Hank Paulson and W (heart) foreign central banks
Three numbers from today’s TIC data release:
- Net recorded inflows to the US in June: $58.8b
- Net official inflows: $58.2b
- Net private inflows: $0.7b
Kind of destroys the illusion that the US is a magnet for private capital, doesn’t it?
Whatever problems Paulson, Bernanke and other US economic policy makers are now facing, they pale relative to the problems Paulson, Bernanke and other US economic policy makers would face had foreign central banks not provided the US with the external financing that private markets no longer are willing to supply. At least not consistently.
Absent official demand for US debt, the US growth slowdown and the subprime crisis likely would have morphed into a dollar crisis. Sure, some US investors started to bring money home in August, helping to support the dollar – but there is no way repatriation flows alone would provide the $65-70b or so in net financing a month the US needs to sustain a $800b or so current account deficit.
The conventional wisdom among supposedly-free market loving Americans increasingly is that a current account deficit financed by other governments is far less risky than a deficit actually financed by private markets. That has been the case over the past few years. And in the short-term, the US doesn’t have any realistic alternatives to relying on ongoing central bank financing — so we all should hope it proves true.
The June TIC kind of makes up for the May TIC data – which was distinguished by the complete absence of (net) official inflows.
To be totally fair, the June data likely overstates official inflows in one way. Norgesbank’s trading activities can sometimes increase net inflows (if it buys a lot of treasuries), just as they sometimes decrease net inflows. They bought $11.85b of US bonds (mostly Treasuries) in June, after selling 4.04b (mostly Treasuries) in May. These are hedge other positions – we know from Norway’s disclosed positions that it has not been a big net buyer of Treasuries.
On the other hand, both the May and June data likely understates total official inflows in another way. The TIC data indicates private investors in the UK bought $33.3b of Treasuries in May, and another $23.1b in June. I am willing to bet a fair amount of money that a lot of those bonds were subsequently sold to foreign central banks.
Net long-term inflows were actually fairly strong. Private investors abroad bought $94.8b of US securities (including about $30b of equities) – and US investors bought about $27.8b of foreign securities (split between debt and equities). That produces a net private inflow of around $67b, a number that needs to be adjusted down for MBS amortizations and the like. But even with that adjustment, net private purchases of long-term US debt topped $50b. In June, though, the purchase of long-term bonds was offset by a large fall in short-term claims.
Foreign central banks did something similar. They bought $53.8b of long-term bonds – including $37.3b of Treasuries. They also reduced their holdings of Treasury bills by $11.8b. Net purchases of Treasuries were more like $25.5b. But official accounts ramped up their other short-term claims by 17.7b.
I should note here that the TIC data doesn’t really provide support for a story that I – and others – were telling back in early June. When long-term bonds sold off (and bill yields collapsed), I – and others – suggested that one explanation might be a shift in central bank demand from bonds to bills. The strong increase in official holdings of bonds and fall in official holdings of bills is inconsistent with that story.
I would though note that the sell off in bonds and unusually low bill yields happened early in June. 3-month bills started June yielding 4.73, dipped to 4.52 in mid-June and then ended June at 4.80. The yield on the ten year bond started June at 4.9, rose to 5.3 or so on June 12th, and then fell back to 5% by the end of the month. The TIC data for the entire month is potentially consistent with a fall in official demand for bonds early in the month, combined with a surge in purchases late in the month. That pattern would be consistent with the pattern in the FRBNY custodial data. But it is also pure conjecture.
The national TIC data, as usual, also tells a host of interesting stories.
China continues to be the major source of official demand for US assets. China bought $20.2b of US bonds and equity in June (mostly Agencies and “corporate bonds” – a category that includes “private” mortgage-backed securities), and increased its short-term US holdings by $0.9b – for a $21.1b net inflow. In the quarter, China bought $41.7b of US long-term debt and equities – including $28.5b in Agencies and $11.8b of corporate bonds (It reduced its long-term Treasury holdings by $1.4b) and cut its short-term holdings by $2.3b, for a $39.4b net inflow.
That is small relative to the $126b (valuation adjusted) increase in China’s reserves in q2, just as the $49.0b increase in US claims in q1 was small relative to the $130b in (valuation-adjusted) increase in China’s reserves. I am confident the US data significantly understates total Chinese purchases of US debt (some likely shows up in the UK data, some in the Hong Kong data).
Almost all Brazilian purchases of US debt show up in the US data. Brazil bought $13b in long-term debt in June ($12.2b of Treasuries) and added $1.1b to its short-term holdings, for $14.1b in net inflows. In q2, Brazil – almost certainly Brazil’s central bank – bought $24.6 b of US long-term debt, and increased its short-term holdings by $2.4b, for a net inflow of $27b.
The net inflow in q2 though was a slightly smaller share of Brazil’s $37.6b reserve increase than in q1. In q1, net inflows from Brazil totaled $22.5b, almost equal to the $23.7b increase in Brazil’s reserves.
Nonetheless, one of the most stunning facts in the TIC data is that Brazil’s central bank provided far more financing to the US Treasury in the first half of 2007 – it bought $41.9b of US Treasury bonds – than the IMF provided Brazil in 2002-03. The IMF’s total lending to Brazil was only a bit more than $30b at its peak. I am always amazed by that particular data point. It drives home just how much the world has changed.
Russia bought $6.15b in US long-term bonds in June, but reduced its short-term claims by $2.3b – so the net inflow was a little under $4b. For q1 the increase in Russian long-term claims ($14.5b) was almost perfectly matched by the reduction in short-term claims ($14.0b). This might be evidence of diversification – Russian reserves increased by around $65b after adjustments are made for valuation, and those funds have to be going somewhere. But the US data has rarely picked up Russian flows, so it is likely that Russia is buying more US debt, but is just buying through London.
India bought $0.7b of US long-term debt in the first quarter, while cutting its short-term holdings by $8b. Hmmm. India’s reserves also are rising. India has long held a fairly diversified portfolio, but I increasingly suspect that it is in the process of cutting the dollar share of its reserves even further. I would put it at the top of my diversification watch list.
Korea, incidentally, has clearly been shifting its reserves out of Treasuries and into Agencies and corporate bonds. I wouldn’t be surprised if it also has reduced the dollar share of its reserves.
