Daily Archives: November 9, 2010

James Politi

The drumbeat of Republican criticism of the Federal Reserve’s quantitative easing plan is getting louder. A few minutes ago, Richard Shelby, the party’s top lawmaker on the Senate banking committee, told the FT in an emailed statement: “While I share chairman Bernanke’s concern regarding the economy, I am worried about the risks associated with his actions.”

He added: “However, chairman Bernanke would not be in this position had president Obama and the Democrats used their power to to enact pro-growth policies.  Instead, they have grown government and created the most anti-business regulatory environment our country has ever seen.”

Several top Republicans have criticised the Fed’s plans to purchase $600bn in additional Treasury bonds since the move was announced last Wednesday, including former House speaker Newt Gingrich and former vice-presidential nominee Sarah Palin, but the top ranks of the congressional leadership on financial issues had been relatively silent. Read more

Political instability sent the modest troy ounce to $2,344 in January 1980, in today’s dollars: the price shot up to $850 (at the time) and fell almost immediately back down. Today’s situation – so far – is different. The gold price has risen gradually, prompted more by monetary events than by international strife. The falling dollar has a lot to do with it: fixing the dollar at its 2000 euro exchange rate would see a current gold price of $1,020, not $1,420. But if monetary phenomena provide the context for the gold price, what would a spot of political instability do? Record-breaking has become commonplace – and the price could rise to $2,300 per troy ounce without breaking it.

If he were still alive today, what would Milton Friedman think of his disciple, Ben Bernanke? This is a matter of some concern to the Fed chairman, who is reported as saying to colleagues on Saturday: “I grasp the mantle of Milton Friedman…I think we are doing everything (he) would have us do.”

With libertarian economists tending to be among those most critical of QE2, Mr Bernanke is relying on Friedman’s halo effect to enhance the legitimacy of the Fed’s recent actions. Friedman’s friends say that his opinions were unpredictable, which is what made them interesting. But some some free market economists, like Allan Meltzer, claim that Friedman would have strongly disapproved of QE2. Are they right?

Mr Bernanke’s admiration for Milton Friedman goes a long way back. In this famous speech, made in honour of Friedman’s 90th birthday in 2002, Mr Bernanke described his hero in simple but glowing language:

“Among economic scholars, Friedman has no peer.”

 Read more

The Greek cost of debt has just risen quarter of a point: Greece will repay the markets €300m over six months at 4.82 per cent, up from 4.54 per cent at the last auction in October. The rise takes the Greek cost of debt back up to highs in 2008 (see red spots on chart).

Greece is testing the market, auctioning short-term debt roughly monthly instead of quarterly (see blue bars on chart). Six month and three month bills are still being regularly offered, but there have been no 1, 5 or 10-year bonds since April and no other maturities for even longer.

The timing of Greek debt auctions has been pretty good, to date, raising funds in periods of relative market calm. The secondary market has been wild at times – above 10 per cent – but the maximum agreed yield at auction was a trifling 5.09 per cent in 2008.

This may lend hope to IrelandRead more

This from the Bank of Japan, in spite of recent QE programme and a cut that takes the bank rate effectively to zero. More worrying still is the reasoning behind forecasts of increased export growth:

Japan’s economy is likely to grow at a slower pace for some time, but is expected to return to a moderate recovery path thereafter… Exports are likely to be more or less flat for the time being, but they are expected to increase moderately again, reflecting the improvement in overseas economic conditionsRead more

A deputy governor at the People’s Bank of China has indirectly criticised the Fed’s $600bn stimulus plan, saying emerging market economies will have to stay alert for inflation and bubbles as a result of the scheme. Ma Delun also said the stimulus might also increase global imbalances, though it might help the US economy “to some extent”.

Similar comments – which amount to indirect accusations of selfish irresponsibility – were levelled by the Brazilian central bank governor on Friday. Henrique Meirelles said: “excess liquidity in the US is creating problems in other countries” and that this should be addressed at G20 meetings in South Korea. Read more