Deficit rule violation is across the board. At least Spain admits it.
As translated from El Mundo, Spain Needs a New Era of Adjustment.
In simple terms, Spain admits it needs another bailout. This is a Mish-modified translation.
An economic collapse is underway. Spain officially sent to the European Union a request for a bailout this year and a new era of adjustments starting in 2021 in order to make sustainable the gigantic jump in public debt.
The forecast is the budget deficit will skyrocket to 10.3% of the Gross Domestic Product this year and for the debt to jump from 95.5% to 115.5% , a level that exceeds the worst …
Spain in Deep Fiscal Trouble
The rest is behind a paywall, but you get the idea:
Spain admits it is in deep fiscal trouble.
Also from El Mundo (but not behind a paywall): The Government anticipates a recession of 9.2% and an increase in unemployment to 19%
The budget plan that the Government sent to Brussels last night includes an economic debacle as a result of the crisis that has unleashed the coronavirus: according to its estimates, the Gross Domestic Product (GDP) will collapse 9.2% this year, while the rate unemployment will skyrocket from 14% to 19%.
In addition, the Government now maintains that the recovery will be asymmetric, in 2021 everything lost will not be recovered.
All the jobs created in the the last four years will vanish. And the recovery will only return to the level in 2017.
Eurozone Outlook
Italy is in worse trouble.
In fact, every Eurozone country will be in severe violation of Stability and Growth Pact rules regarding both debt and deficits.
The Rules
- Budget deficit must not exceed 3% of gross domestic product (GDP).
- Public debt (government debt & that of public agencies) must not exceed 60% of GDP.
Excessive Deficit Procedures
The Eurozone has never really enforced any rules, but it does pressure countries with periodic threats of Excessive Deficit Procedures.
EU Recovery Plan
Eurointelligence comments Thinking Through the Details of a Recovery Fund.
In our assessment of the economic impact of the agreed way forward, we know most of what we need to know right now. The European Council has agreed on Angela Merkel’s version, not the coronabond or the Spanish proposal. As FAZ reports this morning, the plan is for the EU to increase its budget capacity from the current 1.2% to 2%, for a period of two to three years. This increase will not come in the form of direct contributions from the member states, but of guarantees. The paper puts the annual volume at €100bn per year, which would be be approximately 0.6% of EU-27 GDP on our calculations. The total borrowed could be in the order of €250-300bn over the period.
If we assume total borrowing of €300bn, half of it in the form of grants, the average macroeconomic impact would be 0.4% of GDP for three years running.
As ever, beware of headline totals. Ursula von der Leyen said last night that the size would be measured in the trillions, not billions. As we scour this morning’s headlines, we find plenty of gullible journalists impressed by that number. We think it is an illusion. So was the eurogroup’s €500bn package, because it conflated into a single round number the ESM’s outstanding capacity plus the estimated lending capacity of two levered funds.
Assume Spain is granted 0.4 percentage points of GDP for three years.
What does that do in comparison to the numbers above?
EU’s Trickery of a Fake MFF
The EU will not enforce any rules, of course. Instead it will respond with magic solutions as it always does.
In a follow-up article, Eurointelligence discussed The EU’s Trickery of a Fake Monetary Fund Facility MFF.
Return of the German Professors
Also consider the Eurointelligence article on the Return of the German Professors on March 24.
We have been waiting for the German professors to wag their fingers, or to threaten legal action against the ECB or national governments. But so far it has been mostly quiet on that front. This morning, however, we saw an article by Otmar Issing in FAZ, in which he argues that emergency was no excuse for law-breaking. He accuses the ECB of monetary financing and says that a mutualised eurobond is illegal unless formally accepted by national parliaments.
Issing’s comment is likely to matter not only only because of his former role at the ECB. He carries enormous weight among German conservatives.