There is one puzzle in the TIC data though that has nothing to do with central banks: the absence of large Japanese purchases of US debt. Japanese housewives may be playing the markets, but they don’t seem to be buying US securities – or if they are doing so, they do so in ways that don’t register in the US data. Japan bought $13.9b of US securities in q2, but sold $11.3b in q1 – for a net inflow in the first half of the year of $2.6b.
Nothing, in other words. $2.6 is less than China likely purchases in a single week …
UPDATE: Wow, Dow Jones managed to write about the TIC data without mentioning the scale of official inflows. And the headline on a weak TIC report (net flows were low) was "US securities continue to draw foreign interest." That's true, but a bit misleading: private purchases of long-term debt and equity by foreign investors were either financed by running down existing bank accounts or were offset by US purchases of foreign debt and equity. The net inflows needed to sustain an ongoing deficit all came from the official sector. You could argue that the official sector financed US outflows and private inflows financed part of the deficit — or argue that a mix of private inflows and official inflows financed both outflows and the deficit. But you cannot get around the large scale of the official inflows.
re: “China bought $41.7b of US long-term debt and equities - including $28.5b in Agencies and $11.8b of corporate bonds” - so does that mean they bought $1.4b in equities?
more actually. China q2:
Treasuries (l-term): $-1.4b
Agencies: $28.5b
Corp bonds: $11.8b
equities: $4.8b
s-term: $2.8b
not all those equities will have been bought by SAFE tho.
“China, meanwhile, was a net seller of U.S. Treasuries for a third straight month. In June, China pared its U.S. Treasury holdings to $405.1 billion. ”
——
Capital inflows into the U.S. fall
Capital inflows drop to $58.8 billion in June, nearly all are from foreign governments and central banks.
August 15 2007: 11:00 AM EDT
NEW YORK (Reuters) — Net overall capital inflows into the United States dropped to $58.8 billion in June from May’s revised inflow of $107.3 billion, hurt by a plunge in net purchases of U.S. securities by private investors.
June’s net overall capital inflow barely covered the U.S. trade deficit for the month, which was $58.1 billion.
Net long-term capital inflows totaled $120.9 billion in June from a revised $126.0 billion in May.
“We’re still seeing healthy net long term inflows which is positive,” said Brian Dolan, FX research director at Forex.com in Bedminster, New Jersey. “The report is not a real dollar negative as we’re able to still cover the trade deficit.”
The dollar showed little reaction in foreign exchange markets after the U.S. Treasury flows report, while U.S. Treasurys held steady at higher price levels.
The report showed that nearly all of the net capital inflows in June, including investments in short-term securities, were from official sources such as foreign governments and central banks.
Net private sector inflows added just $700 million in June, slumping from $109 billion in May.
Data also showed that U.S. June net purchases of securities from official sources totaled $53.8 billion, the biggest since March 2004.
Inflation moderate, in line with forecasts
Foreigners snapped up a net $54.2 billion of U.S. Treasuries, from $21.6 billion in May.
Japan was still the largest holder of U.S. Treasuries with $612.3 billion during the month, down slightly from $615.2 billion previously. China, meanwhile, was a net seller of U.S. Treasuries for a third straight month. In June, China pared its U.S. Treasury holdings to $405.1 billion.
Net foreign inflows to U.S. equities fell to $28.8 billion in June, from $42.0 billion the previous month. Net foreign purchases of U.S. corporate bonds slid to $25.9 billion during the month, from a record $72.6 billion in May.
The Economics 101 textbooks are completely wrong and need to be revised; there is such a thing as a “free lunch” in economics for the United States. Thanks to “Dollar hegemony”, militarily backed by the Gulf Arab oil reserves which are priced only in US Dollars, the rest of the world exports real economic wealth to the United States and in return, the US exports fiat paper dollars printed in unlimited quantity by the Greenspan-Bernanke Federal Reserve. For devising US Dollar hegemony as the federal government’s official financial policy, former Treasury Secretary Robert Rubin should be nominated for the Nobel Prize in Economics, along with the Nobel economists that managed the Long Term Capital Hedge Fund into bankruptcy requiring a federal taxpayer bailout.
DC — I know you have a beef with Rubin for his handling of the Asian crisis (which i assure you was not done at the beheast of wall street) and the strong $ policy, but your argument that rubin devised dollar hegemony is just plain off. oil prices were low during rubin’s term, so there weren’t petro$ to recycle. and at the time, the US was attracting the private capital fleeing emerging economies (at least post 97) — so the us didn’t rely on official inflows. the current system of central bank/ oil fund financing of the US deficit post-dates rubin … it is a bush administration thing, and i am not sure they actually planned it out, it just sort of happened as other countries maintained $ pegs/ opted to save a good chunk of the oil surplus …
DC’s sloganeering and mottoes are rather characteristic of Chinese diktat as if constant repetition will make it true, despite evidence to the contrary, which is kind of disturbing when you think about it. And even though he derides Bush, they share the same modus operandi. To me that’s a sign of someone unhinged and disconnected from reality. Why must you always counter his conspiracy theories?
i think DC knows that slandering Rubin — who i worked for — is a good way to get a response out of me. i should stop taking the bait.
incidentally, there was no taxpayer bailout of LTCM. and the lead on LTCM came from the fed, and specifically the NY fed, which coordinated an equity infusion/ takeover of LTCM by its creditors/ counterparties.
back to discussing the TIC data, which is plenty interesting this time around. oil exporter flows remain quite hidden, for example …
shouldn’t it read: ”Foreign’ Central Banks love Hank Paulson and W’ - or at least ‘the US’, as no one is forcing them to do what they are doing. Next question would be why?
re: “i should stop taking the bait” - apart from the fact you’ve repeated those arguments dozens of times, it disrupts the flow of responses from those who may be attempting to take you seriously.
re: “oil exporter flows remain quite hidden, for example…”
how about M&A - or knowledge and tech transfer?
