It was the sixth straight gain and the biggest in 27 months.
Japan: continuous decline in bank loans
The picture is not nearly so good in Japan.
The balance of Commercial Paper issuance (the instrument used to fluidify short-term credit) posted the 18th consecutive decline and is accelerating: - 29.1% YoY in January (-23.7% in January, -15.7% in December).
Outstanding loans by Japanese banks fell (-1.6% YoY) in February for the third consecutive month (-1.7% in January).
This credit contraction stems from the reticence of small and medium-sized businesses in Japan to take on debt, which is typical of the ongoing debt deflation process.
It is precisely under such conditions that the 0% interest rate trap (the Keynesian Liquidity Trap) clamps shut its jaws on the economy.
For more information, check out the following two texts on this topic:
It’s the stupidity economy, Paul Krugman.
And the Monetarist response from Café Hayek (that's right, I read it all the time!) : Paul Krugman on The Liquidity Trap. (see link at bottom of page).
In light of these Japanese figures, judge for yourself if we are confronted with a problem of demand (Keynesians) or supply (Monetarists).
To wrap up on a more humourous note, read this comment by People's Bank of China Vice President, Mr Su Ning:
The recent moves by the People's Bank of China to raise the deposit reserve requirement for domestic banks are not indicative of monetary tightening and were simply designed to soak up excess liquidity in the banking system.
Nothing new to add: abstidence has its virtues (but not too long).
However, we are currently working on some nice option trade curve positions (flattening).
Disclosure: Long 20 years OAT Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds