British Economy

Paul Krugman points out ( that the UK’s present slump is now longer than the one of 1930-34. I think this is the result of fiscal austerity, which is doing enormous damage to our country.

Division on the ECB

Money Supply reports ( that the ECB is reluctant even to discuss taking losses on its Greek bonds because it believes that it cannot do so. A voluntary principal reduction, it believes, is akin to monetary financing of Greece’s government deficit, something that the ECB is specifically forbidden to do. What if Greece decided to insert CAC’s to force bondholders to take a write-down? Here there are apparently two camps on the governing council: the first is opposed to taking any losses and would want the ECB to be excluded from any CAC’s; the second, which includes many of the members who were opposed to bond purchases, believes that the exclusion of the ECB from a forced restructuring would undermine future bond purchases by making the ECB senior to existing holders (a problem I mentioned on 16th January). I do not know which camp will win out but if I was in the position of Greece, I would insert collective action clauses that forced all investors, including the ECB, to take a large write-down.

Money-Market Funds

A Fitch note shows that US money-market funds fled the Eurozone last year, and went into Australia, Canada, Japan — and the UK. However, the FT reports that there is evidence that the funds have returned to the Eurozone markets this year ( The flight of money-market funds is a modern version of a bank run. Fund managers either sell their holdings of short-term bank paper or, more likely, allow them and any repo lending to mature and fail to roll their lending. This means that a modern run can happen much more easily than the old-fashioned kind: all it takes is for some fund managers to decide not buy a bank’s new issues or to withdraw from repo lending. Governments are reluctant to preempt this kind of run in the same way as the traditional kind — they do not want to guarantee repo and CP/CD lending in the same way that they guarantee small deposits. This means that the only alternative is to try to reassure everyone of the safety of the banks all the time. This is why banks are presently being required to raise their capital ratios in Europe, in spite of the credit crunch that is likely to ensue.

However, the real risk with a bank run is that it will become self-fulfilling, and that is something that the monetary authorities can deal with, by promising to head off any runs. That is what the ECB is bending over backwards to do, by reassuring everyone that it will step in to provide short-term funding to banks when the markets will not. With the danger of self-fulfilling runs eliminated, one wonders why an immediate increase in bank capital is still judged to be necessary at the present time. Stupidity and intertia, probably.


  • UK CBI realised sales -22 d.e. Jan. Lowest since March 2009!
  • Durable goods orders 3% b.e. Dec. Core 2.1% b.e. Evidence of further improvement in the US economy.
  • Initial claims 377k d.e. Still trending down.
  • New home sales 307k d.e. Dec. Still flatlining.
  • Tokyo core CPI -0.4% YOY d.e. Jan.
  • Japan retail sales 2.5% YOY b.e. Dec.
  • Eurozone M3 1.6% YOY d.e. Dec. Third decline in a row.
  • Eurozone private loans 1% YOY d.e. Dec. A big decline. Evidence of a Eurozone credit crunch. I said yesterday that I expect a credit crunch in Europe this year as the banks retrench.

Friday and the Weekend

  • US advance GDP
  • Revised Michigan sentiment