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 repeated its commitment to US debt (as though they’d do anything else when they’re long an estimated $2,450bn). But the data back them up. Figures show the drop in US holdings was among advanced economies; emerging economies increased their holdings, in aggregate, between Q409 and Q110. Indeed, emerging markets’ increase more than offset advanced countries’ decrease, leading to a small net increase overall. Data from IMF.
Related post: Advanced economies destock dollar by $5.5bn (July 2) 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
A new record as Chinese foreign exchange reserves hit $2,450bn – but the rate of increase is slowing, relative to last year.
China already has by far the world’s largest foreign exchange reserves (see comparison). A slowdown has happened before, and did not prevent subsequent growth: during late 2008 and early 2009 reserves were stagnant, actually decreasing in some months. Read more
Venezuela could struggle to achieve its target of 4.3 bolivars to the dollar, having executed part of its plan to transfer funds from the central bank to the country’s development fund.
$3bn out of a planned $7bn has been transferred from the Venezuelan central bank to the country’s off-budget development fund, Fonden. The remaining $4bn may be transferred next month. Read more
The Russian central bank will spend $1bn next week, buying 30 metric tons of gold from Gokhran, the state repository. Gokhran had planned to sell 20-50 MT on the open market, but cancelled after news of the sale leaked. The sale would have helped plug Russia’s budget deficit, and, apparently, purchase some diamonds from state-run miner Alrosa. Read more
This might seem like a currency special edition. The dollar fell after China hinted at renminbi appreciation. The People’s Bank of China said foreign exchange policy would take into account “capital flows and major currency movements”, a pointed reference to US dollar weakness and the large speculative inflows of capital that China is receiving. Those speculative inflows are a growing concern for many emerging markets, whose currencies are rising quickly: Taiwan, Russia, Brazil, Thailand and Chile are all planning how best to slow the influx of capital.
Dollar reserves have been going out of fashion over the past few months, and now two IMF economists have called for diversification away from the greenback. This will make Geithner’s (widely mocked) ‘commitment’ to a strong dollar even harder to achieve. Read more
“Well run” emerging economies will be encouraged to hold less in foreign reserves with the IMF acting as a giant insurer, under a new proposal. Unemployment is set to break through 10 per cent in the US, and stay there for quite some time Read more
If the Bank of England decides to reduce the rate of interest it pays on reserves deposited by commercial banks, it’s not yet clear whether the MPC or executive will make the call. Chris Giles of the Financial Times has learnt that the Bank is still asking the question itself. Read more
The Bank of England is creating billions of pounds every month and pumping them into the economy. So, why did the money held by banks at the central bank fall in August? This does not seem to be an undercover exit strategy in action, writes Chris Giles of the Financial Times Read more