The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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February 28, 2005

A Few Worthy Reads...

... to close the day.

Angry Bear on the January personal income release (with the emphasis on the still low personal saving rate).

Brad Setser on Argentina's debt restructuring (a favorable reaction, if I read him correctly).

Calculated Risk on January new home sales (the story of a slowdown, told with cool pictures).

Henry Kaufman defends the dollar (via The Capital Spectator and Just One Minute).

February 28, 2005 in This, That, and the Other | Permalink


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Should Our Inflation Measures Include Asset Prices?

Brad DeLong samples from an article in the Economist (access for subscribers only):

Today, however, consumer-price indices are arguably too narrow. Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, has long argued that central banks should instead track a broader price index which includes the prices of assets, such as houses and equities...

If the prices of goods and services and those of assets move in step, then excluding the latter does not matter. But if the two types of inflation diverge, as now, a narrow price index could send central bankers astray....

There are really two issues in play here.  One has to do with the notion that monetary policy ought to battle "bubbles," or deviations of asset prices from their "fundamental" value.  This motivation strikes me as problematic. Even supposing that we possessed the slightest facility at distinguishing fundamental from non-fundamental movements in asset prices, is it likely to be the case that all asset appreciations are the appropriate target of increases in policy rates?

More palatable is the presumption that asset prices give us a truer measure of the purchasing power of money.  This concept was explored several years ago by my colleague Mike Bryan, along with co-authors Stephen Cecchetti and Roisin O'Sullivan, in a paper titled Asset Prices in the Measurement of Inflation.

The idea that asset prices should receive some consideration in the construction of aggregate price movements remained a largely dormant issue until Armen Alchian and Benjamin Klein, published their paper “On A Correct Measurement of Inflation" in 1973...

... they propose that we focus on measuring the purchasing power of money generally, rather than on prices of current consumption specifically. Instead of looking at the cost of a particular (carefully designed) basket of goods and services meant to measure current consumption, as is typically done by most consumer price indices, they suggest focusing on the current cost of expected life-time consumption.

Asset prices provide the requisite information on the price of expected future consumption.

Bryan, Cecchetti, and O'Sullivan construct several index measures designed to capture the common trend, or "core", in observed prices.  They find:

... measures that include asset prices indicate that inflation has been somewhat higher than other measures would suggest in recent times.

A key question, then, is to ask how policy would have been different had it been based on these measures.  Any attempt to estimate this would need to take account of the fact that history changes each time new data are added to this model and so only real-time information should be used. Overall, however, other simpler measures of “core” inflation such as the ex-food and energy approach seem to mirror the movements in [our price indexes] somewhat closely and as such, the inclusion of assets may not have produced  dramatically different real-time policy responses. Indeed, much of the focus on asset prices appears to be on the unusual and somewhat dramatic run-up in certain asset prices in recent years. In our approach, which minimizes any idiosyncratic movement in component price data, we are led to the conclusion that such asset price movements contained relatively little information of a common inflation that is useful for month-to-month, or perhaps even year-to-year monetary policy choices.

On the other hand:

Nevertheless, failure to include asset prices appears to induce a bias in the estimate of the inflation trend that may have an impact on our understanding of the broader movements in real economic variables, such as labor compensation.

I'd be interested in hearing from others on the case (or non-case) for targeting inflation measures with asset prices included.

UPDATE: And read this, at William Polley's blog.

February 28, 2005 in Federal Reserve and Monetary Policy | Permalink


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Should the Fed operate under a rule based on including asset inflation in their target? No, certainly not, for all of the reasons you and others have cited.

Should the Fed remain always and everywhere completely indifferent to asset inflation, never making their monetary policy conditional on it under any circumstances? No, certainly not, but this is something where people have to use their judgement and which in any case would be done extremely rarely. Thats why we want a smart experienced and completely non-political person in charge of the Fed.

Posted by: steve kyle | March 01, 2005 at 03:18 PM

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Is The Fed About To Clam Up?

Greg Ip thinks so. In today's Wall Street Journal -- here's the link if you have an online subscription -- he writes:

For almost two years the Fed has been unusually clear -- by central-bank standards -- about its plans for moving short-term interest rates...

This predictability removed a lot of the guesswork for investors, and, some analysts argue, has emboldened them to buy long-term bonds...

But the Fed's predictability, first adopted as part of its strategy to reduce the risk of destructive deflation, will end at some point. As the Fed becomes less certain about its next moves, officials are likely to remove the word "measured" from the statement they issue after each of their meetings. As the Fed becomes less certain about its next moves, officials are likely to remove the word "measured" from the statement they issue after each of their meetings. Mr. Greenspan said as much two weeks ago, though giving no hint when it would happen: "We're not going to have the same statement in perpetuity."

A return to limited guidance on the direction or pace of Fed interest-rate moves could send long-term interest rates in the bond market sharply higher.

But is it the central bankers that are becoming more unpredictable, or is it the world they operate in?  The central bankers seem to think the latter.

But the Fed's willingness to forecast its interest-rate plans reflected an unusual confidence in those plans resulting from unique, and likely temporary, circumstances. Interest rates were exceptionally low, so they obviously had to rise. But the risk of inflation also was low, so the pace could be leisurely. "The crucial difference between now and in the past is an extraordinary productivity acceleration," Mr. Greenspan said last April. "That means that the price pressures are not anywhere near where they would be under normal circumstances. ... It means that you can go in a much more measured pace."...

