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Willem Buiter's Game Theoretical Explanation Of The Interaction Between Central Banks And Treasuries
Despite missing this most recent paper by Buiter at its first publication three weeks ago, it represents the bedtime reading for this evening as it is just as relevant now as it was then. In it, the Citi strategist asks "who will control the deep pockets of the central bank?" and does so from the perspective of a game of "chicken" in a prisoner dilemma context. Buiter summarizes the problem as follows: "As long as neither the monetary authority nor the fiscal authority gives in, the deficit is financed by public debt issuance. With the public-debt to GDP ratio rising without bound, an eventual catastrophe occurs: the sovereign defaults and banks holding large amounts of sovereign debt may collapse, triggering a financial crisis and a deep slump. Following default, the fiscal authority loses access to the government debt markets, at least for a while. The resulting need to instantaneously balance the government’s primary budget means sharp public spending cuts and tax increases. This would be the "collision" outcome. The outcome where the monetary authority gives in and monetises public debt and deficits is called Fiscal Dominance. Monetary dominance is the outcome where the fiscal authority gives in and cuts public spending and/or raises taxes to stabilise or reduce the public debt to GDP ratio to prevent a sovereign default." Buiter does a dramatic deconstruction of this theoretical principal to the practicality of Europe, in a truly fascinating and must read analysis. His conclusion is that the "analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined." Alas, this only means that fiscal stimulus fundamentalists like Krugman will now start pushing for monetary replacements to traditional policy. And with that QE2 (and its myriad of imminent associated alphabet soup programs) is even more of a certainty.
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What's Obummer to do?
The only way, Americans will accept depressionary situation without a revolution, is if a new government starts presecuting those who broke the laws including politicians and restore faith on justice for the little guy.
History tells us that then and only then a bloodless change can occur.
Additionally, restoring and puting all existing laws under constitutional review and repealing those laws that are unconstitutional will also restore faith in the system.
Transparency shall be mandatory and many restrictions on electing officials should be imposed so that we can start over.
Everything else will fail and result in blood sweat and tears.
Oracle of K
It's fast becoming a game of trust...trust needs to be restored.
I just wrote this on the Poll blog.
Theft: Dishonesty, appropriating property, belonging to another, with the intent of permanently depriving the other of it.
When the world wakes-up and realises that QE is nothing more than complex Theft, then what will follow is a correction beyond Inflation, Deflation, or Stagflation...beyond temporary!
It won't be a currency that falls, it will be Trust in the population which holds lifestyle above all else, and/or a population which has lost control of an elite few (the latter can be rectified through revolutionary means, the former is a death sentence).
The financial institutions that gave the "instant gratification" and the "me generation" crowd enough rope to hang themselves, broke laws and regulations in full knowledge of the regulatory governmental bodies.
No one can deny this fact.
I do agree with you, that Obama neither has the courage nor the intellectual capacity to handle such grave situation. The train has left the station.
Ha!
Do not be ridiculous. The law does not apply to the masters - only to the slaves. Cease your complaining. It irritates your rulers.
What can be expected from a human Kleinbottle? Can you find the parts of the anatomy where it self-intersects?
There is nothing he can do, or could ever have done. He's merely a man witnessing a corrective period, sequel to an extended period of lopsidedness in the way life was being lived. The deeper the problems, ie the deeper the lopsidedness the greater the correction...to cushion the correction is to elongate the period.
He cannot stop the pendulum from swinging back the other way...nobody can.
When Buiter took on the A-Holes at the J-Hole a couple of years ago, insiders at Jackson Hole said that the US boys were major-league pissed off. This guy just keeps poking a stick in any eye he can reach.
The Euro Crisis and the Coming Euro Collapse Act II- Time to Check How Austerity Is Going
Willem Buiter = narcissistic wannabe (Sh)Citi-banker...:=)
Very little about golds role in Europe given the large reserves in German , French and Italian treasuries !
I recall Willem Buiters writing a piece in the FT recently where he projected a very sceptical postion with regards to Golds utility.
As for treasuries taking on the ECB - it ain't happening in Ireland baby.
The ECB is running this place period.
Interesting thought experiment but the reality is that there are just so many ways to 'monetize' bad debts.
It's all a question of time. Particularly since 'speculation' in all markets, not just FX is the game.
My advice is to not be in the game when the gamemaster hits the 'reset' button.
however US fiscal dominance is really a privilege or oversight on the part of monetary dominance ( the abdication of the authority given to monetary policy, the Congress) as Congress still holds that right, whether they exercise it or allow the Fed to exercise it. The Euro however is strictly in the hands of the ECB, so the game is being played under two sets of rules. I'm inclined to think a game of chicken is less likely to go badly, under our system, because we are essentially jousting with ourselves. Otherwise the game of chicken is really between the two systems. Seigniorage, or the inflation tax applies then primarily to the exchange rate between the two countries. If one country, US, or ECB prints more money, they win the game, unless of course they can't convince the other side to take that money. but since we hold Europe under our military umbrella, and now the ECB under our IMF umbrella, we win. When we win there is no collapse, because our system is built to avoid the collision. And we also have the ability to monetize large amounts of debt without creating taxpayer revolt. Whats worrisome though is the Feds increasingly weakened condition, when some Euro Raider, much like Geo Soros, decides to take them down, or the asset market crashes. That seems inevitable, like jousting off the end of a cliff. Nobody wins.
