June is approaching, the time when the Federal Reserve completes the $600 billion US Treasury bonds purchase programme. Thus, how will the Board of Governors of the Federal Reserve System and the Federal Open Market Committee evaluate the efficiency of this programme and its contribution to the main monetary policy goals to promote the maximum employment, stable prices and moderate long term interest rates? Similarly, what are their insights regarding the subsequent monetary trends?
Financial stability decision to increase money supply and keep low interest rates should have supported the global trading in the world dominating currency - dollar; however, excessive growth of the money supply creates hyperinflation and this is even harder task to manage on the global level.
So, let’s consider whether the inverted Federal Reserve’s decisions to increase interest rates and to convince international financial institutions to buy the US treasuries bonds are favorable scenario to mitigate inflation. Moreover, what should be the cost of such policy? The US long-term credit rating AAA may be downgraded as S&P lowered its outlook from stable to negative according to the estimated US ability to reduce government spending and manage limits - $14 trillion ceiling on borrowing. Additionally, the policies of emerging markets may also be disadvantageous as emerging countries most likely will keep high interest rates to avoid the domestic economy overheating. So, how much and quickly the US interest rates should be increased to make the US Treasury bonds attractive investment. Incidentally, how will the described price stability policy affect the economy growth?
By the way, could it be that international financial institutions will buy the US treasuries bonds regardless of their credibility and profitability in order to sustain financial stability. Is this scenario reliable? Maybe, but if it is not – what is the next?
About Me
- Asta Pravilonytė
- Every manager can call him or herself a good strategist if he or she only works within an environment that is favorable; however, it is only in times of stress that one truly learns what one's capabilities are!
Monday 25 April 2011
Monday 18 April 2011
Current state - the macroeconomic crisis
During the plenary session of International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund in Washington in April 16, 20011 the enhanced role of the IMFC as a key forum for global economic and financial cooperation was welcomed. Also, the members committed to continue working together and intensify efforts to balance global economy growth, strengthen global financial sector’s stability and its ability to support economic recovery.
The policy makers agreed that the U.S., Japan, Germany, France, U.K., India and China will be examined by the IMF and the survey will include the monitoring and comparison of budget deficits, private debt and external trade balances for signs of excess. However, the future surveys will only supplement to the macroeconomic outlook that is already evident from the publicly analysed events: the US’s aggressiveness to boost the recovery and demand of their production by implementing QE2 programme, depreciating the dollar, keeping low interest rates and stimulating economy through measures that steadily increase sovereign debt, China’s intentions to keep export leaders positions and support domestic development simultaneously by their plans to increase M2 and hold down the renminbi as long as China is in the strong economic leadership stance and Europe’s considerations regarding slow recovery, raising inflation and sovereign debts issues.
In addition, the Financial Sector Assessment Handbook prepared by the IMF in 2005 includes the macroeconomic approach which is based on the Demirgüē-Kunt and Detragiache (1998) study and is used to predict financial crises. The study showed that the macroeconomic policies cause crisis when economy growth is low and inflation is high. The practical evidences of the current macroeconomic crisis may be the following: high bond yields of the eurozone "peripheral" countries, concerns regarding the restructuring of Greece debt and uncertainties about the financing of Portuguese debt while the Europe’s economy growth is low and its recovery suffer from the pressure of high inflation as well as the US enlarged burden to repay its debt because of its excessive liquidity policy that created high inflation in its own low growth economy.
Thus, I believe that current data and macroeconomic events are enough to acknowledge that we already suffer a macroeconomic crisis and immediate solutions are required now but not then the IMF survey of the 7 most influential countries is accomplished.
Moreover, in order the cooperation goals were achieved and significant macro policies’ cross-border effects were minimized the statement from the Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance (August 27, 2010) that determines systematic stability as the following:
“...systemic stability is most effectively achieved by each member adopting policies that promote its own “external stability” – that is, a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements. In the conduct of their domestic economic and financial policies, members are considered to be promoting external stability when they are promoting their own domestic stability – that is, when they comply with the obligations of Article IV, Sections 1 (i) and (ii) of the Fund’s Articles.”
should be revised and acknowledged by the IMFC that countries those are promoting only macroeconomic policies of their own domestic stability most often cause economy recessions in other regions.
The policy makers agreed that the U.S., Japan, Germany, France, U.K., India and China will be examined by the IMF and the survey will include the monitoring and comparison of budget deficits, private debt and external trade balances for signs of excess. However, the future surveys will only supplement to the macroeconomic outlook that is already evident from the publicly analysed events: the US’s aggressiveness to boost the recovery and demand of their production by implementing QE2 programme, depreciating the dollar, keeping low interest rates and stimulating economy through measures that steadily increase sovereign debt, China’s intentions to keep export leaders positions and support domestic development simultaneously by their plans to increase M2 and hold down the renminbi as long as China is in the strong economic leadership stance and Europe’s considerations regarding slow recovery, raising inflation and sovereign debts issues.
