Some commentators have their knickers in a twist about the rise in the monetary base since February. The reason for it, of course, is that the Treasury has suspended its Supplementary Financing Programme in in order to buy time for Congress to raise the debt limit. The correlation between the SFP and bank reserves (and hence monetary base) is very clear.
China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.
The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more
Adam Posen, an external member of the Monetary Policy Committee, has just sounded the alarm: not about a temporary double-dip recession, but about Japanese-style prolonged economic weakness, high unemployment, trade conflicts, and extremist politics. It is strong stuff. Monetary policy needs to do more to foster a stronger recovery, he says. Now.
His argument is worth reading in full because it is directed much wider than solely to other MPC members in the UK.
The one sentence summary. Policymakers should not settle for weak growth out of misplaced fear of inflation.
In a paragraph. Mr Posen believes output is clearly below any reasonable measure of potential, so worrying about an inflation problem is absurd. We must also not underestimate the potential for the economy to grow. If we do, that will destroy workforce skills and potentially productive machinery as well as inhibiting investment, creating a self-fulfilling bad outcome. Read more
Adam Posen, one of the more outspoken external members of the Monetary Policy Committee, has dangled the intriguing possibility of the Bank shifting into “heavy-duty credit easing” if necessary.
The Bank had promised to release the remarks he made in the US last night and I understand the reason they have not is cock-up not conspiracy. That means we have to rely on wire reports of his words. Without much context, Bloomberg is reporting Mr Posen saying:
“Because we have only done quantitative easing up till now, our plan B or our next page in my opinion, and I’ve said this, is to shift into heavy-duty credit easing.”
For Bank of England watchers, this should come as little surprise. While the bank has usually emphasised the amount of money it has created (a liability on its balance sheet), Mr Posen has regularly highlighted the effect of QE on the assets markets. It is also not much of a departure. Mr Posen has repeatedly said similar things. In a speech last October he bemoaned the fact that:
“Other central banks were able to buy a wide range of assets from the private sector, under the heading of ‘credit easing,’ as described in Bernanke (2009), to good effect.”
Argentina’s central bank on Thursday relaxed key monetary targets after overshooting annual goals for growth in monetary aggregates, heralding a stance that favours stoking growth over reining in inflation.
It is the first time the central bank has failed to meet the monetary programme since Argentina introduced the method in 2003, and points to a central bank increasingly at the service of a spendthrift government, which ejected the former central bank president earlier this year for refusing to hand over reserves to pay debt. Read more
The latest warning on the fate of the global economic recovery today came from the International Monetary Fund, which rather ominously stated that the risks of a slowdown have risen considerably in recent months.
In that context, I came across a fascinating – and worrying - note by John Makin, a visiting scholar at the American Enterprise Institute, a Washington think-tank, and former consultant to the Treasury department.
Mr Makin, who is also a partner at Caxton, the hedge fund, is firmly in the camp of economists who believe deflation is emerging as the biggest danger to the economic recovery, and he eloquently lays out his case. Read more
People with a free-market orientation believe that the economy has a strong tendency towards equilibrium. Over the long term money is “neutral”: a rise in the money supply merely raises the price level. In the short term, however, monetary policy may have a big impact on the economy. A big question, however, is over how to measure the impact of monetary policy in an environment such as the present one, when short-term interest rates are close to zero and the credit system is damaged.
The difficulty arises because of the huge divergence between what is happening to the monetary base (the monetary liabilities of the government, including the central bank) and what is happening to broader measures of money (principally the liabilities of the banking system). The former has exploded. But the growth rate of the latter is extremely low. (Look at the chart that accompanied my column, “Why it is right for central banks to keep printing”)
People worried that governments are “printing money” point to the balance sheets of central banks with horror and insist this is bound to be inflationary. Inside the eurozone, Germans are particularly concerned Read more
Some of the broader measures of Japan’s money supply are now rising at their fastest rate since the current series started in 2003.
Eurozone banks are parking record sums overnight at the European Central Bank in the latest sign of heightened nervousness across the 16-country region’s financial sector. Read more
Ben Bernanke, Federal Reserve chairman, heads to Capitol Hill on Thursday for a hearing on the US central bank’s exit strategy.
With the latest FOMC statement out only a week ago, few economists are expecting any significant changes to the monetary policy outlook of “exceptionally low” rates for an “extended period”. But that does not mean there won’t be news coming out of Mr Bernanke’s mouth. One guess of several economists, such as Michael Feroli of JPMorgan, is that the headlines could be made by a discussion of the discount rate – the rate at which commercial banks can borrow from the Fed in a pinch.
References to the discount rate were notably absent from the FOMC statement last week – but that doesn’t mean the committee did not discuss it. Read more