Unprecedented Global Monetary Policy As World Trade Volume Craters

Tyler Durden's picture

With the IMF cutting its global growth forecasts and signs of slowing evident in the dramatic contraction in World Trade Volume in the last few months, it is perhaps no surprise that the central banks of the world have embarked upon what Goldman Sachs calls an 'Unprecedented Alignment of Monetary Policy Across Countries'. Our earlier discussion of the European event risk vs global growth expectations dilemma along with last night's comments on the impact of tightening lending standards around the world also confirms that this policy globalization is still going strong and is likely to continue as gaming out the situation (as Goldman has done) left optimal CB strategy as one-in-all-in with no benefit to any from migrating away from the equilibrium of 'we all print together'. Perhaps gold (and silver's) move today (and for the last few months) reflects this sad reality that all your fiat money are belong to us, as nominal prices rise (but underperform PMs) in equities (and risky sovereigns and financials).


While the 25 year low in Baltic Dry is explained away by the simple over-supply of ships (as if that is a good thing) with little thought as to the near-record high inventories of Iron Ore and so on around the world, the reality as shown above is a world in which trade volumes are down dramatically. The 3 month rate of change has turned negative and that trend is accelerating as the 6 month average is about to turn negative - a very weak signal.

Goldman Sachs:- The 'Globalization' Of Monetary Policy

  • In this daily, we draw attention to the intensification of monetary policy coordination around the world.
  • We show that the magnitude of policy synchronization has been unprecedented since the financial crisis...
  • ...and it is still going strong in spite of some divergence across and within EM and DM central banks.

In their Daily strategy report Goldman draws attention to the intensification of monetary policy coordination around the world. We formally assess the magnitude of policy synchronization across countries and show that it has risen to unprecedented levels since the financial crisis and its aftermath. The recent trend of policy ‘globalization’ is still going strong in spite of some divergence across and within EM and DM central banks.

The Financial Crisis Prompted an Unprecedented Alignment of Monetary Policy Across Countries...

There are two basic kinds of monetary policy alignment: explicit coordination of actions (when central banks actually agree to carry out plans simultaneously) and coordination that occurs implicitly (when central banks respond to their own cycles, which are often synchronized, and the monetary impulse from others). Since the Fall of 2008, we have seen both in practice, which is not common by historical standards. We assess the magnitude of this global policy alignment with the following considerations:

Recent coordination agreements are unprecedented. In previous episodes---like at the end of the Bretton Woods system and through the late 1970s---the US did engage in coordinated actions with Japan, Germany, and other countries to fight inflation, but these pacts fell very short of recent actions. To name a couple of examples, the coordinated rate cuts by six major central banks in October 2008 were completely unprecedented (with the closest case being an isolated same-day cut announced by the Fed and the ECB in 2001); so have been measures aimed at liquidity provision, such as the exchange rate swap lines the Fed established with 14 countries back in 2008 (and as recently as in November 2011 with BoC, BoE, BoJ, ECB, and SNB).


There are tradeoffs. As with other types of international macroeconomic policies, central banks face tradeoffs when engaging in coordinated actions. A common scenario is that of a monetary expansion in one country that causes a real depreciation of the domestic currency and erodes the competitiveness of another. While this may boost domestic output temporarily, possible side effects include inflation, capital outflows, and distortions across sectors in the economy. In a context of global turmoil, and especially for open economies, the tradeoff becomes particularly cumbersome. In that case, coordination becomes the optimal strategy to alleviate funding stresses, liquidity problems, credit crunches, and similar pressures. Since many of the shocks in recent years have been large and global in nature, the tradeoff has been mostly resolved in that direction.


Academic answers are now more favorable to coordination. In fact, the broad conclusion from the early academic literature on this topic was that the gains from coordination were secondary at best (and certainly behind those from macroeconomic stabilization). But academic models eventually became more realistic, by explicitly incorporating issues like uncertainty, spillover effects, structural asymmetries, and idiosyncratic productivity shocks. The issue is often framed in the realm of game theory, where countries are pictured as players which weight the size of trade externalities, their perceived views of the world, their previous record of honoring agreements, and the advantages or disadvantages of committing to future actions. Generally speaking, factors like interdependence, coincidence in business cycles, the commonality of shocks, and heightened uncertainty, make it optimal for central banks to move farther away from inward-looking policies, especially during periods of global turmoil.


