Guest post by Peter Tchir.
Once again, the fate of the world or at least the markets rests on the shoulder of two men. Ben and Mario hold center stage over the next few days.
I believe Ben will disappoint and rather than highlighting what can be done, will take this opportunity to preach on fiscal policy and to talk about what can’t be done with monetary policy. It won’t do much damage to the markets, but isn’t going to support the rally in the short term. I will be on Bloomberg TV today at 5 to discuss my reaction to what he actually says and does.
Draghi, on the hand, I think will come through. It will be tricky as the market has decided it wants certain things (ESM banking license, full support along the entire curve, etc.) that are outside of his “mandate” to deliver. So there may some initial disappointment, but I think he will be able to push the market along.
The immediate response of many is that he cannot do anything meaningful. That Spain and Italy are in solvency modes with deteriorating budgets, so what can monetary policy do?
On the outside, the new Angela Merkel looks like the old one. She still wears her usual blazer — a camel-colored one on this particular Wednesday. Her striking amber necklace has resurfaced. Her hair? Always the same. Still, something has changed since the German chancellor returned from her summer vacation. And it was apparent on Wednesday, as she stood together with Italian Prime Minister Mario Monti on the first floor of the Chancellery in Berlin.
Guest post by Azizonomics.
But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
— ShitKrugmanSays (@ShitKrugmanSays) August 31, 2012
Krugman claims the US private sector is financing the deficit, not China:
So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)
Lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
He cites as evidence that the current account deficit as a percentage of GDP is way down since before 2008:
There are numerous examples of the federal government suspending or ignoring settled rules of law in order to quickly and effectively respond to particular problems created by the broader financial crisis starting in 2008. UPenn Law Professor, David Skeel, says that the federal government’s inability to revert to the long established principles associated with rule of law in the United States is beginning to have a profoundly negative impact on the national economy. He talks with Bloomberg Law’s Lee Pacchia.