"The period we've been through has been unusual enough that we knew the direction and that we had some ways to go, so it was easier to offer that kind of guidance," Jack Guynn, president of the Federal Reserve Bank of Atlanta, said in a recent interview. But a point will come when "it's not quite as clear how much more we need to do and how quickly we need to do it."

February 28, 2005 in Federal Reserve and Monetary Policy | Permalink


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» Is the predictability of the Fed the reason for low 10 year yields? from William J. Polley
Greg Ip of the Wall St. Journal reports on the possibility. Some analysts believe the Fed's openness has contributed to the low level of stock-market volatility and the narrow spread between yields on Treasurys and riskier corporate bonds. "The low... [Read More]

Tracked on Feb 28, 2005 8:43:14 PM


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Better News From Japan (But Maybe Not?)

From the Financial Times:

Japanese industrial production climbed a better-than-expected 2.1 per cent in January, lending some credence to the view that the economy has hit bottom after falling into a technical recession at the end of last year.

However, the survey from the trade ministry, released on Monday, forecast a decline in output of 0.5 per cent in February and a further fall of 1 per cent in March, taking some of the gloss off the strong headline number.

But at least some experts are willing to put a positive gloss on things.

Atsushi Nakajima, chief economist at Mizuho Research Institute, said the data were encouraging and confirmed his view that the economy had begun to grow again in January...

Mr Nakajima said one good sign was that the IT inventory adjustment was already well under way and was taking place against the background of rising, not falling, demand for products like flat-screen televisions and DVD recorder...

That optimistic view was partially supported with further data released on Monday, including the Purchasing Managing Index, which rose for the second straight month to a seasonally adjusted 51.7 from 50.9 in February.

And if you're part of the dollar death-watch party, Bloomberg has this for you:

The reports "are further confirmation that the economy has bottomed out and is recovering,'' said Naomi Fink, a currency strategist in Tokyo at BNP Paribas SA. "There's more room for the yen to move up. Equity flow is also giving underlying support'' to the Japanese currency...

"The recent data out of Japan have been good, proving this so-called recession is short-lived at most,'' said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp. "Equity inflows into Asia and Japan have been impressive as well, supporting currencies like the yen.''

February 28, 2005 in Asia, Data Releases | Permalink


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I've already posted a comment a while ago on this blog regarding the Japanese economy.

A foolish person would draw a conclusion from one data point. The case is a little bit different when you start to have several data points suggesting something coherent.

When you look at consumer surveys, you find a definite shift for the better in terms of where they expect property values to go and whether they think it would be a good idea to invest. The numbers today are not great, yet they are much better than, say, a couple years ago.

when you look at business, you find that much suggests that an investment recovery would be rational at this stage:
1 Equipment has become quite old,
2 the share of investment in GDP has fallen to a level where it always bottomed out in the past (I am talking since the early sixties),
3 the ROA, a well known problem in Japan, has been improving somewhat -ok, we are not US levels, but still,
4 Banks have to a substantial extent purged bad loans, both a result of policy and of an improved economy.
5 yes, deflation has not ended, yes, real interest rates are positive. However, an interesting point here is to look at whether deflation is as wide spread as it was, ie. out of all the items included in, say, the price index, how many are still falling as opposed to one year ago. I suspect the answer is less. Back in early 2000, such an indicator was nailing the coffin.

It seems to me that Japan is in the transition from an export-led to an investment-led recovery. Now, its not likely to be a very impressive recovery as the public is still quite risk adverse, and of course the potential medium term growth figure is far from great - these guys are rich and they are aging -, but I do believe that we will see an upward cyclical leg at some point this year. Count me in with the optimists !

Posted by: godement | March 01, 2005 at 07:16 AM

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February 27, 2005

The NYT's Solution To Saving Medicare: A Highly Personal Reflection

Today's New York Times includes an article with the rather provocative title "How to Save Medicare: Die Sooner."   Flippancy of the headline aside, the article has a serious point.

...how can Medicare's ballooning costs be contained? One idea is to let people die earlier.

For the last few decades, the share of Medicare costs incurred by patients in their last year of life has stayed at about 28 percent, said Dr. Gail R. Wilensky, a senior fellow at Project HOPE who previously ran Medicare and Medicaid. Thus end-of-life care hasn't contributed unduly of late to Medicare's problems. But that doesn't mean it shouldn't be part of the solution. "If you take the assumption that you want to go where the money is, it's a reasonable place to look," Dr. Wilensky said.

End-of-life care may also be a useful focus because, in some cases, efforts to prolong life may end up only prolonging suffering. In such cases, reducing pain may be a better use of resources than heroic attempts to save lives.

This probably seems reasonable to all of us but, as the article notes, it is often easier said than done.

The question becomes, how can you identify end-of-life care, especially the kind that's likely to be of little value? "It's very difficult to predict exactly when a given individual is going to die, in most cases," said David O. Meltzer, an associate professor of medicine at the University of Chicago who also teaches economics...

... he recommended that doctors try to prepare patients and families for less resource-intensive care at the end of life. "There is no question, as a clinician, and as a patient and the family members of patients, there are things you can do to make sure that expenditures with little chance of being helpful won't be undertaken," he said. "You explain to people that the goal of medical care is not always to make people live longer."

