Just when we begin to see some positive economic news we are reminded by Nouriel Roubini that the Eurozone mess is back. In fact, it never left but was simply ignored over the summer following the trillion dollar palliative in May. Now that summer is over and folks are beginning to realize nothing fundamentally changed over this period sovereign credit spreads are back up to where they were at the height of the crisis. Here is Roubini's conclusion:
So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels. That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies.
So I guess this means we can once again look forward to a further drop in Treasury yields and lengthy blog discussions on optimal currency areas. I am also guessing this will reinforce the downward march of inflation expectations which left unchecked will mean a further passive tightening of U.S.monetary policy. What a great way to head into the holiday season. At least I know what I want for Christmas.
Update: Here is a picture of the sovereign credit spreads that comes from the Atlanta Fed (click on figure to enlarge):
Update: Here is a picture of the sovereign credit spreads that comes from the Atlanta Fed (click on figure to enlarge):
I'll remember to add a little monetary stimulus to my Christmas list as well.
ReplyDeleteDavid,
ReplyDeleteA couple of questions/things you could clarify:
It is both interesting and confusing (for those of us that fear deflation) that the CRB commodities index has now surpassed its record 2008 highs. Any thoughts on this?
Complicating matters is the fact that TIPS inflation signal could be clouded by QE. The 5yr real TIPS yield is close to zero. Assume Treasury yields are primarily a function of the market's expectations of future Fed Treasury purchases. As QE expectations rise, Treasury yields fall. This squeezes the TIPS inflation spread -- even if the market fears future inflation. Therefore, at a zero real yield, the 5yr TIPS spread may tell us more about the market's expectations regarding QE than it does about expected inflation. Of course, I may be wrong in thinking that the TIPS real yield cannot be significantly negative. Again, any thoughts?