Central Perk: 19 aug. 2012

duminică, 19 august 2012

Mish's Global Economic Trend Analysis

ECB Considers Interest Rate Caps; Can Such a Scheme Possibly Work?

Posted: 19 Aug 2012 08:49 AM PDT

Economic Times reports European Central Bank mulls caps on borrowing costs

The European Central Bank is considering buying the bonds of crisis-wracked eurozone countries to ensure borrowing costs do not rise beyond a pre-determined level, German newsweekly Der Spiegel said Sunday.

The bank will define an upper limit for borrowing costs in countries such as Spain and Italy and intervene in the markets to ensure it is not breached, Spiegel said, without citing its sources.

At the end of trade on Friday, Spain was paying 6.39 per cent to borrow for 10 years and Italy 5.76 per cent. In contrast, Germany was paying 1.49 per cent, as investors trust Europe's top economy to repay them.

The so-called spread, or difference, between benchmark German bonds and the debt-wracked countries would be decisive for the proposed rate cap, Spiegel said.

ECB President Mario Draghi announced earlier in August that his institution "may" buy bonds of struggling countries if they first apply for EU bailout funds and accept tough conditions in return.

He said the details would be worked out before the next meeting of the ECB, scheduled for September 6. Spiegel said that ECB governors would decide then whether to implement the proposed borrowing cost cap.

Here is a link to a translated article in Der Spiegel: ECB is planning to challenge interest rate speculation

The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. Thus, they would state papers of the crisis countries always buy when interest rates exceed a certain impact on their yields German Bunds. Sun investors would get a signal that interest rates, the ECB considers appropriate.

Because the Fed has unlimited funds - they can even print the money eventually - it would not succeed even more speculators to drive the returns of the targeted rate also. Thus, the ECB wants to keep not only the financial costs of ailing countries in check, but also to ensure that the general level of interest rates in the euro zone is not too much drifting apart.

At its next meeting in early September, the Governing Council will decide whether the interest rate target is actually installed. One thing is certain, that the ECB will continue to practice their bond purchases more transparent. In the future, they will announce each country, in which capacity she has taken the bonds from the market. This information should be released immediately after the purchases. So far, the ECB had only ever made known Monday how much money she spent on purchases in the previous week as a whole.

Can This Work?

It depends on the definition of "work". In general, if central planners (and it is important to understand that is what we are talking about here) set prices too high there will be unlimited supply.

Likewise, if central planners set prices too low, there will be shortages.

When it comes to money, recall that Switzerland capped the rate of the Swiss Franc vs. the euro. To defend that cap the Swiss National Bank has to offer unlimited money at the target exchange rate.

When it comes to interest rates, the ECB must be willing to buy an unlimited number of bonds (up to the total supply of all bonds).

Theory vs. Practice

So yes, the ECB can "in theory" defend a price target on bonds, but only at the risk of owning every bond.

What about an exit mechanism? How will the ECB get rid of all those bonds down the road? To who, at what price?

Will Germany go along with this ridiculous scheme? For how long?

As is always the case, interference in the free market by central planning fools always fails in the long run.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Join us for the Kids' "State Dinner"

Hello --

Tomorrow is going to be a special day at the White House, and I wanted to make sure you got a chance to be a part of it.

At lunchtime, 54 kids from all over the United States will join me in the East Room for the first-ever Kids' State Dinner.

Each of these young people worked with their parents to create an original lunch recipe. We asked them to design a dish that was healthy, affordable, and tasty -- and which met the nutritional guidelines set up by the U.S. Department of Agriculture. A panel of judges from the groups who partnered with us on this project -- the Department of Agriculture, the Department of Education, and Epicurious -- chose these 54 recipes as their favorites.

So now, the kid chefs and their parents are on their way to the White House, and tomorrow we'll all enjoy a meal together and take in a musical performance from Nickelodeon's Big Time Rush. You can watch the whole thing as it happens on our website -- will you join us tomorrow?

WHAT: The Kids' State Dinner at the White House
WHEN: August 20 at 10 a.m. EDT
WHERE: http://www.letsmove.gov/kids-state-dinner

As a mom, I know that parents are always looking for new ideas to make sure our kids are eating right and staying healthy. That's part of why we launched the Let's Move! initiative.

And it's why we're working with the Department of Education and Epicurious to share a free printable and downloadable cookbook with the winning recipes that these young people created with their parents.

You can learn more about our work to solve the problem of childhood obesity so that all our kids can grow up healthy at LetsMove.gov.

And tomorrow, I hope you will join in the fun of the Kids' State Dinner.

Thanks!

First Lady Michelle Obama

P.S. -- To get a preview of some of the great recipes, go here.

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Seth's Blog : What if your slogan is true?

What if your slogan is true?

Slogans never change anything. They don't grow market share or find you a job or win you an election.

Underneath the slogan, perhaps, is a story. And the slogan well told is a symptom of that story, a shadow of what you're truly up to. A slogan might be evidence that you have a story, but it isn't a story. A story is something you live and connect with and come back again and again and again.

If the story of your work is consistent, if it resonates with your audience and if you can defend it, then you're likely to succeed. And if your slogan reflects your story, good for you.

Apple has had various slogans through the years, but in every successful iteration of the company, the story has been remarkably consistent: Apple's story is that they are idiosyncratic artisans producing beautiful products for smart people. That's not a slogan, but it's a useful tool for deciding if you're making something or doing something that you ought to be focusing on.

So sure, start with a slogan. But don't bother wasting any time on it if you're merely going for catchy. Aim for true instead.