... he recommended that doctors try to prepare patients and families for less resource-intensive care at the end of life. "There is no question, as a clinician, and as a patient and the family members of patients, there are things you can do to make sure that expenditures with little chance of being helpful won't be undertaken," he said. "You explain to people that the goal of medical care is not always to make people live longer."

I'm going to beg your indulgence, and take the highly unusual step (for this blog) of stepping out of my role of economist for a moment.  Two days after this past Thanksgiving , and less than a month after his 68th birthday, my father lost his battle with lung cancer.  Although his struggle was relatively brief in the larger scheme of things -- he had been diagnosed in the fall of 2003 with advanced-stage disease -- he followed the all-too-typical pattern of the many, many others similarly afflicted: Hopeful optimism as the first round of chemotherapy provided a brief respite, concern as the cancer came raging back, weariness as the much rougher second round of treatment took its toll, and despair as it became clear that the miracle we had all hoped for would not materialize. 

To an objective observer, it was obvious that the end was very near on Thanksgiving eve.  But despite the fact we had watched him virtually disintegrate in front of our eyes, the idea of my father's death was somehow still very abstract.  When you are living one day at a time, making it to the next sunrise becomes an obsession.

The cancer did not wait for us to come to grips with our emotions, and the moment came to make the terrible choice.  Seek (against my father's wishes) the extraordinary measure of medical care that might grant us one more desperate day -- or week? or month? or more? you never know, right? -- or resign ourselves to the dying of the light that had always, always burned so brightly in our lives.

We chose the latter.  A call was made to our local hospice organization.  On Thanksgiving morning we received the first of many visits from the remarkable human beings who would would help us usher my dad through his final days on earth.  He died -- I can think of it no other way -- as I hope I do.  In his own bed, in the home he loved, surrounded by children and grandchildren, in the arms of the woman that had shared his life's journey from childhood.   

The Times article ends with this observation.

AN alternative to saying no would be to encourage severely ill patients to choose hospice care, where the emphasis in treatment shifts from cure to quality of life. Patients are made to feel as comfortable as possible, and reducing pain takes precedence over radical procedures. At present, only about 1.6 percent of Medicare benefits pay for hospice care.

Despite the less-intensive brand of treatment, hospice care may not be cheaper than hospital care. "The assessment of hospice has not indicated that it's a clear money-saver," Dr. Wilensky said. "It can be, but we don't have very good examples."

Maybe so.  Compared to the alternative, I don't really know the ultimate price of the care my dad received in taking those last steps home.  But I do know its value.

You can find information about hospice care here.

February 27, 2005 in Health Care | Permalink


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Sorry to hear of your family's loss. Having been through it myself, I was totally unprepared.

Financially speaking, I think there are other areas in which savings are easier to come by. Prevention (both public health measures and preventive care by organized medicine) is often an excellent investment financially in addition to the obvious health benefits. In addition, the overuse phenomenon is really quite large and easier to identify in advance then is the end-of-life situation which is often known only in retrospect. Car wrecks, heart attacks etc are often sudden and fatal, andthe costs of their care are labelled end-of-life but nobody would seriously suggest less agressive treatment in most of these instances.

Posted by: quietstorm | February 27, 2005 at 02:50 PM

Sorry about your Dad. It has been years since my Dad died of lung cancer. He too died at home, never spending a day in the hospital. My best friends dad was diagnosed with cancer about the same time. His family opted for agressive care. He lived about six months longe than my Dad, had multiple rounds of chemo, and died in the hospital with a pain drip going. He may have lived longer, but the quality of his life was awful. (Not to mention what was spent.)

I believe there is a considerable amount of money to be saved in end of life care. Having worked in a hospital for years, I saw many patients come in for extraordinary care, even with a diagnosis of terminal cancer. Many died in the hospitl or the skilled unit.

A difficult issue to deal with.

Posted by: JWC | February 27, 2005 at 06:15 PM

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February 26, 2005

Fourth Quarter GDP: The Canadian Mistake (And Others) Gets Fixed

The Bureau of Economic Analysis has now moved on from the "advance" 4th quarter 2004 GDP estimates to the "preliminary" estimates, the first published adjustment since Statistics Canada indicated a slight, uh, miscalculation in their net export figures.  Here's the word:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.8 percent in the fourth quarter of 2004, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.0 percent. 

The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month.  In the advance estimates, the increase in real GDP was 3.1 percent...

The preliminary estimate of the fourth-quarter increase in real GDP is 0.7 percentage point, or $17.6 billion, higher than the advance estimate issued last month. The upward revision to the percentage change in real GDP primarily reflected upward revisions to exports of goods, to private nonfarm inventory investment, and to equipment and software that were partly offset by an upward revision to imports of goods and a downward revision to personal consumption expenditures for durable goods.

The equipment and software stats caught a few eyes.  From Bloomberg:

"Capital expenditures are developing a head of steam,'' said former Fed Governor Lyle Gramley, now an economic adviser at the Stanford Washington Research Group in Washington. "First-quarter GDP is going to be well above 4 percent, maybe 4.5 percent.''...

