Did Greenspan suggest that the Fed no longer completely controls US monetary policy?
One of the most intriguing passages in the magisterial Ip/Hilsenrath account of the origins of easy credit in Tuesday's soon-to-be Murdoch Journal comes when Ip and Hilsenrath quote Alan Greenspan discussing how long-term rates stayed far lower than the Fed expected once the Fed started to raise short-term rates:
Looking back, he [Alan Greenspan] says today: "We tried in 2004 to move long-term rates higher in order to get mortgage interest rates up and take some of the fizz out of the housing market. But we failed." Something besides Fed policy was at work. Both Mr. Greenspan and his successor, Ben Bernanke, point to an unanticipated surge in capital pouring into the U.S. from overseas. Emphasis added.
That seems — at least to me — to be a rather remarkable admission. After all, the Fed controls at least short-term US interest rates, the expected path of short-term rates should have an impact on long-term rates and the housing market is rather interest rate sensitive.
We are only now — after the most recent Treasury survey and the subsequent revisions to the BEA's data on official purchases of Treasuries and Agency bonds getting a real sense of just how big a role foreign central banks played in that "anticipated surge in capital" from abroad.
Consider the following graph. It shows foreign central bank purchases of Treasuries and Agencies before the recent data revisions (in light green for Treasuries and light blue for Agencies) and after the recent data revisions (dark green for Treasuries and dark blue for Agencies). Central banks were clearly big buyers.
Indeed, by the end of 2006, combined total official demand for Treasuries (over $200b over the preceding four quarters) and Agencies (a bit under $200b) was far higher than back in 2004. And some analysis suggests that central bank buying in 2004 had a rather substantial impact on US rates.
Moreover, the BEA's revised data likely understates official inflows somewhat. The data from mid 2006 on likely will be adjusted upward when the next survey comes out. And the US data (reasonably) counts as private funds sovereign wealth funds and central banks hand over to external managers. And then there are inflows that are only indirectly financed by cental banks: a lot of the dollars central banks have deposited in European banks are lent out to European (and other) investors who want to buy US securities without taking the exchange rate risk.
Ip and Hilsenrath frame the debate over foreign inflows in terms of Bernanke's global savings glut. But Bernanke's formulation sets aside what to me is a key question — did the savings glut emerge because the rest of the world just wanted to save more (or invest less), or is it a reflection of the policies adopted by other governments?
Brad DeLong makes a similar argument. He argues that Ip and Hilsenrath downplay the magnitude of official inflows and that they ignored that the world's spare savings stem as much from a shortage of investment as a surge in savings.
I agree with DeLong's first point, but not fully with his second point [Note: edited -- I initially left out a "not"]. The "investment death" argument worked better in 2004 than in 2005 or in 2006. That is when China's current account surplus started to really surge, as savings grew even faster than investment. And that is also when the surge in oil and commodity prices led to a surge in government savings in the oil exporters, as commodity revenue grew far faster than domestic spending and investment. The increase in Chinese, Indian and oil savings seems more relevant than ongoing weak investment in southeast Asia (Thailand and Malaysia most notably).
I consequently do believe that there was something of a savings glut. But I also think that savings glut stemmed in large part from government policy choices — not a surge in private savings.
The role goverment policy played in pushing up savings rates is fairly obvious in the oil exporting economies. The governments of most oil exporting economies get — in the first instance — most of the revenue from the country's oil exporters. They either own the national oil company and thus get its profits or collective massive taxes and royalities on all oil exports. And at least initially, most of the oil exporting economies decided to save rather than spend the oil windfall. They stashed huge sums abroad — with the central bank, with a transparent oil investment fund or in a secretive oil investment fund.
No matter. The dollars the oil exporters put on deposit in Europe — or handed over to European fund managers to invest — had to be put to work. And a lot were onlent to the US.
The role government policy played in increasing Chinese savings isn't quite as obvious, but there is, at least in my view, a tight link. I have long found Martin Wolf's argument that China's government had to take a series of policy steps — restricting bank lending, running a relatively restrictive fiscal policy, allowing the SOEs to hold on to their rising profits rather than pay dividends – that pushed up China's savings rate if it wanted to avoid a burst of inflation that would undo the RMB's nominal depreciation to be rather persuasive. In this interpretation, the recent surge in China's savings rate stems directly from its exchange rate policy –
The result: large current account surpluses, with savings growing even faster than investment in China and the oil exporting economies, huge central bank and oil fund purchases of US securities, and far lower long-term interest rates than the Fed expected.