“…Indian companies were involved in 177 merger and acquisition deals in 2006, compared with 99 for China. With more talented executives and more flexible management, Indian companies are showing they are ahead of China in what Harvard business professor Tarun Khanna calls “soft infrastructure” - brains instead of bridges…” http://www.globeinvestor.com/servlet/story/GAM.20070815.IBASIA15/GIStory/
“…At least 36 people were killed in the collapse Monday… The disaster in the southern tourist town of Fenghuang rekindled concerns about rushed, shoddy work amid China’s torrid economic expansion…” http://www.iht.com/articles/ap/2007/08/15/asia/AS-GEN-China-Bridge-Collapse.php
guest — the same might be said of some of your (I assume) less-than-on topic links. spell out why the indian M&A data ties in with the absence of oil inflows — are the indian mergers and the like evidence of gulf inflows? are these big enough to make up for the gap between the recorded inflows to the us and the gulf’s current account surplus?
guest (maybe the same one) — yes, foreign central banks have shown a lot of love for W. if the rest of the world doesn’t like the United states foreign policy, maybe they should consider no longer financing it? as for why, how about central banks (heart) dollar pegs?
Brad,
The “real” reason the US military is in Iraq today has alot less to do with “weapons of mass destruction” and alot more with the attempted preservation of the global reserve status of the US Dollar, otherwise known as US Dollar hegemony. Immediately after the US occupation of the Iraqi oil ministry, the first order of the day was to denominate Iraqi oil exports from Euros to only US dollars. No longer an industrial economic superpower, the US Dollar reserve currency status currently rests on backing from the Gulf Arab oil reserves protected by US military power with Oil exports denominated in US Dollars only. In a secret agreement arranged by Henry Kissinger with Saudi Arabia and the Gulf Arab states, the US Dollar was negotiated to be the “de facto” world reserve currency. Since everyone in the world needs Middle East oil, so everyone accepts the US Dollar. US Dollar hegemony policy received the full backing from former Secretary Treasury Secretary Robert Rubin and his employer Wall Street’s Goldman Sachs. If successful, the invasion and occupation of Iraq with the world’s 2nd largest conventional energy reserves would consolidate US Dollar hegemony and military power into the next century.
Dave Chiang
Brad,
Haven’t read for a while. I see DC is still spouting his China good, US bad dogma.
My guess is the europeans are really spooked at what’s happening in the US housing and MBS market and have taken cover. This would be consistent with the recent ECB cash injections. Europeans want Euros. I think their fear is partially fueled by them thinking they may be next in line in the housing/MBS collapse.
i am the odd one out here - i would say that in general you all mostly think in numbers, while i have to translate into images or metaphors.
there are a number of constantly nagging themes in the comments. if the figures were wrong, i might not detect it, i take them on trust - but i have a feeling that some of the underlying assumptions or dogmas are wrong. hard to put a finger on it, but -
china is clearly assumed to be the number 1 rival of the united states, is she not more like the number 2 economic ally, after japan ?
the dollar is clearly assumed to exist on the edge of a cliff, yet does not seem to fall off. there is more u s investment abroad than foreign central bank investment in the u s. - is that not true ? so in a crisis with people running for cover could not the dollar strengthen ? i don’t say it has to - but could it ?
what would china be urged to do if the dollar was rising strongly ?
no one seems to like d c’s repetitive rants against fiat dollar hegemony - yet no one attacks the fundamental flaw of the rant, that fiat dollars are money for free. they are still legal tender after getting spent. do they then become money for free for the oil producers or asian manufacturers ? if not what’s the difference ? it is dud cheques that get spent once. fiat money once created gets spent many times.
if it all goes horribly wrong, there seems to be an assumption that the helicopters fly and massive inflation is set in train. maybe so, but in a world of labour surplus, declining wages, and energy plateau, would massive deflation not be just as likely ?
i think the economic wrestling match with china does not exist. it is a pantomime show. the potential wrestling match is between savers and borrowers, or between nationalists/protectionists and globalisers/free traders. the china show is a diversion to head off domestic political tension. america is bankrupt in the technical sense that if all debts were called in she could not pay. far from being the unwitting victims of this, the foreign creditors are very anxious that this remains a technicality and does not surface. so d c does not speak for china, or for anyone else.
brad, maybe we need to be educated a little on the plaza accords. what is the lesson there ? and what should japan have done ?
“…There has been a sluggish response to the urgency of remedying the astonishingly under-funded social infrastructure - for example, the need to build many more schools, hospitals and rural medical centres - and developing a functioning system of accountability, supervision and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rail), which required both governmental and private initiatives. Large areas of what economists call “public goods” have continued to be under-emphasised… Some failures are huge, such as continuing undernourishment, particularly in children, and of course the continuing scandal of a quarter of the population (including half of all women) remaining illiterate in a country with such high-technology achievements based on excellent specialised training and practice. A democratic country can hardly want to maintain a divisiveness that makes it part California and part sub-Saharan Africa…”
“At least 26 people were killed and 15 others injured when a seven-story building collapsed in Mumbai… Building collapses are frequent in India — where construction is often hastily carried out with little regard for safety regulations.” http://www.cbsnews.com/stories/2007/07/19/world/main3074146.shtml
At this juncture, what alternative economic/political strategy can the Chinese arrange with the US Dollar as the world’s reserve currency. With rampant US hostility and hatred toward China, the Chinese State Council has allocated increasing double digit military budgets to defend the Western Pacific region from implicit US support for Taiwan Independence. But China still needs at least a decade more of high speed economic growth to integrate the hundreds of millions of migrant workers into its urban centers. The problem with the suggestion that China sell its dollar hoard is that China has become too big a player. Any attempt to shift large parts of its reserves out of the market for US government debt risks precipitating an US bond-market crash that would carry other markets with it and thereby defeat the purpose. That leaves China with its present and only strategy: keep the engines of growth humming with exports on the one hand and a constant flow of foreign investment on the other. If rapid growth goes on long enough, and when the dollar-centered global financial regime unravels, the Chinese hope they will have an economy sufficiently developed to permit the yuan to takes its place among the world’s major currencies without the need for external backing that the country’s dollar reserves currently provide. That will allow it to deal with the collapse in American purchasing power when the US is finally forced to live within its means.
not sure how or why you’d expect comments to remain ‘on-topic’ if you are not prepared to honour your own rules.
“central banks love dollar pegs” might make more sense - what do you think?
i was thinking about ‘hidden flows’ - such as knowledge, information and tech transfer - which as you mention in the previous post, seem to be assets the US has, and that ‘foreigners’ covet (perhaps as recognized by the India quote) and need (perhaps as recognized by the China bridge story quote).
this is the best i can find, at the moment -
http://www.whiskeyandgunpowder.com/Archives/2007/20070815.html
seems that china has a folk memory of this kind of thing ?
