The Great Debate UK

from Breakingviews:

How to tell you’re not Greece — yet

By Rob Cox and Agnes T. Crane

Greece may be enviable as the ancient cradle of democracy -- but no country wants to emulate its contemporary fiscal troubles.

Markets are exacting a heavy price for the Hellenic Republic's budget woes. Yet the Mediterranean archipelago is hardly the only country that would fall into crisis if creditors lost faith. Indeed, the government of the United States is running a deficit of Greek proportions, although its total debt load is much less frightening.

A spike this past week in the yield on U.S. government debt -- the benchmark 10 year Treasury yield hit 4 percent -- ignited fears over the creditworthiness of the world's largest economy. Those faded when investors piled in to the next bond auction, pushing the yield back down by 0.1 percentage point.

Bond yields, and the cost of financing they imply, are an important gauge of the pressure in financial markets. Leaders of highly-indebted countries need to watch them closely. But there are other signs. Herewith, a dashboard for America's financial stewards:

from Breakingviews:

Markets right to take Fed move badly

The Federal Reserve deserves some sympathy. The U.S. central bank did everything it could to stage-manage its minimal tightening moves, announced late on Feb. 18. But markets reacted as if to serious bad news.

The changes really are small. The main one was to increase the Fed's discount rate, which is not currently crucial to the financial system, by a token quarter of a percentage point. That widens the spread between the policy interest rate, currently zero, and the discount rate, which is used for emergency lending to banks, to half a percentage point. Before the crisis, the gap was a full percentage point.

from MacroScope:

Britain heading for rude awakening?

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There is a divisive election ahead for Britain, the threat of a ratings downgrade on its sovereign debt and a deficit that has ballooned into the largest by percentage of any major economy.  UK stocks, bonds and sterling, however, are trundling along as if all were well. What gives?

For a fuller discussion on the issue click here, but the gist is that all three asset classes  are being support by factors that may be masking the danger of a broad reversal. UK equities have been driven higher by the improving global economy, bonds held up by the Bank of England's huge buying programme and sterling by valuation and the distress of others.

Are the markets right to fear a hung parliament?

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-David Kuo is director at The Motley Fool. The opinions expressed are his own -

There is a well-trodden saying that markets hate uncertainty. Elections are inevitably uncertain, so until the votes in the next election are counted we cannot be certain which party will govern the UK.

Currently, there are suggestions that no single party may get sufficient votes to form the next government outright. It is true that the Conservatives have a strong lead over its rivals. However, with a first-past-the post voting system, it only takes a small swing away from the Conservatives to change the complexion of the next parliament.

Light at the end of the tunnel for the U.S. economy?

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Kully Samra

- Kully Samra is UK Branch Director, Charles Schwab. The opinions expressed are his own.-

The last year was an unbelievable roller coaster ride in the financial world.  In the U.S. we saw the S&P 500 plunge to 667, a 12-year low, in March, and then rise over 60 percent from that low as the economy moved away from the edge of the cliff and started to recover.

Economic outlook remains fragile

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John Monks-John Monks is general secretary at the European Trade Union Confederation. The opinions expressed are his own.-

One year on from the collapse of Lehman Brothers, we can see that that wreckage was the first of many.

Lehman sparks a year of trading opportunities

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angus-rigby

-Angus Rigby is CEO of TD Waterhouse. The opinions expressed are his own.-

Volatility has been the name of the game since Lehman’s collapse, an event which sent shock waves through the global financial markets. The ripple effect on correlated sectors sent share prices on a roller coaster ride of unpredictable fluctuations throughout the year – and yet at the same time this very volatility paved the way for the profit-taking retail trader, if they got their timing right of course.

Volatility, a dirty word for the long term investor, has been the fuel driving traders who successfully shorted on peaks and bought on lows. Even the Bank of England cutting rates by 1.5 percent to 3 – the biggest single cut since 1992 – failed to slow down individual traders. In fact, in many ways, this has been The Year of the Retail Investor.

Government must act on bold promises to UK manufacturers

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radley1- Steve Radley is Director of Policy at EEF, Britain’s manufacturers’ organisation. The views expressed are his own.

This week the index of manufacturing activity in the UK moved into growth territory for the first time in more than a year. While that does not necessarily mean that the recession is over, it does suggest that we should be thinking a bit more about what sort of recovery we are likely to see and how well placed the UK is to meet it.

Liquidity & inflation, lessons from the 1940s

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johnkemp
– John Kemp is a Reuters columnist. The views expressed are his own –

LONDON, April 24 (Reuters) – Comparisons between the current downturn and the Great Contraction of 1929-33 have multiplied as commentators and investors have tried to forecast the recession’s likely depth and duration. But as the U.S. economy shows signs of stabilising and attention switches to future inflation the more useful comparison is actually with the 1940s.
The massive build up of highly liquid assets (cash and bank balances) during the Second World War is the closest parallel to the current escalation of bank reserves as a result of quantitative easing programmes in the United States and elsewhere around the world. The relatively modest pick up in consumer prices after the war ended may hold lessons for the outlook for inflation over the next five years.
There is a risk the commodity markets may have over-estimated the speed with which excess liquidity will be transformed into higher inflation and higher prices.
The outbreak of war was accompanied by an unprecedented build up of liquidity in the U.S. financial system. Deficit-financed spending on armaments and the war effort finally eliminated the persistent under-employment of the previous decade and ensured strong growth in corporate revenues and household incomes.
At the same time, households and firms had little opportunity to spend the money. The Federal Reserve imposed strict limits on consumer credit from September 1941 onwards. Consumer durables disappeared from the shops as the government first restricted then banned production of motor vehicles, refrigerators, washing machines and other electrical appliances for civilian use to conserve output capacity for the war effort.
The result was a massive increase in cash and bank balances. After having been flat for the previous 20 years, the amount of cash in circulation quadrupled from $6 billion to $25 billion between 1939 and 1945. Bank deposits more than doubled from $43 billion to $101 billion (https://customers.reuters.com/d/graphics/POSTWARADJUSTMENT.pdf).    But while inflation rose when wartime price controls were lifted, the increase was nowhere near as much as expected given the massive overhang of liquidity which had built up.
To paraphrase Arthur Conan Doyle about the dog that did not bark at night time, the surprise was not that inflation rose so much after the war, but that it rose so little.
Consumer prices rose just 8 percent in 1946, 14 percent in 1947 and 8 percent in 1948, and actually declined in 1949 — and this was after the removal of extensive price controls that had limited increases for 5 years. There was no inflation outbreak.

from Africa News blog:

Time to stop aid for Africa? An argument against

Earlier this month, Zambian economist Dambisa Moyo argued that Africa needs Western countries to cut long term aid that has brought dependency, distorted economies and fuelled bureaucracy and corruption. The comments on the blog posting suggested that many readers agreed. In a response, Savio Carvalho, Uganda country director for aid agency Oxfam GB, says that aid can help the continent escape poverty - if done in the right way:

In early January, I travelled to war-ravaged northern Uganda to a dusty village in Pobura and Kal parish in Kitgum District. We were there to see the completion of a 16km dirt road constructed by the community with support from Oxfam under an EU-funded programme.

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