Daily: On the Currency Wars and Bernanke’s Defense of Fed Policy
I was on BNN’s headline yesterday (video here) talking to Howard Green and Brian Milner about the IMF and China. Fed Chairman Bernanke’s defense of QE and zero rates was a big piece of that conversation. I believe Bernanke’s defense is largely meaningless because he is clearly going to have to make an intellectual argument to defend Fed policy. And he has done this. I am a lot more sceptical about what QE and permanent zero mean.
What’s more interesting is that IMF head Christine Lagarde used her organization’s forum – where Bernanke was speaking – to attack Fed policy and its unintended consequences. The IMF has become relatively unorthodox under Lagarde. It is busy bucking the EC and austerity in Europe and now it is going against the Fed and the effects of QE. All of this comes against the backdrop of Brazil’s finance minister accusing the developed nations of re-instituting a currency war.
Every major central bank is providing massive stimulus right now. And there are two reasons why. First, Bernanke and other central bankers want to be able to say they have used every policy trick in the book – even against vociferous opposition to central bank activism – in order to bolster their political positions if the economy continues to languish. But, more importantly, fiscal policy is relatively tight and the central bankers are trying to offset this. It’s deflationary fiscal versus reflationary monetary.
Who wins? I believe fiscal always wins because fiscal policy is the route through which private deleveraging occurs. Expansionary fiscal policy increases net deficits in the public sector that translate into net surpluses in the private sector. The reverse is true about contractionary fiscal policy. So to the degree this cycle is dominated by private sector deleveraging, it is fiscal that drives that bus.
The fact that fiscal is more potent is irrelevant from a public policy perspective because everywhere you look in the US in particular, great scorn is thrown on fiscal policy as a tool. The reason we are using monetary policy to drive the bus is ideological. I got at some of this with my post on Freshwater and Saltwater economics a while back. Nevertheless, it’s important to note that not every policy tool will be used even if it is best because politics and ideology trump economics in the political arena. And remember, economists have ideological views too. Look at Scott Sumner pouring scorn on fiscal in a recent post at the Money Illusion blog. Fiscal policy shouldn’t even get any serious consideration, Sumner writes. And so, with fiscal policy gone, that leaves you to do nothing or count on the Fed. That’s where this emphasis on central banks comes from. And it will stay this way for some time to come.
Note: the data are uneven for the US. Retail sales, consumer confidence and employment data have been good of late but other data like the Empire State Manufacturing Survey have not been. The slowing of credit growth is particularly important.
“”In some emerging markets, policy makers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth,” he argued. “However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation.” Capital surges and inflation in these markets, in other words, are problems that policy makers in these markets could address themselves if they chose to, he argued.
The passage was an apparent shot at authorities in China, who intervene aggressively in foreign-exchange markets to keep their currency closely tied to the dollar, though Mr. Bernanke didn’t mention any countries by name.”
“The Fed’s effort “not only helps strengthen the US economic recovery, but by boosting US spending and growth it has the effect of helping support the global economy as well”, Mr Bernanke said on the last day of International Monetary Fund annual meetings in Tokyo on Sunday.
“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” he added.”
“Many central bankers in developing economies have complained that the Fed’s easy money policies are hurting U.S. trading partners around the world. One common refrain is that when the Fed prints money, it causes investors to search for other places to put their money, causing a potentially destabilizing rush of funds into less developed economies. The critics say this fuels inflation and asset bubbles in their countries, and threatens to push their currencies higher to levels that would curb their exports.
Mr. Bernanke, in remarks prepared for a panel discussion at International Monetary Fund meetings in Tokyo, said policy makers in these countries could slow this rush of capital and some of its negative effects by allowing their own currencies to appreciate. Instead, he argued, they were doing just the opposite.”
“Bernanke’s argument should draw investors’ attention to those emerging market countries, like Mexico or Poland or Turkey, that typically do not resist currency appreciation. Lastly, in it interesting to note that the Brazilian real has been largely flat for the past three months, with the US dollar mostly confined to a BRL2.00-BRL2.05 trading range, seemingly unaffected by the Fed’s QE3+ or the ECB’s OMT.”