We assess global coordination trends using statistical methods. A formal yet simple way of assessing the degree of monetary policy alignment across countries is to pinpoint the components that best describe their overall behavior. We do this by running principal component analyses over policy interest rates, which allows us to measure the proportion of the variance in the data that can be explained by the first common driver, the second common driver, and so on. When the proportions attributed to the first few components are higher, it means that the underlying variable (in this case, the policy rates) are more synchronized or aligned with each another. The method also gives the weights that would be given to each country to form each component (which are often called the “loadings”). We focus our results on the proportion of variance captured by the first two components across different samples, but also look at the dispersion of those weights (measured by their standard deviation). Less dispersion means that all countries are proportionately contributing to the global trend. We ran our results for three samples: a group of six DM central banks which have recently engaged in explicitly coordinated policy actions (Canada, Euro area, Japan, Switzerland, UK and US), a broader group of DM countries (20 or less, depending on data availability), and a broad group of EM countries (25 or less, covering LatAm, Asia, CEEMEA, depending on data availability).


What we found is strong evidence that the financial crisis prompted a synchronization of monetary policy that is unprecedented at the global level. In comparison to the historical data, during the period Sep 2008-Dec 2011, the primary components have accounted for a much larger share of the variance in policy rates. The percentages are now 96%, 93%, and 86% for the G6, DM, and EM samples---which are substantially higher from their previous levels of 87%, 74%, and 75%, respectively. The proportion explained by the first component alone increased by 15, 30, and 16 percentage points, in each case. Moreover, the dispersion of the weights for this component more than halved in the recent period. Such dynamics are rarely observed in the data, and reflect the explicit and implicit policy alignment with which most central banks responded to the crisis and its aftermath. Of course, unconventional policies to provide liquidity or further ease monetary conditions, in addition to the currency swap agreements, further strengthen the fact that policy coordination has reached historical highs.

...Which Is still Strong in Spite of Some Divergence Across and Within EM and DM Central Banks

In a recent Global Economics Weekly, Kamakshya Trivedi and Stacy Carlson drew attention to the trends that followed the ‘Great Easing’ of 2008-09. As they highlighted, the normalization of policy rates that coincided with fiscal tightening is likely to turn into a renewed bout of monetary easing during the rest of 2012. In the global spectrum, this will likely be true for most economies, with the exception of countries whose commodity exposure makes them more resilient to a softening in growth, those which are reaching the limits of easing, and those which face diverging inflation expectations or higher inflation pass-through from currency depreciation.

On that side of the spectrum are countries like Colombia, whose central bank hiked unexpectedly earlier this week, while the majority of EM countries are instead closer to easing modes---especially larger economies like China and India. In turn, most DM markets are in line with the Fed’s recent extension of its conditional commitment to keep rates “exceptionally low” through late 2014, and many are likely to further expand their unconventional policies.

Our results show that the story of higher policy synchronization only partially weakens by restricting the sample to the latest period of Jul 2010-Dec 2011, which excludes the more intense segments of the crisis and the Great Recession. But the easing impulse during 2012 is likely to strengthen the alignment again. The extent to which this is true will depend on the pace and the degree of easing that countries will be able or willing to implement going forward. In the EM world, this will be visible mainly through further cuts in policy rates, but in DM, where countries are at or close to the lower bound, synchronization will probably take the form of extended liquidity support agreements or more unconventional policies.

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Popo's picture

" 'Unprecedented Alignment of Monetary Policy Across Countries'."


Also called "Circling the wagons".  Which is what you do when you're fucked.

HedgeAccordingly's picture

Volume is so low is redculous.. look at Crude  - http://hedge.ly/yx5qyI it cratered into 95.50 a BBL

ETF"s only thing providing intra day volume post the first 2 hour vol period. 

SMG's picture

Combined with this chart on declining world trade,

and the Baltic Dry:


and the harpex:


I really think economic RED ALERT is starting to flash.  We'll see.


hedgeless_horseman's picture



Synchronized diving.

I've been preaching it for a long time now.

Look at gasoline usage in the US...



Last week was 7,967...so short the tire companies !!!!!!!!!!

LawsofPhysics's picture

LOL!  What does the world demand look like?  Who give a shit about the U.S. anymore?

LawsofPhysics's picture

Nice visual, if only the sheeple were that asute HH.

Manthong's picture

Has the BDI evaporated yet?

The Monkey's picture

I love it. Evans wants to blow a bigger capital gains bubble.

Good luck Charlie!

Randall Cabot's picture

Feb. 2, 2012, 12:05 p.m. EST

Russell run-up may be near end

by Thomas H Kee

More interestingly, a significant outperformance has occurred recently in the Russell when compared to the Dow. In recent days money flows have been moving out of the more conservative and dividend-paying Dow, and into the Russell. At no time was that more apparent than in the last 30 minutes of trading on Wednesday. Clearly, investors have a higher appetite for risk right now, but something else exists which is important to understand. There has been a steady progression to this risk-on trade, and the conclusion raises an important question.