I would give DC’s dollar hegemony theory more consideration if he could explain why it matters what currency oil is priced in. If the ex-US world prefers to hold euros for example, when an oil importer wants oil, they can simply change enough euros to dollars, pay for the oil, and then the oil exporters can change the dollars for euros. Since the stock of dollars needed for such a fleeting use must be small, I cannot see pricing oil in dollars generates much need for dollars. DC has never answered this point.
The only dollars that are fiat dollars are base money, which is a small proportion of broad money. I believe that there are more fiat euros than dollars now.
In short, interactive debate using evidence and logic is informative and possibly even convincing; ranting is not.
” I should note here that the TIC data doesn’t really provide support for a story that I - and others - were telling back in early June. ”
No kidding.
Not every butterfly that flaps its wings comes from a central bank.
From Texas Congressman Ron Paul, on US Dollar hegemony
(ie. the only guy I would vote for who has the integrity to speak the truth. - DC )
http://www.lewrockwell.com/paul/paul303.html
” There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining US dollar dominance.
Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.
It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran.
But the truth is that paying the bills for this aggressive intervention is impossible the old-fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony - it’s dominance as the world reserve currency - is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that. ”
- Texas Congressman Ron Paul
Reply to RebelEconomist on US Dollar Hegemony.
Quote from Congressman Ron Paul
” Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources - we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.
Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system - like Iraq, Iran and Venezuela - become targets of our plans for regime change.
Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.
Using force to compel people to accept fiat money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid. ”
- Congressman Ron Paul
Dr. Ron Paul is a Republican member of Congress from Texas.
Guest — “not every butterfly that flaps its wings comes from a central bank” –
true. but do tell me what butterfly wing flap led bill yields to fall sharply in mid june while note prices gapped down (yields moved up). as i noted, the aggregate june data doesn’t support a shift in the composition of central bank demand, but it also doesn’t tell us when in the month central banks sold bills and bought notes. the data doesn’t confirm the particular hypothesis i had, but presumably something drove moves in the bond and bill market in june?
both anecdotes (FT stories about the absence of a Chinese bid … ) and the FRBNY custodial data are consistent with a change in central bank activity from mid-June on. if you have access to flow data that tells a different story, please share.
re: “assets the US has, and that ‘foreigners’ covet” - if by assets you mean institutions, maybe they are just not genetically capable of it yet, per Clark?
gillies — interesting comment, as always.
you note that the “potential wrestling match is between savers and borrowers, or between nationalists/protectionists and globalisers/free traders”
that’s true.
within the US it is also between sectors that have benefited from chinese financing and sectors (notably workers in those sectors) that have been hurt by chinese competition, as well as the knock-on effects of that pain (i.e. local plant shuts down, local real estate values collapse, service sector collapses, workers from small town ohio have to find other jobs elsewhere, pushing down wages and the like). within china it is between Chinese taxpayers (Who will pay the fill for china’s export subsidy) and China’s exporters — and currently between the PBoC (which feels the peg constraints its monetary policy options) and Chinese exporters.
that said, i do think you may be downplaying some very real points of tension between china and the Us. as you note, there is a potential wrestling match between “Savers” and “borrowers” — and China is globally the saver par excellence and the US the borrower par excellent. their interests are not aligned. China would rather the US adopt policies that increase the return on china’s existing savings in the US (or at least help to minimize losses), the US would rather see China take large losses … China wants the freedom to pick who it lends to (and specifically what us assets it buys), the US would rather China limits its demand to those kinds of financial assets that the US is most happy to sell. I could go on, but i think you get my drift.
i hesitate to call a debtor/ creditor relationship where the debtor depends on an ongoing subsidy from the creditor symbiosis — it seems potentially damaging to both parties, though the nature of the damage to each party (and the nature of the current benefits) differ
frankly the whole notion of foreigners buying hidden us assets is way off topic. foreign official institutions don’t get any knowledge when they buy us treasury and us agency bonds, and all the data suggests that they bought a ton of them in june. there aren’t hidden flows here — there are some miscounted flows through london, but the pattern is now well known. they are simply large official purchases that are the counterpart to large reserves growth. if that reserve growth stems from a clever policy of knowledge accumulation rather than a stubborn insistence on clinging to outdated fixed exchange rates, i would be stunned.
china and the middle east are getting a bunch of dollar denominated bonds in exchange for their current production of goods (and oil). those dollars aren’t worthless — they are claims on the us economy’s future production, and they can be exchanged for other countries current production (giving that country a claim on future us production). but they also are unlikely to maintain their current real value –
Brad, you must admit that Wall Street until recently has been having an awesome party with wine and women from foreign financing of US deficits (ie. US Dollar hegemony). But I bet Congressman Ron Paul would have some choice words with Rubin Rubin and his hedge fund cronies at Goldman Sachs
Guest :
Until I got to the next paragraph, I thought this was about the USA -
“…There has been a sluggish response to the urgency of remedying the astonishingly under-funded social infrastructure - for example, the need to build many more schools, hospitals and rural medical centres - and developing a functioning system of accountability, supervision and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rail), which required both governmental and private initiatives. Large areas of what economists call “public goods” have continued to be under-emphasised… Some failures are huge, such as continuing undernourishment, particularly in children, and of course the continuing scandal of a quarter of the population (including half of all women) remaining illiterate in a country with such high-technology achievements based on excellent specialised training and practice. A democratic country can hardly want to maintain a divisiveness that makes it part California and part sub-Saharan Africa…”
i accept brad’s comments - some differences are more in the way things are expressed, than in substance.
perhaps i am pointing to genuine saver / borrower tension and genuine and emerging globaliser / nationalist-protectionist tensions being dressed up as jingoistic complaints that china will not play ball.
there is also a genuine advantage in a national currency acting as a global reserve currency, but the assumption seems to be (a) that creditor countries are unwilling hostages of the system, and (b) that the system will collapse and serve america right . . .
a further possibility is that china - or some other country or bloc with the clout and political will - would use their potential to collapse the market for the dollar. they would not wish to actually carry out the threat, nor to destroy dollar hegemony, but to leave the dollar in place as a global reserve currency controlled by a g7, g8, or g9 etc. committee, not a single nation.
collapsing the dollar or the bond market would be ‘mutually assured destruction.’ but like nuclear weapons with similar effects - the threat could be used as bargaining leverage to bring greater democracy to global financial arrangements.
i am coming from an irish perspective. our government used to wrestle with interest rate decisions. now they are offloaded, for as long as the euro lasts, to the e c b.
the u s might wonder - having if you like given seats on the fed to the leading nations - what all the fuss was about.
i am convinced that dollar hegemony means free credit, not free money (this side of repudiation of obligations). i am also convinced that this free credit is at the root of a moral hazard that leads inevitably to debt.
the u s deficit is in effect a sub prime mortgage sold to a chinese bank, among others. some think that the world can retreat from fiat currency. i doubt it. i think that we will be going on to a more democratically managed global currency, as soon as the current neo-con unipolarity phase of u s policy comes to its fast approaching end.
