Thursday, December 01, 2005

 

Major Central Banks Try To 'Mop Up Excess Cash'

This Reuters report looks at what the worlds' central banks may be planning. "Years of super-cheap credit are coming to an end as the world's major central banks begin to act in unison to drain excess cash that many fear could have severe repercussions for economic and price stability."

"As heads of the U.S. Federal Reserve, European Central Bank and Bank of Japan meet in London this weekend with finance ministers and bankers from the Group of Seven economic powers, they are likely to conclude there is still much to do."

"By the middle of next year, all three of these central banks may be withdrawing cash from the global economy, via higher Fed and ECB interest rates or, in the case of Japan, by ceasing to pump even more cash into the system. Whether this is concerted or just coincidence is unclear."

"What is clear to many experts is Fed tightening alone has not been sufficient to dampen what many see as high levels of risk-taking in world markets, buoyant private credit growth everywhere and bubble-like behavior in housing and equity markets. To the extent there is a collective desire to drain global liquidity, it will require tightening from all three regions."

"'There's clearly concern in Washington and Frankfurt that financial conditions are still too loose,' said Jim O'Neill, chief global economist at Goldman Sachs. He added that Japan may lag, but will also need to mop up abundant global cash."

"Some say there is a gnawing anxiety that core consumer price inflation is not telling the full story. If interest rates remain so low, the risk is financial excess, more bubbles and even deep deflation down the line."

"When the G7 met in September, a central feature of that meeting was a presentation by Fed Vice Chairman Roger Ferguson on how cheap money was allowing global markets to indulge in a very high level of risk taking."

"So, if there was collective G7 concern last September that global liquidity was too high, it will not have gone away. 'I'd say relatively little progress has been made, debt spreads are still very narrow, asset prices are still very high and real and nominal long yields are very low,' said Larry Kantor, head of global economic research at Barclays Capital. 'It's not the whole story, but to some extent that must be contributing to the decision of the ECB to start tightening and the Bank of Japan to consider its options too.'"

Comments:
I like the sound of it, but, looking at the real-world actions that are being taken, and especially with the Fed's retreat into cowed obscurantism lately (going so far as to hint the current tightening cycle is almost over!), this seems awfully tepid.

There simply isn't the willingness to cause the markets the slightest discomfort, even though the grownups simply have to know the real situation. A really great way to start mopping up excess cash is to get it out of the stock market, but they spend all their time reassuring the markets.

Frankly, I'm at a loss: is it because they know they'll be blamed for a selloff if they signal significantly higher rates, but can pass the buck if they let things go right over the cliff? I know it's all about credibility with central bankers, but this bunch doesn't look likely to earn any from me anytime soon.
 
david:

I know it's all about credibility with central bankers, but this bunch doesn't look likely to earn any from me anytime soon.


Second that!!

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Ben,

Next time your HB2 blog gets into money and/or metals discussions, I'm going to encourage some posters to come over here. We could get some killer debates started with JL2, feepness, Mr. D, et al. Macroeconomics going the way they are, this blog should be rocking, too!
 
It is nice to hear these Central bankers worried about the consequences of their rrand liquidity pump experiment, but they are soon going to have to face what seems obvious to many of Ben's regular posters: Once the horses leave the barn, it does no good to close the doors.

The choice really gets down to whether they will continue to court a catastrophic crash at some randomly determined point in the future when the size of imbalances they have created overwhelm their managerial capabilities, or take their lumps sooner at the risk of getting blamed for starting a forest fire when all they had intended to start a controlled burn. The policital temptation for inaction will win IMO, against Paul Volcker's best advice.

P.S. Ben, where is HB2 today?
 
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