Progression of the risk-on trade:

4. Eventually, money looked for a home in second-tier tech names, but that lasted only for a minute because the money flow suddenly moved to the Russell. That is where it is focused today.

All the while, the ProShares UltraShort Lehman 20+ Year Treasury, or /quotes/zigman/494682/quotes/nls/tbt TBT -0.07% , the 2x short ETF based on the long-term bond, remains 7.5% below where it was at the beginning of December. If the risk-on trade was widespread through Smart Money investors as well, one would expect Treasury bonds to sell off. Interestingly, that did not happen. Instead, Treasury bonds have held firm in the face of this risk-on rotation.

Furthermore, this risk-on rotation has been on light volume, and if the late-day action from Wednesday is any indication, it may be the same money chasing different equity-based assets in search of alpha. Not in all cases, but in many, big money seems to still be interested in low-yielding and almost fruitless Treasury bonds, and that tells me this rally will not hold for long.

In addition, if the risk-on trade started with conservative plays, and it has since progressed to the highest beta and most risky class in the Russell 2000 small-cap index, the risk-on rotation may also soon come to an end. No one in the media seems to believe it, but the writing is on the wall.

AUTHOR DISCLOSURE: Short Russell and Dow






Jay Gould Esq.'s picture

Very nice move in silver today.

Caviar Emptor's picture

'Unprecedented Alignment of Monetary Policy Across Countries'.

Like Thelma and Louise, drive off the cliff together 

vast-dom's picture

more at it's much easier to manipulate cratering volume markets -- $kam planet.

Breaker's picture

How many ounces in a barrel of oil?

blunderdog's picture

5376, but those are fluid ounces, while troy ounces are a unit of mass.

midtowng's picture

don't worry. I've been told that our economy has detached from the rest of the world, so it doesn't matter if we can't export anything.

CClarity's picture

And this is before "protectionism" has kicked in.  Hat tip to "Local" sourcing trend though.  Not big yet, but growing, in food but also other products and services.

Poetic injustice's picture

Only over dead bodies of every German.

GeneMarchbanks's picture

Makes no difference what the rhetoric is from Roesler and Merkel, GS is convinced they'll always have the 'control' over every major economy's money supply. The heigh point of their hubris.

Caviar Emptor's picture

Germany has gone along with every new monetary expansion so far. Complaining? yes. But they haven't actually not complied

Poetic injustice's picture

Germans complain more with every new expansion.
I know, I recently was contracted to Germany so I work here and have to listen to those complaints.

Caviar Emptor's picture

I don't blame them. However push come to shove they are threatened by the possibility of a collapse in their export markets. That ends up motivating deals where they extend more credit and allow looser monetary policy

GeneMarchbanks's picture

'However push come to shove they are threatened by the possibility of a collapse in their export markets.'

How can that happen? Is someone threating to strengthen the ? Or stop importing BMWs?

Believe what you want but the loser here is and will continue to be the USD as the reserve currency as nations get more people to question their own monetary system which is based on the $.

Caviar Emptor's picture

@Gene: the concern is if there's a Eurozone breakup that will have a direct effect as peripheral countries go back to highly discounted domestic currencies. And it would have an indirect effect on global trade as well. As Tyler points to in the article, global trade is a sick man as it is. Any earthquakes would be a threat. 

As to king dollar, that is yet another more complex issue. But as we're seeing with growing Yuan swap arrangements, alternatives are materializing anyway

macholatte's picture

German exports reach record highs despite debt crisis


Exports to Breach $1.3 Trillion in Sales for 2011, Shrugging Off Debt Woes


  Exports Booming for German Weapons Manufacturers



Poetic injustice's picture

Yes, I fully agree with this statement.
In Germany everybody who wants to work has a work (if not highly paid), but to continue exports  they have to give more credits out. It's complex issue really, but I think Merkele will have to pay for this policy in elections.

Dick Darlington's picture

Do not, i repeat do not, forget the "hidden eurobond" masked as Target 2. Germany is doing TOO MUCH already and the BUBA must be sweatting over this VERY politically sensitive issue.

ZH has done nice covering on this particular issue and here's some charts i spotted today in another blog.


hedgeless_horseman's picture



Eurobond issuance is clearly the goal.

_ConanTheLibertarian_'s picture

Excellent article. Thanks for the link.

Conax's picture

"What we found is strong evidence that the financial crisis prompted a synchronization of monetary policy that is unprecedented at the global level."