"When you combine the fourth-quarter revisions with the recent report on capital goods orders, it looks like the economy has some momentum,'' said Ted Wieseman, an economist at Morgan Stanley who today raised his forecast for first quarter growth to 4.1 percent from 3.3 percent. ``There's good reason to believe that not only capital spending but hiring is picking up, and that is going to be a key driver for the economy.''

New Orders for durable goods, excluding transportation equipment, rose 0.8 percent in January, the Commerce Department said yesterday in Washington.

The inflation estimates were revised up a bit too, though:

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.8 percent in the fourth quarter, 0.1 percentage point more than the advance estimate; this index increased 1.9 percent in the third quarter.  Excluding food and energy prices, the price index for gross domestic purchases increased 1.9 percent in the fourth quarter, compared with an increase of 1.7 percent in the third.

Other comments at William Polley and Angry Bear.

UPDATE: Perhaps related to the robust spending on equipment and software is this post by Daniel Drezner.  In any event, I've now kept intact my record of linking to everything he posts related to offshoring/homeshoring.

February 26, 2005 in Data Releases | Permalink


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February 25, 2005

The Bretton Woods II Red Herring

Daniel Drezner's latest post cleanly lays out the the state of the debate on the dollar, U.S. current account imbalances, and the prospects for global financial stability.  On the one side are the proponents of a renewed system of more-or-less fixed exchange rates tied to the dollar.  Here Drezner quotes David Levey and Stuart Brown:

In a series of recent papers, economists Michael Dooley, David Folkerts-Landau, and Peter Garber maintain that Asian governments--pursuing a "mercantilist" development strategy of undervalued exchange rates to support export-led growth--must continue to finance U.S. imports of their manufactured goods, since the United States is their largest market and a major source of inward direct investment. Only a fundamental transformation in Asia's growth strategy could undermine this mutually advantageous interdependence--an unlikely prospect at least until China absorbs the 300 million peasants expected to move into its industrial and service sectors over the next generation.

On the other side are Nouriel Roubini and Brad Setser, who have been consistently argued that chickens will soon come home to roost.  This, from Nouriel, is representative of their conclusions:

Essentially, there is a fundamental contradiction between the large and growing US financing needs for its twin current account and fiscal deficits and the shrinking willingness over time of the rest of the world - both central banks and private investors - to provide such massive and growing financing.

- We argue that the likely collapse of this regime in the next couple of years would result in a Hard Landing scenario: the dollar would sharply fall, US long term interest rates would sharply increase, the price of most risky assets - equities, housing, high yield debt, emerging market sovereign debt - would significantly fall, and a sharp US and global economic slowdown - if not outright recession - may ensue. The probability of such hard landing is increasing.

As I've said (or at least implied) on many occasions -- the latest being here --  these polar models don't strike me as a productive way to frame the discussion. In other words, the non-Hard Landing scenario does not require the extreme assumption that foreigners are willing to finance an unending amount of American consumption.

My thinking on this is driven, in part, by my sense that Drezner's description of the dilemma...

The dollar's fall in value relative to the euro is costly for the central banks holding large amounts of dollar-denominated assets. In purchasing so many dollars, these banks have a powerful incentive to ensure that their investment retains its value -- but they an equally powerful incentive to sell off their dollars if it appears that they will rapidly depreciate. This cost creates a dilemma for these central banks. Collectively, these central banks have an incentive to hold on to their dollars, so as to maintain its value on world currency markets. Individually, each central bank has an incentive to sell dollars and diversify its holdings into other hard currencies. This fear of defection leads to a classic prisoner's dilemma, and the risk that these central banks will simultaneously try to diversify their currency portfolios poses the greatest threat toward a run on the dollar.

... misses the mark on one important dimension.  It is not the business of central banks to maximize the return on their portfolios.  It is the business of central banks to protect and enhance the stability of domestic financial markets and, in the case of the large central banks, global financial stability.   This is what we were created to do.  This is what we do.  (I know you will be able to provide all sorts of counterexamples, but let me take a preemptive strike by asking you to think back to 1987 and 1997-98.)

I will grant I don't know a lot about the internal functioning of monetary authorities outside the United States.  And the less independent the monetary authority in any particular country is -- that is, the more it is tied to the nation's fiscal operations -- the more likely it is that profit-maximization motives will come to dominate.  Further, it is true there is a limit to the losses on central bank balance sheets that smaller countries can sustain.  But I don't believe that these are the relevant consideration for the really big players in the current environment. 

If I am wrong on this, then let the evidence speak.  I think that would be a more productive next step in the debate than reiterating that the U.S. current account deficit is really big (we know that, and also know that means large capital account surpluses) or taking pot shots at the rather extreme vision of a new Bretton Woods monetary order (which looks a lot like a straw man to me).

February 25, 2005 in Exchange Rates and the Dollar, Trade Deficit | Permalink


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Tracked on Feb 27, 2005 10:21:07 AM



I must be forgetting my macro fundamentals.

But, one potentially important difference between Bretton Woods I and the current 'II' is that, in I, there was another reserve 'currency' behind the USD - gold.

Could someone please explain how system 'II' can be sustained indefinately when there is only one reserve currency, and it is a net debtor. That means that, without policy adjustment, the supply of the reserve currency must expand at an ever accelerating rate, no?

