Until someone can articulate a better alternative for ‘second tier’ CBs, then as long as China and Saudi Arabia are committed to BWII it seems the rest of the emerging world has no choice but to follow along.

As for what the Fed watches, like i said, I don’t know. On a couple of occasions, I have presented some of my data to an audience that included members of the Fed’s international staff, and I got the sense that they were surprised by the pace of Chinese reserve growth — which would suggest that this isn’t something that they pay a lot of attention too. Certainly the public speeches of the Board don’t tend to emphasize the role foreign central banks play in global capital flows — they have preferred to talk of financial globalization in general terms without highlighting the role central banks outside the US have played in the buildup of external claims on the US. Whether this is indicative of a real belief that central banks don’t matter that much or indicative of a decision that it isn’t in their interest to highlight central bank flows i don’t know.

shouldn’t you be putting this within the context of the further integration of the ‘u.s.’ and world economies along with estimates for the overall growth/ monetization of world assets and trade – yes through inflation, but also the creation of new markets and assets which may not have existed, or been in the venture stage just 5 or 10 years ago – the ‘information industry’ comes to mind and should be of great interest to you, i’m looking at a estimated revenues of $260 billion in 2004 as compared to $381 billion in 2007 – and assets held by u.s. entities? custodians like bank of new york, citigroup and more recently jp morgan through bear stearns…

you can be sure he does

I think your scepticism about the Fed’s view of flows is well taken. Both Bernanke and Greenspan have been questioned by Congress on the issue of the sustainability of foreign capital flows, and they have generally maintained it’s not something that keeps them awake at night. This is equivalent to saying that the money has to show up somehow – it’s a matter of what asset category and what pricing. As far as potential disruption is concerned, there’s no more reason to hedge against a super catastrophic liquidation of foreign treasury holdings than there is to hedge against the explosion of the sun. The fear of liquidation scenarios in general underestimates the potential for other investors to recognize value in treasuries once foreign holders have switched into something else.

Flows in my view are substantially overemphasized for their specific effect on pricing. It’s always amusing to hear that there’s money “coming into the market” when stocks go up, or that there’s money “on the sidelines”, waiting to come into the market. Of course money is coming into the market. But it’s going out as well. All sorts of investors are making different value assessments and acting accordingly. It’s the balance of value assessments that forces prices higher, not the fact that one half of the transaction constitutes an “inflow” of money. 0 sum is in play.

It’s not much different when it comes to the value of treasuries. While central banks equate to large “insider” positions, the float outside of central banks is large enough to make the longer run value assessment reasonably liquid and accurate. There’s a big difference between periodic dealer front running of Chinese treasury purchases, and the fundamental value assessment that the entire market puts on treasuries. This includes the value estimated by those who may not currently hold them, who control a reservoir of potential funds that vastly exceeds foreign central bank reserves. This value is determined by, among other things, Fed policy interest rate expectations, inflation expectations, real rate expectations, and periodic flight to quality considerations. And PBOC is not beyond making these types of value assessments itself, relative to what it may actually be paying, which at times may be too much. But valuation factors dominate in the long run, and these other factors have little to do with the fact that China holds a ton of them, or is in a position with its normal trading activities to cause short term hiccups, wretched tummy acid, or temporary jubilation in the dealer community.

My comment probably extends to scepticism about the potential effect of SOMA released Treasuries on interest rates, although I haven’t considered this a great deal. The recent rise in Treasury yields is obviously correlated with a much broader resuscitation in risk taking, including a significant revaluation of equity risk. The market’s somewhat reluctant recognition of the Fed’s overall approach in dealing with the credit crisis has supported this latest episode of broad risk repricing, including the repricing of Treasury yields. I found your comment surprising in noting a variation on the theory of the savings glut and its effect on interest rates – a thesis that, ironically, I’m warming up to in part (although not the part about its effect on interest rates). Nevertheless, my bet would be that the Fed does have somebody tracking this stuff, although it may not be precisely written into their job description. Maybe somebody who reads your blog regularly, and is dying to post what he/she thinks he/she knows, but is conflicted in some way. But my further guess would be that Bernanke has pretty good incoming data radar with respect to the type of incremental data that you compile, and is quite aware of what the trend is in this regard.

rich to "resource rich"

Were input prices to stay high, and the USD to stay weak (relative to pegging Asian countries, and yes China pegs), I suspect the US, and the rest of North America, would get very competitive moving forward, seems to me a New Deal is in the offing. Wasn’t it Toffler who spoke to the return of industries to North America due to high transportation costs, along with the creation of mobile factories. On a per capita basis, North America is very much more rich than East Asia, I believe even not on a per capita basis. Whereas so much heavy lifting needs to be done throughout Asia, I tend to think that China realizes this as it scours the world for resources, and keeps investing in depreciating assets as it races to get richer, before it leaves the demographic sweetspot and ages. I would bet that lessor populations will bear this storm better.

"so if I had to guess, i would guess that the fed board doesn’t pay as much attention to the growth in the fed’s custodial holdings as i do. I also would bet that I now have better data on global reserve growth than they do — though I hope i am wrong on this. I just am not sure anyone at the board in DC really has built up a big spreadsheet to track reserve flows on a high frequency basis."

That is a pretty frightening statement. This implies that the Fed isn’t aware of what is really driving the economy/markets. This implies that the reserve growth ("money printing") could keep spiralling through the roof and the Fed will be oblivious to the impact of this—UNTIL IT IS TOO LATE. This money printing pyramid scheme is destined to collapse.

You said:

"Their aim of switching from treasuries to repo is to try to backstop the MBS market, but it will have the effect of raising treasury yields, relative to other bonds if not in absolute terms."

Very good point that has been overlooked.

Fed asset switches like the TSLF should increase the supply of Treasuries out there, since they are no longer on the Fed balance sheet ("off-the-market").

That should drive Treasury yields up (compared to not making the switch). It’s kind of like taking a plug out of one hole in a leaky boat, and putting it in another hole. The water leaks in no matter what and the rates paid by end borrowers (overall) remain unchanged. Someone correct me if I’m wrong.

http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html