James Saft

Iceland’s remarkable return to growth shows once again that in this crisis the best policy is often the one that will make international partners most angry.

Having been reviled and chastised when it refused to make good the outsize debts of its banks, Iceland this week capped a striking turnaround when it announced that its economy expanded by 1.2 percent in real terms in the most recent quarter, its first such rise in two years.

This is in stark contrast to Ireland, whose pliability and inability as a member of the euro zone to act unilaterally leaves it with a still crashing economy which must service ever more debt by making ever deeper cuts to public spending.

Iceland, which sailed into the crisis in 2008 as essentially a small fishing fleet with a massive hedge fund attached, looked its predicament square in the eye and followed a set of policies seemingly designed to tick off both its friends and enemies, doing its small but mighty best to beggar its neighbors by letting its currency crash, imposing capital controls and, crucially,  refusing to make whole the global creditors of its three failed international banks.

While an International Monetary Fund and multilateral package was eventually agreed, and a deal with Britain and the Netherlands over debts from Icesave Bank are currently being hammered out, Iceland’s leaders, at least the current ones, seem convinced that making bank creditors share its pain was the right course.

James Saft is a Reuters columnist. The opinions expressed are his own.

The move to reform taxation of billions of dollars in so-called carried interest paid to hedge fund and private equity executives is dead and prominent among the mourners should be investors in U.S. debt.

A country that can’t even get it together to ensure that some of its highest paid people pay as much proportionally in tax as their secretaries and personal trainers is a country with very little hope of effecting meaningful budgetary reform.

Suffice to say that the long bond didn’t sell off on news that U.S. Senate Finance Committee Chairman Max Baucus has dropped a higher carried interest provision from his since-defeated tax bill, a sign that the Democrats have effectively given up hope of the measure. The news should, however, make holders of U.S. debt even more willing to sell to the Federal Reserve, currently buying Treasuries often and in size. The script has been written for tax and spending reform over the next two years and for lenders to the U.S. the story does not end happily.

The good news is that the European Central Bank will probably start a massive additional round of quantitative easing to fight the break-up of the euro zone.

The bad news is that they will, as ever, only choose the right policy, as Winston Churchill said of the Americans, after exhausting all of the alternatives.

Global share markets rallied furiously on Wednesday, fed by hopes that the ECB would increase its bond-buying efforts, a possibility raised by its chief Jean-Claude Trichet in an appearance before the European Parliament. Trichet faces stern opposition inside the ECB from fellow central bankers, notably German Axel Weber, who believe that policy should be normalized rather than loosened.

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala — If you think that the business of America is consumption, then sit back, enjoy the Black Friday sales and take heart from the recent upbeat data on spending and income.

If, on the other hand, you think the future of the U.S. is going to have to be productive industries which throw off the cash flow that funds the paychecks and pays for the $5 made-in-China Barbie dolls at Wal-Mart, then perhaps you had better take note of the sharp slowdown in orders for durable goods.

The contrast between consumption and investment really could not be more stark.

The U.S. Commerce Department said on Wednesday that consumerspending rose by 0.4 percent in October and also upgraded spending growth in September to 0.3 percent. Incomes rose by 0.5 percent in the month, one of the best such showings this year.

James Saft is a Reuters columnist. The opinions expressed are his own.

There is a pretty good rule of thumb in global financial markets: if you want to know where problems are beyond the reach of policy, look for places where the authorities are blaming “speculators”.

So it was in Europe, where last spring, as the depths of the euro zone’s problems were becoming clear, officials railed at the speculators who had the temerity to point out the obvious: that several nations would not have the money to repay their debts.

Greece and Spain went so far as to put their intelligence agencies on the case of tracking down speculative “attacks.”
So, it would seem, is it now in China, with food prices.

We’ve all gone down the rabbit hole.

World Bank President Robert Zoellick has lent a certain Alice in Wonderland quality to the financial landscape by saying that the world should consider a return to a modified gold standard of international exchange.

If you’d asked me in 2007 how likely it was that a consummate insider like Zoellick would propose such a thing I’d have said it was only slightly more credible then the head of the National Cattlemen’s Beef Association coming out in favor of giving cows the vote.

The idea that we would move away from or curb a fiat money system — in which the value of money is tied only to faith in a government, buttressed by its policies — was, and probably is, unsupportable, not so much impossible to implement as impossible to agree.

We’ve entered a new era in global financial markets: the U.S. is intentionally devaluing the dollar.

For the U.S., which has long espoused a strong dollar but in reality had a policy of benign neglect, this is the equivalent of pushing the big red eject button in the jet cockpit: something big is going to happen and we will have to see how it will work out.
The Federal Reserve on Wednesday moved to open a second round of quantitative easing, pledging to purchase a total of $600 billion of longer-dated Treasuries between now and the end of the second quarter of next year. As well, the Fed will reinvest $250-300 billion in the same period, meaning that the central bank will be buying up $110 billion a month in Treasuries and creating a like amount of new money out of the ether.

Perhaps the principal way QE will boost the economy, the Fed hopes, is by lowering effective interest rates, enticing investors to move into riskier assets, some of which may generate inflation and jobs. As well there is the wealth effect; the old canard of spending more because your retirement account and house have gone up in nominal terms.

-The opinions are the author’s own-

By the end of this week, the U.S. will face a government that is unable to act to aid the economy and a Federal Reserve that is unable to stop.

The stock market may well rise on this dysfunctional combination, only serving to prove that the economy and market are becoming fundamentally disconnected.

Tuesday’s election may well deliver a split Congress with the Republicans in control of the House of Representatives and the Democrats clinging to a narrow majority in the Senate. This means that there is no chance of further meaningful stimulus and that Democratic timidity will likely harden into an intransigence to match that of the Republicans.

-James Saft is a Reuters columnist. The opinions expressed are his own-

A dilemma at the heart of the response to the financial crisis is that the antidote to so many ills actually causes the symptoms to worsen.

Take for examples bank capital levels and the chaos surrounding home mortgage foreclosures.

Both issues are the fruit of the same tree: the desire to do things quickly, cheaply and with minimal safeguards.
And both, if you want to fix them, are probably going to slow the economy and lower asset prices in the short term.