“current real value” against what?
“stubborn insistence on clinging to outdated fixed exchange rates” perhaps more convincing than your generousity of foreigners or sinister intents arguments
guest — clinging to outdated pegs = overpaying for dollar assets = generousity of foreigners … they are all part of the same argument.
real value — how about v. the rmb. afterall, china’s government in borrowing in rmb to buy $. it would like a positive (or at least not hugely negative) real return in rmb terms. but the $ also hasn’t held its real value v say oil, or v. a basket of european goods …
gillies — interesting as usual. i would argue that at some point the advantage of a reserve currency turned into the problems associated with having a currency whose value is determined by central banks in the emerging world, who seem intent to block a depreciation that would better equilibriate global growth (a bit more in the US, a bit less in china — but with more of the growth from domestic demand and likely more job creation). and from that point of view, the us is as much trapped by the existing system as emerging economies. emerging economies are afraid to let the $ go. and so long as they are afraid, they hold natural pressures for adjustment — pressures to be sure that would hurt parts of the us even as they help other parts of the US — at bay.
Any chance the Chinese could sue for fraud and/or misrepresentation re the toxic waste they have been sold? I would think such a lawsuit started by such a powerful and deep-pocketed litigant would give Washington and Wall Street much to worry about.
the only “toxic” waste china has bought is (potentially the dollar). they generally have bought bonds with little credit risk (treasuries and agencies — particularly so called agency mbs) make up the bulk of their portfolio. their private mbs holdings are comparatively speaking small — and (per mcgregor) generally the higher quality stuff. china’s risk is its exposure to the dollar, and you cannot sue someone else for a risk that you voluntarily took on as a result of your own policy choices (the $ peg)
” true. but do tell me what butterfly wing flap led bill yields to fall sharply in mid june while note prices gapped down (yields moved up) ”
I don’t know. And neither do you, at least not with great certainty. That’s part of the point.
The fact that I won’t construct in detail a more general non-central bank or at least more balanced scenario doesn’t mean there wasn’t one.
Try a more general change in the market’s perception of the Fed’s intentions and of risk in the bond market. That could cause any government debt investor to consider taking refuge in the short term for a while. Sometimes the butterfly takes the form of economic data or financial data or communication or interpretation of policy information (such as Fed policy) that even secondary (in your paradigm) market participants outside of central bank trading desks can understand.
It is also true that not every butterfly flaps its wings in the form of a specific financial flow, or in the absence of such a flow. Changes in yields don’t necessarily require proportionate quantums of flows to generate those changes. Market prices can gap with relatively little flow for many reasons. Just look at recent activity - price gapping in credit markets has occurred with a relative lack of flows. How can flows be the explanation when the problem is the seizing up of flows? The magnitude of flows doesn’t always correlate with the magnitude of price changes. If you insist on a paradigm where they do, and restrict your paradigm to central bank activity, you run some risk of incomplete modeling.
And do we now look to central bank flow data for the reason why treasury bill yields have fallen 100 basis points? I’ll look forward to the unveiling of the evidence.
The same tools that economists use to describe flows between nations can be used to describe flows between any two sets of actors - regardless of their internal organization or management structure.
As I’ve said before, it strikes me as far more useful to draw the line not between the US and China, but between the central banks and everyone else. Hank and Ben cannot tell the PBoC what to do, but their broad general goal - preserving global prosperity - is identical.
So we have two pseudo-nations: “CB Nation,” whose incentives are fundamentally political, and “Debt Nation,” whose citizens behave as normal economic actors.
CB Nation can produce currency at near-zero cost. Predicting its behavior as if it was a private, profit-seeking entity is absurd, and leads to absurd results. There is no way to model CB Nation as though it was a nation of private investors. CB Nation’s actors are somewhat heterogeneous, but all of them exist in order to distort price signals for political purposes.
When we look at the flows between CB Nation and Debt Nation, we see that CB Nation is buying a vast quantity of securities issued by Debt Nation. Dipping into its infinite paper mine, it is purchasing across the maturity and risk spectrum. All prices of all financial instruments are affected by this so-called “savings glut.”
Since CB Nation is a monopoly producer of currency, it’s interesting to see what would happen to Debt Nation if CB Nation suddenly started behaving as an economic actor.
CB Nation, as an economic actor, has no interest in buying securities below their market price. Let’s assume that our newly economics-savvy CB Nation has no special entrepreneurial expertise, and thus no reason to think that its predictions of the future are better than those made by the markets in Debt Nation.
Therefore, CB Nation immediately stops buying the securities of Debt Nation. If you have no information about a market it is irrational to speculate in it. The “savings glut” disappears, and no more currency flows from CB Nation to Debt Nation.
The effective disappearance of CB Nation leaves Debt Nation with a fixed supply of currency. (In fact it is slightly less than fixed, because the debts to CB Nation still need to be paid off.) Prices of Debt Nation securities (and other assets) return to free-market levels, revealing a natural yield curve that is probably extremely high and upward-sloping, but which cannot be measured while CB Nation is still intervening.
The result, of course, is that almost anyone in Debt Nation with any kind of debt is insolvent. If Debt Nation has reasonable bankruptcy laws, they work out the defaults in a year or two, and normal economic activity resumes. Otherwise, Debt Nation becomes a sort of giant open-air debtors’ prison.
Obviously, since CB Nation is in fact a political actor, this is not about to happen. However, the Fed’s little experiment in raising short-term rates is a kind of small-scale hint at the above process.
