Today's quote: "Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment.
The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market. " James Grant, WSJ
All of this speaks to the enormous sensitivity of bond markets to even the slightest deviation by central banks from market expectations. With bond prices in unprecedented territory, even a slight drop in confidence in central-bank buying can prove costly to investors.
Having waded so deeply into markets, central banks are finding that they are vulnerable to the technical forces that drive short-term prices just as much as the fundamental economic risks that they usually worry about. While central bankers might think of the size of their balance sheets as the deciding factor, it is the flow of purchases that drives markets. That is why the words from the Fed and ECB, which didn’t signal any significant changes in policy, has such a big impact on markets.
It may be too early to call it a full-blown tantrum. But the summer lull is clearly over.
If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice.
Ken Rogoff is a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund and (to boot) a chess grandmaster. He laid out his case against cash in a Saturday essay in this newspaper two weeks ago. By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the Federal Reserve’s control of interest rates...
Come the next recession, the book’s second part contends, the Fed should have the latitude to drive interest rates below zero. Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before.
In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” thus restore prosperity.
You may doubt this. Mr. Rogoff himself sees difficulties. For him, the problem is cash. The ungrateful objects of the policy community’s statecraft will stockpile it.
What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency. If the author has his way, there will be no more Benjamin Franklins, only Hamiltons, Lincolns and George Washingtons. Ideally, says Mr. Rogoff, many of today’s banknotes will take the future form of clunky, base-metal coins “to make it even more difficult to carry large quantities of currency.” ..
To such deep thinkers as Mr. Rogoff, 0% is only a number, not a boundary. It ought not to constrain an enlightened central bank, which strives to set a negative inflation-adjusted interest rate when prices are drooping. Thus, if the CPI should happen to come in at 1%, let the federal-funds rate be set at, say, minus 1%. If the CPI should measure minus 1% (meaning that prices are actually falling), let the funds rate register minus 3%....
Negative rates? You rub your eyes and search your memory. You can recall no precedent. And if you consult the latest edition of “A History of Interest Rates” (2005) by Sidney Homer and Richard Sylla, you will find none. A recent check with Mr. Sylla confirms the impression. Today’s negative bond yields, he says, are the first in at least 5,000 years. ...
Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment.
The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market.
(Ken Rogoff, the prophet:) You have never met a more cocksure lot than the monetary-policy clerisy. The author, one of the highest of these high priests, casts aside his pro forma concerns about radical experimentation to deliver the following prediction about the coming brave new world: “A true shift to a world where negative interest policy is possible will be transformative, comparable to moving off the gold standard in the 1930s, moving off of fixed exchange rates in the 1970s, and the advent of modern independent central banks around the world in the 1980s and 1990s. Like all of these changes, there will be uncertainties during the transition, but after awhile, central banks and financial market participants likely won’t be able to imagine doing things any other way.”...
As for the campaign for zero cash in the service of negative interest rates, Mr. Rogoff’s brief is best seen not as detached scientific analysis but as a kind of left-wing crotchet. Strip away the technical pretense and what you have is politics. The author wants the government to control your money. It’s as simple as that.
---A widespread – and false – perception is that Obama has kept the US out of the Syrian war. Indeed, the US right wing routinely criticizes him for having drawn a line in the sand for Syrian President Bashar al-Assad over chemical weapons, and then backing off when Assad allegedly crossed it (the issue remains murky and disputed, like so much else in Syria). A leading columnist for the Financial Times, repeating the erroneous idea that the US has remained on the sidelines, recently implied that Obama had rejected the advice of then-Secretary of State Hillary Clinton to arm the Syrian rebels fighting Assad.
Yet the curtain gets lifted from time to time. In January, the New York Times finally reported on a secret 2013 Presidential order to the CIA to arm Syrian rebels. As the account explained, Saudi Arabia provides substantial financing of the armaments, while the CIA, under Obama’s orders, provides organizational support and training.
Unfortunately, the story came and went without further elaboration by the US government or follow up by the New York Times. The public was left in the dark: How big are the ongoing CIA-Saudi operations? How much is the US spending on Syria per year? What kinds of arms are the US, Saudis, Turks, Qataris, and others supplying to the Syrian rebels? Which groups are receiving the arms? What is the role of US troops, air cover, and other personnel in the war? The US government isn’t answering these questions, and mainstream media aren’t pursuing them, either. ....
Through occasional leaks, investigative reports, statements by other governments, and rare statements by US officials, we know that America is engaged in an active, ongoing, CIA-coordinated war both to overthrow Assad and to fight ISIS. America’s allies in the anti-Assad effort include Saudi Arabia, Turkey, Qatar, and other countries in the region. The US has spent billions of dollars on arms, training, special operations forces, air strikes, and logistical support for the rebel forces, including international mercenaries. American allies have spent billions of dollars more. The precise sums are not reported.
The US public has had no say in these decisions. There has been no authorizing vote or budget approval by the US Congress. The CIA’s role has never been explained or justified. The domestic and international legality of US actions has never been defended to the American people or the world.