I have taken the liberty of forwarding this important exchange from “Visualizing The Past of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future”:
M.B. Drapier
on Sun, 08/15/2010 - 14:32
#522865 : Wm. Buiter's recent bit about the chicken match between central banks and governments appears relevant here. (Shorter version.) It seems the Fed is about to lose badly while the ECB is still mostly holding the white line.
by Escapeclaws
on Mon, 08/16/2010 - 02:10
#523507 : CENTRAL BANKS--ECB, FED--HAVE $TRILLIONS IN CONCEALED ASSETS
Thanks for the great article by Buiter, MBDrapier. Fascinating read and a real eye-opener. Not being an economist, there were some obscure parts for me, but I made the assumption that one could trust his mathematics, and his sensitivity analysis on alpha in his currency equation shows that his model is robust.
This is an article that everyone should read because it shows that Central Banks such as the Fed and the ECB have around 30 times the equity that they show on their official balance sheets. This goes to the trillions of dollars. This money ultimately goes to the real owners of the Central banks, the European people in the case of the ECB and the Rothchild's et al in the case of the Fed.
Consider Ireland, which has shifted the entire onus of the Banksters' theft of their national wealth to the taxpayer for one or more generations in their so-called "austerity" program. This article indirectly shows what a crock austerity is! The ECB could easily subsidize most of the increased taxes and decreased allotments on and for the Irish people. A combination of clawbacks and fines, plus ECB subsidy would be sufficient to take this burden off the backs of the innocent parties currently being pillaged. Europeans should be out in the streets demanding that the the ECB step up and make good the banksters' depredations.
In effect few people, even at ZH, are going to see the glaringly obvious need to capture these trillions of dollars in central bank funds, rather than impose austerity on taxpaying populations. There are too many equations (even one equation is too many for all but economics PhD's) and the article is written on too high a level to be absorbed by any but its intended audience.
(Given these ECB assets and the fact that the even now the French and German economies are showing fundamental strength, I find it hard to see why the Euro should not in fact be increasing in value against the dollar at this very moment. Propaganda seems to rule the day in currency movements.)
Unfortunately, this article cannot be reduced to a CNBC soundbite, so nothing will come of it in terms of helping ordinary people.
Edit: I just realized ZH published this article right ahead of the article containing this comment. Oh well, perhaps this comment will induce others to read the Buiter article, which has 1/10 the number of comments of the current article! Sexy graphs do make a difference, as shown consistently by Robotrader.
the EURO is an unworkable attempt to widen the ECB. Jim Rogers has predicted their demise for years. They are entirely beholding to US largesse, read IMF support, and military protection. As for the Rothchilds using the FED, that is 99% nonsense, the FED is in dire straights here, exchanging UST for worthless MBS is no way to rip anyone off.
The Federal Reserve Bank is not owned by the taxpayers. The question is, who owns it? The Rothschild leverage created America’s Federal Reserve System. And it’s a little hard to believe that the primary share ownership of the banks that manage the System was frivolously given away by the Rothschilds through the years.
Here from ANDYGAUSE.COM. is the list of the Fed’s top 16 bank holding companies; the name Rothschild is not mentioned but to deny its ownership, as shown in the stockholders list, is naïve.
BANKS OF THE FEDERAL RESERVE SYSTEM
Top 16 Bank Holding Companies: Rank – Name – City – State
1 Citigroup Inc.- New York - NY
2 J.P. Morgan Chase & Co. - New York - NY
3 Bank of America Corporation – Charlotte – NC
4 Wachovia Corporation – Charlotte - NC
5 Wells Fargo & Company - San Francisco - CA
6 Bank One Corporation – Chicago - IL
7 Taunus Corporation - New York - NY
8 Fleetboston Financial – Boston - MA
9 U.S. Bancorp – Minneapolis – MN
10 ABN Amro North American Holding Company – Chicago - IL
11 HSBC North America Inc. – Buffalo - NY
12 Suntrust Banks, Inc. – Atlanta - GA
13 National City Corporation - Clevland - OH
14 The Bank of New York Company , Inc. - New York - NY
15 Fifth Third Bancorp – Cincinnati - OH
16 BB&T Corporation - Winston-Salem - NC
http://www.andygause.com/index.php?option=com_content&task=view&id=246&Itemid=1
WHO OWNS THE FEDERAL RESERVE BANKS Wednesday, 01 October 2003
The Federal Reserve Banks are a privately owned consortium controlled by the eight major stock-holding families: The Rothschilds of England and Germany, Moses Seif of Italy, Lazard Freres of France, the Warburgs of Germany, Kuhn-Loeb of Germany, Goldman-Sachs of the United States, Lehman Brothers of the United States, and the Rockefellers of the United States. Only three of these families are American. This small group decides the fates of hundreds of millions of people by their financial policies and maneuvers. It was Baron Meyer Amschel Bauer Rothschild, (born in 1744 and died in 1812), who said, "Give me control over a nation's currency and I care not who makes its laws.”
http://www.andygause.com/index.php?option=com_content&task=view&id=160&Itemid=
"Unfortunately, this article cannot be reduced to a CNBC soundbite, so nothing will come of it in terms of helping ordinary people." ???
I disagree: Central Banks can print a shit-load of money if they don't care about creating high inflation or "ordinary people."
And you can wipe your ass with all the fancy formulas...
so put simply fiscal dominance is inflationary and monetary dominance is deflationary.
and of course when you add the two together, you get a lot more crime and less paid cops to deal with it. and then you get a lot more war but with more nukes and less soldiers.
Bocconi University professor Francesco Giavazzi used the chicken-match metaphor in September of last year.
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