News Links: Are western central banks having an existential crisis?

David Wessel over at the Wall Street Journal has followed up on a story FT Alphaville has been covering for a while. That the world economy is running out of super-safe financial assets, and that this is doing untold damage to central banks’ abilities to control interest rates (the last bit is our spin).

The past few years have taught us a lot about the effects and operations of monetary policy in the United States. The Federal government responded to the economic downturn by spending enormous amounts and Federal Reserve responded to the financial crisis with an enormous expansion of its balance sheet – what the proles call "printing money" – and both occurred without any attendant inflation or giant soaring of interest rates. The so-called "bond vigilantes" turned out to be mythological creatures, at least as far as U.S. federal debt is concerned. Even the crisis over the debt ceiling and the downgrade of the U.S.’s credit rating only lead to lower interest rates. The school of economics that best explains this phenomenon is called "Modern Monetary Theory" or MMT.

Deserted by many of his fellow Republicans, U.S. House Speaker John Boehner surrendered to attacks from President Barack Obama and congressional Democrats and agreed to a two-month extension of a payroll tax cut that he derided hours earlier.

Southern Europe’s battered debt markets are basking in a glorious pre-Christmas rally as hedge funds and investors celebrate a blast of cheap liquidity from the European Central Bank.

A top European Central Bank policymaker has called for "quantitative easing" to be used to boost the eurozone economy if deflation risks emerge across the 17-country region. The comments by Lorenzo Bini Smaghi, ECB executive board member, are the strongest indication yet that the central bank would expand its policy tools to prevent a possible disastrous economic slump in continental Europe.

the beauty of a stealth subsidy is precisely that: it is too subtle for most voters to understand. It is also arguably a more equitable form of burden-sharing, and thus less politically divisive, than, say, state spending cuts. Moreover, governments do not necessarily need to be "repressive" to achieve the "repression" trick; as the economist Alan Taylor observes, if investors are so terrified that they cannot see alternative investment choices, they may end up buying government bonds by default – even at unattractive prices. Indeed, that is arguably what is already occurring today in the Treasuries market, or the world of JGBs. And, perhaps, in the eurozone too