Matt Nolan

Is qualitative easing a partial default?

/22 Comments/in /by

The Fed is going to buy some government bonds.

Now, if they fund this buy printing money – doesn’t this effectively imply that they are shifting the burden of their recession from taxpayers to bond holders? If so, isn’t this equivalent to a partial default on debt.

I don’t think other countries would be allowed to do this.

What am I missing?

Update: CPW points out why I’m wrong – effectively I’m presuming that the Fed won’t stick to a future inflation target anymore, which is not really a fair assumption.  He pointed me to this very good post as Econbrowser, and I also really enjoyed this post on Greg Mankiw’s blog.  I’m nervous about the Fed’s willingness to pull back the QE/lift rates in the future – but this is no different to the usual concern I hold during the whole economic cycle.  The introduction of QE hasn’t actually changed this issue.

Matt Nolan

Please President Obama, stand up for my nations freedom to trade

/15 Comments/in , /by

There has been talk of the US performing a “stocktake” of free trade agreements – a stocktake that will likely end with New Zealand still being stung by quotas and tariffs when American citizens and New Zealand citizens want to trade.

This does not seem consistent with the platform of change that President Obama promised, not just the US, but the entire world. Please President – now is the time to show that you are a world leader that believes in freedom, that believes in a brighter day for all men, irrespective of their race or creed.

Please Mr President – show the world that you have the power to strike down the lobby groups, and fight for the liberties of both your own people and the people of the world. Give the citizens of our nations the freedom to trade for mutual benefit – and for the betterment of all.

Kiwiblog, Homepaddock, and the Standard express similarish sentiments.

Matt Nolan

Is credit card availability falling?

/8 Comments/in , /by

In the US it appears that this may be the case.  American express is offering some clients a $300 gift card to close their accounts and pay off credit card debt in the next few months (ht Marginal Revolution).  This is interesting, given that a few months ago (in the middle of the explosion of the credit crisis) there still appeared to be plenty of available credit for consumers.

Will we see the same sort of deals in New Zealand?  According to RBNZ figures (here) credit card limits are still growing at a reasonable clip (4.3%pa).  Furthermore, we know that credit card rates have fallen – implying to me that banks/credit card companies are still willing to provide credit to consumers.

However, interest bearing debt has also risen quite sharply – as “interest bearing debt” is generally debt that is in some way overdue this way be a concern.  In the US it was concern about overdue payments that has lead to a pull back in credit card availability – implying that there is scope for it to happen here. When looking for a new credit card which you will sure get approved, visit this review of the surge mastercard.

Personally, I think a sharp decline in peoples willingness to use credit cards will be the primary factor behind growth in credit debt going forward – as a result, I would expect the interest rate on credit cards to fall further as well.  I don’t think we will have to worry about credit card companies trying to restrict lending amounts …

Matt Nolan

A sure way to increase uncertainty

/9 Comments/in /by

Is it me, or did Treasury Secretary Tim Geithner make matters worse with his announcement about the TARP today.

Given how long people have been waiting for a “solution” from government, statements like:

We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it

Seem a bit soft. Surely the market thought that the US government had already done this!

In fact, the market did think this – which is why the DOW collapsed. You increase uncertainty, you reduce the value of capital – it’s as simple as that:

Source (The Austrian Economists)

Matt Nolan

Why the US recession may be the worst in recent history

/4 Comments/in , /by

This graph from the Big Picture really tells it all:

Source (Big Picture)

Employment levels in the US are declining rapidly.

Read more

Matt Nolan

The issue of debt and government

/in , , /by

There has been a bunch of web ink spilt on a recent article by John Cochrane (both pro and anti, we do discuss a little here) – I plan to spill a little bit more, but on a slightly different issue.

In the article he suggests that current people won’t loan to individuals but they will loan to the government – he suggests that the government could loan the money out to individual firms and household in order to get the economy rolling again.

This reminded me of Ricardian equivalence.  In Ricardian equivalence households expect any cut in taxes, without a cut in spending, to lead to higher future taxes – so they increase savings.  In this case, if government started putting money into risky projects, wouldn’t it increase the rate of return that the investors would need in order to invest in Treasuries?  If this is the case, then the existence of the type of “roundabout” lending that Cochrane discussed does not really exist – although I’m not sure how comfortable I am about spreading risk around like that 😛

Then I remembered that, if the government loses money on loans it will just increase taxes on everyone – so if people think that buying Treasuries leads to risk being “spread around” from risky ventures they will be more willing to.  I wouldn’t say this is a good thing – but if this is why money is flooding into Treasuries at the moment it does give government “scope” to lend some of it out …