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ThEUnit Podcast 01 - Interview with Dr Eric Edmond
Friday, 02 December 2011 11:55
Our first podcast, and we our delighted to have with us Dr Eric Edmond. In this show we discuss the finer points of the Eurozone Economic Crisis
We would like to cover some terms that are being used widely in these financial stories perhaps you could explain there meaning ?
Public spending cuts and tax rises
Debt appearing as an asset on a bank's balance sheet whose market value is much less than the balance sheet figure
A tradeable instrument that is derived from one or more underlying tradeable securities eg an equity
A government IOU which will repay its par capital value at the end at its term of 2 or more years and also pays a semi-annual interest payment called a coupon. Eg a £100 bond with a 5% coupon will pay £2.50 every six months.
Gilt edged bonds
A UK government bond
What exactly is a banking reserve ?
The bank's own money as opposed to depositors money. Usually about 8% of a bank's total balance sheet.
In regard to the collapse of the banking system, could you explain what has actually happened for us ?
Banks have to roll over and refinance their debt on the unsecured inter bank market. When they stopped lending to each other those unable to refinance from their own resources went bust.
Could we talk about what money is, perhaps you could explain the Gold Standard, and compare that against Fiat currency ?
Gold has its own intrinsic value in any country in the world. Fiat is paper money printed by the government. In most countries it has no value outside the country eg Zimbabwe
I learned a little about double entry accounting, and I know that money doesn't simply disappear, and yet it seems that in this crisis literally Trillions has simply vanished, what are your thoughts on this Eric ?
Andrew and I discussed recently this notional debt problem in Europe where it appears that every country apparently owes every other country money to a greater or lesser degree, what is going on there ?
Bank's balance sheets in total shrink when they stop lending to each other. It was always mainly debt. They lend across national boundaries.
Can you explain what Quantitative easing is ?
Printing money to buy assets, mainly government bonds from banks so they can buy more bonds that the government prints and so on.
Where has QE been used in the past ?
What are the economic risks of QE ?
Hyper inflation on a Zimbabwe Weimar Republic scale.
If Greece defaults further, or indeed any of the other debt laden countries, what are the wider implications for the European economy and the economies of the member states ?.
Banks, French etc, holding Greek bonds will need a bail out from government. Brit banks also hold Greek debt but they have stronger balance sheets and hold less Greek debt.
Are there likely to be any more bailouts for other countries ?
Yes. Spain very soon.
If there are further bailouts, where will the money come from ?
Nobody really knows.
Reading the papers I hear that the ECB has infinite resources, if this is true, can you explain why that is the case?
Because they alone can print Euros ad infinitum or until they run out of paper.
Can you explain how Government Bonds work, in particular the relationship between, USA / Europe debt, and China's buying of Bonds from these regions ?
The relationship works through banks. They hold sovereign debt to meet their risk weighted reserve requirements under BIS rules. Sovereign debt is zero risk weighted. It also pays them a coupon at a rate that which the central bank will pay them on any funds they leave on their eg ECB account.
Finally, the future looks very concerning. What is your opinion on our economic future ?
Dire. There will be blood on the streets of European Capitals. Possibly an army take over in Greece. The UK will face civil unrest like we have never seen in our lifetime. The US is as gridlocked as the EU