James Saft

Budget cuts to test banks’ mettle

Apr 7, 2011 16:03 UTC

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

While it may well be a case of cut the U.S. budget or suffer a bond crisis, the current debate begs a question: who will pick up the slack in the economy and who exactly will finance them?

Democrats and Republicans raced, in a plodding sort of way, on Wednesday to reach a compromise budget deal that would keep the government operating past a Friday deadline.

Regardless of what may be wise, the likelihood is that there are going to be further substantial cuts in government expenditure, though this won’t begin in earnest until after the 2012 elections.

That is when the fun is going to start.

It is a simple fact that every dollar less in government expenditure is a dollar less received by the private sector.

Households in the U.S., being already in a sort of adrenal failure, are in no shape to expand spending and borrowing when the government contracts. Even the most extreme monetary policy over the past three years has only managed to bring on a tepid resumption in consumer spending, and, given the state of the housing market and the depressing path of wages, families beneath the top 10 percent are simply not going to go on a spree.

Euro debt and the high cost of justice

Mar 31, 2011 11:53 UTC

It looks just about possible that creditors are going to be paying something like their share of the euro zone debt disaster after all.

This could be a little patch of justice in an unfair world, but like most justice it promises long term benefits but short term pain, both for those dispensing and receiving it.

Firstly, people with money and a choice are going to – indeed already are – voting with their feet, choosing not to lend to the ailing governments on Europe’s periphery.

Bonds, risk and Bernanke’s intentions

Feb 10, 2011 20:49 UTC

Will bond investors keep faith with U.S. government debt amid signs of growing global inflation?

In the end, as with all banks, even central banks, it boils down to trust.

Asked on Wednesday at an appearance before the U.S. House of Representatives Budget Committee if the Fed’s $600 billion programme of quantitative easing amounted to monetization — that Peter to Paul transfer when a government prints money to pay for a shortfall — Ben Bernanke said an interesting thing:

“Monetization involves a permanent increase in money supply though money creation. (QE) is a temporary measure that will be reversed. Money will be normalized and there will be no permanent increase in outstanding balance sheet or inflation.”

Good luck hedging against inflation

Feb 3, 2011 13:42 UTC

Looking to hedge against a spike in inflation? Equities may not be much help.

Neither, for that matter, will you do all that well over the longer haul with bonds, cash or even commodities, at least on the historical evidence. In short, when it comes to investing, inflation is a real drag.

It’s impossible to know if, much less when, the current very stimulative monetary policy in the developed world will spur inflation, but increasingly indicators are raising concerns. Emerging market economies show signs of overheating, while prices of food and many other commodities are surging.

The traditional view has been that equities are an effective hedge against inflation, in least over the long term, because companies will, all things being equal, eventually pass on inflation to their clients as higher prices.