Wednesday 24 February 2010

Crowding out...

As per Wikipedia:


"In economics, crowding out is any reduction in private consumption or investment that occurs because of an increase in government spending. If the increase in government spending is financed by a tax increase, the tax increase would tend to reduce private consumption. If instead the increase in government spending is not accompanied by a tax increase, government borrowing to finance the increased government spending would increase interest rates, leading to a reduction in private investment. There is some controversy in modern macroeconomics on the subject, as different schools of economic thought differ on how households and financial markets would react to more government borrowing.

Usually when economists use the term "crowding out" they are referring to the government spending using up financial and other resources that would otherwise be used by private enterprise. However, some commentators use "crowding out" to refer to government providing a service or good that would otherwise be a business opportunity for private industry."

This is what you can expect in the short term:

There was an excellent article published on

"with €2.2 trillion of EMEA bank debt set to mature between now and December 2012, Peach said banks would need to compete aggressively for limited retail funds, as well as reduce loan volumes and extend the maturities of their capital structures."

Governments are currently reducing the support to the financial sector which means you can expect weaker banks to face massive difficulties in raising capital and issuing debt in the very near future.

Given Banks will be competing with countries to raise money and that you can add to that 600 Billions USD of High Yield debt maturing in the next four years, you can expect another wave of defaults and weaker banks to hit the wall. Some will just not get the support they need.

And the icing on the cake is the Commercial Real Estate peak of trouble which you can expect to happen around the same time...ouch...

Add to that a steep yield curve and then you really have a recipe for more trouble ahead...

And if you want to go into more details about Commercial Real Estate Losses and the Risk to Financial Stability, you can read the full report on the following:

Tuesday 16 February 2010

Inflation is creeping up in the UK...

There we go: 3.5% inflation rate.

In my last post I mentioned a risk of the return to Stagflation. Well, it seems I am not the only one having this thought:


Looks like Jeremy Warner is having the same views.

It is is a terrible situation for pensioners and savers who are now getting negative real interest rates on their savings.

If inflation starts showing its ugly face again, borrowing long term at a decent fixed rate will be a great trade to have. Inflation will pay for it.

You need to closely monitor commodities prices because they are steadily going up again as the CRB index is showing. Lyxor CRB ETF denominated in Euros displays this increase: FR0010270033 is the ISIN.

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