The risk premium that investors are willing to pay for Italian 10 year treasuries is used as a measure of the contagion fear in Europe. This graph shows that the risk premium has been increasing today. German debt is the risk free benchmark that measures the risk premium for Italian debt.
Tuesday, November 1, 2011
Risk Premium For Italian Debt Is Rising
The risk premium that investors are willing to pay for Italian 10 year treasuries is used as a measure of the contagion fear in Europe. This graph shows that the risk premium has been increasing today. German debt is the risk free benchmark that measures the risk premium for Italian debt.
Misinformation About Social Security Funding As A Scare Tactic
Paul Krugman explains why social security can't be two things at the same time. Its kind of like saying that an apple is an apple but it is also an orange. Most people would have problems with that description of an apple. On the other hand, critics of social security have no problem with that kind of illogic when they complain about social security spending.
The case in point is an article in the Washington Post that publishes a headline about social security running out of money to pay out benefits. Social security tax revenues have declined in the recession and the payments to beneficiaries are greater than the revenue collected. However, social security revenues have exceeded payouts since 1983. The excess revenues created a $2.3 trillion surplus. The government borrowed this surplus and issued interest paying bonds that it put into a social security trust fund. If we regard those assets in the trust fund as real, those funds can be drawn upon to make payments to beneficiaries. Consequently, there is no immediate funding problem. On the other hand, if the trust fund in an illusion, and social security revenues are not distinct from other tax revenues, then expenditures on social security are no different from other government spending mandated by current law. In either case, there is no immediate social security funding problem. Either it draws down its trust fund to make payments, or it makes payments just like we make payments for other programs. If the government borrows to make payments it is no different from government borrowing to fund the defense budget.
Unfortunately, misinformation about social security funding is widespread and many young people believe that they will not collect on social security when they retire. That is just what the propagandists desire. If young people do not believe that they will collect benefits, they will be less supportive about maintaining a program that conservatives hate.
The case in point is an article in the Washington Post that publishes a headline about social security running out of money to pay out benefits. Social security tax revenues have declined in the recession and the payments to beneficiaries are greater than the revenue collected. However, social security revenues have exceeded payouts since 1983. The excess revenues created a $2.3 trillion surplus. The government borrowed this surplus and issued interest paying bonds that it put into a social security trust fund. If we regard those assets in the trust fund as real, those funds can be drawn upon to make payments to beneficiaries. Consequently, there is no immediate funding problem. On the other hand, if the trust fund in an illusion, and social security revenues are not distinct from other tax revenues, then expenditures on social security are no different from other government spending mandated by current law. In either case, there is no immediate social security funding problem. Either it draws down its trust fund to make payments, or it makes payments just like we make payments for other programs. If the government borrows to make payments it is no different from government borrowing to fund the defense budget.
Unfortunately, misinformation about social security funding is widespread and many young people believe that they will not collect on social security when they retire. That is just what the propagandists desire. If young people do not believe that they will collect benefits, they will be less supportive about maintaining a program that conservatives hate.
Problems In Europe And Coginitive Illusion In Spain
This article points out that recent optimism about a solution in Europe stimulated the stock market but bond traders were less enthusiastic. It turns out that the bond traders knew more than the equity investors. The recent events in Greece were also unexpected and the stock market has turned sour.
The description of a report by Spain's central bank in this article is what really amazed me. The central bank blamed slower economic growth in Spain on austerity measures imposed on regional governments which were forced to reduce spending. It concluded, however, with little concern for logic, that growth would be better later in the year despite the austerity imposed on regional governments. Its hard to imagine a better example of cognitive illusion. Central banks are such firm believers in fiscal austerity that they continue to believe in its beneficial effects on the economy despite contrary evidence that they acknowledge.
The description of a report by Spain's central bank in this article is what really amazed me. The central bank blamed slower economic growth in Spain on austerity measures imposed on regional governments which were forced to reduce spending. It concluded, however, with little concern for logic, that growth would be better later in the year despite the austerity imposed on regional governments. Its hard to imagine a better example of cognitive illusion. Central banks are such firm believers in fiscal austerity that they continue to believe in its beneficial effects on the economy despite contrary evidence that they acknowledge.