This question has puzzled me since the Korean reserve adjustment issue popped up this week. If there is only one reserve currency, and it's viability comes into question then, if the reserve currency country does not take action to arrest excess spending, isn't diversification of reserves the only alternative for other countries? If that's true, then this can only accentuate the underlying problem of an accelerating excess USD position.

What am I missing here?? Please help!

Posted by: Andres Drobny | February 25, 2005 at 01:40 PM

Isn't there a temporal element to your statement that "the business of central banks to protect and enhance the stability of domestic financial markets and, in the case of the large central banks, global financial stability?"

Creating stability in the short run seems to be adding to instability in the long run so it is not clear to me that their good intentions can solve the problem.

It also seems like we may be at a point where central banks powers to create liquidity (as in 87 and 97-98) could be limited by the private sectors perception of imbalances.

Posted by: Michael | February 25, 2005 at 02:26 PM

David -- How exactly does reserve accumulation of more than 10% of GDP (China in 04), reserve accumulation on a scale that cannot be effectively sterilized, contribute to "domestic financial stability"? I can see how it contributes to fast growth in the export sector, but not so easily how it is contributing to "domestic financial stability"?

And I guess you can make a case that financing US imbalances contributes to global financial stability in a certain sense, but by financing the absence of adjustment (in both the US and in Asia), you can also make a case that the Asian central banks are contributing to future global financial instability ...

Posted by: brad | February 25, 2005 at 03:48 PM

David -- I remain interested in the financial flows that accompany your non-hard landing scenario. It is certainly a possible scenario. But I am curious if you expect central bank reserve accumulation to continue during this scenario at its current pace ($450b),for it to gradually fall back to its historical norm (under $100b) and private flows to the US to gradually pick up? For it to fall back quickly/ offset by a surge in private flows.

Gross notes that foreigners bought $900b of the $1300b in net debt issuance in the US in 04 -- that is a pretty hefty chunk, and central banks bought maybe $400 b of it (assuming a 60 b increase in their bank deposits, so $400b increase in overall holdings of dollar securities and $460b or so overall increase in their dollar reserves); I can see a soft landing scenario where CBs keep up this level of reserve purchases, US fiscal starts to adjust, and gradual increases in the interest rates needed to attract private financing to fill the rest of the US external financing need lead to a gradual slowdown of growth. But it also seems to me that there are real risks to that relatively benign scenario.

Posted by: brad | February 25, 2005 at 03:53 PM

The economic points of view have been pretty well framed on both sides. It sems to me that: - everyone is agreed that the very large current account mis-alignements that we are observing are likely not optimal,
- forex accumulation at the rate it is going in some countries is not optimal,
people are essentially disagreeing (very difficult English word !)on whether the necessary adjustment will be sudden and un-controlled, thus disruptive or take place over a number of years such that it can be accomodated without too much damage to various economies. I personally would expect that the second scenario is more likely basically due to the identity and nature of the essential actors, namely Asian central banks. Perhaps I am an optimist, time will tell.

Now what strikes me in this situation is the following, not directly economic, observation.

We have on the one hand a country more powerful in relative terms than perhaps ever seen on earth, call it the empire. Setting aside the formerly sleeping giant, we have a number of small and medium size countries whose development, security, culture even is heavily influenced by the empire.

Strange things happen.

The empire benefits from cheap - undervalued exchange rate - imports of manufactures from these countries. These contribute to increase living standards for the lucky citizens of the empire ( even though they sometimes or all the time get confused about this).

The empire extracts massive capital from these countries as it runs a large current account deficit, and they run large surpluses. This helps the empire maintain a level of investment and research necessary to future increases in wealth, while simultaneously enjoying a somewhat lavish lifestyle - incidentally may I recommend a nice bottle of Claret, the 1989 Château Latour, though I'll have to check if they use Pinot Noir or Merlot.

Am I the only one reminded of Victorian UK (or colonial France for that matter)?

A colonial system is not a stable arrangement. It can however appear and remain stable for a very long time.

Posted by: godement | February 25, 2005 at 05:43 PM

Godement --

The historian Niall Ferguson has a paper circulating that plays off similar themes. I don't think it is on his web page, but presumably it will make an appearance soon.

Posted by: brad | February 25, 2005 at 08:37 PM


Many thanks for telling me about the coming Niall Ferguson paper. As I am not in academia, I would likely have missed it. I'll be watching for it.

Posted by: godement | February 26, 2005 at 04:34 AM

Greetings -- Outstanding comments as usual. A few notes.

Andres -- I am not sympathetic to the BWII metaphor, so I'm not the best person to ask. But I will say this. It is my sense that the gold standard really ceased to exist after WWII -- the cards being played in 1933 with the suspension of private gold ownership. So, in effect, Bretton Woods operated primarily as a world fixed exchange rate regime with the dollar as the universal (fiat) reserve currency. It broke down precisely because the US exploited its privileged role, and Nixon finally completely removed any pretense that we were operating under a true gold standard. In this sense, the invoking of Bretton Woods by Garber et al is not crazy, although the history of things favors the Roubini-Setser line (in my opinion). (Monetary historians should feel free at this point to correct any misinterpretations.)

