Five Key Posts on Marc to Market in Past Week: Did You See Them?

1.  The Thermidor:  Push Back Against Germany  Discusses the recent developments that seem to try to check Germany.  It also suggests that while the political left has been quiet despite the high unemployment social costs of both the crisis and recovery, there is a split on the political right.  

2.  Summers Expects a Long Winter  Explores some of the issues raised by Summers' recapitulation of longstanding arguments about the inability of modern economies to sustain aggregate demand without resorting to bubbles.  Without them, the natural interest rate, which is the real rate needed, economists say, to produce a desired level of employment and investment, could be below zero.   We suggest Summers' neoliberalism does not allow him and recognize that  root cause is the abundance of capital.  The thematic point of a split in the right, between market fundamentalists and conservatives, is further developed.  

3.   Raining on the Parade  We argue that the market confused noise with the signal last week when  single report played up the risk of a negative deposit rate and thought the FOMC minutes might signal a December tapering.  The true signal, which Draghi underscored shortly after we posted this comment, is that while the ECB is technically prepared to adopt a negative deposit rate, it is not imminent.  Indeed, most ECB officials that spoke, excluding France's Praet, played down the risks of deflation, while accepting that inflation may be low for a prolonged period.  We would attribute little to no chance of a December tapering by the Fed.  Inflation has not moved back toward the target.  The monthly non-farm payrolls have improved, but the decline in the unemployment rate exaggerates the improvement. Another fiscal deadline is approaching.  Lastly, although few others have picked up on it, the large changes at the Federal Reserve in the coming months also would seem deter new initiatives by the Bernanke Fed.  Such new initiatives would reduce the degrees of freedom of the new Fed and deny it the opportunity to build independent credentials, including balancing perceptions of the ultra-dovishness of Yellen.  

4.  Bitcoins, Dollars and Renminbi  A dispassionate analysis of the interest in Bitcoins in the China and the US.  To the extent that Bitcoins, and digital currencies or e-money more generally, help facilitate growing internet-based transactions, they can become an increasingly important part of the economy.  However, to the extent that they are seen as an alternative store of value, or as some have suggested an alternative reserve asset, we are more skeptical.  We identify an critical contradiction such a role.  On one hand, if Bticoins are to be an alternative to fiat (not backed by gold or silver) money, they ought be hoarded, especially in the current context in which the Federal Reserve and the Bank of Japan are expanding excess reserves by $160 bln a month.  On the other hand, the network effect necessary to make the Bitcoin viable as a transactional vehicle requires consumers spend (not hoard) them and a dramatic increase in the number of businesses that will accept them.  

5.  Great Graphic:  EONIA Being Squeezed Higher, Likely Seasonal Noise  The ECB has suspended LTRO payments over the year-end period.  Banks increased their repayment of such borrowing and these will settle in the week ahead.  Some observers link these with the rise in the overnight rate in the euro area.  Yet the increase began prior to these new developments.  We suspect this is just month end pressures.  Despite the decline in excess liquidity in the euro area, there is little evidence that EONIA has risen more than 1-2 bp.