Friday, 25 May 2012

There Are Also Reindeer

"Fantastic grow the evening gowns;
Agents of the Fisc pursue
Absconding tax-defaulters through
The sewers of provincial towns."
Raise a cheer for St Louis Fed President James Bullard who sat down with Reuters earlier this week and told them: 'I'm one that thinks that Greece could exit, and it could be handled in an appropriate way without causing too much damage, either in Europe or in the US.'

I've previously tracked how foreign banks in New York and London, including European banks, have restructured their offshore balance sheets to an extremely conservative stance. To those outside the Eurozone's political cluster it seems obvious that recovery from Southern Europe's Depression won't begin before they are set free from the hobbles of a wrongly-pegged faux gold standard. It also seems certain that the 'bad equilibria' between public and private sectors of the economy in Southern Europe are intensifying dramatically right now (see this story, for example), and that if post-Euro these countries get a chance to migrate to a 'good equilibrium' then their recoveries could be surprisingly dramatic.

Mostly, Bullard's comments remind us this is no longer just a financial or economic crisis (though it is that, right enough), but fundamentally a crisis of European politicians' unwillingness to confront  their own failure. Instead, like damned souls, they shuffle endlessly into windowless rooms (18 times in the last two years) in the hope, presumably, that the world will be different in the morning.

But perhaps we need not join them. As the Euro's denoument draws nearer, a curious thing is happening: CDS markets are beginning very gently to consider whether Bullard might be right. The correlations between movements in CDS rates in Europe and elsewhere cannot but be high, but the 30-day correlations have peaked for both Asia and Europe, and are now falling. For the US, in particular, the correlation is now below the average since August 2011 (which I measure as the start of the true end-game for the Euro).

For the crisis of the Eurozone is not the only thing happening in the world. Or, as Auden ended the poem:
“Altogether elsewhere, vast
Herds of reindeer move across
Miles and miles of golden moss,
Silently and very fast."

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