Comments on: Official purchases and the bond yield conundrum http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/ Fri, 09 Jan 2009 00:39:59 +0000 http://wordpress.org/?v=2.6.1 By: bsetser http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105770 bsetser Sun, 02 Mar 2008 05:01:28 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105770 anonymous -- whoah. on what basis would you think that the Bulgarian lev and the Serbian dinar have joined the Swiss franc as a reserve currency? Guest -- a cut in military spending could be modeled as a reduction in the fiscal deficit, and thus a rise in government saving. The overall impact of such a change hinges on whether or not private savers and investors end up saving less (and consuming more) as the government save more, and/ or investing more. And that to some extent hinges on the policies adopted outside the US -- i.e. does a reduction in government borrowing lead to lower rates and thus induce more private borrowing, whether for consumption or investment. Such a policy also is a restraint on us dmeand and thus on other countries export revenues, so their is some effect their, and some potential fall in their savings as a result. all in all, I think Menzie Chinn's work would suggest that a percentage point fall in the fiscal deficit produces half a percentage point fall in the current account deficit; others have gotten a smaller number. I was a bit surprised frankly that the 04-06 improvement in the fiscal balance (mostly from rising corp tax revenues) didn't have a bigger impact on the current account. anonymous — whoah. on what basis would you think that the Bulgarian lev and the Serbian dinar have joined the Swiss franc as a reserve currency?

Guest — a cut in military spending could be modeled as a reduction in the fiscal deficit, and thus a rise in government saving. The overall impact of such a change hinges on whether or not private savers and investors end up saving less (and consuming more) as the government save more, and/ or investing more. And that to some extent hinges on the policies adopted outside the US — i.e. does a reduction in government borrowing lead to lower rates and thus induce more private borrowing, whether for consumption or investment.

Such a policy also is a restraint on us dmeand and thus on other countries export revenues, so their is some effect their, and some potential fall in their savings as a result.

all in all, I think Menzie Chinn’s work would suggest that a percentage point fall in the fiscal deficit produces half a percentage point fall in the current account deficit; others have gotten a smaller number. I was a bit surprised frankly that the 04-06 improvement in the fiscal balance (mostly from rising corp tax revenues) didn’t have a bigger impact on the current account.

]]> By: Anonymous http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105769 Anonymous Sun, 02 Mar 2008 03:25:13 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105769 re: "This model is vulnerable to asset depreciation" some might argue a bit too much attention has focused on the assets which have depreciated "...Why, then, are so many experts describing the present credit crunch as the worst financial crisis in living memory? ...to create any financial crisis... there has to be a widespread belief that things are much worse than ever before..." http://www.theaustralian.news.com.au/story/0,25197,23286731-643,00.html re: “This model is vulnerable to asset depreciation”

some might argue a bit too much attention has focused on the assets which have depreciated

“…Why, then, are so many experts describing the present credit crunch as the worst financial crisis in living memory? …to create any financial crisis… there has to be a widespread belief that things are much worse than ever before…” http://www.theaustralian.news.com.au/story/0,25197,23286731-643,00.html

]]> By: Anonymous http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105768 Anonymous Sun, 02 Mar 2008 03:03:21 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105768 "...Clearly, there is great uncertainty about the evolution of SWFs and forex reserves relative to total global assets. Our assumption... is that forex reserves have risen to a level such that they stop growing faster than global financial assets. Current account surplus countries now channel new investments overwhelmingly into SWFs..." http://www.morganstanley.com/views/gef/archive/2007/20070601-Fri.html "...SWFs typically seek to diversify foreign exchange assets and earn a higher return by investing in a broader range of asset classes, including... corporate bonds... commodities, real estate, derivatives, and foreign direct investment..." http://www.frbsf.org/publications/economics/letter/2007/el2007-38.html “…Clearly, there is great uncertainty about the evolution of SWFs and forex reserves relative to total global assets. Our assumption… is that forex reserves have risen to a level such that they stop growing faster than global financial assets. Current account surplus countries now channel new investments overwhelmingly into SWFs…” http://www.morganstanley.com/views/gef/archive/2007/20070601-Fri.html

“…SWFs typically seek to diversify foreign exchange assets and earn a higher return by investing in a broader range of asset classes, including… corporate bonds… commodities, real estate, derivatives, and foreign direct investment…” http://www.frbsf.org/publications/economics/letter/2007/el2007-38.html