In the game between CB Nation and Debt Nation, CB Nation has all the cards. The only question is how much pain CB Nation wants to inflict on Debt Nation. To answer this question, one needs to understand the political dynamics within CB Nation. Events in Debt Nation are only relevant to this question inasmuch as they have a political effect on CB Nation.
Thus the role of indicators such as “inflation,” “unemployment,” etc. In economic terms these indicators are worthless - they are great vats of aggregate fudge. However, as a means of predicting the actions of CB Nation, they are excellent.
The behavior of a rational investor in Debt Nation depends considerably on his assessment of the politics of CB Nation. The main unanswered question is how CB Nation will behave in case of an increase in both “inflation” and “unemployment.”
Obviously, anyone who has the correct answer to this question can profit almost infinitely. Which is why CB Nation cannot and will not answer the question, at least not honestly. This essential uncertainty in CB behavior is a natural cause of the business cycle.
And, incidentally, a great way to cream people whose quantitative models depend on the assumption that the past will mirror the future. By definition, you can’t model an irrational actor - irrational is not the same thing as stochastic. What the quants forgot is that the enemy gets a vote.
re: “if by assets you mean institutions, maybe they are just not genetically capable of it yet, per Clark?” - it looks like there’s scientific data to back him up.
“Evolutionary changes in the human genome could help explain cultural traits that last over many generations as societies adapted to different local pressures… generation after generation, the more trusting individuals would have more progeny and the oxytocin-promoting genes would become more common in the population. If conditions should then change, and the society be engulfed by strife and civil warfare for generations, oxytocin levels might fall as the paranoid produced more progeny…” http://www.nytimes.com/2006/03/12/weekinreview/12wade.html?pagewanted=1&ei=5088&en=4ffa8520bf6f7229&ex=1299819600&partner=rssnyt&emc=rss
re: “more trusting individuals” might do a better job of sharing information too.
re: “generousity of foreigners” then the hidden asset is good will
re: value - rmb’s value being expressed through its relationship to USD. as for the oil and other commodities and goods, perhaps we’ll see as the unwinding and asset repricing continues.
might (Private) Equity Nation fit into your scenario moldbug?
Was going to ask much the same thing - but thought it might be OT -
anyone know why the short end of the $ yield curve has collapsed and why gold lease rates have spiked?
Seems incongruous with a stronger dollar…
moldbug - this is a good description of the current 2-player game. But, the one who controls the money wins the game. Without wishing to get political here, you can view it more cynically as people vs plutocrats. We saw it play out more or less in Russia if I’m not mistaken.
Lots of cheap debt, the people takes on debt, credit crunch/monetary contraction, insolvencies, cheap assets, money re-creation, money goes to plutocrat class with access to credit or ready cash, they buy up cheap assets, re-inflation, plutocrats deleverage, the cycle begins again.
As one of the people, the only way to win is not to play, which is why you’re a moldbug I suppose.
“…The U.K. is the largest foreign investor in Russia after Cyprus, the Netherlands and Luxemburg… It is difficult to distinguish between foreign investment and investment by Russians…” http://www.bloomberg.com/apps/news?pid=20601013&sid=ac7yoP3CbHTI&refer=emergingmarkets
David Chaing,
Ron Paul’s fun to watch, but so is Homer Simpson. Which one do you think will fade first?
China’s one-child gereration is probably the most selfish group to ever find itself on the precipice of power. China’s living, preceding generations, as well as those of us who inhabit the rest of the world, may have much to fear in the coming years.
The US Government doesn’t have to force China to revalue its currency or slap tariffs on Chinese goods to cure America’s buying-all-things-Chinese addiction. All it has to do is convince the American buyer that Chinese goods are inferior and unsafe. The campaign is well under way.
“China announced a crackdown on what officials called “false news” and illegal publications ahead of the most important meeting of the Communist Party in five years.” http://www.nytimes.com/2007/08/15/world/asia/15cnd-china.html?ex=1344830400&en=cc4122a41e744ecd&ei=5088&partner=rssnyt&emc=rss
“…Foxconn, in cahoots with Chinese courts, retaliated against Chinese journalists who wrote stories about conditions at Longhua…” http://www.salon.com/tech/htww/2007/08/13/foxconn_wsj/index.html
black swan - a wishful thinking but won’t happen because: 1) Low price matters 2) Americans consist of multi-national citizens/residents 3) American “Made in China” retail goods are produced upon US firms’ approved product specifications.
guest — true, i don’t have evidence that cb funds were parked in treasuries in mid june. i do think that central banks were not big buyers in early june. at the time, there wasn’t a generalized run into treasuries either — it was a bit before bear broke, and it is hard to square the sharp fall in bill yields with a story about the fed that also leads to a run up in note yields.
again, if you have a story do tell … i put forward a hypothesis that was consistent with anecdotes (see the ft) about what was happening in the note market, some stories i heard from friends who work in a big bank, the FRBNY data and the price action on bills. i am open to alternative hypotheses. the tic data doesn’t confirm my hypothesis — but it also doesn’t fully refute it b/c there could have been strong buying at the end of the week.
as for the recent rally in bills (and in notes), it seems perfectly consistent with a broad flight to liquidity (folks are hoarding cash), with the fall in note yields and with changing expectations about the fed’s likely policy course. i certainly don’t think it is a central bank story. it fits the classic story of what one would expect in a flight to liquidity.
t — stronger $ seems to me to be a function of:
a) us funds bringing money home (and taking profits on their foreign equities), in part b/c they are deleveraging and in part b/c they need liquidity (expected redemptions/ margin calls/ etc). the fall in bill yields fits the same story.
b) i think some bank sponsored european funds that bought $ assets (ABS/ CDOS and the like) financed themselves in the $ commercial paper market. that market had dried up and they are turning to backup credit lines, some of which are in euros — which means that they are selling euros for $.
but if anyone else has a better explanation, i would be interested.
also worth noting that q2 european growth was a bit lower than expected …
i should have checked the t-bill yields today more closely –
wow.
[yields] “fell to about 4 percent, from 4.65 percent on Tuesday”
for the record, my guess is that this seems tied to problems in the CP market, not central banks. someone is nervous.
DC: A quote, especially from a politician, does not answer the objection I raised to your dollar hegemony idea. Think it through and explain how the mechanism works. If you cannot, it probably does not work. You may have a good point, but it needs to be explained.