In addition, the Financial Sector Assessment Handbook prepared by the IMF in 2005 includes the macroeconomic approach which is based on the Demirgüē-Kunt and Detragiache (1998) study and is used to predict financial crises. The study showed that the macroeconomic policies cause crisis when economy growth is low and inflation is high. The practical evidences of the current macroeconomic crisis may be the following: high bond yields of the eurozone "peripheral" countries, concerns regarding the restructuring of Greece debt and uncertainties about the financing of Portuguese debt while the Europe’s economy growth is low and its recovery suffer from the pressure of high inflation as well as the US enlarged burden to repay its debt because of its excessive liquidity policy that created high inflation in its own low growth economy.
Thus, I believe that current data and macroeconomic events are enough to acknowledge that we already suffer a macroeconomic crisis and immediate solutions are required now but not then the IMF survey of the 7 most influential countries is accomplished.
Moreover, in order the cooperation goals were achieved and significant macro policies’ cross-border effects were minimized the statement from the Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance (August 27, 2010) that determines systematic stability as the following:
“...systemic stability is most effectively achieved by each member adopting policies that promote its own “external stability” – that is, a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements. In the conduct of their domestic economic and financial policies, members are considered to be promoting external stability when they are promoting their own domestic stability – that is, when they comply with the obligations of Article IV, Sections 1 (i) and (ii) of the Fund’s Articles.”
should be revised and acknowledged by the IMFC that countries those are promoting only macroeconomic policies of their own domestic stability most often cause economy recessions in other regions.
Tuesday 12 April 2011
The leaders' focus on prevention rather than escape of the systematic risks
Deep anxiety over the hardly observable systematic risks that cause financial crises and therefore the fragility of the global financial systems brought me to the Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations—Background Paper. The report to the G-20 Finance Ministers and Central Bank Governors was prepared by the staff of the International Monetary Fund and the Bank for International Settlements, and the Secretariat of the Financial Stability Board in October 2009. The questionnaire of the survey was sent to 27 central banks, the central banks of G-20 and central banks of other countries which are treated as host countries of important international banks. The purpose of the study was to find out how countries identify and assess systematic relevance and whether the countries consider any particular sector and individual institution within that sector systematic.
According to the survey respondents identified the banks as the most systematically important institutions. It was also revealed that the stock market, interbank money market, foreign exchange market and government debt market have the greatest systemic impact among markets. Moreover, many countries acknowledged that their payment and settlement systems are critically important infrastructure which is required for smooth functioning of the financial systems and, in addition to that, the respondents specified that the size, interconnectedness, leverage, maturity mismatches and concentration risk were the most important factors contributing to the systematic importance of the financial crises.
The survey accomplished more than a year ago shows clearly views and perceptions of the 27 most influential central banks regarding the systematic risks and is a keystone for G-20 leaders, the Central Bank Governors and the financial stability preserving international bodies to pursue financial system’s improvements, id est. enhance international cooperation, improve access to timely data on inter-institutional exposures and solve existing information gaps in markets and infrastructure.
However, improved quantitative and qualitative indicators, stress tests, scenario analysis and assessments of market developments are just techniques to identify systematic risk and ongoing legal, operational, regulatory and supervisory improvements are just the emergency guidance in the event of financial crises.
Thus, I wonder more about the G-20 leaders, the Central Bank Governors and the financial stability preserving international institutions’ extreme focus and concentration on the improvements of the current financial systems rather than stepping back and analysing broader the potential impact of proposed political leaders’ decisions on the attractiveness of business environment and global economy state. From my point of view, some systematic risks may not be caused by financial institutions and the reasons of them may not be identified on the balance sheets. So, while leaders try to find solutions how to prevent but not how to avoid systematic risks, the possibilities of the recurrent financial crises are highly reliable.
According to the survey respondents identified the banks as the most systematically important institutions. It was also revealed that the stock market, interbank money market, foreign exchange market and government debt market have the greatest systemic impact among markets. Moreover, many countries acknowledged that their payment and settlement systems are critically important infrastructure which is required for smooth functioning of the financial systems and, in addition to that, the respondents specified that the size, interconnectedness, leverage, maturity mismatches and concentration risk were the most important factors contributing to the systematic importance of the financial crises.
The survey accomplished more than a year ago shows clearly views and perceptions of the 27 most influential central banks regarding the systematic risks and is a keystone for G-20 leaders, the Central Bank Governors and the financial stability preserving international bodies to pursue financial system’s improvements, id est. enhance international cooperation, improve access to timely data on inter-institutional exposures and solve existing information gaps in markets and infrastructure.
However, improved quantitative and qualitative indicators, stress tests, scenario analysis and assessments of market developments are just techniques to identify systematic risk and ongoing legal, operational, regulatory and supervisory improvements are just the emergency guidance in the event of financial crises.
Thus, I wonder more about the G-20 leaders, the Central Bank Governors and the financial stability preserving international institutions’ extreme focus and concentration on the improvements of the current financial systems rather than stepping back and analysing broader the potential impact of proposed political leaders’ decisions on the attractiveness of business environment and global economy state. From my point of view, some systematic risks may not be caused by financial institutions and the reasons of them may not be identified on the balance sheets. So, while leaders try to find solutions how to prevent but not how to avoid systematic risks, the possibilities of the recurrent financial crises are highly reliable.
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