Comments on: Ken Rogoff is also confused by the US policy towards dollar pegs

By: s

Tue, 10 Jun 2008 15:04:07 +0000

The Feds are desperately afraid of a move away from the dollar – can you say franking privalige gone. In agreement with you on rates; if inflation was such a worrey why si the long bond not moving? the short end is anshort term unwind and will eventually wind its way lower, damn the dollar. The banks are in catastrophic shape and a flattening curve is not good to say the least.

By: bsetser

bsetser — Tue, 10 Jun 2008 14:49:37 +0000

JKH — yep. the carnage among those trading the shape of the yield curve is really quite stunning. Must be a lot of selling of 2s by folks covering positions. I am not sure that I really think the fed will raise rates this year tho — even tho that is what the market now expects.

By: JKH

JKH — Tue, 10 Jun 2008 12:16:48 +0000

Re the 2 year treasury yield -

I guess China delegated bond pricing to the Fed this time

By: don

don — Mon, 09 Jun 2008 18:07:04 +0000

I don’t see much of a contradiction in the U.S. policy. Chinese and Asian currency pegs are deindustrializing the U.S. economy. The yen carry trade also would probably not be quite so vigorous (and the U.S. auto industry not quite so devastated) if traders thought currency manipulation would not be tolerated if the yen were to rise to trade for fewer than 100 per dollar.
In contrast, I think the Gulf pegs are doing little to U.S. aggregated demand or to U.S. industries.
On another note, I wonder if some oil exporters besides Iran are concerned about U.S. expropriation of their U.S. assets. They can hold dollars in other ways (I think the euro-dollar market came into being to allow the Soviet Union and other ‘Iron Curtain’ countries to hold dollars.) But is there any effect on their investments?
The piece does not seem in keeping with someone of KR’s reputation. For example, he talks about the Administration’s monetary policy, and he makes no clear statement about the effects of the Gulf pegs on the U.S. economy.

By: bsetser

bsetser — Mon, 09 Jun 2008 13:36:09 +0000

jkh — it would be an interesting exercise, tis true …

but remember that supply of treasuries is fairly elastic. the US is issuing a lot more, and the fed’ balance sheet operations are also having an impact by adding more treasuries to the market.

as for the agencies, well, central banks haven’t gotten close to holding even 50% of the outstanding stock. tis a big market. that number includes the agency pass-throughs tho, and some CBs won’t hold them.

2fish — methinks you are right. i still think the US policy logic is wrong/ puts too high a premium on cheap saudi financing v other goals.

By: JKH

JKH — Mon, 09 Jun 2008 10:54:14 +0000

Oblique to topic:

It would be interesting if sometime you could do a time graph on your estimate of CB treasury and agency holdings versus the outstanding float of same. It would show a couple of natural boundary points or limits on CB reserve accumulation.

By: zebla

zebla — Mon, 09 Jun 2008 07:56:13 +0000

“Surely politicians can ignore macroeconomics, but they can also be victims of the economic consequences of their decisions.”

will the victims no be ordinary people than politicians?

By: FG

FG — Mon, 09 Jun 2008 05:45:09 +0000

Surely politicians can ignore macroeconomics, but they can also be victims of the economic consequences of their decisions.

By: Twofish

Twofish — Mon, 09 Jun 2008 04:02:04 +0000

bsetser: The macroeconomic logic of the US position is hard to decipher.

That’s probably because there is no macroeconomic logic behind it. US wants cheap oil and money for bailouts from the Saudis. It want fewer job losses from China imports.

Macroeconomics has nothing at all do to with this, and I think we’ll have much more honest and constructive discussions if people stop pretending that it does.

By: bsetser

bsetser — Mon, 09 Jun 2008 03:38:36 +0000

the IMF was supporting pegs as a disinflationary tool in the early 1990s. By the late 1990s, pushed by the US among others, it was encouraging emerging economies to allow more flexibility. the pegs of the early 1990s had left many emerging economies with overvalued exchange rates and they had difficulty adjusting to a fall in capital flows (and for some a fall in commodity prices). Most emerging economies then devalued — and in retrospect, far more “repegged” at a lower, depreciated rate than really moved toward greater flexibility.

the other source of the big swing tho was the dollar — pegging to the dollar in the 90s created problems b/c of the dollar’s appreciation, pegging to the dollar now creates problems b/c of the dollar’s weakness.

given that oil has been weak when the dollar was strong and strong when the dollar is weak, this has been (in my view) particularly problematic for the oil exporters.