Issing argues that, if countries had followed the EU fiscal rules and built up fiscal surpluses in good times, they would not be in the position to needed a bail-out now.It is not the role of the ECB to prevent a collapse of national public finances. And Art 125 TFEU, the no-bail out clause, is still there. It says the union must not take over the liabilities of member states, and that member states must not take over one another’s liabilities. Even as advocates of a mutualised eurobond ourselves, we must acknowledge that there is no firm legal basis for it under EU law.
Issing’s article is likely the beginning of a legal discussion about the future course of policy. We saw it during the euro crisis. The legal fall-out from that period is still not over. The German constitutional court has yet to rule on the legality of QE. We expect the next phase of legal arguments to arise before the old one has come to an end.
Huge Political Battle Brewing
A huge political battle is brewing.
Spain wants another bailout and Eurobonds, Germany wants neither.
The EU responded as it always does, with magic proposals and fake leverage.
Solidarity?
- Sure. Solidarity is between German and the Netherlands.
- Solidarity is also between Spain and Italy.
- France is somewhere between the extremes depending on the French president, now Emmanuel Macron.
Creditors vs Debtors
More accurately, view solidarity as a battle between the creditor states and the debtor states.
Italy vs the EU
https://twitter.com/Bollocks_Dogz/status/1244686549117263872
Please note that Italian politician Fabio Rampelli removed the EU flag from his chambers and replaced it with the national one.
Eurozone Collapse: V-Shaped Recovery Mirage Is Gone
Please note the Eurozone Collapse: V-Shaped Recovery Mirage Is Gone.
If by any chance you were wondering why the US dollar has been firm despite all the Fed shenanigans, you now know.
Inflation or Deflation?
Meanwhile, the debate over inflation or deflation continues.
Will it be Inflation or Deflation?
If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.
Mike “Mish” Shedlock
Europe is screwed. 4-5% of its GDP is tourism. It is so deeply in debt that defaults will be massive. Especially in the south. It is dependent on imports for most of what it eats, it’s transportation needs, and energy. This will probably be the death blow for the EU as the poor and rich countries battle over debt default and bail outs.
Plenty of food(self sufficient mostly) in Europe, don t worry, and, if you don t mind, we get our energy from Russia ! I am anti EU, in case you doubt it, but I don’t like reading nonsense…..
Good read on the European political train wreck in progress.
How about a “Trillion Euro Coin”?
“Creditors vs Debtors”
In the way back days- ancient times, they had a financial procedure every 50 years called the Year of Jubilee. The debt cycle can only be run so far and at some point, the reset button has to be pushed. There isn’t some magical way around it, the math hasn’t changed in 5,000 years. “Experts” can come up with fancy new mantras such as Modern Monetary Theory, but they only “work” until their fatal flaw is exposed somewhere down the road.
“If the Coronavirus did one good thing, that was expose the European union for the inept bureaucrats they are.”
Seems the CDC is inept as well.
Martin Armstrong had a video from someone saying she was nurse practitioner, posting a video on behalf of a concerned nurse in New York City.
Denninger posted excerpts from a PDF by EVMS Medical Group.
“It is our collective opinion that the historically high levels of morbidity and mortality from COVID-19 is due to a single factor: the widespread and inappropriate reluctance amongst intensivists to employ anti-inflammatory and anticoagulant treatments, including corticosteroid therapy early in the course of a patient’s hospitalization. It is essential to recognize that it is not the virus that is killing the patient, rather it is the patient’s overactive immune system. The flames of the “cytokine fire” are out of control and need to be extinguished. Providing supportive care (with ventilators that themselves stoke the fire) and waiting for the cytokine fire to burn itself out simply does not work… this approach has FAILED and has led to the death of tens of thousands of patients.”
“Our treatment protocol targeting these key pathologies has achieved near uniform success, if begun within 6 hours of a COVID19 patient presenting with shortness of breath or needing ≥ 4L/min of oxygen. If such early initiation of treatment could be systematically achieved, the need for mechanical ventilators and ICU beds will decrease dramatically.”