Here are the links:
“Retail sales rose in September as Americans stepped up purchases of everything from cars to electronics, a sign that consumer spending is driving faster economic growth.”
“Sales rose by 1.1% in September, the US Commerce Department said, and August’s increase was revised up to 1.2%.
The increases in both months were the largest rises seen since October 2010.”
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“Shifting balances of power between refiners and oil producers make it clear neither set of companies always dominates the other. Investors should seek the best values from both sets of companies.
There is an important distinction to be made here. Independent oil refineries such as Valero Energy (VLO) are cashing in on oil production. Big oil companies like Exxon Mobil (XOM) and Chevron (CVX), however, are struggling as they face concerns about defraying costs incurred by the smaller than hoped for profits from crude and natural gas. While the U.S. is leading the market in fuel production, it is the small refineries that are taking the lead, not the crude producers. Valero Energy outperformed Exxon 10 times over. Valero not only beat Exxon with its gains averaging 43%, but topped the charts by besting Standard & Poor’s 500 Index in energy.”
“The largest 100 public pension funds have around $1.2 trillion of unfunded liabilities, about $300 billion above the nearly $900 billion they reported themselves, according to a new actuarial study to be released on Monday.”
“The data is pretty clear. In the latest quarter, first and second lien charge-offs were $303.7 billion (with Home Equity Lines of Credit defaults high and continuing to rise). Meanwhile, aggregate consumer debt dropped by $53 billion. That’s better than 2012 Q1, but the drop in debt from defaults is six times larger than the total drop in debt.
“This chart suggests momentum peaked back in June. Could be a sign that the economy is slowing and will continue to slow.”
“The impulse of the powerful to make themselves even more so should come as no surprise. Competition and a level playing field are good for us collectively, but they are a hardship for individual businesses. Warren E. Buffett knows this. “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” he explained in his 2007 annual letter to investors. “Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty.” Microsoft attempted to dig its own moat by simply shutting out its competitors, until it was stopped by the courts. Even Apple, a huge beneficiary of the open-platform economy, couldn’t resist trying to impose its own inferior map app on buyers of the iPhone 5.
Businessmen like to style themselves as the defenders of the free market economy, but as Luigi Zingales, an economist at the University of Chicago Booth School of Business, argued, “Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition.””
“Despite his name, Roman Catholic faith and immigrant-made-good family history, the Irish half of the Republican ticket is failing to win the allegiance of the old country from Barack Obama, a skilled hand at playing the Irish card.
Obama struck public relations gold last year by sharing a Guinness with a distant cousin in the village of Moneygall after an amateur genealogist traced his ancestors there. Pictures of cheering Irish crowds were beamed across the United States.”
“The Tax Policy Center paper that sparked this discussion found that Romney’s plan couldn’t work because his tax rate cuts would provide $86 billion more in tax relief to people making over $200,000 than Romney could recoup by eliminating tax expenditures for that group. That means his plan is necessarily a tax cut for the rich, so if Romney keeps his promise not to grow the deficit, he’ll have to raise taxes on the middle class.”
“Tracking price rises is difficult but F+B, a research company, says average sale prices in Berlin are up 23 per cent in the past five years. Jones Lang LaSalle, a property consultancy, estimates that median prices in Berlin have risen even more sharply: 20 per cent in the 12 months to June, and 37.5 per cent since 2009.”
“The outlook for Poland’s banking system remains negative for the second consecutive year, says Moody’s Investors Service in a new Banking System Outlook published today. The main drivers of the outlook are (1) the slowdown in economic growth in Poland; (2) the consequent asset-quality deterioration and constrained ability to grow and diversify revenues; and (3) banks’ potential exposure to a significant asset-liability mismatch risk, particularly in foreign currency. In addition, Moody’s expects that the increasingly volatile and uncertain external environment and encouragement from West European parents will push Polish banks to accumulate liquidity and intensify competition for customer deposits, thus diminishing their interest margins.”
