Spain now also aspires to being more like the Germans. Italy’s government is a joke of course, but at least its private enterprises are good and its people save.

It is Britain that worries me. I fear that our cynical, weak and vain prime minister and sybaritic population will be reluctant to face up to our problems.

no doubt China can’t “switch” to euros overnight, that however does not switch off the spe culation from observors and investors. how damaging that may be is anyone’s guess. the question is if the slightest hint of a shift will set off a speculative stampede.

rebeleconomist

was wondering if the eurozone could maintain its stability harmonious front/policy line for very long before open fractitious spats start, hmm am thinking german-french-spanish spat soon, what do you think?

You do not even know the size of your own country’s bond market. As of November 30th 2008, there were $5.8tn treasuries outstanding.

I am sure that the European Commission would be gratified to know that someone considers the stability pact so binding, especially considering that even those famously disciplined Germans are currently in breach of it.

As I said, before you dispute what others write, check your own facts. Don’t waste peoples’ time.

In the meantime, have a Merry Christmas!

Something similar is happening right now with the United States and the fact that no one is buying agencies anymore. If everyone buys Treasuries, the US can’t do monetary policy anymore, and so the only thing left is fiscal policy.

I’m sure that there are ways of restructuring the system to deal with this issue, just as the US fiscal and monetary system is being massively restructured right now. It seems inevitable to me that the Fed is going into the home mortgage business whether it wants to or not.

However, it will involve quite a bit of coordination, and the PBC can’t say one day “let’s switch to Euros” without a huge amount of disruption which I can’t see them wanting.

Before July, agency bonds were acting as a proxy for Treasuries adding about $5 trillion to the volume of bonds available to hold reserves. Once central banks stopped buying agencies and shifted to Treasuries, we’ve had massive market disruption in the form of negative interest on T-bills and huge spreads on everything else. It’s like watching an elephant in a bathtub when the bathtub suddenly got smaller.

Given what’s happened with the shift from agencies to treasuries, seeing more than a 20% shift in PBC holding from Treasuries to Euro-bonds seems to me impractical without a lot of market disruption, which is the last thing that anyone wants right now.

I strongly think that with Treasury rates negative and Obama talking about massive stimulus packages and trillion dollar deficits, that we’ll end up in 2009 with the world economy more “unbalanced” than in 2008.

Compared to $6.3 Tn for US Treasuries. I stand by my point.

Rebel: It is certainly easily large enough to support a shift in the composition of foreign exchange reserves.

Given the numbers above, I really don’t think that this is the case.

Rebel: In Europe, the stability pact is supposed to limit government debt, but the US has its own debt ceiling.

The US debt ceiling can be moved upward by an act of Congress whereas to renegotiate the stability pact requires a long and painful intergovernmental negotiation between the various governments with any major EU government (probably the Germans) saying no.

2fish. There are plenty of eurozone bonds that China could buy. Whether it could buy more without driving yields down even more than it is already is a somewhat different question. But there is no shortage of existing bonds, and with rising fiscal deficits in Europe, there shouldn’t be a shortage of new supply either.

Especially if you are willing to buy government guaranteed bonds issued by european banks …

I notice that you don’t state the size of the euro government bond market, probably because you don’t know much about it.

The big four AAA euro governments alone account for about $3.6tn at the present exchange rate. In addition, there are several smaller AAA euro sovereign issuers in Europe (Austria, Finland, Ireland etc, even including the UK). At less than AAA, Italy and Belgium account for about $2.3tn. Then there is Greece, if you dare!

The euro government bond market is actually bigger than the treasury market. It is certainly easily large enough to support a shift in the composition of foreign exchange reserves.

In Europe, the stability pact is supposed to limit government debt, but the US has its own debt ceiling.

Before you dispute what other commenters write here Twofish, you owe it to them to make sure that you know the facts yourself.