The problem is that the politicians’ parents never read to them the story of the Ant and the Grasshopper.
“Spain officially sent to the European Union a request for a bailout this year”
…
I’m all for “What happens in Europe, Stays in Europe” … unlike the troika working with Greece that put US taxpayer potentially at risk (via IMF).
Was not someone on here moving to Utah? Utah company Banjo is building a massive surveillance system with the help of the state’s attorney general https://www.sltrib.com/news/politics/2020/03/08/utah-company-is-building/
Solidarity will fray more and more in Europe.
Forced and divisive solidarity with hordes of imported Muslims have wearied people to solidarity. When things become serious, they will no longer be able to show any solidarity for anybody. In the US there is also no solidarity. It is virtually impossible in a socially multi-ethnic hodge podge where nobody recognizes fellow “citizens” as being like themselves or related in a we’re all in this together kind of way.
Solidarity will make way for the rule of the jungle, everyone (and every nation) needs to survive for themselves, the hell with the consequences to others. Others are prey.
That ‘ s how nature functions and that s what it should be like ! Artificial, fake fairweather friendship and legally imposed solidarity will only work when there s plenty to feast on ! I wonder how long out of the blue created common fiat currency will keep the shaky house of cards together, the foundations are already gone, have never been there in fact, it s merely the ECB roof keeping it together ….
Couldn’t have said it better myself.
“The net result of meddling are bubbles in several key markets, all pressurized by the Fed.”
Yup! The Fed’s illusory virus (of debt being income) has spread across the world and except for a few fiscally conservative countries all others have been spending with gay abandon. In fact starting from Greenspan everyone deserves capital punishment for the destruction they have wrought. It is sad that they are not held accountable for the arsonists they are.
It baffles common sense to expect a good ending with such policies.
Consequences – there are none to those screwing it up, they walk away onto the book and after dinner speeches round with brilliant pensions.
If there was a clause in their contracts to the effect they would be held full responsible for future outcomes I’m pretty sure some would think twice before seeking the role and others would do a much better job when there.
“Issing argues that, if countries had followed the EU fiscal rules and built up fiscal surpluses in good times, they would not be in the position to needed a bail-out now.”
He is correct. The problem is the prudent and conservative ones follow it and save for the rainy day but the profligate ones spend with gay abandon during the good times and then spend some more, with the motto being beg, borrow or steal, when in crisis. The EU should be called a Union of ants and grasshoppers.
Or threaten to leave the EU if “loans” are not given.
They should leave. It’s the only way for Italy, after going through a painful adjustment, will ever be able to compete with Germany.
Italians have lost it. Slaves to Brussells, on their knees, not getting back up, spiralling into a black hole of depression and decay.
When will the Germans get tired of this?
Pretty soon, I think.
If you are a German business owner, the money Spain borrows and hands to its population, ends up via sales in your pocket. The borders are open for trade, which is harmonised to a single standard as far as paperwork is concerned, and you have cheap labour turning up from abroad.
If Germany leaves, that would change, and there is no alternate model that it could turn to without a lot of strife for the country. That is not forgetting the financial/political influence it still holds in Europe.
Also, Germany has spent a lot of time isolated since the world wars, if not technically then somehow socially or politically. So I think there is some deeper argument about how germans view europe and EU, how they choose to interact with. EU was very much a german french enterprise, I expect Euro as much so, in spite of some reservations aired by germany at the time of its proposal.
They will never tire of this, just go along. The Germans are frightened of themselves. The EU is a salv to German anxieties about their history, an excercise in virtual signalling whilst also proving their superiority over the lazy southerners and French.
A big ego trip without having to fight.
You’re correct: virtual signalling sound better in the context than virtue signalling.
“If countries had built up fiscal surpluses in good times…”
ROFLMAO!!
Yes, that was a German speaking.