Your thesis is not entirely unreasonable. You’ve researched and thought it out and supported it much detail. I’ve not suggested otherwise. But you’re also looking for the answers directly under the light where the street lamp shines (your central bank paradigm). Use a flashlight to probe for alternative possibilities in the dark areas. For example, just consider the comparative move in Treasury bill yields in the two cases. You acknowledge that the recent move - about 100 basis points in total - is probably due to non-central bank activity. It is somewhat surprising in your paradigm that the non-central bank market would be capable of generating such an outcome. It means the non-central bank market has considerable power to move yields well beyond the zone of anxiety considered in the June central bank scenario, which was not much more than 20 basis points at the short end. So the question is - why should central banks necessarily be attributed to account for such a relatively small market adjustment in June, accounting for it by their own flows in one case of market anxiety, when the rest of the market has demonstrated the potential to create consequences well beyond that quantum in the August case? Why is one case of market anxiety specific to central banks (street lamp) and the other case universal (dark areas)?
if you’ve checked the Brazilian Real lately…
“…Paulson told the Wall Street Journal… that nothing should be done to protect market players against losses or restrain their risk-taking. “One of the natural consequences of the excesses is that some entities will cease to exist… ” http://www.washingtonpost.com/wp-dyn/content/article/2007/08/16/AR2007081600379.html
re: “clinging to outdated pegs = overpaying for dollar assets = generousity of foreigners”
where does Voldemart fit in?
“Sweden’s Financial Supervisory Authority on Thursday sent additional questions to Borse Dubai demanding an urgent explanation of the way it amassed its stake in OMX, the Nordic market operator. Its questions focus on the options contracts Borse Dubai arranged with a range of hedge funds that gave it the right to acquire an additional 22 per cent of OMX on top of the 4.9 per cent it already holds…” http://www.ft.com/cms/s/35f4ddc0-4bd1-11dc-b67f-0000779fd2ac.html
Dr. Setser,
Sorry to be off topic
Can you explain more about T-bill Yield going to 4%..what could have caused it and what are the implications ?
I heard that TED spread is on a 10 year high
“For anyone worried hedge funds could spark another market crisis, Wednesday is a red letter day: the final chance for investors to put in demands for their money back… By Thursday, hedge funds with these terms will know exactly how much cash they must find to repay shareholders; cash they are likely to find by selling their investments. Large-scale redemptions may prompt big sell-offs…” http://www.ft.com/cms/s/3dc39278-4a99-11dc-95b5-0000779fd2ac.html
Dr Dan,
I presume that it is because of the seizure of the commercial paper market:
http://www.bloomberg.com/apps/news?pid=20601009&sid=aufcfYrSKp2Q&refer=bond
CB nation decides on its level of intervention in the flows.
But it also controls the price of the most elementary form of money - i.e the price expressed as the most elementary interest rate.
(Whether events conspire to force an unpleasant decision for the price of elementary money, it is still the decision of CB nation).
To continue the theme, flows are never the complete explanation.
“…This is no longer a subprime crisis, this is a full-blown structured product crisis,”… foreign investors have become exposed to high-risk credits in Brazil through the large amount of debt raised overseas by Brazilian financial institutions. Last year, $18.8bn entered Brazil as foreign debt, the vast majority raised by banks. They invested some of it in high-yielding public securities. But a significant amount was passed on as consumer credit. Total financial sector credit in Brazil stands at about $395bn, of which $135bn is consumer credit and $260bn, corporate. Foreign banks account for 36 per cent of the total… Consumer credit is the engine of recent growth in Brazil… ” http://www.ft.com/cms/s/29bc98fa-4b76-11dc-861a-0000779fd2ac.html
Things are changing, it is OECD who cannot buy oil assets any more. look at the statement of Exxon, they cannot increase production, because Russia, Venezuela, Iran all closed down for westerners. Nigeria is closing down as well, Sudan is China’s zone of influence now. Iraq can’t increase production, guess why? because Iran silently backed by China and Russia wont allow it to slip into US spheres of influence.
the prospect of increased taxes triggers massive profit taking, Hillary takes the hospital pass:
“Good news for Wall Street: Recent market events should have only have a modest effect on bonus pay this year… compensation accruals through the last seven to eight months, which are higher than those in 2006, will buffer bonuses from the markets’ negative impact this year.. Next year does not look so rosy…”
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070815/REG/70815008/-1/INDaily01
Finally a voice of reason from Republican Mitt Romney,
“The US must focus on becoming more competitive rather than raising trade protectionism.”
“China and the rest of Asia are on the move economically and technologically. They are a family oriented, educated, hard-working and mercantile people,” he said. “We must be ready and able to compete.”
“If America acts boldly and swiftly, the emergence of Asia will be an opportunity. If America fails to act, we will be eclipsed.”
“There is a legitimate conversation to be had about globalisation,” he said. “But it should not be a xenophobic one.”
“…It’s not so easy for Chinese companies, or at least state-backed ones, to bring their money here, perhaps because Corporate Canada is still uncomfortable with the sight of Communists bearing large cheques. “If I were forced to do something today, I would enact legislation that would stop [takeovers by foreign] companies where government has a say,” says Peter Munk, chairman of Barrick Gold…” http://www.globeinvestor.com/servlet/story/RTGAM.20070816.wdecloet0816/GIStory/
re: bills — wish i knew. there is a flight to liquidity. the banks have lots of outstanding credit lines (backup lines) that they now think people may use — so they may be hoarding cash (and parking it in bills). same with Hfunds facing redemption risks. and if you think everything else will fall, cash is a good place to be.
re: “For example, just consider the comparative move in Treasury bill yields in the two cases. You acknowledge that the recent move - about 100 basis points in total - is probably due to non-central bank activity. It is somewhat surprising in your paradigm that the non-central bank market would be capable of generating such an outcome.”
