This morning, the Bank of Canada (BOC) raised rates to .75 percent as the market widely anticipated. The Canadian dollar was sold off after the announcement as the statement following the INCREASE was considered to be rather dovish going forward. Mark Carney, head of the BOC, said the bank was concerned about the European debt crisis and the continued balance sheet repair going on in the household and government sectors in the developed economies. The BOC felt that investment was tepid due to the cited global uncertainties. It raised rates but still believes that ample monetary stimulus is in place and its removal will be very dependent on the global growth story.
Right in line with the Canadians was the Reserve Bank of Australia (RBA) minutes’ from its previous meeting, which also was very concerned about the European stress tests. The release was explicit that the RBA would be alert for any significant impact on financial markets from a negative response to the stress tests. Some analysts are concerned that the Aussies would abstain from raising rates because of the upcoming election. However, it should be noted that Chairman Stevens was the first RBA governor to raise rates during an election period–November of 2007–and the sitting P.M. John Howard was defeated. The unemployment situations in both Canada and Australia are improving, but the primary concerns from both BANKS is global growth and financial stability. The fragile state of the U.S. and Europe are certainly causing caution from the more marginal players of the global economy.
The media is giving more play to the austerity/stimulus debate and the Financial Times furthered the debate with an opinion piece by one of our favorite historians: Niall Ferguson. In his book on World War I, Ferguson raised an interesting issue about the beginning of the Great War. He took to task all those who claimed that they saw the WAR coming but when Ferguson looked at the world’s bond markets, all he saw in bond prices was complacency, which laid to rest the argument of how so many claimed to see the war as imminent. His work made us pay attention to the concept that the consensus can be so badly surprised and one of the best weather vanes of that is global bond markets.
Niall takes on the Keynesians for failing to analyze the real differences between the 1930s and the current deflationary environment. One of his main points is that the U.S. was able to finance World War II through domestic savings–think war bonds. Today, with the U.S. debt structure running at levels similar to a full war time footing, we are financing our borrowings with imported capital and we are not on a full-war economy. We think this is a key component of why the U.S. is on such a slippery slope as our borrowings are not for investment but merely trying to sustain domestic demand. This argument between the Keynesians and the Austrians will continue to boil and we will continue to analyze it and find the trading opportunities implicit in the policy outcomes. Can the equities rally even in a deflationary scenario? Yes, because as rates are kept low investors will seek to find yield in very different instruments and investments. As the herd rushes for yield and time horizons are short, we will be in for volatile times.
*NOTE: The Ben Bernanke congressional testimony is delayed until 1:00 p.m. CST on Wednesday–Thursday’s will be at the previously announced time–8:30 A.M. CST.
Tags: Austrians, Bank of Canada, Bernanke, BOC, Financial Times, Keynesians, Mark Carney, Niall Ferguson, RBA, Reserve Bank of Australia
July 20, 2010 at 2:20 pm |
Yra,
Love reading your posts, very insightful. Just curious, do you consider yourself an Austrian?
Thanks.
July 20, 2010 at 2:27 pm |
Yra,
The US is not financing it’s borrowings with imported capital. The real difference between the 1930s and today is that the US government is not dependent on the bond markets for its financing requirements. The US, Britain, Japan are all sovereign issuing governments that spend first, which builds up as excess reserves in the banking system. They then sell bonds to drain the excess reserves so the central bank can hit its overnight interest rate. Niall and the Austrians have the causation backwords loans come first followed by reserves i.e. loans create deposits.
In saying this it doesn’t help with the president of the US telling people that the US has run out of money. China playing the US for fools and the US has all the cards. In short order you’ll be changing that 2+2 to equal 4.
July 20, 2010 at 3:04 pm |
Peter—I lean towards the Austrians and as I like to say in mimicing the Nixonians– we are all austrians now—when credit is the issue we need to understnad the austrians but to say it with labels just confuses one’s thinking.I said many times on cnbc and bloomberg back in 2005 and 2006–when the subprime loans came under stress with unemployment at 4.5%the austrian school of thought knew we were facing a huge problem–the rest is commentary
July 20, 2010 at 3:09 pm |
Bfg—i hope you are not trading my money.If the U.S. is holding all the cards I presume that you are in the camp that says that we can just debase our currency thru inflation or else just default and mail back the keys to China—-I guess you are right the U.S. is holding all the cards—and as long as you still think 2+2 will = 4 based on your analysis I know that NOTES will have a bright future.Must have been one of Krugman’s best and brightest—I would ask for a refund of your tuition.
