The Great Debate

Renewables roll-out needs price guarantees

May 13, 2009

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

Power generation from renewable sources such as wind turbines, solar cells and biomass plays a small but important part in satisfying total electricity demand around the world, and is growing at an exponential rate thanks to generous public subsidies and government support.

from The Great Debate UK:

Bank of England faces dilemma on QE extension

April 9, 2009

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

LONDON, April 9 (Reuters) - The Bank of England's terse press statement announcing it will maintain overnight rates at 0.5 percent and continue the existing 75 billion pound quantitative easing (QE) programme gives no clue about whether the Bank intends to extend the programme when the first tranche of asset purchases are completed in June.
But officials will have to make a decision soon: unless they signal a commitment to extend QE, gilt yields will rise even further in anticipation that the major buyer in the market will withdraw.
The QE programme is dogged by ambiguity about its objectives (which a cynical observer might conclude is deliberate).
Officially, the aim is to prevent inflation falling below target by accelerating money supply growth, not manipulate the yield curve for government and corporate debt.
In this, the Bank's avowed strategy is more conventional than the Fed's ambitious efforts to determine the cost of credit for borrowers throughout the economy. It is a straightforward quantitative easing patterned on the Bank of Japan, rather than a credit easing patterned on the Fed.
If true, the measure of success is how much the money supply has been boosted at the end of the three month period; the Bank should be indifferent about whether ending QE causes yields and borrowing costs to rise.
So long as money supply has risen consistent with the inflation target, and the Bank can discern some green shoots of stabilisation if not recovery, officials can declare victory, end the programme, and keep the other 75 billion pounds of asset purchases authorised by the chancellor in reserve. Yields can be left to find their natural level.
But many suspect the Bank's real objective is yield control -- in which case it will have to announce another round of buy backs of gilts and corporate bonds in good time, well before the current programme is completed, to shape market expectations.
The results of the existing round have been unimpressive.
After falling initially, gilt yields are almost back up to the level they were at before the Bank's foray into unconventional monetary policy.
The snag is that if the Bank stops buying, other investors will struggle to absorb all the new government paper on offer without a major increase in yield -- pushing up borrowing costs for everyone, precisely what the Bank has sought to avoid.
The Bank's dilemma is whether to push on (heightening fears about inflation) or call a halt (risking a spike in yields all the same).
Either way, the Bank needs to give the market, as well as the Treasury and the Debt Management Office, plenty of warning about its intentions.
(Editing by Richard Hubbard)

Senators press tough line on commodity rules

April 1, 2009

johnkemp1

Prominent senators have put Gary Gensler’s nomination to head the Commodity Futures Trading Commission (CFTC) on “hold” in a bid to force the administration to take a tougher line on commodity regulation.

Fed sets out exit strategy

March 26, 2009

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

Intense criticism of the Fed’s role in the financial rescue program and the decision to triple its balance sheet, including monetizing a portion of the Treasury’s debt, has forced the central bank to issue an unusual defense of its actions (http://www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).

U.S. government borrowing runs into resistance

March 26, 2009

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

Investors have started to balk at absorbing large quantities of U.S. government debt, taking on substantial inflation and devaluation risk in return for little reward. While the government has no trouble placing short-term debt with a maturity of up to 2 years, longer-dated securities are proving much harder to sell.

Time to rethink inflation targeting

March 19, 2009

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

It is time to add another victim to the ever-growing list of institutions (Bear Stearns, Lehman Brothers) and theories (value at risk, fair value accounting and originate to distribute) which have been tested by the financial crisis and found wanting. The central bank practice of inflation targeting — the jewel in the crown of modern monetary economics — has palpably failed.

The equity illusion

March 12, 2009

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

Even after its recent decline, the U.S. equity market does not look especially “cheap” or “undervalued” when viewed over time; the bear market has simply brought valuations back into line with long-term trends.

Should there be limits on commodity investment?

March 9, 2009

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

The commodity boom and bust in the last 5 years suggests there is a natural limit on how much investment money these markets can absorb before price-setting mechanisms become distorted and prices unmoored from supply and demand fundamentals.

U.S. cap-and-trade choice inferior to carbon tax

February 27, 2009

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

President Barack Obama’s first budget puts climate change at the heart of the administration’s long-term economic plan. But despite the clear theoretical advantages of a simple carbon tax, he seems set to follow the EU and California in opting for a cap-and-trade system.

Commodities send coded clues on inflation

February 23, 2009

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

After an 8-year period of remarkable stability, the ratio between gold and oil prices has broken down spectacularly.