Of course, the “silver lining” here is that this debacle will allow the Fed to continue to print $Trillions monthly and the $USD will still look good vs. the Euro.
Right, like the elected representatives of the people can tell good times from bad. Such elementary mistake.
And even if they could, da voters demand the goods as well as fiscal prudence.
Spain should produce toilet paper en masse and then use that as collateral for more ECB loans.
“Can we put in a bid on Spain? Is it on a fire sale yet?”
Not so fast, the Eurozone at least has vague budget rules, like 3% deficit.
When did you hear such thing this side of the Atlantic?
MAX, you can t compare the motley EU circus with the US of A ; you are ONE(lousy?) nation, with one currency, a reserve currency on top of that ….and yes, for the time being, we enjoy enviable social welfare but it is becoming more unaffordable by the day… Some people in Belgium ( the N° 1 social paradise), don t like the idea of going back to work, not for Corona paranoia but simply because they get paid MORE now than when at work …..Sustainable ?
The same here, in Arctic India.
Can we put in a bid on Spain? Is it on a fire sale yet?
The Med countries are designed around fleecing people coming there for the nice weather. It’s what they do. Once they know you have spent enough to be committed, there’s no end to the charges and levies and runaround and this and that.
If you have a business which in any way competes with someone local’s, every random event will, conveniently for him, work to his benefit, at your cost… Even if you don’t compete with someone local, say just work remotely, they can be relied on to figure out exactly how hard they can squeeze you, before you leave.
Even more so than California, they are absolute masters of ensuring that they aren’t giving away their nice weather without being richly compensated for it.
I’m past imagining what will happen to the country now. On the left they accept EU control as long as there is pay and position with it, but the right like to keep a modicum of say, and to play for position at the EU table.
While we are looking at EU “contribution” , remember that it is ECB that is keeping government deficit functioning. That is to say the whole financial sector and economy can go to pieces, but the Spanish government is able to keep borrowing. EU doesn’t fear national deficits, instead of allowing countries to inflate out of them though they tighten (relatively speaking) but guarantee an increased % national debt figure due to that along with taking influence via restructuring.
Here there is not a cyclical credit event as gfc is pinned as, so it isn’t the lack of caution of the individual countries that can be directly blamed, hence Troika demanding restructuring is not going to hold meaning – how do you demand restructuring of an economy and finance around a plague ? So critics of mutualised bailout are probably on better ground than they seem, not because any country “shouldn’t have taken on so much debt before, then” arguments, but because there is just no economic solution to impose on the circumstance that goes along with easing. The only political argument therefore is each saying they need to spend more due to the circumstance, that is to say countries want to centralise national economic management to compensate for unexpected difficulty. At that level the answer is “fine, but on your own tab”.
That is EU level, where the front actually is is at ECB level though, because that is where the national tab is. So what happens probably is that many countries (are allowed to) sink deeper and deeper into debt, EU says little and ECB mutualises this via Target2 . Eventually you have say ten countries at 150% debt to GDP, and what happens ? At that point national economy has been in the dumps for a year or two, the state is running much of it, there is wide subsidy to society also. A discreet take over would fit, because that is where a country would be most susceptible to a transfer of power, something the right ( which is a good portion of the country), would not normally accept.
When you look over the deeper history of the country, it is still very tribal. The “new Europeans” catching up with “northern wellbeing” is often superficial, not only because northern superiority is in many ways a miserable myth, but also because trading property for nice clothes and cars does not really encompass the essence of modern discipline and knowhow. The german presence goes back to the goths who sort of merged as small minority into the ruins of what was roman, only to be expelled by a small moorish army for several hundred years, the reconquest and future kings were frankish (germanic) with I think just one gothic line of descent. The lands were shared over to migrants from northern europe. The bourbons french/belgian, the austrians…austrian. Even before roman times there was only a part celtic influence, the south and east being desribed by greek travellers as egyptian. Different people and ways to the north of europe, post dictatorship included. Even france is only recently all “french”, or was for a while at least. So the “new normality” the current pm is talking of fits right into statist northern format – it’s a takeover bid. How they conjure up the formalities at european level , if they are able to, and if the spanish accept, is something else though, as is whatever a post post war socialist german progressive EU whatever meant to be.
