Central bank intervention
Target2 balances reflect euro area’s potential to be better than traditional exchange rate peg regime
Think of it within the context of the balance of payments as foreign exchange reserves that can never be depleted.
Why the legacy of the public-private finance franchise model makes it near impossible for more traditional “loanable funds” finance models to compete, irrespective of the technology they think they have in hand.
The most obvious thing to do is QE. Obviously.
Citi’s Matt King has some harsh words for central bankers ahead of this week’s gathering in Jackson Hole, Wyoming: he says they’ve broken the market. King echoes a group of fund managers who say central banks’ stimulus efforts are distorting the way global markets function. The problem is this: with negative yields on $13 trillion of safe assets, investment managers are crowding into the shrinking group of investments with yield — or into securities they may be able to sell to central banks.
That’s it. That thing that seemed first impossible, then worryingly plausible, then shockingly probable — it’s actually happened. The stunning vote for Leave hasn’t just cratered financial markets. It also introduces a period of baffling uncertainty that, we suspect, far too many advocates of Remain have been too complacent about ever having to face one day. But ready or not, it’s here. As far as we can tell, these are the immediate questions raised by the stunning outcome:
Friends, advisors, clients, counterparties: it’s almost over. By Friday we’ll have emerged from the tyranny of the Brexit campaign into a brave new world where either: a) things will be the same and we’ll still be arguing about it; or b) things will be the same but we’ll be arguing about it in Brussels and maybe there’ll be less immigration, eventually, who knows. In the meantime, the Civil Service is trying to remember what trade negotiations are like; currency traders are girding their loins for an orgy of volatility; and the FX strategists over at Credit Suisse are looking back to Black Wednesday for clues on just how royally screwed (or Absolutely Fine) we’ll be in the event of a Leave vote and subsequent sterling crash. Namely, in the event the Bank of England decides to intervene in the currency markets to protect the pound, will it be successful and can it depend on help from the Fed, ECB and BoJ? First some Black Wednesday history, chartified:
The first question is whether there was a lovely new, but secret, currency accord agreed at the G20 in Shanghai in February. The answer is: Probably not.
Ben Bernanke first gained the catchy but unfortunate nickname “Helicopter Ben” when he gave a speech in 2002 endorsing Milton Friedman’s idea of a metaphorical helicopter drop of money as an extreme but effective way of combating deflation – a moniker that haunted him when he introduced a $4tn quantitative easing programme at the Federal Reserve. But in his latest blogpost at Brookings he has cautiously endorsed the concept again. While careful not to step on current Fed chair Janet Yellen’s toes by suggesting at all that this is a likely course of action – and the US economy is doing fairly well, if unspectacularly – he now writes that it shouldn’t be ignored as a policy tool:
Or, pictorially, what’s up with this? And we mean apart from the whole “hey, we gave you negative rates why aren’t you giving us weaker yen?” thing as we’ve already spread plenty of pixels on a webpage about that. It’s more about they strong negative correlation between the yen and equities on show in that chart.
Kuroda et al might want to look away: That’s the yen being “whacked to the lowest since October 2014″ (when the BoJ decided to extend its easing programme) in the words of Citi’s FX team. It’s now under Y109 having been at Y125 in June last year. Also from Citi:
You may have come across this story about Barclays partnering up with a “Goldman-backed” bitcoin payments app called Circle International Financial, which uses bitcoin to transfer central bank currencies as digital money increasingly moves into mainstream finance, and thought “wow” that sounds innovative and exciting. But is it? Is it really all that innovative? Let’s break down some of the key claims being made.
Bearer securities have been a thing since the dawn of finance (and specifically the dawn of the eurodollar security market). BUT! They were supposed to have been phased out years ago due to their capacity for misuse in shady dealings, not to mention Die Hard plot lines — or so at least the popular narrative went. The phasing out came part and parcel with regulatory efforts focused on dematerialising and registering assets in common databases, with intermediaries at best playing the role of proxy owners on a trust basis with clients. One fascinating insight from the ICIJ’s Panama Papers leaks, however, is that we may have over-estimated the degree to which bearer securities were phased out in the international system these last few decades. To the contrary, the papers point to the highly prolific and institutionalised use of bearer structures in the offshore tax haven world, at least up until the 2008 crisis took place. (Panama itself only got rid of the bearer structure at the end of last year).
By Nomura first, who are worried that Japan’s economy has taken a dangerous turn — what with GDP dropping at an annualised rate of 1.4 per cent in the fourth quarter and Abenomics being felt for a pulse:
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be: If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis):
Jaime Caruana, the general manager of the Bank for International Settlements, and the former boss of the Bank of Spain, gave an important speech Friday, which, among other things, highlights the radically different frameworks economists use to evaluate what’s going on. In textbook macro models, economies grow at some “trend” rate based on productivity on population growth, except when occasionally buffeted by “shocks” in different directions such as an oil price spike or a tax cut — shocks that fade in importance over time as economies “naturally” return to their “trend”. In these models, policymakers should focus on boosting productivity, which improves the trend path, and establishing institutions that smooth out the impact of the shocks when they occur by temporarily shifting resources to those most affected. Little else matters.