Posted on Monday, November 2nd, 2009
By the Center for Geoeconomic Studies
The greatest challenge of European monetary union is devising a single monetary policy for a large grouping of countries facing divergent economic conditions. As these charts show, this challenge has been thrust to the fore since 2008, as eurozone employment conditions have diverged dramatically across member countries. Whereas the effectiveness of independent monetary policy as a tool for managing employment in smaller open economies is much debated among economists, the political challenge facing the European Central Bank in having to justify its policy decisions under current conditions is clear.
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Posted in 2008/9 Downturn, Central Banks, Europe | 0 Comments »
Posted on Wednesday, October 7th, 2009
By the Center for Geoeconomic Studies
This chart shows who financed the massive amounts of debt that the U.S. government issued in the first half of 2009. The total net issuance of treasuries and agencies is shown on the left, and economic sectors are ordered from left to right by the size of their total purchases. Given the federal backing of the GSEs – government sponsored entities such as Freddie Mac and Fannie Mae – it is best to look at the sum of treasuries and agencies rather than treasury issuance alone. Through the first two quarters of 2009, issuance has been financed primarily by official buyers. Official buyers often have motivations other than profit. The Federal Reserve is buying debt as a part of its quantitative easing program, while some foreign central banks are accumulating debt as a function of their currency policy. The Federal Reserve plans to slow and then stop its purchases by the end of the first quarter of 2010. This raises the question of who will replace this source of demand, and at what price.
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Posted in Capital Flows, Central Banks, U.S. | 8 Comments »
Posted on Tuesday, September 8th, 2009
By the Center for Geoeconomic Studies
The Federal Reserve responded aggressively to the economic crisis with unconventional monetary policy measures. These measures have vastly expanded the size of the Fed’s balance sheet, leading to concerns over future inflation. Chairman Ben Bernanke has argued that the Fed has the tools to fight any uptick in inflation; for example paying interest on reserves. But it is not only the size of the Fed’s balance sheet that has changed; its composition has changed as well. As the chart above illustrates, the Fed is now holding riskier assets, such as mortgage backed securities, that may prove difficult to unwind in a timely fashion.
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Posted in Central Banks, U.S. | 6 Comments »
Posted on Thursday, August 6th, 2009
By the Center for Geoeconomic Studies
The U.S. and IMF bailout of Mexico in 1994 is often cited as a textbook example of a successful financial rescue. The economy stabilized allowing Mexico to pay back most of its loans in less than 2 years. In response to the current crisis the Fed took on the role of global dollar lender of last resort by lending to foreign, primarily European, central banks. These loans were paid back more quickly than Mexico’s.
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Posted in Central Banks, International Institutions | 2 Comments »
Posted on Monday, July 27th, 2009
By the Center for Geoeconomic Studies
China has expressed concern that the growth of the Federal Reserve’s balance sheet will adversely affect the value of its dollar reserves. But China has plenty of experience of its own with rapid balance sheet growth. The PBOC’s balance sheet is a larger share of China’s GDP than the Fed’s balance sheet is of U.S. GDP. Does China’s own experience sterilizing rapid growth of its central bank balance sheet provide a hint about the U.S.’s future?
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Posted in Central Banks, China, U.S. | 3 Comments »