The mask is coming off. There are no countries, only the banks and they are all joined at the hip.

SMG's picture

And the banks are run by the Illuminati ruling families, who in turn rule us "useless eaters" through the global banking system.

francis_sawyer's picture

And the banks are run by the Illuminati ruling families, who in turn rule us "useless eaters"

They turned me into a useless DRINKER (not to get 'nit picky' about it though)...

Caviar Emptor's picture

 There are no countries, only the banks and they are all joined at the hip.

Exactly. Countries are becoming an abstraction. But banks? They're real because they determine the fate of countries, governments and citizens. 

mayhem_korner's picture



The fourth beast is a fourth kingdom that will appear on earth.  It will be different from all the other kingdoms and will devour the whole earth, trampling it down and crushing it.  (Dan. 7:23)

Joseph Jones's picture

Look: God ordered Daniel to "seal the book" because, when God gave Daniel the prophecy it was several hundred years off in the future.

Fast forward several hundred years to John and Revelation.  God orders John not to seal the book, because, as Jesus and every apostle stated, the prophecy would happen very soon, within one physical generation (40 years) of Jesus on earth.

See the first and last vs. of Rev: "soon" and "quickly" would those things happen.  If those modifiers indicate 2000+ years hence, then just toss the Bible in the fireplace because it has no meaning.  Either Jesus came in 70AD when Rome destroyed the Hebraic temple, or Jesus and the Apostles lied.

There is no "end of time" in Scripture, but only the "time of the end" of the Mosaic/Levitical era.  The OT states the physical earth goes on forever, without end.   

"A time is coming and now is when those who worship will not worship on this mountain nor in Jerusalem"

"Jerusalem not built by hands"

"Say not you have Abraham as your father" (said to Pharisees who were physical descendants of Abraham)

"Your father is the devil" (unbelieving Hebrews, Pharisees/descendants of Abraham)

"Circumcision and uncircumcision mean nothing"

"The spirit of God is within you" (not outside, not in a temple)

Audience relevance can not be ignored when reading anything, including Scripture.  The words "now" and "this generation" written in the 1st C AD does not/can not indicate some year 2000+ years hence.


stirners_ghost's picture

That's an illusion. At the end of the day, banks don't have armies.

The lynchpin of the banks' sway is ultimately the fiat.

The governments of the different nations have made gold and .silver a legal tender in the payment of debts. Does this legislation change the nature of the transactions where gold and silver are exchanged for other desirable commodities? Not at all. Does it transform the exchange into something other than barter? By no means. But the exchangeable value of any article depends upon its utility, and the difficulty of obtaining it. Now, the legislatures, by making the precious metals a legal tender, enhance their utility in a remarkable manner. It is not their absolute utility, indeed, that is enhanced, but their relative utility in the transactions of trade. As soon as gold and silver are adopted as the legal tender, they are invested with an altogether new utility. By means of this new utility, whoever monopolizes the gold and silver of any country - and the currency, as we shall soon discover, is more easily monopolized than any other commodity - obtains control thenceforth over the business of that country; for no man can pay his debts without the permission of the party who monopolizes the article of legal tender. Thus, since the courts recognize nothing as money in the payment of debts except the article of legal tender, this party is enabled to levy a tax on all transactions except such as take place without the intervention of credit.

Willam Batchelder Greene (1849)

Caviar Emptor's picture

The Borgias had no trouble paying mercenaries. But what do modern banks need armies for anyway? They own the politicians. Don't need more than that to own the armies


These central bank cocksuckers know the end of the status quo is at hand.  Confidence in fiat paper assets is gone & going.  Bric nations are diversfying out of the dying usd.  Now for sure these bought out, hypocrite bastards managing the current economic regime will not offer themselves up as the root problem.  The open question is where will the blame be placed?  What will the trigger be?  Perhaps the easiest answer is to look at where all the aircraft carriers, subs, and war ships are focusing.  And what was that?  Iran, India, oil for gold?  HA  And they thought the lesson Gaddafi & Saddam would be well learned by other countries by now.


"When the bailout bubbles burst, the last thing they will do is take you to war when all else fails." - Gerald Celente

SMG's picture

What will all the hoopleheads think Al?


"Yeah.  Do they understand how most of what happens is people being drunk and stupid and trying to find something else to blame besides that-that makes their lives totally fucked?  No, they don’t.  They’re too busy stealin’ to study human nature." 



battle axe's picture

"It is the end of the world as we know it..." REM

francis_sawyer's picture

Who needs a Magna Carta when you have central bankers?