]]> By: Anonymous http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105767 Anonymous Sun, 02 Mar 2008 02:55:45 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105767 if we can assume 'other' european currencies account for at least some part (increasing or decreasing?) of the 'non-dollar' holdings - swiss francs, serbian dinars, bulgarian leva, polish zlotys: "...with 49 million bank accounts for 7.5 million inhabitants, Poland has reportedly been the target of Italian and American mafia who use multiple bank transfers between Polish banks and financial institutions in the Caribbean and Liechtenstein..." - Financial Havens, Banking Secrecy and Money Laundering, UN Office for Drug Control and Crime Prevention, June 1998, Jack A. Blum, Prof. Michael Levi, Prof. Thomas Naylor, Prof. Phil Williams if we can assume ‘other’ european currencies account for at least some part (increasing or decreasing?) of the ‘non-dollar’ holdings - swiss francs, serbian dinars, bulgarian leva, polish zlotys:

“…with 49 million bank accounts for 7.5 million inhabitants, Poland has reportedly been the target of Italian and American mafia who use multiple bank transfers between Polish banks and financial institutions in the Caribbean and Liechtenstein…” - Financial Havens, Banking Secrecy and Money Laundering, UN Office for Drug Control and Crime Prevention, June 1998, Jack A. Blum, Prof. Michael Levi, Prof. Thomas Naylor, Prof. Phil Williams

]]> By: Taxpayer http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105766 Taxpayer Sat, 01 Mar 2008 22:22:07 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105766 "...Mr Bébéar said the introduction of accounting rules that required companies to state assets at the latest market prices had helped contribute to global financial market volatility... His comments were echoed by Henri de Castries... who branded mark-to-market... as a "conceptual mistake"..." http://www.ft.com/cms/s/0/b71c32a4-e668-11dc-8398-0000779fd2ac.html If you don't book the losses then you can't book the gains. Many corporations revalue assets annually and issue securities based on the increased value. This is then available for further asset acquisition or dividends or if you are going through a rough patch, expenses. What happens to this model when assets are not booked to market value? This model is vulnerable to asset depreciation like the real estate market but changing this rule would ruin the model completely. “…Mr Bébéar said the introduction of accounting rules that required companies to state assets at the latest market prices had helped contribute to global financial market volatility… His comments were echoed by Henri de Castries… who branded mark-to-market… as a “conceptual mistake”…”
http://www.ft.com/cms/s/0/b71c32a4-e668-11dc-8398-0000779fd2ac.html

If you don’t book the losses then you can’t book the gains.
Many corporations revalue assets annually and issue securities based on the increased value.
This is then available for further asset acquisition or dividends or if you are going through a rough patch, expenses.
What happens to this model when assets are not booked to market value?
This model is vulnerable to asset depreciation like the real estate market but changing this rule would ruin the model completely.

]]> By: Dave Chiang http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105765 Dave Chiang Sat, 01 Mar 2008 15:53:43 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105765 Twofish, "It's actually $32 billion in subprime and $32 billion in Alt-A." - Twofish Wall Street Journal friday's editorial bashing the GSEs says its over $100 billion of subprime on Fannie Mae's balance sheet. Well, who the hell knows what crap is on Fannie Mae or former Enron's balance sheet? "There's no such thing as an average Chinese." - Twofish Ok, the average savings rate for Chinese is about 30% of household income while the average savings rate for Americans last year was negative 1 percent. Is it really an overgeneralization to state that thrifty Chinese have taken saving to excess, while profligate Americans have overspent their way into debt? The average Chinese is more thrifty, right or wrong? "The mistake people make is to assert that differences in behavior are due to deep cultural traits, when the reality seems to be quite different. " - Twofish It is politically correct in the US to state that cultural values make no difference, but cultural values really make the entire world of difference. Why are some ethnic groups in America doing better than other ethnic groups? The best educated ethic group in America isn't white or chinese, it's the Indian-American immigrants from India followed Japanese-Americans who have lived in the the US for multiple generation. Japanese Americans have faced state-led discrimination like being thrown into concentration camps during World War II by the US government. Twofish,

“It’s actually $32 billion in subprime and $32 billion in Alt-A.” - Twofish

Wall Street Journal friday’s editorial bashing the GSEs says its over $100 billion of subprime on Fannie Mae’s balance sheet. Well, who the hell knows what crap is on Fannie Mae or former Enron’s balance sheet?

