Prieur’s readings (December 2, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Edward Harrison (Credit Writedowns): On the sovereign debt crisis and the debt servicing cost mentality, December 1, 2009.
In my view, economic stimulus has been warranted in order stabilize the financial system and prevent economic collapse. However, the price of that stimulus is unsustainably high increases in government debt – in a world in which private sector debt is already critically high. I see the sovereign debt problem as critical, especially in Europe. The sooner we abandon a debt servicing cost mentality, the more likely we are to face up to this challenge.

• Michael Pettis (Financial Times): Competitive devaluations threaten a trade war, December 1, 2009.
As more countries adjust their currencies, the US and eurozone are suffering. Restrictions on imports appear almost inevitable as a response – repeating the errors of the 1930s.

• Gretchen Morgenson (The New York Times): Get ready for half a recovery, November 28, 2009.
Deflating an asset bubble is never fun, and this particular specimen is one for the record books. The binge may have been a blast, but the purge, alas, sure is painful.

• Martin Wolf (Financial Times): Why Copenhagen must be the end of the beginning, December 1, 2009.
Next week’s summit will fall short, but at least there is now broad agreement that action is needed to tackle climate change. Solving the problem needs a stable price for carbon, needs wealthy countries to pay up and needs big subsidies for new technology.

• Mayumi Otsuma (Bloomberg): BOJ offers “minimum” deflation response for Hatoyama, December 2, 2009.
The Bank of Japan accommodated demands by the government to combat deflation with a 10 trillion yen ($115 billion) program that economists said was insufficient to spark domestic demand. The central bank yesterday said it will offer three-month loans to commercial banks at 0.1% under the new facility.

• Andrew Ross Sorkin (The New York Times): A financial mirage in the desert, November 30, 2009.
Willem Buiter, a former Bank of England official who was hired as chief economist of Citigroup on Monday, says that Dubai’s credit crisis is just the natural progression of “the massive build-up of sovereign debt as a result of the financial crisis.” He wrote on his blog on The Financial Times’s website that the contraction of credit “makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral.”

• Michael Santoli (Barron’s): Putting Dubai in perspective, December 2, 2009.
Dubai was the global equivalent of the most profligate developer in Las Vegas succumbing to excess debt and outsized ambitions; its troubles simply were not a huge surprise. This little fissure in the capital markets seems to belong in the same category as the recent rout in Greek government bonds cited here last week – early, mild previews of the sorts of trouble that could arise once investors’ comfortable confidence in the predictability of government and central-bank actions is disturbed.

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