This of course doesn't mean that the Fed is powerless. It still exercises a lot more control over US monetary conditions than say China's central bank. But if China's central bank is buying lots of long-term bonds, it also implies that the Fed may have to push short-term rates up by more than it otherwise would in order to slow interest-rate and credit sensitive parts of the economy.
Update: The Economist on the growing importance of emerging economy central banks.
how would you compare that with the UK’s situation? (inverted yield curve + growing CAB)
no one is pegging to the pound and, presumably, their inflows are mostly private
Crossposted in hopes of an answer: is it fair to say that Hank Paulsen’s tell for when he’s lying is that he stammers? Watching an interview with Maria Bartiromo on CNBC, he seemed to transition from almost incomprehensible when saying that the US economy is in great shape to fluent and easy when he was saying that the housing sector has problems.
Apologies for being off-topic.
Perhaps he’d just heard the Blackstone news and it took him that long to regain his composure:
“Blackstone Group LP raised $21.7 billion for the world’s biggest private-equity fund, just as a global credit crunch slows leveraged buyouts… “The private-equity firms have a ton of money, and they’re not going away.”… “The record-breaking amount of capital at our disposal allows us to continue our leadership role in private-equity investing on a global basis,” Schwarzman, 60, said…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aGjICSTV7B00&refer=home
I’d be interested in a response to Guest on 2007-08-08 17:33:23
Hi Brad,
As a rookie, I’ve been interested in what options are available to the Fed if they really did want to raise the longer end of the yield curve (which more directly impacts mortgage rates). Typically the Fed moves the short end of the curve, but recently the longer end of the curve has been impervious to what is going on at the short end. Hence, the Fed hasn’t had any impact on the longer end of the yield curve.
Couldn’t they more directly impact the longer end by issuing more or less treasuries at the longer end? Why couldn’t monetary policy directly pick and choose where on the yield curve they wanted to move things?
Thanks
There were unexpected twin consequences of the Fed’s dramatic policy rate path - one was the persistence of the inverted yield curve; the other was the compression of credit spreads and the underpricing of credit risk generally. Interesting that the long overdue correction of the first problem a few months ago was quickly followed by the long overdue adjustment in the second problem. Both of these represented additional tightening of monetary policy relative to the existing funds rate of 5.25 %. To further complicate matters, the abrupt adjustment in credit spreads and terms caused the curve to ‘re-invert’ as an automatic curve easing reaction to the credit tightening. If credit conditions become a little more settled, even temporarily, the curve may once again move toward normal. But with additional credit episodes, or with the threat of economic recession, the curve should remain inverted and correctly (this time) discount the path to a lower funds rate. Bottom line is that the potential for a repeat of curve renormalization or further credit repricing gives the current fed funds rate far more traction to exert the proper monetary policy than it had in prior stages. This reflects lags in monetary policy effects. And it means that China’s influence on US monetary policy through bond market demand has some new competition from short rate expectations and credit pricing. Nevertheless, the next major cyclical move in bond yields may feature active PBOC participation expecting inevitable Fed easing (along with everybody else).
“…the idea collateral is required to support gross international capital flows suggests that the pattern of current account balances seen in recent years is a sustainable equilibrium.” http://ideas.repec.org/p/nbr/nberwo/13197.html
“More might be done to improve arrangements for pledging collateral to central banks across borders. For example, the G10 Committee on Payment and Settlement Systems (CPSS) is considering practical ways to strengthen cross-border collateral arrangements, including greater information-sharing and enhanced operational co-ordination among central banks… In the United Kingdom, the Bank is currently examining a range of additional mechanisms through which banks could deliver cross-border collateral to raise liquidity at the Bank of England, including whether to allow banks to transfer collateral via links between international and national securities depositories…” http://www.bankofengland.co.uk/publications/fsr/2007/fsr21sec4.pdf
re: “the longer end of the curve has been impervious to what is going on” - or not as Kroszner argues; as Friedman understands (or not) ‘the world is flat’.