Meantime here is the gazette for exercise for the whole of spain
which is really just a small paragraph long giving time of day for going out of home by category of person. Schools will have had half a year off by the time they return, if they do. Not to forget the ubi like benefit system being introduced also.
Trying to add it all up is like asking :
If ten sheep were in a field last thursday, and the farmer ploughed his fields three days later, what did his neighbour have for lunch.
Ultimately, the debt will defaulted on.
If there is even a fractional backbone left in Spaniards, Greeks, Italians, or even Americans, the government portion of it will be defaulted on without any transfer of state property nor sovereignty. Financialization is a failed experiment. Anyone who believed in it strongly enough to put his own money, savings, pension etc. on the line, has only himself to thank. The rest should just move on, while being suitably ashamed of their country for ever falling for something so inane and inhumane.
The best anyone, aside from profiteers like Southern European governments and Northern European banksters, can hope for, is that the default come sooner rather than later. The longer it goes on, the more misery it is able to inflict. In the form of homelessness, usury, destruction of productive enterprise for the benefit of FIRE leeches etc.
There’s no aggregate benefit to society, from having half the population, and the best paid half at that, run around and do what is just zero-value-add makework. They still spend just as many hours pretending to be “working”, yet the output of their makework is nil. Ensuring that the other half has to receive only half as much in real compensation for their work, in order for things to go around. There’s nothing positive about that. And the sooner it is all brought to a screeching halt, the better off “everyone” will be.
Automation will put an end to most of the human element. This virus will speed that up. Humans are the weakest link.
I wouldn’t underestimate the ability of Spanish authorities to find/make work for themselves though. The weak link is those that are not part of that framework, to be exploited obviously. It’s very social and hierarchical at the same time, in a confused sort of way – everyone is in charge of everyone else, but few know what they are doing so profit and reputation stand out as a reasonable and understood measure instead.
Automation, adds jobs. It doesn’t remove them. It’s not as if horse drawn carriages permanently put the guys who used to carry Cesar around out of a job. Instead, “they” found different work. Ditto the enormous number of jobs
carrying water from rivers and wells, which were “destroyed” by running water.
As long as there is any shortage, of anything at all, increased efficiency at producing that which took more labor yesterday, increases the amount of stuff people can afford today. That increased demand, will always require more work to be done.
Assuming a somewhat free society. Absent freedom, I suppose some Dear Leader could decide to ban the water carriers rendered unnecessary by plumbing his palace from doing anything else. But as long as some amount of freedom exists, efficiency improving automation will always create more jobs, and better paying jobs.
Then there is the odd catch of population decline in the west’s supposedly satiated society, so less work means… less work?
Meanwhile the spanish PM explained today why a state of alarm (emergency) is a reply that might work for anything:
“Is there a Plan B? There is no Plan B. The only plan is the state of alarm” Sanchez
Sánchez says that the state of alarm represents “a defence” for workers and companies with the special temporary lay offs: “Is there a Plan B? There is no Plan B. The only plan is the state of alarm”
Sanchez assumes there will be new outbreaks.
Sánchez makes his threat to the opposition explicit: the special temporary lay-offs would run out if the state of alarm were not extended. He spends some time on this issue. Now we know why he wanted to make statements today.
Sanchez also says that if he were not for the state of alarm, people doing sports could go out any time they wanted and infect old people. The political blackmail in today’s statements is clear. A full-on warning to the opposition. The government, weak.
This has not been very subtle. Support the extension of the state of alarm or we will blame you for all the ills that come afterwards, from problems with the temporary lay offs to the infection of old people with Coronavirus.
