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TMFAleph1 (94.91)

The Bull 'n Bear on Irrelevant Debates, Commodity Index Funds

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May 27, 2011 – Comments (1) | RELATED TICKERS: GS , USO , TLT

Yesterday, I referred to the dysfunctional approach our leaders are adopting regarding the federal debt ceiling. Glenn Hubbard, the (fomer?) dean of Columbia Business School has an interesting piece in the FT, Forget the Debt Ceiling, Focus on Debt, that highlights how this squabbling has nothing to do with the problem we must solve.The zinger that sums up the absurdity of the situation:

That the US has an unsustainable fiscal trajectory is clear, but the problem is not the debt ceiling per se. My wife and I don’t vote on whether we will pay our bills. Rather, we discuss whether our spending or income needs adjustment.

I continue to believe that a combination of spending cuts and tax increases will be necessary to resolving the problem, but it's worth noting Hubbard's reference to academic research according to which spending cuts dominate tax cuts in terms of their positive effect on stabilizing debt levels (and stimulating growth).

There is another interesting article by Gillian Tett on the effect of commodity index funds (which now represent $200 billion) on commodity prices. The bottom line: It is likely that the growth in these funds has contributed to the rise in correlations between different commodities and between commodities as a group and other asset classes. I've always been slightly uncomfortable with the notion of including commodities into one's asset allocation, and this rise in correlations suggests it has become less useful anyway.

Finally, as someone who was born on European soil, it was with sadness (and some measure of shame) that I read How We Dined with Mladic and Failed our Duty concerning the way in which European politicians coddled the Bosnian Serb war criminal Ratko Mladic. What an catastrophic error in judgement, with tragic consequences.

Enjoy your day! 

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1 Comments – Post Your Own

#1) On May 27, 2011 at 2:04 PM, TheDumbMoney (38.50) wrote:

I'm meh on the debt-ceiling debate.  The Democrats, bless-'em, appear to have basically decided that if they stall and delay and talk about Paul Ryan's medicare plan enough they can all get relected in 2012, and hopefully the economy will have improved enough that revenues will be up and they won't have to make tough choices.  It's classic.  It's exactly what Democrats do in California where I live.  Everyone knows the debt ceiling debate is the only tool the Republican House has to extract any kind of a meaningful spending cut from the President and from a still-fairly-liberal Senate.  Everyone knows some deal will get done before the true August deadline.  This of course is why the markets down't care.  If the Republicans can get the Democrats to actually cut more than a pathetic few tens of billions of dollars, then in my view, great, and I say this as a moderate Democrat.  If the Republicans are simply posturing, and end up extracting only a nominal spending cut, fine, they lose by that in the court of opinion.  The debt ceiling was imposed by Congress, and may be raised by Congress.  Its existence is nonsense.  Its raising is nonsense.  It is fair to have nonsensical political gamesmanship about that raising, since eveyone knows that passing through the ceiling is not the same as actual default. 

You can go the other way on second-order effects, too.  What about the second-order effects to the dollar and to other things that will result from cutting nothing until January 2013 or later?   The debt-ceiling debate, as stupid as it is, makes that less likely.  Everyone already knows this is really about the structural deficit, not about the ceiling.

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