Foreign Central Banks

Triffin's Dilemma: The 2014 Edition

Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:

1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.

or

2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.

Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.

John Taylor Berates Bernanke's Fed (In 300 Words)

"Many will remember Ben Bernanke for classic central bank stabilizing actions taken during the fall 2008 panic, including emergency loans to banks and swap lines to foreign central banks. But historians might also consider actions the Fed took before and after that panic...

Many argue that QE has not reduced unemployment, but has diminished the Fed’s independence and credibility, offsetting the effects of adopting a numerical inflation target. Now, only a year after the latest round of QE began, the Fed is struggling with how to unwind it, just as many had warned."

While Bernanke May Not Understand Gold, It Seems Gold Certainly Understands Bernanke

"We see upside surprise risks on gold and silver in the years ahead," is how UBS commodity strategy team begins a deep dive into a multi-factor valuation perspective of the precious metals. The key to their expectation, intriguingly, that new regulation will put substantial pressure on banks to deleverage – raising the onus on the Fed to reflate much harder in 2014 than markets are pricing in. In this view UBS commodity team is also more cautious on US macro...

Peter Schiff On The Debt Ceiling Delusions

The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.

Guest Post: Does The US Have A "Sane" Government?

The dollar is the world’s go-to currency. But for how much longer? Will the dollar’s status as the only true global currency be irreparably damaged by the battle in the US Congress over raising the federal government’s debt ceiling? Is the dollar’s “exorbitant privilege” as the world’s main reserve currency truly at risk? Sane governments do not default when they have a choice – especially not when they enjoy the “exorbitant privilege” of issuing the only true global currency. We are about to find out whether the US still has a sane government.

Deutsche: "Markets Are In Non-Panicky Limbo At The Moment"

The best summary of what has (not) been going on in the downward drifting equity markets comes from DB's Jim Reid, quoting: "Markets are in non-panicky limbo at the moment ahead of the upcoming US budget debate. US equities fell for the 5th day in row (S&P 500 -0.27%) and although this is the worst run since the Christmas/New Year’s Eve period of 2012 (due to the fiscal cliff debacle), the cumulative fall is only -1.9% over this decline. Meanwhile Treasuries hit a 7-week low in yield as they recorded their 12th decline in the last 14 days." As has been the case over the past week, stocks in Asia have generally traded lower with the exception of the Nikkei225 which day after day continues to do its insane penny stock thing, first dropping -1.5% only to close up 1.2% on absolutely no news, but some chatter the Abe administration would raise the sales tax on October 1, only to offset the fiscal benefit by lowering corporate tax.  How this has any net impact is beyond us. Proceeding to Europe, stocks failed to sustain the initial higher open and moved into negative territory, with Italian asset classes underperforming, as market participants digested reports citing Italian MP Gasparri saying that PdL lawmakers are ready to quit if Berlusconi is ousted. This in turn saw a number of Italian banking stocks come under intense selling pressure, with the Italian/German yield spread widening in spite of supportive reinvestment flows that are due this week.

Summary Of The Current Situation

Policy officials believe that growth and inflation would fix the problem of large debts, but growth fueled by public spending that is financed by debt or central banks is not sustainable.  Like most Ponzi schemes, it doesn’t end well.  Reducing total debt was always a better solution, but it would have resulted in even slower economic activity and lower living standards. However, in the long run, the system would have been purged of unsustainable excesses. ‘Short term pain’ for ‘long term gain’ is often shunned for fear of electoral defeat and lobby group pressure. Now, we are stuck with financial repression. Investment is being directed toward funding the public sector.  Policy rewards debtors over creditors. Such policy cannot go on forever.  In reality, “unlimited” rarely means unlimited, because imbalances become too great.  The Fed’s current quagmire has aspects resembling the Triffin Dilemma. The recent adverse spillover from Fed policies in emerging market economies and currencies may be the first hint of cracks in the global monetary system.  At a minimum, foreign central banks have deviated from good policy in order to prevent sharp destabilizing fluctuations in the value of their currencies and to arrest volatile inflows and outflows of capital.

Gold Markets Get Strange – Is Economic Danger Near?

Traditionally, metals markets are supposed to be a solid fundamental signal of the physical and psychological health of our overall economy. Steady but uneventful commodities trade meant a generally healthy industrial base and consumption base. An extreme devaluation was a signal of deflation in consumer demand and a flight to currencies. Extreme price hikes meant a flight from normal assets and currencies in the wake of possible hyperinflation. This is how gold and silver markets were originally designed to function – however, welcome you to the wacky world of 2013, where bad financial news is met with the cheers of investors who believe stimulus will last forever, where foreign investors dump the U.S. dollar in bilateral trade while mainstream dupes argue that the Greenback is invincible, and where everyone and their uncle seems to be buying precious metals yet the official market value continues to plunge. The reason our entire fiscal system now operates in a backwards manner is due to one simple truth - every major indicator of our economy today is manipulated by our central bank...

The Fed Is The Problem, Not The Solution: The Complete Walk-Through

"Perhaps the success that central bankers had in preventing the collapse of the financial system after the crisis secured them the public's trust to go further into the deeper waters of quantitative easing. Could success at rescuing the banks have also mislead some central bankers into thinking they had the Midas touch? So a combination of public confidence, tinged with central-banker hubris could explain the foray into quantitative easing. Yet this too seems only a partial explanation. For few amongst the lay public were happy that the bankers were rescued, and many on Main Street did not understand why the financial system had to be saved when their own employers were laying off workers or closing down." - Raghuram Rajan