Italian Bonds

Italian Resolution


Meanwhile, Italy's latest bout of turmoil is over for now, after the populist 5Star Movement and center-left Democratic Party agreed to form a coalition goverment. The 5Stars' erstwhile coalition partner, the far-right League, recently pulled the plug on that arrangement in the hope of triggering a fresh election and taking over entirely. But the new coalition means no election is needed, and Matteo Salvini's League will have to grumble from the opposition benches. Guardian
 
piezoe said:
The problem for all the EU monetary zone countries, including eventually Germany, is that although they have a common currency, they don;'t have true monetary union. They lack a common bond. Soros said it best when he said two years ago, in Frankfurt, that Germany should either agree to the Eurobond or leave the EU.

There are two salient observations here: 1. All the Euro zone countries must agree to both a common currency and a common bond, and 2., If Great Britain wants to stay in the EU, they must agree to a true monetary union -- the Euro and the Eurobond. Otherwise they must go their own way and suffer the consequences. The way of the modern world is globalization; not selfish nationalist interests. It is as unstoppable as the rotation of the planets.
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piezoe said:
That is of course the concern, but practical experience tells us it is an unfounded concern. Germany will do better still with a common bond as will all the eurozone countries. Does Alberta or British Columbia do worse because there is a Quebec. Do Connecticut and California do any worse because there is a Mississippi an Alabama and a Louisiana?

There is a common misconception that federal bonds are used to raise money for deficit spending. Under a strict gold standard this is true. However it is not true under fiat currency that is backed by productivity rather than a hard commodity. Those countries that use a fiat currency do not have to borrow to spend! And in fact, in general, they don't. Although some countries do have statutory laws requiring bond issuance to match deficit expenditure, this is entirely unnecessary in a fiat money regime. In a fiat money regime, Bonds serve two main purposes: 1. They are a temporary interest bearing replacement for money that serve to allow temporarily unneeded stores of money to remain constant in buying power; 2. they are an essential tool of the central bank in managing reserve accounts -- this is true even in countries without a specific reserve requirement, such as Canada and Australia. Bonds held on the Central Banks Balance sheet represent money that is available for commerce. Bonds held in the private sector represent money that is temporarily unavailable for commerce.

Bonds allow central banks to regulate the amount of money available for commerce and thus hold that amount in line with productivity and population growth, which in a fiat money regime becomes a necessity to prevent undue inflation or deflation. Of course we are accustomed to thinking of the central banks as indirectly controlling money by controlling the wholesale price of money, e.g., in the U.S.,the Fed funds rate. This is the main tool used by central banks under a gold standard or in a fiat regime. Bond trading by the Fed is intimately tied to this mechanism. When the central bank has only one bond to buy and sell their job is made infinitely easier and more flexible than when there is no common bond behind the currency, as is the case in the current Euro zone. The ECB is handicapped and their job made more difficult because the EU lacks a common bond. Mario Draghi has done well considering how difficult his task is without a common bond. It would be made infinitely easier had he a common bond to work with.
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OK, I get it, deficit doesn't matter one bit. So democrats promise to not raise taxes but raise more benefits. Republicans, cut taxes but don't reduce benefits. Sooner or later, a genius will promise to both cut taxes and increase benefits for everyone and as you said, there is no downside in a fiat regime.

Of course I am being sarcastic because I still don't quite understand how it works even after reading your posts over and over again.
 
Italy bond has been rather tradable for day traders.
It has been on uptrend since 2012 and also Nov 18.

In fact, Italy BTP just broke the record high last Thursday.
 
ironchef said:
OK, I get it, deficit doesn't matter one bit. So democrats promise to not raise taxes but raise more benefits. Republicans, cut taxes but don't reduce benefits. Sooner or later, a genius will promise to both cut taxes and increase benefits for everyone and as you said, there is no downside in a fiat regime.

Of course I am being sarcastic because I still don't quite understand how it works even after reading your posts over and over again.
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deficits do matter! What most people have a hard time wrapping their head around is that not only can deficits be too large, they can also be too small. If you have a basic background in undergraduate economics, then I could recommend a book such as Randall Wray's, "Modern Money Theory", to you. That was written in the 1990s (If I recall correctly). One important change since that book was published is that in the 1990's the MMT economists thought of modern economies after the Nixon Shock as being on a labor standard, whereas today, because of the influence of automation, it makes more sense to think of a country with its own fiat currency as being on a productivity standard.
 
And how productivity/labor standard economies relate to deficits? What I see is that developed economies tend to accumulate debt because they are net consumers, i.e. have to sell assets including their debt.

piezoe said:
deficits do matter! What most people have a hard time wrapping their head around is that not only can deficits be too large, they can also be too small. If you have a basic background in undergraduate economics, then I could recommend a book such as Randall Wray's, "Modern Money Theory", to you. That was written in the 1990s (If I recall correctly). One important change since that book was published is that in the 1990's the MMT economists thought of modern economies after the Nixon Shock as being on a labor standard, whereas today, because of the influence of automation, it makes more sense to think of a country with its own fiat currency as being on a productivity standard.
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pipeguy said:
And how productivity/labor standard economies relate to deficits? What I see is that developed economies tend to accumulate debt because they are net consumers, i.e. have to sell assets including their debt.
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It is not impossibly complicated, but far too much to address in detail here. My suggestion, if you have an interest, is to read the MMT economists: these would include Randall Wray, Bill Mitchell, Warren Mosler, etc. Mosler comes from more of an Investment Background, the others are academicians, and there are many others. The Wray book "Understanding Modern Money," is a classic, but perhaps a bit hard to read unless you have a good basic economics background. Also the book is a little out of date but still one of the most thorough. Mitchell has a nice blog. Mosler's little book is cheap and easier to read: "Soft Currency Economics." You could do a you tube search on MMT or Modern Money Theory and turn up many lectures and forums. (It's also called "Modern Monetary Theory" by some.)
It has taken many years, and will take more years yet, for economic thinking and policy to adapt to fiat currency. Commodity backed currencies are a thing of the past; they are not coming back. And good riddance!
 
piezoe said:
deficits do matter! What most people have a hard time wrapping their head around is that not only can deficits be too large, they can also be too small. If you have a basic background in undergraduate economics, then I could recommend a book such as Randall Wray's, "Modern Money Theory", to you. That was written in the 1990s (If I recall correctly). One important change since that book was published is that in the 1990's the MMT economists thought of modern economies after the Nixon Shock as being on a labor standard, whereas today, because of the influence of automation, it makes more sense to think of a country with its own fiat currency as being on a productivity standard.
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Thank you for the suggestion. I completed Economic 101 online last year.
 
piezoe said:
deficits do matter! What most people have a hard time wrapping their head around is that not only can deficits be too large, they can also be too small. If you have a basic background in undergraduate economics, then I could recommend a book such as Randall Wray's, "Modern Money Theory", to you. That was written in the 1990s (If I recall correctly). One important change since that book was published is that in the 1990's the MMT economists thought of modern economies after the Nixon Shock as being on a labor standard, whereas today, because of the influence of automation, it makes more sense to think of a country with its own fiat currency as being on a productivity standard.
More...
A quick question for you sir: What about countries with huge balance of payments?
 
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