“There is no Plan B. There is a Plan A and Plan A is the state of alarm”, Sanchez insists. Me or chaos.
The PP says Sánchez has only spoken to them three times since the start of the state of alarm (43 days).
PP reacts to Sánchez threats: “Spain does not deserve this government”.
Courtesy Matthew Bennett twitter.
Over 40 000 careworkers infected into the bargain also.
Watch what happens this time. This is not transport of goods, it total supply chain and “intelligence”.
The worse of it as far as Spain is concerned, to my view, is having corrupt incompetent ideological authorities all claiming priority as they practice their social experiments on society. It used to be simple there, very direct but simple, and alive, and close. I watched what they did post euro, most of society is left trailing and confused by it, a boom that goes nowhere on top of the original tourist boom from say the 60’s (which by comparison was minimal) which did.
The country cannot go back though, it’s destructured now, with false expectation and a generation that will not accept less but has to make do with what you describe. The right are corrupt, the far right go against the excesses but don’t exactly embody tradition, the left are french socialist no longer workers party, and the far left bolivar or something. The centre party are german civil. The royalty are losing support, the new king is part progressive plus there is corruption. The police have become technical, even the guardia are not what they were. It’s all fubar, just the locals could rebel and take back, but they won’t because too much to lose. So it limps on getting picked to pieces, by own and by outside, reformed on top of reformed. When you watch it you can understand how a civil war started there , but times are different now, it is more atomised and people more dependent on government.
So would take default, out of eu plus a couple decades to recenter itself maybe, would be worthwhile from my point of view but too many are subscribed to whatever is left to get out of current direction, they will be surprised maybe when they find it empty one day.
Headlines just from today, elespañol :
“People take to the streets on the first day of walks, and no one respects anything”
“Sanchez says he calls the opposition on Mondays (to discuss new measures he announces before presenting them to congress, such as extending emergency rule), opposition says he is lying”
“The four big ripoffs of masks and tests; conman Mayra bills 263 million to government” (walked off with over 30 million, faulty gear, got jailed I think, a load of careworkers are now in fear because of defective masks etc. )
and those are just a smallest part of it, on one day.
The country has gone nuts.
RE: “Automation, adds jobs. It doesn’t remove them.
?!?!
It’s not as if horse drawn carriages permanently put the guys who used to carry Cesar around out of a job. Instead, “they” found different work. Ditto the enormous number of jobs carrying water from rivers and wells, which were “destroyed” by running water.”
“Finding DIFFERENT work” in no way proves that “automation adds jobs” … all it says is that there were still many other different jobs available that had not yet been automated.
RE: “That increased demand, will always require more work to be done.”
And that in no way proves that the additional work that needs to be done won’t be done by automation rather than people. It might … or it might not. But in many cases it eventually will be.
Automation removes jobs … there may still be plenty of other, or even additional jobs for people to do … UP TO A POINT. But sooner or later the kinds of jobs for people to do, still available or even being added, are fewer than the jobs that automation is replacing and the jobs that remain are either the more menial or the more highly technical. Add ever-increasing population to the mix and “Houston, we have a problem …”
Clearly the UK made the correct choice.
It was already a large contributor to EU budget nonsense and it would have been on hook for all kinds of bailouts.
Now the EU is totally screwed if they do not give the UK a reasonable trade deal.
This was my view all along. Covid just amplified it.
I think UK still on the hook until fully out.
“Clearly the UK made the correct choice.”
This is clear from the fact that Euro* cannot contain their primal instincts, and even now continue membership negotiations with southern Balkan countries, after the experience of Greece, Romania and Bulgaria. They’re incapable of learning.
Because it’s an empire, it has to keep pushing out. A reconstruction of the Holy Roman Empire. They cant help themselves and like all empires it will end in monetary debasement, conflict ans collapse. None last forever.
No different to any other empire. All the same playbook except this one expands by offering carrots.
