Budget Deficit

The UK General Election will be held tomorrow. The polls close at 10 pm. We should have a pretty clear picture of the overall seat count by 5 to 6 am on Friday morning. The result, as SocGen notes, is almost certain to be a hung parliament. Then the fun will really start. However, at the macro level the implications of the election may be less pronounced than many anticipate. Monetary policy has been de-politicised through the BoE’s independence, the formation of a coalition government is likely to involve convergence towards centrist positions, and a minority administration that pursues policies outside the mainstream would be unlikely to survive given its fragile parliamentary basis. In either case, the political system is unlikely to deliver radically different macroeconomic outcomes.

"Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors," FT reports, indicating that the organization may force the ECB and implicitly the German taxpayer to take the hit if Greece wants to receive the last tranche of aid under its existing program.

Peering into the froth of a cappuccino, we noticed various sized bubbles. There is a fine line between froth and bubbles. As we continued our gaze, both eventually disappeared. Stirring made the frothy bubbles disappear more quickly. Markets are beginning to stir (more later). Unsustainable states ultimately end.

With the USDJPY's ascent to 125, 150 and higher having seemingly stalled just under 120, with concerns that the BOJ may not monetize more than 100% of its net debt issuance suddenly surfacing, the BOJ and the Nikkei would take any help they could get. They got just that an hour ago when Fitch downgraded Japan's credit rating from A+ to A, citing lack of sufficient structural fiscal measures in FY15 budget to replace deferred consumption tax increase. 

"We think that, at the 10-year tenor, the spread between Spanish and Italian bonds yield versus Bunds yield could still widen to around 350-400bp before a policy response is enacted. We stress that the departure of a country from the ‘irrevocable’ monetary arrangements of the EMU would take us into unchartered waters and it is difficult to predict how negative the market reaction could be."

Today is shaping up to be a rerun of yesterday where another frenzied Asian session that has seen both the Shanghai Composite and the Nikkei close higher yet again (following the weakest Chinese HSBC mfg PMI in one year which in an upside down world means more easing and thus higher stocks) has for now led to lower US equity futures with the driver, at least in the early session, being a statement by the BOJ's Kuroda that there’s a "possibility" the Bank of Japan’s 2% inflation target will be delayed and may occur in April 2016.

"Whenever total federal tax receipts have exceeded 18% of GDP, the result has always been a recession for the U.S. economy."

Hopes ran high among Europe's unelected bureaucratic oligarchy and the Troika of official creditors that the Greek government, after the ECB openly dropped hints of a Greek IOU currency in the immediate future, would finally relent over the weekend and admit that all of its promises to its voters were a lie and that the Tsipras government would finally pick up where the Samaras government left (and was booted) off. There was even a perfect venue: Washington D.C., where Varoufakis and Obama met for the first time just hours before. The hopes were promptly dashed after Greece, once again, said it would not "renege on election pledges to end austerity measures as creditors pressed for a compromise."

Having generously (if not obliviously) stepped up to the plate to bail out Ukraine (with open-ended bond guarantees), US taxpayers are opening their wallets again - this time for Iraq. As Reuters reports, cheap oil has ravage Iraq's state finances just as the government faces rising military spending from the war it is waging against ISIS; and so it has decided to issue $5 billion in international bonds. However, Iraq is considering other ways to cover its budget deficit, including asking the IMF (i.e. US taxpayers) for relief funding and also requesting the controversial U.S. Export-Import Bank (US Taxpayers) finance the purchase of 10 planes from Boeing Co, which cost the government $500 million.

While today's macro calendar is empty with no central bank speakers or economic news (just the monthly budget (deficit) statement this afternoon), it’s a fairly busy calendar for us to look forward to this week as earnings season kicks up a gear in the US as mentioned while Greece headlines and the G20 finance ministers meeting on Thursday mark the non-data related highlights.

Despite being an otherwise staid, traditional news service, the professional banking division of the Financial Times recently released an utterly scathing assessment of the British economy. It was entitled, “The UK economy is a ticking time bomb,” and the editor didn’t pull any punches in completely shattering the conventional fantasy that ‘all is well’, and that advanced economies can simply print and in debt their way to prosperity.

If normalisation is the result of economic recovery we will be familiar with the playbook. However, The Fed has to face the possibility that, for whatever reason, highly suppressed interest rates are not working, and an escape from the zero interest rate bound without economic recovery may have to be contemplated. If interest rates cannot rise, then the dollar itself is ultimately exposed to loss of confidence in the foreign exchanges. The dawning realisation that after recent strength, the dollar is vulnerable after all can be expected to be reflected in a positive sentiment towards gold, which once under way could drive the price up dramatically due to the lack of available bullion.

Ignoring the considerable risks in the mid 2000s led to the global financial crisis. Irish politicians, bankers and financial experts, like their international counterparts, are slow learners ... 

Krugman wants his US readers to believe that all proper economists now agree that cutting deficits was a bad mistake, and it’s only self-interested finance types and ideologically-motivated politicians and think-tankers that take a different view. But that’s nonsense. Just think about it: “Everyone agrees that austerity was a mistake”… apart from every government in Europe except the Greeks, and the economists and many of the civil servants that advise them. Krugman and his fan-club do not constitute all serious opinion, much as they might like to regard themselves that way. It’s all very nice sitting in a US university office preaching to the Europeans (or, indeed, preaching in the New York Times)