Auctions in Lost(Stolen?) Goods

Why small changes in the Italian bond market have such big effects

In August, when the European Central Bank began buying Spanish and Italian government bonds , the two nations’ 10-year bond yields fell to 5% from 6.4%. What happens when the Bank stops buying? Some simple calculations from Leeds on Finance tell us why a small change in Italian yields has such significant effects on all of Europe:

You don’t need to know anything about economics to do some basic math. Here it is…lets imagine a country with debt-to-GDP of 120%. Lets also imagine that the country pays interest of 6% (that’s what Italy is currently paying; Greece is paying much more). If that’s the case, you’re paying interest that is equivalent to 7.2% of GDP. (That’s 120% x 6%.) Italy’s tax revenue is around 22% of GDP. If one-third of their tax revenue is needed to pay interest, the numbers don’t work out.

The US is different from Italy only in that our debt is a little lower, and our interest rates are a lot lower. But as soon as the markets figure out that we cannot or will not reduce our spending, then our situation looks very much like Italy's. What happens when we have to pay 1/3 of our federal budget to bondholders?

 So what are the long run prospects for Italy?

At a press conference after the first summit, Angela Merkel and Nicolas Sarkozy were asked whether they were reassured by Mr Berlusconi’s promises. The German and French leaders hesitated, stole a glance and smirked. The room burst into laughter. Rarely has a leader—from a founding member of the European Union, no less—been treated so disdainfully by his peers.

Why Pay?

When negotiating for a the ticket fee, evidently these fans have too high of a disagreement value.

Who celebrates inequality?

Watch Does U.S. Economic Inequality Have a Good Side? on PBS. See more from PBS NewsHour.

How long before the rest of the PIIGS ask for debt relief?

Any economist would look at the news coming out of the EU this morning with a healthy dose of skepticism: by granting Greece a reprieve, they reduce their incentive to "fix" their fiscal mess; and by granting banks a reprieve, they increase the incentive to take on further risk. Zerohedge explains:

the European joke has come full circle. Indebted nations borrow more money to bail out other indebted nations who ask insolvent banks to cut a 50% off deal on the loans that were given to them, but the insolvent banks will then have to raise capital which the will of course borrow from the over-indebted nations whom they just gave money to. Get it? Problem solved - BTMFD!!!.

Irony

The Occupy Wall Street demonstrators are learning what Wall Street already knows, that people respond to incentives:

The Occupy Wall Street volunteer kitchen staff launched a “counter” revolution yesterday -- because they’re angry about working 18-hour days to provide food for “professional homeless” people and ex-cons masquerading as protesters.

So, lets get this straight: the Occupy Wall Street crowd want to re-distribute income from those who have it to those who don't. Like many deontologists, they ignore the trade-offs created by their principles.

Is there a parking space "shortage"...

...or just prices that don't adjust?

In the Metro-North parking lots along Connecticut's Gold Coast, the haves and the have-nots aren't defined by their clothes, car or even their net worth. Here, it's about whether they have a flimsy green piece of paper visible on their dashboards. 

A public parking pass in this and other towns along the Long Island Sound has become a precious asset. The waiting list for a Fairfield Parking Authority permit has 4,200 people and stretches past six years. In another town, Rowayton, the annual permit sale is an epic frenzy similar to that surrounding the release of a new iPhone, with residents camping out overnight to ensure they get a $325 pass.

Did Netflix Raise Price Enough?

Netflix has been getting hammered in the press for its missteps from raising prices, starting Qwikster and then killing Qwikster, and now for raising price (see earnings report).  But lets look a little closer at the effects of the price change. Its $9.99 monthly plan went to $15.98 (an increase of 60%) and the earnings report indicates that they lost 800,000 subscribers during the quarter (from 24.6 million to 23.8 million, a loss of 3%). This would imply an elasticity of 0.05, pretty inelastic.

When you increase price with an inelastic demand, revenue goes up.  Indeed, Netflix earned $62.5 million in the quarter compared to $38 million the same quarter last year. On this news, the stock price plummeted 37%, wiping out $2.3 billion in market capitalization. Stock market analysts claim that the stock price is warranted despite the good earnings news because they expect much lower future earnings.  

Stossel on city pensions

This is a little long (7 minutes) for my taste, but it dramatically illustrates the problem of unfunded pension liabilities.

 QUESTION: Most city pension funds use an 8.25% to discount the future pension liability. What are the consequences of this high discount rates?

ANSWER: (from earlier blog post)  A recent paper blamed some of the under-funding on the use of discount rates based on the characteristics of the invested assets:

•  the use of higher-than-appropriate discount rates reduces the value of the pension obligations that is reported to the public, and thus likely reduces the contributions that sponsors feel they must make to pre-fund their pension obligations. 
•  the link between the discount rate and the expected return on plan assets may encourage sponsors to invest in riskier portfolios than they would otherwise choose in order to justify a higher discount rate, and thus a lower contribution into the pension trust. 
•  these rules may encourage fiscal gaming in the form of “Pension Obligation Bonds.” These devices allow governments to borrow, invest in risky assets through the pension trust, and treat the difference between the expected asset return and the bond interest rate as “found money.”

Where were you when...

our debt surpassed our income?

Your kids will want to know.