“…the development or extension of a yield curve worldwide, bond yields have tended to be relatively low and flat, at least in part because of the conquest of inflation… the combination of lower and less volatile inflation around the world has led to a reduction in inflation expectations and lower perceived inflation risk, and hence to a lower premium in long rates for inflation uncertainty. I believe that these factors have been important contributors to the lower long-term yields and the flattening of yield curves… The development of long-term local-currency bond markets may also help to enable governments and firms to plan long-term infrastructure and investment projects that boost economic development… globalization, deregulation, and financial innovation, in part spurred by recent experiences of high inflation, have fostered currency competition that has led to improved central bank performance and, hence, the conquest of worldwide inflation. The resulting enhancement of central bank governance and credibility has allowed the development of long-term bond markets in many countries and flattening of yield curves around the globe…” http://www.federalreserve.gov/boarddocs/speeches/2006/20061116/default.htm
While we’re quoting from 2004:
“…Developing countries should not, equal truth be told, be so charitable in grading the Greenspan Fed. While the Fed has done a fine job of stabilizing inflation at a low level for a basket of goods and services in America and other developed countries, the cost of that “victory” has been a boom and bust pattern for globally-traded goods… America may have a comparable advantage in the creation of re-runs of Baywatch, but I have both economic and moral problems with America manipulating its terms of trade between inches of re-runs of Baywatch and ounces of what emerging market countries have a comparative advantage in producing. America preaches free trade, but until the day in which there is free trade in developed countries’ passports (like with New York City taxi medallions!), globalization will be a comparative advantage game tilted to the advantage of the haves relative to the have-nots… such bastardized globalization is not absolutely bad for developing countries… But the real-time journey is fraught with the potential for destabilizing currency and asset price adjustments, both up and down (as well as bouts of protectionist whiplash)…” http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2004/FF_Nov_2004.htm
“The result: large current account surpluses, with savings growing even faster than investment in China and the oil exporting economies, huge central bank and oil fund purchases of US securities, and far lower long-term interest rates than the Fed expected”
Brad, makes one wish 4 the ol’ gold standard again. Trade imbalances without an automatic exchange rate mechanism can create all sorts of unsustainable nonsense. Duncan, in his “Dollar Crisis” spelled this out quite clearly quite a few yrs back.
Me thinks the US has bitten off more than it can chew in handling the ex-commie countries. Allowing Japan to become mercantilist made sense in that a strong US presence was needed in asia to counter Soviet/Red-china expansionary plans. Allowing 1-way trade was a necessary evil. Continuing these policies against 2 billion asians is a death wish. As the claims continue to grow against the US, it’s a matter of “when not if” these claims are used as FWMD(nuclear option)
Both China and Russia are keen on expanding this leverage against the “superpower”, who is looking less and less super with every passing claim against.
Putting Politics In Your Economics
In the textbook, global arbitrage is presumed to bring currencies into such an alignment that prices for goods and services denominated in various currencies are all roughly equal. In the real world, currencies deviate so far from presumed purchasing power parity values as to make a mockery of the concept. Why?
Very simple: there is no free and open global market in citizenship. Sovereign countries retain the power to print passports and visas. In turn, sovereign governments - especially democratically-elected governments, but also governments with democratic tendencies - must be responsive to their citizens’ needs and wants, not global citizens’ needs and wants. Thus, sovereign countries should and do have the ability to print their currencies in sufficient volume to keep them undervalued on purchasing power parity terms. It’s called mercantilism. And all developing countries practice it, to some degree, so as to bootstrap themselves to prosperity by exporting goods to developed countries, while importing their superior know how, institutions and political stability.
This is neither good nor bad, just the way it is: developing countries acting in their own perceived best interest, undervaluing their currencies through the power of sovereign-owned printing presses for money. Developed countries do the same thing, just in a different way, overvaluing their passports by restricting their production via sovereign-owned printing presses. This is neither good nor bad, just the way it is. Thus, it is impossible to forecast future currency values without starting with an assumption as to how developing countries will run their printing presses for money and developed countries their printing presses for passports. It’s called political economics!
[...]
Yes, savings and investment equal each other after the fact, but before the fact, investment is not - repeat not! - a function of savings. Rather, investment is a function of prospective returns on current resources deployed in building the tangible capital stock. If those risk-adjusted prospective returns are perceived to be high, capitalists will, as if by an invisible hand, pursue more investment, which will beget higher income, which is the mother’s milk of savings.