“There’s no such thing as an average Chinese.” - Twofish

Ok, the average savings rate for Chinese is about 30% of household income while the average savings rate for Americans last year was negative 1 percent. Is it really an overgeneralization to state that thrifty Chinese have taken saving to excess, while profligate Americans have overspent their way into debt? The average Chinese is more thrifty, right or wrong?

“The mistake people make is to assert that differences in behavior are due to deep cultural traits, when the reality seems to be quite different. ” - Twofish

It is politically correct in the US to state that cultural values make no difference, but cultural values really make the entire world of difference. Why are some ethnic groups in America doing better than other ethnic groups? The best educated ethic group in America isn’t white or chinese, it’s the Indian-American immigrants from India followed Japanese-Americans who have lived in the the US for multiple generation. Japanese Americans have faced state-led discrimination like being thrown into concentration camps during World War II by the US government.

]]> By: Guest http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105764 Guest Sat, 01 Mar 2008 14:40:44 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105764 One topic I would like to see Brad turn his attention to is the waste of US resources on war and empire. For instance, if the US were to get out of Iraq and Afghanistan and cut the Pentagon budget by at least 50% what would be the effects on the US balance of payments, and our financial soundness? Say we spent a half of the savings on domestic infrastructure and social spending and simply saved the other half. How would that work out? Would it reduce our need for dollars from China? For dollars from other surplus countries? And by how much? Those are the questions that really matter I think, since it is within our power to do them, without having to nag China or some other nation to do things they don't want to do. One topic I would like to see Brad turn his attention to is the waste of US resources on war and empire. For instance, if the US were to get out of Iraq and Afghanistan and cut the Pentagon budget by at least 50% what would be the effects on the US balance of payments, and our financial soundness? Say we spent a half of the savings on domestic infrastructure and social spending and simply saved the other half. How would that work out?
Would it reduce our need for dollars from China? For dollars from other surplus countries? And by how much?
Those are the questions that really matter I think, since it is within our power to do them, without having to nag China or some other nation to do things they don’t want to do.

]]> By: bsetser http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105763 bsetser Sat, 01 Mar 2008 10:50:34 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105763 the goal is to get their aggregate positions. the UK and eurozone data do not provide much insight into the composition of their non-dollar holdings. the goal is to get their aggregate positions. the UK and eurozone data do not provide much insight into the composition of their non-dollar holdings.

]]> By: moldbug http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105762 moldbug Sat, 01 Mar 2008 09:42:43 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105762 <i>the other interesting question is the gap between the green dots (estimated $ reserves) and the blue line (total treasury and agency purchases). it is getting kind of big --</i> Indeed. I'd like to think the Maltese falcon at the end of all this fascinating financial detective work is an estimated reconstruction of the BWII CBs' positions... the other interesting question is the gap between the green dots (estimated $ reserves) and the blue line (total treasury and agency purchases). it is getting kind of big –

Indeed.

I’d like to think the Maltese falcon at the end of all this fascinating financial detective work is an estimated reconstruction of the BWII CBs’ positions…

]]> By: moldbug http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105761 moldbug Sat, 01 Mar 2008 09:28:53 +0000 http://blogs.cfr.org/setser/2008/02/29/official-purchases-and-the-bond-yield-conundrum/#comment-105761 2fish, <i>No. They are concerned with avoiding future depreciation. These aren't the same thing.</i> Appreciation and depreciation are a continuum. To be more precise, "kulaks" hold foreign currency because of their predictions of the future exchange rate between foreign and domestic currency. <i>The Fed does keep track of paper dollars issued, and the total volume of paper money in the world is just under $1 trillion dollars. The thing about paper money is that its unlikely to contribute much to the flow of currency, since paper is just hard to move.</i> Definitely, which is why I said the effect is probably small. 2fish,

No. They are concerned with avoiding future depreciation. These aren’t the same thing.

Appreciation and depreciation are a continuum. To be more precise, “kulaks” hold foreign currency because of their predictions of the future exchange rate between foreign and domestic currency.

The Fed does keep track of paper dollars issued, and the total volume of paper money in the world is just under $1 trillion dollars. The thing about paper money is that its unlikely to contribute much to the flow of currency, since paper is just hard to move.

Definitely, which is why I said the effect is probably small.

]]>