Koo proposes limiting the sale of government bonds to domestic purchasers in the Eurozone. Felix Salmon, the blogger (who prefers Eurobonds- an idea unlikely to happen) correctly identifies why it won’t work.
"The fact is that when money flows into US Treasuries or JGBs or Gilts during a balance-sheet recession, that has absolutely nothing to do with the fact that they’re government bonds, and absolutely everything to do with the fact that they’re the dollar- or yen- or pound-based securities with the lowest perceived credit risk. If you ban Spanish institutional investors from investing in
Bunds, then they’ll just buy something else with extremely low credit risk instead — AAA-rated corporate bonds, perhaps, or covered mortgage bonds from somewhere in the north, or some other kind of highly collateralized structured credit instrument. None of those things might have quite the degree of liquidity that Bunds can offer, but they’re still safer than Spanish government debt right now.
Koo is absolutely right that the flow of savings out of Spain is doing absolutely gruesome things to the Spanish economy: you can’t possibly grow when your companies and households are paying down debt, and all your national savings are fleeing the country. So maybe there’s a case for fully-fledged capital controls. But Koo’s weak-tea version would only serve to decrease,
rather than increase, demand for Spanish government bonds. Their price would go down, their yields would go up, and Spain would be in an even worse position than it’s in now."
Koo’s and Salmon's analysis, however, points to what I think the end game here will be within 5 years. Koo is suggesting limited capital controls, the real way of making things work is to implement rigorous trade sanctions- since current account must equal capital account. This is why Koo’s partial measures won’t work. From a structural unemployment perspective, this is the only way the periphery countries are going to get investment in domestic industries that have been replaced by imports from Germany and China.
"The fact is that when money flows into US Treasuries or JGBs or Gilts during a balance-sheet recession, that has absolutely nothing to do with the fact that they’re government bonds, and absolutely everything to do with the fact that they’re the dollar- or yen- or pound-based securities with the lowest perceived credit risk. If you ban Spanish institutional investors from investing in
Bunds, then they’ll just buy something else with extremely low credit risk instead — AAA-rated corporate bonds, perhaps, or covered mortgage bonds from somewhere in the north, or some other kind of highly collateralized structured credit instrument. None of those things might have quite the degree of liquidity that Bunds can offer, but they’re still safer than Spanish government debt right now.
Koo is absolutely right that the flow of savings out of Spain is doing absolutely gruesome things to the Spanish economy: you can’t possibly grow when your companies and households are paying down debt, and all your national savings are fleeing the country. So maybe there’s a case for fully-fledged capital controls. But Koo’s weak-tea version would only serve to decrease,
rather than increase, demand for Spanish government bonds. Their price would go down, their yields would go up, and Spain would be in an even worse position than it’s in now."
Koo’s and Salmon's analysis, however, points to what I think the end game here will be within 5 years. Koo is suggesting limited capital controls, the real way of making things work is to implement rigorous trade sanctions- since current account must equal capital account. This is why Koo’s partial measures won’t work. From a structural unemployment perspective, this is the only way the periphery countries are going to get investment in domestic industries that have been replaced by imports from Germany and China.
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