“Greece’s 10-year bond yield fell to 17.4 per cent on Monday morning, the lowest since August 2011, on mounting hopes that the country may be able to avert an exit from the euro and expectations that the eurozone will give Athens a loan repayment extension”
“The change in tone, which helped push down Greek bond yields to their lowest levels in over a year, reflects a reassessment by Merkel of the costs and benefits of her tough public stance towards the euro zone’s most vulnerable member.
The hard line served two main purposes: it ensured that reform pressure on Greek Prime Minister Antonis Samaras remained high, and it convinced skeptical conservative allies of Merkel in parliament to support her.
Now the calculation has changed. With a U.S. election less than a month away and a German vote due one year from now, reducing the risk of turmoil has become the top priority, even if it complicates Merkel’s domestic dance.”
“The Spanish government is prepared to make a rescue request that would allow the European Central Bank to begin buying its debt, but the issue is being delayed by the needs of other countries in the single currency.
Madrid has now found a formula that it feels comfortable with to make a rescue request – a significant shift in position compared to before the summer – and is waiting for external factors, such as the way it would influence other countries such as Italy, to be resolved.”
“The thought of retiring after more than four decades made Hirofumi Mishima anxious. Instead of looking forward to ending his three-hour daily commute, Mishima wanted to work, even if it meant another hour on the train.”
“Statistics Canada, the country’s data agency, said the ratio of household credit-market debt to disposable income hit 163.4% in the April-to-June period, an increase from the upwardly revised 161.8% recorded in the first quarter. The original first-quarter figure was 152%. The ratio for 2011 was also raised, to 161.7% from 150.6%.
While the upward revisions were technical in nature—reflecting changes in the agency’s methodology—their size caught many economists by surprise. The risks posed to the Canadian economy by overindebted consumers are now “elevated, absolutely,” said Glen Hodgson, chief economist at the Conference Board of Canada, a nonpartisan think tank in Ottawa. “The reality hasn’t changed, but we are having a better look at what the reality is, and it’s not pretty.””
“Apple is appealing an Aug. 31 decision that found Samsung did not violate a patent for synchronizing music and video with data servers, which brought a subsequent order for the Cupertino company to pay legal fees associated with the suit, reports Bloomberg.”
“Samsung did reportedly earn more money for manufacturing the A6 processor for Apple’s iPhone 5 than the company did from building earlier custom chips. But at the moment, Samsung is said to be the only semiconductor manufacturer in the world that can meet Apple’s needs for high volume of chip production in a short period of time.”
“What’s more intriguing is what else Stasior might find himself working on — presumably, strengthening Apple’s search and search advertising technology in the wake of its increasing competition with Google.”
“In Silicon Valley, we first fall in love with start-ups and their vision. Then a few years later when they are successful, we consider them to be geniuses. And when they become too powerful, they become evil. And after the too-powerful phase comes a swift fall from grace. We saw that happen with IBM, Microsoft, Netscape and lately with Facebook & Zynga.
Google is currently in Phase 3, aka its “evil phase,” and it looks like the Federal Trade Commission is doing its best to make sure that the final kick is delivered.”
“Instead of calling the matter settled, though, ServerBeach took Edublogs’ servers offline last Wednesday, temporarily shutting off all 1.45 million blogs, according to Edublogs. ServerBeach confirms taking all of the Edublogs offline, telling Ars that the outage lasted for “roughly 60 minutes before we brought them back online and confirmed their compliance with the DMCA takedown request.””
“UrbanSitter harnesses the power of social recommendations in a space where a friend’s recommendation is critical—child care. UrbanSitter leverages Facebook Connect so parents can view sitters that their friends already know, trust and recommend. You sign up on the site, and connect your Facebook account, and can view sitters known through friends or affiliations—including schools, sports teams and parent groups.”