When an empire stops expanding……..what’s next for the empire?
When an empire begins to expand in areas of diminishing return?
History rhymes. Same as it ever was.
Spain and Italy are holding financial weapons to the unelected EU heads of state. “Bail us out, or we’ll leave the EU.”
The chief beneficiaries of the EU debt rackets, have been Southern ruling classes, but also Northern banksters. While still a smidgen shy of the sheer magnitude of the horrors on display in the Anglo countries wrt the share of total resources transferred to useless FIRE idiots; Germany, Holland and the rest of the European North, have also had rapidly growing FIRE rackets over the past decade. To the point where even Germans, once fairly intelligent beings, are now busy “making money off their homes” and “portfolios.”
Halfwits from Germany, too dumb to get a real job, are crawling all over Silicon Valley now, looking to “invest” either their own or others’ ill gotten gains in something they are, to a person, way too dumb to ever understand. Just like Americans. Perhaps not to quite the extent of here and in the UK, but it’s still a rather ominous sign, for Europe’s industrial standard bearer.
Germans of a similar persuasion have also bought an absolutely massive amount of houses in Spain. Northerners have always done that, since the weather in their part of the world flat out sucks no matter how rich they are. But over the past decade or two, lots of them have, as befits stupid and well indoctrinated drones everywhere, began to think off their vacation spot as that limit-case idiotic pagan god of the financialized era: An inveeestment. So they are now in debt to the hilt, for housing which cost a fraction of its sales price to build. In a much poorer country than theirs, where local incomes to support said housing prices aren’t even in the general ballpark of the debt incurred ….. Kind of like as if Monegasques went into debt to their necks, to procure huts in Zimbabwe.
So, Germany will no doubt bend over all manners of ways, in order to bail those clowns, and the German banks they have borrowed from, out. Bailing out illiterate clowns forever too dumb to do anything useful is, after all, the only concern of government in the central banking era.
They wont leave. Both have become slaves to sucking the tits of others. Neither have the leadership necessary nor belief in themselves.
Germans are happy to have their superiority proven and keep others on their knees.
Everyone’s happy, no change.
Let me have a stab:
With the Fed throwing ‘money’ (and low interest rates) at the stock/bond markets, inflated prices in those markets became the norm. It overflowed into related markets, such as housing–also inflating prices. Subsidiary effects included mal-investment, corporate buybacks etc.
Yields were driven primarily by price appreciation, not by dividends/earnings or coupons. Yields, which arguably should reflect such price ‘inflation’ under competitive pressure, declined–i.e. deflation. Risk also declined because the Fed became underwriter. Risk and return entered a false ‘equilibrium’. (R-R tradeoff drops to zero% for risk-free, and remains close to horizontal)
The apparent Fed-caused increase in stock/bond prices induced money to flow from elsewhere in the economy into those markets–gotta get me some stocks before the DOW goes to 40K–inducing more price inflation. The net drain of money from other markets (not Fed supported), reduced prices in those markets i.e. deflation.
The net result of meddling are bubbles in several key markets, all pressurized by the Fed. Any change in the investment environment affects the perceived risk/return relationship. Covid-19 is a shock to the risk/return relationship. KA BOOM.
Will we see inflation in CPI items (oil not included)? Only when the gov’t/Fed realizes they have a debt implosion on their hands, and no way of paying for it. That is when the US goes full-bore Weimar.
.
“The net result of meddling are bubbles in several key markets, all pressurized by the Fed.”
Yup! The Fed’s illusory virus (of debt being income) has spread across the world and except for a few fiscally conservative countries all others have been spending with gay abandon. In fact starting from Greenspan everyone deserves capital punishment for the destruction they have wrought. It is sad that they are not held accountable for the arsonists they are.
It baffles common sense to expect a good ending with such policies.
Velocity of money is supposedly low. What impact? Deflationary even though money being pumped in?