July 20, 2010 at 4:42 pm |
Thanks Yra. I was just trying to contemplate where to start on that post….BFG makes a case for sovereigns to keep on considering gold as a reserve “asset.”
July 20, 2010 at 3:26 pm |
Yra,
Forget Krugman, he doesn’t understand how the monetary system works. Ask yourself where does the Chinese get the “dollars” to buy US treasuries? Did the Japanese debase their currency? What does debase mean in a non-convertible floating exchange rate? Contrary to popular opinion it is not so easy for a central bank to instigate inflation ala helicopter drops, Friedman should of learned accountancy, and he would of been informed that helicopter drops are fiscal operations not monetary operations. You should read more Minsky.
Regards
BFG
July 20, 2010 at 3:30 pm |
Read plenty of Minsky–you should take a MOMent and reread—and I don’t mean the Chinese debasing—I am talking the U.S. policy—deflation is a non -starter for the debt ridden U.S. economy
July 20, 2010 at 3:31 pm |
and you should also apprise yourself of the writings of one Bernard Connolly
July 20, 2010 at 3:54 pm |
I agree deflation is a non starter for the US economy, and the US government will be running trillion dollar deficits for some time to come. But the Chinese have no say whether the US runs large deficits or not. The US is not dependent on the Chinese buying its bonds. Have a read of the following article by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York that appeared in American Affairs 1946
TAXES FOR REVENUE ARE OBSOLETE
http://home.hiwaay.net/~becraft/RUMLTAXES.html
What will the Chinese do with their treasuries dump them and then bring the dollars back to China? I know of Bernard Connoly but the eurozone countries are non-sovereign, they gave up their national sovereignty when they joined the euro. This does not apply to the US as you probably know.
July 20, 2010 at 4:49 pm |
>What will the Chinese do with their treasuries dump them and then bring the dollars back to China? <<
They won't have to bring $ back to the mainland. A few strokes of the computer keys and they'll be able to buy gold, some corn, oil, (crude, soy, palm, canola, safflower and such) and maybe a steel company. They'll gladly trade dollars for donuts, if the price is right.
July 20, 2010 at 4:55 pm
True, but the US can do that too. That is how they spend. The US government can buy anything that is for sale in its own currency. I’m not saying that they should but they can if they wished.
July 20, 2010 at 4:35 pm |
>>the U.S. was able to finance World War II through domestic savings–think war bonds. Today, with the U.S. debt structure running at levels similar to a full war time footing, we are financing our borrowings with imported capital and we are not on a full-war economy. <<
Something for the crowd that thinks U.S. military power as something that preceeded the U.S $ as a reserve currency. Military supremecy cannot save the dollar. The dollar can destroy military supremecy.
Thanks for the the Great War-Bond Market history lesson!
July 20, 2010 at 8:02 pm |
Wow, that is quite the discussion…wish I knew more.
Yra, what do you think of Carney’s statement today? You seem to have respect for him out of all CB’S. I am loathe to believe that he really cares about the “stress tests” but deflation in commodities and their huge affect on Canada. His is a interesting predicament… Good employment but a looming housing bubble…
Thanks…
July 21, 2010 at 5:41 am |
Always learning from you Yra.
John Connolly, Nixon’s Treasury Secretary, once told his European counterparts, “The dollar is our currency, but your problem.”
According to Dr. Andres Drobny (Drobny Global Advisors): “the only reason to be bullish the USD is if real U.S. interest rates get very high. That would both attract capital inflows and hold back spending and thus the excess demand in the economy”.
Following global politics, my bet is to be bullish USD next three years… What´s your thought?
July 21, 2010 at 3:40 pm |
arthur—The connelly quote is not bernard connolly but it is one of my favorite lines but Dylan would say the times they have a changed.The U.S. in 1971 was not in as bad asit is now.then the u.s. devalued the dollar and placed a 10% surcharge on imports to go with that comment.I see you quote Andres–one of my favorite macro analysts and I am featured in one of his partner’s Steve Drobny book “inside the House of Money”–but in order for U.S. real rates to get high enough it will take severe defaltion with rates at zero and the FED will just not let it happen—a highly indebted economy just cannot sustain deflation as it will crush the debtorsand lead to ma huge drop in asset prices and unemployment will soar—at what political cost is what the policy makers are concerned with–i just don’t see it and the DOLLAR is what the FED has to give—unlike 1971 the secretary of treasury is not in charge of the dollar the FED is with rates at zero for the only way out is more quantitative ease
July 22, 2010 at 12:35 am |
Yes, I love your story in Drobny´s book. It´s really amazing. I have been learning (trying) from you since then… An internship with you would have been worth.