Best of Q4 Posts

Here is the selection of our best posts from the fourth quarter.

1.  The Passion of Monti:  A Christmas Story  An allegorical analysis of Italy's political situation and Mario Monti's ambiguous legacy.  

2.  Great Graphic:  Fiscal Cliff Negotiations  A graph that shows the differences between the Democrats and Republicans proposals to avert the fiscal cliff.  Contrary to the partisans' claims, this is really a case of a hubris of small differences. 

3.  Misunderstanding IMF COFER Adjustments   The IMF is considering breaking out the Australian and Canadian dollars from the "other" category.  This simply reflects what central banks are already doing and does not mean that IMF is recommending them as reserve assets.  It is noteworthy that China's yuan has not yet reached the critical mass that would suggest it too ought to be recorded separately.  

4.  Misdirection of Currency Wars This has been a popular topic in the conventional media and blogosphere.  We argue that currency wars cannot be simply the attempt of the central banks in high income countries pursuing monetary policy to revive their economies during the de-leveraging phase.  It also has to do with medium income countries refusing to allow their currencies to participate in the adjustment process.  Capital flows to the emerging markets have actually slowed despite the unorthodox monetary policies among the developed countries. 

5.  The French Connection We argue that German reforms were spurred by the fall of the Berlin Wall and that the peripheral of Europe's reforms have been imposed by investors and European officials.  France has not been as fortunate.  We suspect that the European debt crisis will not be over until France too acquiesces to structural reforms. 

6.  What is Rajoy Waiting For? Some Thoughts Since the ECB unveiled its Outright Market Transaction scheme, Spain's Prime Minister Rajoy has hemmed and hawed, but has refused to sign up.  Spain has benefited from the sharp decline in yields spurred by the announcement and cannot be assured that actually implementing the program will produce a further significant decline in interest rates.  We suspect if and when Rajjoy acts it will be in the heat of a crisis and potential capital strike. 

7.  Yuan and Won:  Now This is New We have argued that much of the internationalization of the Chinese yuan is about appearances more than substance and the Sino-ification of Hong Kong rather than the increased international use of the yuan.  However, the development to use bilateral swap lines to promote trade settlement in local currencies is noteworthy and could be the model of the next stage of development. 

8.  Japan:  Slip Sliding Away A look at the forces that would be brought to bear after the Japanese elections.  Abenomics is simply the aggressive easing of monetary and fiscal policy with the aim of depreciating the yen, stimulating the economy and ending defllation's grip on the world's third largest economy.