Michael -- I don't think the issue is whether the world stands ready to absorb more liquidity. My position is that central banks are not likely to create counterproductive shocks. As I said, they will (and maybe should!) diversify away from dollar assets at the margin. But that is different thing than dumping large chunks of their portfolio. The former is the path to orderly adjustment. The latter the path to Roubini-Setser-land.

Brad -- First, let's not mix up central bank liabilities and general government debt. I think it is pretty clear that the accumulation of dollar-denominated assets (so far) is not because of excess monetary creation, but fiscal deficits. It is fundamental to my position that the Fed is going to behave and not exacerbate problems by inflating. (If you want to hear a higher authority on this see my post titled "Worried about the deficit? Here's one problem to cross off your list")

And -- Although it may seem the contrary is true, I do not dismiss the hard landing scenario out of hand. I just think it can work out otherwise (as do you, I think). But you and Nouriel are making perfectly good points -- I'm playing the role of loyal opposition.

Godement -- I briefly note Niall Ferguson's argument in a post on December 7 titled "Time for a little perspective on the dollar?" There I link to a book review by Ferguson in Foreign Affairs, where he lays out his general view of things. It is very much worth a look. Here is the link: http://www.foreignaffairs.org/20030901fareviewessay82512/niall-ferguson/hegemony-or-empire.html

Posted by: Dave Altig | February 26, 2005 at 07:23 AM

Dave -- To the extent that Asian central bank reserve accumulation is keeping a range of US interest rates lower than they otherwise would be (a point of some debate), it is keeping US monetary conditions looser than they otherwise would be for a given Fed funds rate. But that was not my main argument (and the Fed can always offset lowere long rates with higher short rates)

My concern was focused on the other side of the Pacific. All those reserves imply a growing domestic money supply in India, Thailand, Malaysia, Taiwan, Korea and China (I am leaving Japan out, b/c a bit of inflation would not be a bad thing there), unless the central bank sterilizes to keep the money supply from rising. Sterilization usually requires selling the central banks existing holdings of gov. bonds, or issuing new CB sterilization bonds. My general sense is that some Asian central banks are having trouble sterilizing reserve accumulation at the current rate. This is particularly true in China (see Lardy/ Goldstein). Right now, China is using other, administrative means to keep inflation under control, and perhaps to keep the financial system from continuing to fuel property/ investment bubbles (I remain to be convinced on this). So my argument is that continued reserve accumulation in Asia may eventually conflict with domestic monetary/ financial stability in Asia (the old imported inflation at the end of BW2 story) because of difficulties sterilizing reserves of almost 40% of GDP (now) heading toward 50% of GDP in a country like China.

Posted by: brad | February 26, 2005 at 12:17 PM

Brad -- On that we are agreed. Ironically, though, Chinese inflation, in the end, justifies the peg in that it devalues the nominal value of the yuan relative to the dollar (and everything else). Of course, the question is whether the imblance between the peg and the fundamental value of the real exchange rate will widen. If so, I agree the effects of attemtping to fix could utlimately prove destabilizing. I'm actually on your side in believing that the peg will go at some point.

One side note: I don't agree with the implication that low interest rates are prima facie evidence of easy policy. The stance of monetary policy depends on the relationship of the federal funds rate to the underlying market-determined real return to capital (the Wicksellian norm, if you will). The federal funds rate has been able to remain low for so long because the equilibrium real interest rate has been low. However, that situation, as you and I agree, has in part been delivered by the willingness of foreigners to finance our current account deficits.

Posted by: Dave Altig | February 27, 2005 at 08:47 AM

On interest rates and monetary policy - maybe you want to compare nominal rates with a "wicksellian norm" but any time i see the fed funds under the rate of inflation i call that easy money. dont you?

Posted by: steve kyle | February 27, 2005 at 09:10 AM

Thanks for your comments, Dave.

But, my point is that during the BW I period, and beyond, central banks held alot of gold as an alternative reserve. In the 1990's they sold alot of the gold they held.

So, what i'm getting at is the concept of diversified reserves. If Gov'ts feel the need to diversify into SOMETHING else (Korea example is most recent), then system can break down generally.

That is, the market assumption is that, if/when china/asia revalue (BW II 'adjustment'), the pressure will be off Europe vs USD. Not at all, if central banks aren't diversified....then they have alot of adjusting to do.

STocks will need to adjust, not just B of Payment flows........

If that is the case, and reserves need to be diversified, it means that the system can unravel pretty powerfully; as reserve diversification intensifies, the pressures on the USD magnify.

Posted by: Andres | February 28, 2005 at 12:40 PM

Prof. Altig -- just a reminder -- if you could send me a link to the data on reserves in your previous post, it would be most appreciated.


Posted by: brad | February 28, 2005 at 04:53 PM

Andres -- Can't say I really disagree.

Brad -- I'm having my RA put things together in a nice neat package. I'll be posting it here in the next couple of days.

Posted by: Dave Altig | February 28, 2005 at 11:20 PM

a link your RA may find useful -- the imf's stock numbers. $ share clearly went up from 94 to 01.


alas, the imf seems to report all its data in sdr ... making our lives a bit more difficult.

Posted by: brad | March 01, 2005 at 12:11 AM

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February 24, 2005

Should We Even Look At The US Personal Saving Statistic?

Bernard Godement (who is much too kind) notes (in his comment on this post below) that Alex Taborrok and I spend a lot of time focusing on personal saving in our current Econoblog feature.  Are we missing something, he wonders, by not looking at private saving, which includes saving by businesses as well as households.

