EUCOM Economic Analysis - Part I

[Firn]

From the Guardian

10.36am: Germany has just managed to sell two year bonds at its lowest borrowing cost ever -- with a yield of just 0.07%.

This morning's sale of two-year Schatz bonds proved popular with investors, even though the bonds won't pay a coupon (a regular payment). Investors snapped up €4.555bn of the bonds, at prices that mean they will have received just 0.07% per year when the money is repaid in 2014. That's down from 0.14% previously.

Germany had offered €5bn of bonds, and could have sold the lot if it had accepted higher yields in return.

This is the first time that Germany has sold a 0.0% coupon* bond - it took the move after seeing record demand for its debt. This indicates that investors are prioritising capital safety at any price, rather than worrying about profitability.

Such low yields mean of course that inflation and GDP growth are lowering the debt burden. For private money Germany did, like the UK and the US pay little and now nothing. I don't know the turnover of debt but it should be around 10-15% IIRC. For the state it would certainly make sense to strech the years and lower the yields asked, considering how much demand there is for this 'safe' heaven.

Especially the UK would greatly benefit from sound public investmen, just like the US and Germany would lend a helping hand to other members of the Eurozone. To some extent it is just the old sad story of persons being greedy when others are greedy and fearful when others are fearful. This concept is rightly ingrained in us humans through our long evolution but it is a poor guideline for macro.

9.38am: New sales figures from the British high street have dealt a blow to hopes that the UK economy is recovering.

UK retail sales fell by 2.3% month-on-month in April, much worse than the 0.8% decline predicted by economists. That's partly due to a drop in fuel sales (after motorists rushed to fill up in late March after a brief panic over a truck drivers strike). On a year-on-year basis, sales were also disappointing - down by 1.1%, versus a forecast of an increase in 1%.

So the UK consumer is reining in its spending, in the face of cutbacks and slowing economy at home and the euro crisis abroad. Not good. As Howard Archer of IHS Global Insight said:

@Surferbeetle: Just a war of words, but rather heavy ones. It won't get biblical but this crisis will leave its traces in the European mind. Insults and pain tend to do.