Congressional Supercommittee Is Far From Reaching Agreement on Debt Reduction Plan
This editorial describes the status of negotiations in the Congressional Supercommitte that is charged with creating a plan to cut the national debt by $1.2 trillion. If the bipartisan committee fails to reach agreement, huge cuts in government spending will occur across the board automatically. It was assumed that the committee would reach a compromise on spending cuts and tax increases to avoid that possibility. The GOP representatives refuse to increase taxes and they are using the default alternative as weapon to get the Democrats to yield on tax increases and to include more cuts in spending. The Democrats have offered more spending cuts but the GOP will not accept any plan that includes tax increases. They are arguing that tax cuts will promote growth that will pay for the tax cuts. Few economists believe that tax cuts can be paid for by stimulating economic growth.
Stock Market Tumbles After Greek Government Decision On Referendum
The Greek government decided to allow its citizens to vote on a referendum that would enable its citizens to accept or reject the austerity measures required by institutions that are involved in rescuing Greece from a default on its debt. The public has not been happy with the austerity measures and its not clear how the government will word the referendum. Citizens in Greece would vote to remain in the eurozone if the referendum is framed on that dimension. If it is framed about the specific aspects of the austerity package imposed upon Greece it may not pass.
Changes in Greek situation show how volatile the whole situation in Europe is. Its like a four dimensional chess game that increases the uncertainty of any outcome in Europe. Investors have responded to the uncertainty.
Changes in Greek situation show how volatile the whole situation in Europe is. Its like a four dimensional chess game that increases the uncertainty of any outcome in Europe. Investors have responded to the uncertainty.
Cognitive Illusion At MF Global
This article describes recent failure of MF Global, which was led by Jon Corzine, who has had a storied career on Wall Street, as CEO of Goldman Sachs, and in politics.
MF Global made a big bet on European sovereign debt. He purchased large amounts of debt, at a discount from par, with borrowed money. He was betting that eurozone leaders would not let the distressed country's fail, and that the price would rise on the bonds that he purchased. His bet was consistent with what he had learned at Goldman Sachs. The rewards go to those who take risks when they believe they have a good rationale for the bet.
MF Global ran into trouble when its lenders learned about the size of its bet on European banks. They were less convinced than Corzine about the risk, and they demanded more collateral for the short term loans that MF Global depended upon. Like Lehman Brothers and Bear Stearns in the financial crisis, MF Global became illiquid because of its dependence upon short term loans to cover its highly leveraged bet. It was forced into bankruptcy when potential customers for parts of its business that were put up for sale declined to purchase its assets. They were worried about $600-$700 million that was missing from customer accounts which are supposed to be segregated from the firm's proprietary trading accounts.
MF Global made a big bet on European sovereign debt. He purchased large amounts of debt, at a discount from par, with borrowed money. He was betting that eurozone leaders would not let the distressed country's fail, and that the price would rise on the bonds that he purchased. His bet was consistent with what he had learned at Goldman Sachs. The rewards go to those who take risks when they believe they have a good rationale for the bet.
MF Global ran into trouble when its lenders learned about the size of its bet on European banks. They were less convinced than Corzine about the risk, and they demanded more collateral for the short term loans that MF Global depended upon. Like Lehman Brothers and Bear Stearns in the financial crisis, MF Global became illiquid because of its dependence upon short term loans to cover its highly leveraged bet. It was forced into bankruptcy when potential customers for parts of its business that were put up for sale declined to purchase its assets. They were worried about $600-$700 million that was missing from customer accounts which are supposed to be segregated from the firm's proprietary trading accounts.
Cognitive Illusion By Leading Behavioral Economist
This article (via Manan Shukla) may make us more sympathetic about the bad performance of Wall Street traders that regularly lead to problems in our financial system. They all suffer from cognitive illusion (and so do we). This article we help you to examine your own cognitive illusions.
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