Argentina was bankrupt, a product of a stagnant economy, rampant crony-corruption, and—most important of all—of having its currency fixed to the dollar. This currency peg had created a huge credit bubble, and of course massive capital outflows as a result, eventually leading to the depletion of foreign reserves by the government and an inability to raise more funds on the open markets.
In other words, sovereign bankruptcy.
Coupled to these problems, in the months leading up to the December 2001 crash, people were aware that the country was going bankrupt—so they were quickly converting all their Argentine pesos into dollars, and then sending this money to safe havens overseas.
To solve these problems of sovereign insolvency and massive capital flight, and at the same time to stabilize the situation, on December 1, 2001, the Argentine government imposed the infamous corralito—literally, the “little bullpen”: A series of measures designed to hold in capital and prevent it from fleeing the country, while devaluing the currency to a more realistic, sustainable rate of exchange.
Guest post by Themis Trading.
Bloomberg View published an op-ed today titled “High-Speed Trading Is Progress, Not Piracy” written by Professor Bernard Donefer of Baruch College. As expected, this is the typical HFT defense piece (why does Fred Mishkin come to mind every time we read an academic piece like this). We’ll save you the trouble of reading it and summarize Prof. Donefer’s main points:
- Criticism of HFT is overblown
- Information-timing asymmetries have always existed
- Automated market makers are liquidity providers
- There is some bad HFT (momentum ignition, layering) and this needs to be identified but don’t blame all HFT.
- Credit Suisse (the largest dark pool provider) published a study that shows volatility is down and spreads are tight.
On the Spanish Denial via Macro Business.
There seems to be a pattern emerging as stressed Eurozone nations struggle against the austerity based policy that slowly strangles them. The first stage is a denial that anything is wrong, the second is that there is some problems but with renewed vigour the issues will be solved and the third stage is when reality finally begins to sink in that the country is in serious trouble and some form of external “help” is inevitable.
Given the recent denials by the Spanish economics minister I would suggest we are somewhere between stage 2 and 3 for Spain:
A European bailout for Spain is not on the table and would be the worst possible outcome for the country’s debt troubles, Economy Minister Luis de Guindos said in an interview with state radio late on Thursday.
De Guindos blamed the sharp rise in spreads on general market nerves about the lack of growth in European economies and said the issue was not restricted to Spain. Borrowing costs for countries and the private sector were not sustainable at these levels, he said.
“These spread levels are not sustainable for long,” de Guindos said. “It makes it hard for Spain or Italy to finance themselves, it makes it hard for the private sector, namely the banks, to finance themselves. It’s a situation that must be turned around.”
Just a reminder on what happened in Germany when too much printing hit the Economy. Let’s not forget, inflation is now running higher than GDP growth…
Fergusson discusses how the hyperinflation affected different groups in German society in different ways — with debtors benefitting and huge numbers of middle-class savers wiped out. Riots, corruption and political extremism were just some of the malignancies encouraged by the hyperinflation. He points out that those who held hard currencies as well as people who held tangible assets like gold and silver were in-large part protected from the worst economic consequences of the hyperinflation. In his words: “gold remained at all times in Germany the measure of what was important to them.” Video below.
Former European Central Bank President Jean-Claude Trichet speaks about the European sovereign-debt crisis, the role of central banks and the need for Europe to improve its governance “very significantly.” Dressed up in a tuxedo he delivers a rather interesting speech, especially as he nowadays speaks more “freely”. Bloomberg video below.
Time for a review of the European dog’s charts. This is what we wrote on March the 28th;
We clearly see how several European indices all show the same pattern. The Bernanke rally has faded, and we marked a short term top. What is interesting, is the fact that we never even tried pushing the previous highs. This is the same psychology when we topped out over the previous tops. Did Bernanke fool the last momos covering their shorts, and more new “smart” longs entered the fake move?
One thing is sure, Spain’s Ibex is trading very badly, and we strongly believe Spain will become the next major point of focus.
The European indices have pretty much collapsed since then. We might get a short term bounce, but the dogs, Spain and Italy are looking at taking out new lows.
The global crisis has shown how a shock that originates in one country or asset class can quickly propagate to other markets and across borders. As in the closed-economy case, the nature of the balance sheet linkages between financial institutions and markets will affect the size of spillovers and their direction of propagation. At the global level, however, financial linkages and channels of propagation are more complex. Many of the data needed for identifying and tracking international linkages, even at a rudimentary level, are not (yet) available, and the institutional infrastructure for global systemic risk management is inadequate or simply non-existent. This paper highlights some of the unique challenges to global systemic risk measurement with an eye toward identifying those high-priority areas where enhancements to data are most needed.
It takes some curage delivering the speech below, especially to a group of central bankers. PIMCO’s El Erian on the crisis, central banks avoiding the the Great Depression, and the most important; what do do next. With the ballooning balance sheets of the central banks, they better have a plan, or….Simply a must read.
After diffusing a material threat of a global depression, central banks in the advanced economies did a good job in maintaining a certain status quo in the midst of too much debt, too little growth, too much inequality, and an historic global economic realignment. Critically, they succeeded in their overwhelming priority of avoiding an economic depression. Concurrently, they reduced the risk of market overshoots and disruptive multiple equilibrium dynamics, thereby alleviating well-founded concerns about extreme negative tail risk events, including a renewed financial meltdown.
This success involved the unprecedented use of tools available to central banks. In the process, central banks stretched like never before in the era of modern central banking the very concept of a monetary institution. And while the benefits were immediate in the crisis management phase, they have been less consistent when it it comes to securing certain economic outcomes. Also they have come at a potential cost and with risks. They are also serving to alter behavioral relationships, change market functioning and modify the configuration of certain market segments.
I think that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances.
Up, up and away, but it is not Apple. Much has been written on the topic, but just how big is “it”? Guest post by Doug Short.
Pop Quiz! Without recourse to your text, your notes or a Google search, what line item is the largest asset on Uncle Sam’s balance sheet?
|A) U.S. Official Reserve Assets
B) Total Mortgages
C) Taxes Receivable
D) Student Loans
The correct answer, as of the latest Flow of Funds report for Q4 2011, is … Student Loans.
The rapid growth in student debt has been a frequent topic in the financial press. One stunning chart that caught my attention illustrated the rapid growth in federal loans to students since the onset of the great recession. Here is a chart based on data from the Flow of Funds Table L.106, which shows the Federal Government’s assets and liabilities.
Biderman- Buy Gold, short the Euro as it will reach par with the USD. The top in equities is in, but the big sell off is not happening until later in April. Full video below.