Let me repeat: investment is not a function of savings; rather, savings is a function of income, which is a function of consumption and investment! Or, in the elegant words of Lord Keynes:
“…the traditional analysis is faulty because it has failed to isolate correctly the independent variables of the system. Saving and Investment are the determinates of the system, not the determinants. They are the twin results of the system’s determinants, namely, the propensity to consume, the schedule of the marginal efficiency for capital and the rate of interest. These determinants are, indeed, themselves complex and each is capable of being affected by prospective changes in the others. But they remain independent in the sense that their values cannot be inferred from one another. The traditional analysis has been aware that saving depends on income but it has overlooked the fact that income depends on investment, in such fashion that, when investment changes, income must necessarily change in just that degree which is necessary to make the change in saving equal to the change in investment.”
Bottom Line
Economics as a discipline is neat and the invisible hand of markets is cool. But economics without politics is the analysis of a world that does not exist. In the real world, the invisible hand of markets depends on the visible fists of government to enforce property rights, and is also subject to the visible fists’ power to redistribute property, acting in the perceived best interest of sovereign peoples. Political economics is neither an oxymoron nor a contradiction of terms, but a definition of reality.
the way the fed traditionally influences the long-end of the curve is by raising short-term rates even more — at some point, the inverted yield curve makes it costly to hold long-term bonds rather that s-term deposits or bills.
unconventionally monetary policy tools include buying l-term bonds — and bringing l-term rates down directly through greater demand. this is a potential response to deflation — basically, you monetize long-term debt.
but unless you already own a lot of long-term bonds, it is hard to try to push up long-term rates by selling them … the usual way to do so would be through the short rate, at least as i understand it.
i also would second jkh’s comment
Re: the pound. Too bad macro man is on vacation. i am pretty sure he would tell you that central banks and sovereign wealth funds have been huge buyers of pounds, and they are one reason why the pound is so strong. and guess what, he would be right –
the IMF’s COFER data clearly indicates that the pound has been a big beneficiary of diversification flows (or to be more precise, a beneficiary of central banks aversion to the yen). the pounds share of central bank reserves is rising (mostly at the expense of the yen and chf, low carry currencies), and with global reserves rising, the result has been large inflows to the UK. Sovereign wealth funds have been big buyers of UK assets, and “private” russian and gulf money loves UK property as well. throw it all together and official inflows have almost certainly financed most of the UK’s current account deficit (I would need to spend some time looking at the numbers).
remember, with unprecedented global reserve growth — the dollar, the euro and the pound are all in effect receiving unprecedented inflows from emerging market central banks.
As I have pointed out before, the Fed have plenty of longer treasuries to sell if they do want to raise longer rates.
Central banks need to rethink what monetary policy means and how they do it. This should probably involve less emphasis on interest rates.
“…What has endured the mess of the past few weeks? First, faith in emerging markets remains almost undimmed. Normally in risk aversion, emerging markets would be expected to fall further than the market as a whole. They have budged but barely any more than the rest of the market. By Monday’s close, MSCI’s emerging markets index had fallen 7.5 per cent since July 19, when the MSCI world index peaked. The world index itself was down 6.1 per cent. For the year, emerging markets were up 16.5 per cent, against 4.8 per cent for the world index. Compared with other risky assets, faith in emerging markets remains robust. Faith in human frailty also remains constant. Las Vegas Sands and Wynn Resorts have both gained more than 40 per cent in less than a month.” http://www.ft.com/cms/s/6b79f3d8-4549-11dc-82f5-0000779fd2ac.html
“…The growing number of hedge funds could be a factor behind increased suspicious trading as funds scramble for information that will provide them with an edge…” http://www.ft.com/cms/s/6015cc52-442b-11dc-90ca-0000779fd2ac.html
Volcker could have sent those mortgage interest rates skyward. Greenspan just didn’t have the cohones. I remember the 90s, when AG buckled, as his cries of “irrational exuberance” changed to the “new productivity” after Wall Street kicked him in the family trust. For most 2000-2001 shareholders and pension plan enrollees, that ‘new productivity’ turned out to be ‘irrational exuberance’ (and financially unproductive)
That is what I recall too Black Swan. Higher productivity - real or imagined - should have meant higher interest rates anyway.
In fact, Greeny already had bailout form from 1987 and the early 90s thrift crisis.
Greenspan lowered rates to 1 per cent because he feared the risk of deflation. He thought the probability of deflation would be low, but the economic consequences would be unacceptably negative. He also probably feared the risk of U.S. deflation becoming global deflation via China’s high saving rate and therefore was not overly concerned about a growing U.S. current account deficit facilitated by low U.S. rates and increased borrowing. So the ‘unintended consequences’ of a 1 per cent funds rate were worth the risk in his view.
