Speakers´ corner

Content in this Forum is not to be considered investment advice.

Knut Anton Mork

Chief Economist Norway

Norway and China

knmo01@handelsbanken.se

The week before Christmas!

Readers unfamiliar with the poem familiar to millions of Americans can check the original here.

’Twas the week before Christmas, and all through the House
Speaker Boehner were moving, as quick as a mouse.
Positions were made in the market with care,
In hopes that a compromise soon will be there.

The keepers of hedge funds all snug in their beds
With good carried interest alive in their heads.
While others were worried and thinking, “what if,
The economy falls off the big fiscal cliff!”

When out of the White House I heard such a clatter
I sprang to my Mac to see what was the matter.
I opened a window of news like a flash,
Hoping to find some good promise of cash.

Then I saw a figure, so handsome and black,
I knew in a moment it must be Barack.
More rapid than eagles his aides moved around,
While radio and TV crews covered the ground.

He sprang to the mike, took a look at the prompter,
Then spoke in his baritone voice without stutter,
“Ill be keeping my promise, I am holding on tight.
Happy Christmas to all, and a good budget fight!”

Oil Price Increase and Decrease

Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries

Abstract: The correlations between oil-price movements and GDP fluctuations are investigated for the United States, Canada, Japan, Germany (West), France, the United Kingdom, and Norway. The responses to price increases and decreases are allowed to be asymmetric. Bivariate correlations as well as partial correlations within a reduced-form macroeconomic model are considered. The correlations with oil-price increases are negative and significant for most countries, but positive for Norway, whose oil-producing sector is large relative to the economy as a whole. The correlations with oil-price decreases are mostly positive, but significant only for the United States and Canada. Most countries show evidence of asymmetric effects, with Norway again as an exception.

See our  Research Paper published in The Energy Journal, new window

 Authors; Knut Anton Mork, Oystein Olsen and Hans Terje Mysen

What difference the euro makes

Martin Wolf's column in today's FT makes an excellent point recently advanced in a paper by Dutch econ professor Paul de Grauwe. The point is made as a response to the question of why British government bonds are faring so much better in the market than their Spanish counterparts. The answer is that liquidity risks become much greater for the bonds of a government of a country that does not have its own currency. Although other arguments surely can be advanced, I agree with Wolf and de Grauwe that this very well may be the main reason for the big difference between British and Spanish government bonds, a difference that seems paradoxical considering that British sovereign debt is larger as a percentage of GDP, not only historically, but also for this year and the next, according to DG EDFIN ofrecasts.

The argument goes like this: Suppose a holder of Gilts starts to doubt the wisdom of his or her investment and sells the bonds. The sale may raise the bond yield marginally. Suppose further this selling investor is a foreigner and also exchanegs the pounds (s)he gets for the sale into some other currency. That may weaken the pound. However, the person who buys the pounds will have to invest them in some pund-denominated asset, of which Gilts will be a suitable candidate. Thus, there will always be both buyers and sellers of Gilts. The Gilt market will remain liquid.

Compare this to Spanish government bonds. If an investor sells his or her holding, (s)he will receive euros as payment. And the same euros can be used to invest in Bunds instead, for example. Holders of euros can compose perfectly good euro portfolios without including Spanish bonds. This creates a risk that the liquidity in the market for Spanish bonds can dry up. That can make investors flee.

Note that this argument has nothing to do with credit risk. We're not talking about default. Not at all. And yet, the market may easily collapse if liquidity dries up. That could create a default risk which wasn't there in the first place.

Participating in a common currency is no child's play.

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