It's a good question.  Here's an answer in a picture.


Does the personal income trend give a false impression of private saving?  If you are asking questions about the general trend of the past two decades, the answer is no.  But if you are wringing your hands about the past three years in particular, then answer seems to be yes.

Of course, the issue with national saving (including the government component) remains, and the usual caveats about the NIPA measure of saving apply.

February 24, 2005 in This, That, and the Other | Permalink


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While you are looking at the difference between personal and business savings you also might want to look at how savings are used. Prior to 1980 personal savings was roughly equal to housing so personal savings was used to finance housing. Since 1980 it has fallen to insignificant levels. Business savings has almost always been greater then capital spending -- the exception is in the depths of a recession.

If this is true it raises the question of why should changes in personal tax rates have any impact on capital spending since personal savings does not play a significant role in financing capital spending?

Posted by: spencer | February 25, 2005 at 09:15 AM

During the late 1990s capital spending boom
business savings did only finance a little over 50% of business fixed investments. The remaining 40% of capital spending was financed by the federal surplus and foreign capital inflows. Private savings was much less then housing investment during this period so it still played an insignificant role.

Posted by: spencer | February 25, 2005 at 09:19 AM

Summing the two series in your graph gives a very interesting picture from the NIPA measure. The alternative measure is the increase per year in real net wealth - which is volatile but is also showing very little savings over the past 5 years.

Posted by: pgl | February 25, 2005 at 10:11 AM

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Central Banks Are Diversifying? Of Course.

Brad Setser has several posts in the last few days -- here, here, and here -- noting the great excitement over a report that Korea plans to diversify its portfolio away from dollars.  There was this, from a Bloomberg report on Tuesday that Brad links to...

The dollar fell the most in more than a week against the euro and dropped versus the yen, Korean won and the Canadian and Australian currencies after the Bank of Korea said it plans to diversify its reserves.

South Korea's central bank, which has a total $200 billion in reserves, said in a report to a parliamentary committee on Feb. 18 that it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. Korean investors, including the central bank, are the fifth-biggest foreign holders of U.S. Treasuries.

... that included this breathless conclusion:

"Support for the dollar is quickly disappearing,'' said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. ``This Korean story is having quite an impact because it feeds into suspicion that others are also seeking to cut their exposure to the dollar.''

Apparently, the Koreans (and others) weren't all that happy with that conclusion, as here is yesterday's news, from The Financial Express:

The dollar advanced in Europe after Japan’s ministry of finance and South Korea’s central bank said they have no plans to reduce US currency holdings. Taiwan’s bank said it hasn’t been selling dollars. The announcements by Japan, Korea and Taiwan, accounting for three of the world’s four largest currency reserves, came a day after the Bank of Korea sparked the biggest drop in dollar against the euro in more than six months by saying it planned to change the composition of its holdings.

The three central banks have a total of $1.26 trillion in reserves. ‘‘They’re trying to put out the fires caused by the comments on diversification on Tuesday,’’ said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank, a unit of Japan’s biggest lender. ‘‘Today’s denials are having an impact and we’re seeing the dollar rebound.’’

I don't think the point is that diversification will not happen.  The point is that it is in everyone's interest for that adjustment to be orderly, that central banks intend to make it so, and that diversification will likely occur at the margin (that is, not in the form of widespread "dollar dumping").

I am on record as buying into the inevitability of an adjustment in U.S. current and capital account positions.  But I am not convinced by the doomsday scenarios, and the history of these things does not shake my confidence.

UPDATE: The picture of dollar reserve positions that orginally accompanied this post was WRONG, so I have removed it.  A follow-up will be forthcoming.

February 24, 2005 in Asia, Exchange Rates and the Dollar | Permalink


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Tracked on Mar 2, 2005 7:51:48 PM


I could not agree more with the view that central banks are not in the business of creating disorder. Perhaps one anecdote will suffice.

The time is late-late nineties. The Euro is about to be born, markets are awash with intellectual speculation regarding whether the Euro will become a major reserve currency overnight. I am thinking to myself, well, these European central banks, the Euro will become their national currency, right, so they are going to have to switch out of these old (converted into EUR) DEM's and buy USD or JPY(fat chance) as forex reserves. So I wonder, what about the currency composition of non-Europe Central Banks and, as Stalin might have suggested, who's got the heavy armor. The answer is at that time of course major oil producers and a very few Asians. I happen to meet privately with the "chairman" at, let's say, the least-unlikely-to-switch oil producer central bank. I put to him the market's theory that EUR will displace substantially the USD in forex reserves, ask for his opinion. He tells me "young man, look at me, do I look like I'm about to enter the olympic 100 yards race ?". He was, well, a rotund man, let's leave it at that.

Of course, now that North Korea has declared itself a nuclear power, South Korea, Taiwan and Japan can decide to do the US a favour and precipitate a USD crisis, but somehow I doubt it.

Posted by: Bernard Godement | February 24, 2005 at 08:40 AM

Orderly or not? time will tell.

But it is notable that the last time we needed an orderly adjustment we actually cooperated with the rest of the world in the Plaza and Louvre accords. Where is the cooperation now?