It should be remembered that at the point tightening began, the yield curve was incredibly steep - almost 400 basis points. This was very pronounced in absolute terms and unprecedented in relative terms (i.e. slope as a percentage of funds rate). The curve began to invert before the end of the tightening cycle. So the curve went from record steepness to persistent inversion over the course of this tightening cycle. China was well underway in its reserve accumulation at the beginning of the Fed tightening, and accelerating its accumulation at the end. So the unusual path of both the funds rate and the yield curve complicates the story of China’s influence on rates over the same time period.
It seems possible therefore that a major factor in PBOC’s bond market strategy would have been it’s own strategic view on the expected path of the funds rate. This would help explain how the curve was so steep around the outset of tightening and how the curve reacted just two months ago when China backed away from the bond market. These are examples of why China’s influence is not a simple as lower rates per se. Of course, PBOC’s view of the expected path would be a factor weighed into the average of all such views in the market. But as China’s bond market penetration grew, so did their importance in valuing bonds.
That view of the fed funds path is not difficult to explain. It should be recalled that well before the Fed ended up at 5.25 per cent, there had been ongoing market debate about when they should stop. E.g. very few people were predicting a funds rate as high as 5.25 per cent by the time the rate was in the 3.5 to 4 per cent range.
It could also have been the case that PBOC had a vested interest in ‘wishing’ the future funds rate down through its influence on pricing the curve in the latter stages of the cycle. Other things equal, a higher future funds rate would mean a stronger dollar, a stronger RMB, and lower Chinese exports (to the rest of the world) than what otherwise might be the case (imagine that). Moreover, helping out with curve inversion would stimulate the US housing market and encourage a persistent US current account deficit and a market for Chinese goods in the US. Thus, China’s vested interest and influence on persistent inversion might have been an additional form of export subsidization, supplementary to the RMB peg.
My conclusion is that Greenspan’s “conundrum” may have been driven in large part by China’s bond market participation, but more precisely by the impact of PBOC’s ‘proprietary’ view of the expected funds rate path. Given his apparent surprise at the conundrum, it would also imply that Greenspan’s view of the expected rate path of the funds rate was different from the market (and PBOC) - he expected to move and hold the funds higher for longer than the market did. And he was basically right. But his view was self-fulfilling in the sense that the persistent inversion created more overall ease than he intended, causing him and his successor to keep moving the funds rate higher, and so far not to bring it back down as quickly as the market had originally expected. It means that for a time at least Greenspan and Bernanke were right and the market was wrong, regarding the sustainability of a high fed funds rate - so far. The reason the market (including PBOC) was wrong for a time is that it underestimated the historically proven systematic resilience of the US economy, when faced with tightening monetary policy.
“The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130.2 billion) to assuage a credit crunch…” http://www.bloomberg.com/apps/news?pid=20601087&sid=a3BgW.MHBVfE&refer=home
“…”The business cycle is one of boom, bust and recrimination; we’re now observing the bust and moving toward the recrimination stage,”… Virtually every party involved in the huge Wall Street securitization machine that financed the late, great housing boom is a potential target—the lenders who originated the loans, the brokers who bought them, the underwriters who pooled them and carved them up into securities, the rating agencies that rated the securities, and the bond insurance companies that guaranteed them. “The law firms are assembling their subprime litigation teams in anticipation,”…” http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070806/REG/70803038/1036
“…When funds hedge, they can do it in ways that Jones never dreamed of—playing the currency markets, for example… it’s often hard to tell whether reported profits are real, because the sophisticated financial contracts that hedge funds invest in are so difficult to value. Currency contracts, for example, are often accounted for at current market value, even though their actual value cannot be known for some time. The complexity of financial contracts provides cover for lots of other sins, too, including tactics for evading regulations and rigging markets…” http://www.legalaffairs.org/issues/November-December-2005/feature_skeel_novdec05.msp
“…The influx of dollars is seeding a huge and destabilizing monetary expansion in China… For those who believe that, in the shadow of a presidential election year, the U.S. government will somehow succeed in its quest to make the dollar cheaper (and the bilateral deficit with China smaller): How to invest? For anyone who does not happen to have a derivatives dealer on call, there is only one easy way to play the yuan. That is to open a yuan-denominated account at Everbank World Markets, a division of First Alliance Bank, Jacksonville, Fla…” http://moneycentral.msn.com/content/invest/forbes/P62506.asp
i am not a big fan of posting excerpts from articles without taking the time to explain (briefly) why the excerpt is relevant for the current conversation. the 03 grant’s article (via forbes) is a good example.