I don’t think i have never suggested that all market moves are due to central bank activity — though i do think huge inflows from china are part of the backdrop that has generated a lot of private activity we see. central banks were not piling into the TRY or the ISK. pure carry trades. Japanese retail (and HFs) were piling into the NZD. i could go on.
but there is a big difference between the current market move and the move in june. bill yields and note yields are moving in the same direction. the large gap that opened between bills and notes in mid-june seemed to suggest something else was at work.
it could have been central banks. it could have been someone else with a lot of cash that they wanted to part in safe assets — maybe someone who had a inkling of bear’s credit troubles? who knows. but if you though the market was going to blow up, then buying longer duration safe assets would have offered more bang for your buck, so it is hard to see why notes would have been selling off …
(incidentally, the t-bill market is liquid — so a rise in price likely reflects a rise in demand, not a change in the dealers marks. maybe price adjusted in anticipation of a change in the demand — but the dealers responded to an expected change in demand)
The June event was clearly inflation risk inspired - hence the bond sell off. Like you, I don’t have a spread sheet of every transaction that occured globally. But the bill yield change was relatively minor. Today’s events are deflation risk and flight to quality inspired. Hence the entire curve change and the dollar’s strength. I don’t buy the argument that one type of change is a disproportionate response from a single participant and the other isn’t. The bill market alone is too big to reflect that.
“…it has taken a bit longer for the spotlight that exposed problems with derivatives based on subprime U.S. mortgage loans to shine on Canada… It’s “the seizing up of Canada’s term money market,”… If liquidity problems persist in Canada, the Bank of Canada will be faced with three options, analysts said: It can move into the asset-backed commercial paper market and provide liquidity where the banks won’t - a move that would be highly irregular and unlikely for a central bank; It can freeze its key interest rate, which market players believe is a probability; And it can bring financial institutions, lenders and borrowers together in a room and not-so-gently tell them to hash out an agreement for the greater good of the markets. There are growing signs that this type of effort is in the works…” http://www.globeinvestor.com/servlet/story/GAM.20070816.RBOC16/GIStory/
One thing that puzzles me is why China instead of using its dollars to purchase US paper does not use those dollars to purchase Brazilian money, roubles, pounds, Euros, yen, etc. Those currencies can be used to pay for imports from those countries or simply hoarded or exchanged for bonds denominated in those currencies; in most cases the long term loss would probably be much less. Why is it so limited to dollars and paper denominated in dollars?
well, one story now circulating (see bloomberg via mark gilbert) is that the collapse in bill yields was a product of the fed’s liquidity injection … i.e. policy driven.
two questions though:
one, why would inflation fears drive bill yields lower? the bill move was large for the time …
two, do you give any credence to the FRBNY data, which seemed to show a fall off in central bank buying (at least buying and then holding the bills/ bonds at FRBNY) in early June?
dollar benefiting from a flight to quality? hmmm. not sure i buy that. $ benefiting from deleveraging by us based institutions and european banks borrowing in euro s to make up for shortage of dollar financing seems more likely … but maybe i have a mental block when it comes to seeing the currency of a coutry with a big current account deficit w/o sufficient private inflows as “quality”
Take a look at the USD/JPY rate: 112.6, Carry trade is unwinding fast.
Guest: One thing that puzzles me is why China instead of using its dollars to purchase US paper does not use those dollars to purchase Brazilian money, roubles, pounds, Euros, yen, etc.
Because when push comes to shove, people trust the United States to keep its currency stable more than Brazil and Russia. As far as England and Japan, these are much smaller economies than the US, and there are limited to the degree you can store vast amounts of value. The Euro could be a world reserve currency, but it will take a while. Basically people use dollars because people use dollars.
DC does have a point when he talks about US dollar hegemony, but one of my disagreements with him is that I think he vastly underestimates the stability of this hegemony and its nature. It’s not one or two deals that results in the US being the world’s currency.
Also I think he vastly overestimates the degree to which Washington controls or influences Wall Street. As far as foreign policy goes, Wall Street probably influences Washington more than Washington influences Wall Street, and China has been a tremendous beneficiary of this.
Also, DC seems to think that “US hegemony of the world” is a bad thing. I’m not so sure that it is such a bad thing.
Twofish,
I think China has other reasons why they do not buy yen! Unless you think that the Japanese government will go for inflationary repudiation of its debt, the yen seems a good candidate for a reserve currency to me - safe borders, stable society, reliable laws, liquid debt market etc.
If you can explain the mechanism of dollar hegemony, I would be interested!
I’m not challenging your tracking of central bank related data - you probably do a better job of that than anybody. But I’m skeptical of exclusive cause-effect relationships concerning broad market events imputed to that data. I have no science to disprove that exclusivity - just my own simple-minded version of common sense and that things other than central banks can affect markets.
My comment on inflation risk was directed totally to the long end reaction in June. Indeed, the opposite reaction at the short-end is counterintuitive with inflation risk - but it may reflect temporary substitution demand arising from long end sales. I believe that’s more or less your thesis for central bank activity, whatever the cause for long end selling. I think that’s quite believable, but according to your post may not fit unambiguously with the available data. It requires a further assumption. My point is, either way, other market players may be involved and influential as well - players on which we don’t have comparable tracking data as systematically as you aim for in your central bank overview - the entire market may be influential.
Of course the collapse in bill yields is associated with the Fed’s liquidity injection. But the policy objective was to bring the funds rate back to target, with temporary sub-target levels as necessary, in order to assuage severe funds flow indigestion in the banking system - an event that essentially imbues credit deflation risk. The trading of funds well above the target or the seizing up of the general flow of credit is surely a recipe for at least the risk of credit and debt deflation. The collapse in the bill yield is fallout in terms of at least temporary flight to credit quality with still suboptimal routing of funds while the Fed attempts to restore flow of funds order.
Flight to quality on the dollar - I hear you in terms of the reason for your ‘mental block’. Again it’s counterintuitive to more robust predictions of dollar decline for all of the reasons you are most familiar with. But as a wise man said on the tube today, people in times of panic tend to gravitate to what they are most familiar with. When the panic’s over, fundamentals will reassert themselves.
guest — i think we are finding a few points of convergence.
tis true that i cannot exclude the hypothesis that another source of demand led to the collapse of bill yields in mid-june — at the same time, the monthly data cannot prove or disprove the hypothesis that c banks piled into bills in mid-june, then shifted bank to notes. bill yields actually were higher at the end of june than at at the end of may — which sort of fits a net (central bank) sales (of bills) in (late) june hypothesis. the basic problem i am struggling with is that i want data from mid june, and all i have is data from end june.
i agree with your point that in time of stress, folks migrate towards the familiar …
Is there more info on who buys U.S. Agency debt (FNMA, FHLMC, FHLB) bullets and callables?