Watch the development of the French-German government bond spread!

Observation on the Pro- vs. Contra-Keynesian debate of our times, drafted and published on May 24, 2012

The economic commentary surrounding yesterday’s EU summit in Brussels would have you believe that there is a pro-Keynesian, pro-Eurobonds consensus building in the international community and in the financial markets. After all, it appears now as if this consensus doesn’t just comprise your usual suspects, such as Hollande’s France, Monti’s Italy and Rajoy’s Spain, but rather also includes otherwise reasonable observers from Britain and the US which perhaps not so surprisingly like to see a bigger Euro spending on the part of the German tax payer.

And yet one shouldn’t fool oneself thinking that the international public opinion (or better the internationaly “published” opinon) on one hand and market sentiment on the other are necessarily one and the same thing. Because the computed market sentiment doesn’t just include the opinion of those who are media and establishment favourites. No, the computed market segment also reflects the interpretations of those who are not lucky enough to get courted by the powers that are but who, nevertheless, like to put their money where their mouth would be if only they were asked to open it. In that, it seems to us, as if there is only one and one indicator only, that can really tell us what markets think in the pro- and contra-Keynesian debate of our times. And, if we are not mistaken, that indicator would have to be the development of the yield spread between the German and the French 10 year government bonds. Because here it is, where commentators do not just vote with their opinion for what they think is right. No, here, they do in deed put their own livelihood on the line when deciding to back a German supply side approach or to go with a French demand stimulus tactic. And funnily enough, according to our own humble findings and calculations, this yield spread between the German 10 year bund and the French 10 year bond has widened from 106 basis points a month ago, to 110 basis points a week ago, to 132 basis points yesterday. Does that warrant any further questions? Do these numbers really ask for more jockeying in the court of public opinion? Or can we now take it that reason is already shaping up to prevail?

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