jkh,
I think the truth is that Greenspan liked to be celebrated(eg “Maesto”), not to mention reappointed. The talk about deflation and risk management etc just gave the Fed the intellectual cover for what they were inclined to do anyway. 1% was an extraordinary low rate that the economic activity indicators at the time hardly justified. Moreover, I believe Greenspan himself used to hint in the early 90s that 2% was a reasonable inflation rate. Adding back the Boskin adjustments - about 0.7% - to make the prevailing inflation rate comparable with the early 90s, it becomes clear that inflation was actually about on target. And I would question whether deflation is such a big deal anyway. Far too much is made of Japan’s experience, in which minor deflation is a more a symptom of a bigger problem of a bubble overhang than the disease.
In the circumstances, 1% short rates were tantamount to theft from depositors. Is it any wonder that the US saves so little?
“If you look at Lee’s SOMA (Fed system open market account) chart and the orange line, you will see that it is completely or indeed slightly down since March. As I’ve mentioned, the Fed has NOT conducted a permanent coupon pass since May 3rd. Finally with a big blow out this morning in Libor rates in Europe from 5.35 to 5.89%, the Fed did an aggressive repo adding $24.0 billion against $13.25 expiring. I don’t believe this is at all recognized by the cognoscenti, who believe that the Fed has been providing liquidity and “printing money”. However I don’t think there is much doubt that the Fed itself has been tight or more accurately an insignificant player.
So what’s going on here? Several theories can be advanced, but the most likely bet to me holds that the Fed is acting in this manner as a decoy because the real monetary power over the United States is held by creditors like China, Japan, Wildcat Financiers (see primer on Winterisms for definitions of my terms) and Kimono women (Yen carry traders). Lately China in particular has been sounding off on this score on what is being called the “nuclear option”.
Of course the primary indicator I use for determining liquidity and interest rates in the US are foreign central bank (FCB) purchases, most of which shows up in the Thursday afternoon Fed release of H4.1. Total FCB custodial holdings of US securities now totals $2.011 TRILLION, of which 37.63% or $756.7 billion is housing agency paper. $574 billion of this housing agency debt has been bought in indiscriminate fashion over the last four years. Little wonder there was a housing Bubble! The total holdings (now a factor of 2.66 FCB holdings / Fed holdings) completely dwarfs the $790.8 billion in securities held in the Fed’s portfolio. In fact as of last week FCBs held almost as much in GSE’s housing agency securities alone as the Fed held in it’s entire portfolio, the former which has taken 94 years to accumulate. Actually this $2 trillion figure is low, as some reporting (particularly China) is less than complete and is not transparent.
Just four years ago this number was $937.8 billion in FCB custodial holdings and $715.4 billion in the Fed’s portfolio, a factor of 1.31 times. The math suggests that FCB now have twice the impact of the Fed from four years ago, and the effect is expanding exponentially. Figure that over $100 billion in interest alone is being paid out annually to FCBs at today’s interest rates. However, in terms of present day market operations the effect is 13.7 times to one, as FCBs in the last year purchased $355.6 billion in custodial securities, compared to the Fed who in the last year purchased or monetized a mere $26.0 billion. In reality the Fed is now really functioning as a defacto minion of China and other FCBs, better get used to it.
Finally the Fed (and other central banks) may also be quite aware of the out of control speculative forces at loose throughout the world, and is simply showing solidarity with foreign central banks and creditors to try and curtail this. The Fed has to at least provide lip service and a semblance of a defense for the USD. Mostly this is done by exaggerating US economic strength, talking authoritatively and lying about inflation. Then every six weeks the Almighty Wizard of Oz issues the FOMC statement and the “experts” and traders dissect and parse every single word, much like Stone Age medicine men examining animal entrails.”
http://wallstreetexaminer.com/blogs/winter/?p=970#more-970
dallas fed prez fisher has suggested that OER skewed core inflation causing greenspan/bernanke (who authored the japan deflation/experience comparison - i.e. helicopters - that maneuvered him into the chair) to overreact… compounding greenspan’s monetary ’sin’? admonishing the public to go forth and acquire ARMs; meanwhile, ‘micro regulation’ bernanke fell asleep at the switch… it all felt so good and now we atone
Q: where is twofish?