I am not a chicken little running aound saying that the sky will fall tomorrow. But the fact that we are even talking about the POSSIBILITY that the sky could fall is a testament to the incompetence of our economic and political leadership. This problem we are in is one we brought upon ourselves with irresponsible fiscal policy. We could fix it today by reversing the tax cuts of the past few years and knocking off the talk about borrowing $2 trillion to phase out Social Security - something that would go a long way toward convincing the markets that grownups were actually in charge over here.

Just such fiscal retrenchments were at the core of the agreements that led to the orderly adjustments in the 1980's. I see no sign of them now - in fact Bush is so widely hated in Europe and is so unilaterally arrogant that it is hard to imagine him actually able to make such an agreement. And it is that inability/unwillingness to use his political capital to do the right thing - and the right thing is to raise taxes to fix our budget hole - that makes it even possible to imagine a "disorderly" adjustment.

Posted by: steve kyle | February 24, 2005 at 09:04 AM

This is a fine post but I am more pessimistic and will argue a bit when I come away from philosophy land. Nice blog.

Posted by: anne | February 24, 2005 at 10:43 AM

The intriguing part of that chart is '87. An imperceptible blip in reserves accompanied a big, if transient blowoff in dollar asset values and lotsa lucrative volatility (which is now easier to exploit, and maybe intensify). Orderly adjustment is not incompatible with blood running in the streets.

Posted by: psh | February 24, 2005 at 12:48 PM

david -- could you provide a bit more detail on your data sources? I have not looked at the historical time series on reserve composition (imf annual report data may be the best source), but the graph looks funny to me. there is a srange spike in euro holdings/ dip in dollar holdings around 2000, and even ignoring that, the shift from say 30% of the overall reserve stock in dollars in 99-00 to say 70% in 2002 or 2003 seems a bit too big -- a shift of that magnitude in the overall composition of the stock would imply enormous flows out of euros and into dollars, and during much of 02-03 the euro was rising v. the dollar. I am also a bit surprised to see the dollar's share of global reserves dip so low in the mid 90s. It could well have happened, i have not looked at this data, but it "feels" a bit strange. in 1990s, every emerging economy in the world seemed to peg to the dollar for a while, including places like Russia. It is hard for me to link the data in the chart to a story about what was happening in the world, so I instinctively want to know more.

p.s. I misunderstood your post on my blog earlier today -- i thought you were referring to treasuries held abroad/ total treasury stock of marketable debt.

brad setser

Posted by: brad | February 24, 2005 at 04:00 PM

one other thought --

nouriel and i have argued that the number that really matters is the absolute increase in dollar debt held by central banks, since this generates the flows needed to finance ongoing deficits. obviously, this number can go up even if there is some diversification so long as the overall stock of reserves is rising rapidly. But i have trouble seeing how the US can get $400 b in net financing from central bank reserves if there is signficant diversification, even at the margins. The implied overall pace of reserve accumulation is just too high to be plausible.

So i would be interested in knowing a bit more about the financial flows that would accompany your orderly adjustment scenario -- assume say a 800b current account deficit in 05, 700 b in 06, 600 b in 07, and 500 b in 08 -- deficits of that magnitude imply significant ongoing external financing needs, even if the deficit is shrinking both absolutely and in relation to GDP. Presumably, you envision a gradual reduction in the pace of central bank dollar reserve accumulation that is combined with an increase in private flows, and presumably there is some gradual increase in uS interest rates that both slows the US economy (reducing import growth) and helps generate the needed private flows? Or am I putting words in your mouth?

Posted by: brad | February 24, 2005 at 04:07 PM

This article today makes it sound like the Asian banks will work together to support the dollar:
Morgan Stanley, ABN Amro Say Asia to Coordinate Currency Policy
Feb. 24 (Bloomberg) -- Asian policy makers will work together to try to stem the advance in their currencies against the U.S. dollar, said Morgan Stanley and ABN Amro Holding NV.


"Asian officials agreed on Feb. 22 to set up an organization called the Asian Bellagio Group to stabilize regional foreign-exchange markets, the Korea Times reported."

Bellagio? Isn't that the place for high stakes gambling?

Posted by: CalculatedRisk | February 24, 2005 at 09:05 PM

Great comments, all.

For Brad, specifically --

I'm away from the Bank (and the bulk of my resources) until Monday, but I'll send you the data when I get back. (That goes for anyone else interested, as well.) The blip that looks so funny comes about because the BIS data is monthly, and some wierdness happened right at the time of the switch to the euro. The IMF data is annual, so that stuff is washed out. And you are right that this trend is not nearly so apparent when you focus on total foreign holdings. (The BIS data looks very much like the IMF data on that score, as well it should.)

Posted by: Dave Altig | February 24, 2005 at 09:27 PM

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February 23, 2005

So Now We Know...

... that Greg Ip had it right.  The FOMC released the minutes of the February 1-2 meeting today, and confirmed that

At this meeting the Committee engaged in a broad-ranging discussion of the pros and cons of formulating a numerical definition of the price-stability objective of monetary policy.


The Committee decided to defer further discussion.

Not too much else of interest, really.  I'll post the reaction from options on fed funds futures tomorrow.  Until then, William Polley has a more complete rundown.

February 23, 2005 in Federal Reserve and Monetary Policy | Permalink


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