A: busily marking CDOs to market
Not for BNP…..they say there aren’t any!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUIoRzrktg4M&refer=home
RE - makes sense. Expect AG to highlight personal deflation nightmares and his ‘risk management’ approach, in his upcoming book, as mea culpa explanation for 1 per cent. (Although I don’t imagine you’re holding your breath to read it.)
“…”A rising gold price warns of troubles ahead… That’s why central banks are capping the price of gold.”…” http://www.bloomberg.com/apps/news?pid=20601012&sid=ajSEk5FMPqqM&refer=commodities
“…Manipulation in the commodity futures markets takes many forms. They may be manipulated through rumors or false information conveyed in the market. Prices may also be manipulated through rigged trades or the use of “capping” or “pegging”, by which market prices are set at artificial levels for margin purposes, price setting and other reasons…” http://www.illinoisattorneygeneral.gov/consumers/natural_gas_report.pdf
“…The average during July was 17 tonnes, with the resumption of Spanish disposals and the start of disposals from the Swiss National Bank, which is proposing to sell up to 250 tonnes over a period of time in order to rebalance its gold within its foreign exchange reserves to roughly 33% as against 42% at the start of May, when the first gold fix for the month was $677.50. The fix this morning (Tuesday 7th August) was $669.25, at which price the average gold holdings across the world (i.e. including supranational organisations) amounted, to approximately 14.5%. It is not possible to be absolutely precise due to the lag in publication of reserve figures. The average holding across the members of the European system of Central Banks (not just the ECB itself) amounts currently to approximately 14%, although within that system some of these figures are markedly higher, with Germany at 63% and France at 57%. Spain is currently at 38%. In the United States, of course, (which is not a signatory to the CBGA although along with Japan, it has agreed to abide by the spirit of the Agreement), gold comprises a much higher degree of foreign exchange, at 76%…” http://www.mineweb.net/mineweb/view/mineweb/en/page33?oid=24838&sn=Detail
if you are so attached to your shorts, wait until the market closes adn you have time to do more than cut and paste before posting links … or follow Rebel Economists example and keep the comment short and pithy.
(I realize that there is risk I am giving a serious response to a comment that was meant to be ironic …)
comments section seems to be stuck on ‘bold’
Good info…rising credit rates are affecting the market due to the America’s over-use on credit plays a significant factor in the housing market. I recommend this report on home sales that is useful…
http://www.dailyreckoning.com/rpt/HousingReport.html
-Cheers!
But what is the causation chain here? Someone in the US has to borrow before foreigners have USD to recycle back. Maybe the recycling messed up the signaling?
Nah. The Fed already owns a fair amount of the long term notes/bonds. Not sure what is the theory there, but if AG was truly concerned about the long term yield being too low the Fed could have sold long term Ts. The treasuries could have shifted issuance duration towards the long end. Etc. Etc. Instead Bernanke was making noise then threatening to buy the long ends. Now it just looks like an excuse in hindsight on AG’s part to complain about the inability to conduct monetary policy. Blame the foreigners, as always.
Timing is everything, and some participants may only value immediate responses, or have more lucrative or rewarding ways of spending their time than composing and donating research to salaried bloggers and for-profit entities - so when aimed at the wrong volunteers, what you risk is loosing them altogether. When posted by obviously knowledgeable people, I find the parsed excerpts with links more helpful than comments and recommendations from anonymous posters, moniker or not.
note: I took the earlier post about not wanting to interrupt looking at shorts to add context around links because it had an open bold and all subsequent comments were showing up in bold. I had no intent to take down the content of the comment, but it was the only easy way to return to normal script. be sure to close any htlm code at the end of a comment.
Hi jkh,
You said,
“My conclusion is that Greenspan’s “conundrum” may have been driven in large part by China’s bond market participation, but more precisely by the impact of PBOC’s ‘proprietary’ view of the expected funds rate path.”
Is it possible that not only China but also oil exporting countries had similar contributions to the conundrum? Emerging markets? It seems logical that it was due to sovereign investments not limited to China.
IAmEric on 2007-08-09 22:52:55
Agreed - no need to single out China for the point I was making.
The point being that the conundrum was driven by the interest rate expectations of those investing current account surpluses, as much as the surpluses per se. After all, the deficit country (US) required funding, so its not as if there was no demand for financing.