Further comments on Guonan Ma "A compelling case for Chinese monetary easing", 14/07/2015
I think some of China’s monetary policy approaches are innovative. For example, the differential treatments of first home buyers and other property buyers is a good example, as I mentioned earlier. The People's Bank of China (PBoC), China's central bank, has used different requirement of Loan Value Ratios (I am not sure it also applied differential rates) for the two different buying groups.
I would suggest that the central bank could charge a non-zero interest rate to commercial banks for home loans for non-first home buyers. That can regulate the property market and at the same time acts as a revenue to the country as opposed to let commercial bank to reap the benefits of higher rates applied to non-first home buyers.
Secondly, the use of reserve ratio, though it has been available to the monetary authorities but seldom used in the west advanced countries, provides another flexibility in applying monetary policy. That is because the monetary authority can maintain a particular target interest rate and at the same time to regulate the level of money supply.
Having said that, I would caution that the Chinese monetary and fiscal authorities in unduly intervening in the market activities, such as the authorities’ words and actions in the stock market over the last year and including the most recent interventions to proper up the market. The government and monetary authorities should not be in that market in that way.
In summary, the addition of additional tools or the allowance of more flexibilities in the monetary policies in China should be studied for the more widespread application of the better ones.
In response to Guonan Ma's reply on 15th July, 2015, 10:43 am: "To Lintong Feng: Policy issues involved are multiple in China. A threshold question is whether Chinese monetary policy stance should become less restrictive. Then the next question is what tools should be matched with which particular targets. The issue you raised hence relates more to the choice of instruments. In principle, the Chinese government might also tax mortgage for the second or third homes rather than regulating their mortgage rates, especially in a more liberalised environment."
Thanks Dr Ma for your reply.
I agree with your point on an easing monetary stance in China.
My argument for the imposition of an interest rate on the banks from the PBoC is effectively a tax in nature. I think we are on the side of that argument. There is no disagreement between us on that.
The PBoC may be relatively better positioned to initiate and enforce the "tax" as part of its monetary policy tools than the Department of Finance or the Taxation Bureau. In fact, monetary authority should probably have the responsibility for the health of asset markets, i.e. preventing bubbles and the so called exuberance (is it the correct word that the former Chairman of the Federal Reserve, Alan Greenspan used?)
Showing posts with label monetary policy. Show all posts
Showing posts with label monetary policy. Show all posts
2015-07-13
Ma has a good point on Chinese monetary policy
Comments on Guonan Ma "A compelling case for Chinese monetary easing", 13/07/2015
It is regrettable that the deleveraging process earlier on and the response to the possibly excessive fiscal in the wake of the GFS took a rather mechanical approach in China, particularly in the global context of extremely easing monetary policies in the major economies as Dr Ma has mentioned. That mechanical approach reflected either inexperience or some silly ideological approach by some advisors or policy makers.
Further there was a weaker external demand and macro policies should have been aimed at stimulating domestic demand, including either or both of monetary and fiscal policy tools. I have elsewhere argued that there is an issue of optimisation even when dealing with excess capacities, as opposed to simply tightening in both monetary and fiscal policies.
On one point, though, I would not necessarily agree with Dr Ma, that is, the role of the PBoC in credit allocation. It appears that China's approach to financing housing market with a differential approach to first and other residential properties is commendable.
On the contrary, in most west advanced economies, there is a lack of monetary tools apart from the economy wide and market agent wide tool, that is, one interest rate for all, reflecting the weakness of their approach to monetary policy of being unable to deal with the requirement of more than one tasks. In that regard, China's differential approach is superior in my view.
We need more tools to deal with more tasks. The Chinese approach, in principle, is in the right direction. Of course, there is a degree or limit to that approach and one cannot expect all problems can be solved through monetary policies.
Having said that, the exact way the Chinese authorities has managed its stock market over the past year or so has created the problem of moral hazard and is not commendable at all. It should not have intervened as it has done, creating a bubble and then trying to sustain the bubble.
It is regrettable that the deleveraging process earlier on and the response to the possibly excessive fiscal in the wake of the GFS took a rather mechanical approach in China, particularly in the global context of extremely easing monetary policies in the major economies as Dr Ma has mentioned. That mechanical approach reflected either inexperience or some silly ideological approach by some advisors or policy makers.
Further there was a weaker external demand and macro policies should have been aimed at stimulating domestic demand, including either or both of monetary and fiscal policy tools. I have elsewhere argued that there is an issue of optimisation even when dealing with excess capacities, as opposed to simply tightening in both monetary and fiscal policies.
On one point, though, I would not necessarily agree with Dr Ma, that is, the role of the PBoC in credit allocation. It appears that China's approach to financing housing market with a differential approach to first and other residential properties is commendable.
On the contrary, in most west advanced economies, there is a lack of monetary tools apart from the economy wide and market agent wide tool, that is, one interest rate for all, reflecting the weakness of their approach to monetary policy of being unable to deal with the requirement of more than one tasks. In that regard, China's differential approach is superior in my view.
We need more tools to deal with more tasks. The Chinese approach, in principle, is in the right direction. Of course, there is a degree or limit to that approach and one cannot expect all problems can be solved through monetary policies.
Having said that, the exact way the Chinese authorities has managed its stock market over the past year or so has created the problem of moral hazard and is not commendable at all. It should not have intervened as it has done, creating a bubble and then trying to sustain the bubble.
2013-09-20
RBA, monetary policy and $A
Comments on Stephen Koukoulas "The sum of all our dollar fears...", 20/09/2013, http://www.businessspectator.com.au/article/2013/9/20/currency/sum-all-our-dollar-fears
The RBA and many economists and commentators have really adopted a very funny approach, namely when the dollar was really very high at about 1.05 they argued that the RBA is powerless in influencing the currency while now when the dollar is at 0.95 or even lower, they are saying the RBA could do something to make it lower.
Of course, the RBA now has probably understood it can play a role of influencing expectations, although the fall of the dollar in the past had little to do with the RBA policy on interest rates. Rather, it was because the global factor of the Fed on future QEs. But that has not limited the RBA from joining the force in making the noise that it thinks the dollar should be lower even when it was at 0.90 or lower.
The RBA should have known that it might have an influence on expectations when the dollar was really high and should have done better to play that role at those times!
Having argued that I fully understand that the RBA has its difficulties in targeting multi goals with only one policy tool that is interest rate.
The RBA and many economists and commentators have really adopted a very funny approach, namely when the dollar was really very high at about 1.05 they argued that the RBA is powerless in influencing the currency while now when the dollar is at 0.95 or even lower, they are saying the RBA could do something to make it lower.
Of course, the RBA now has probably understood it can play a role of influencing expectations, although the fall of the dollar in the past had little to do with the RBA policy on interest rates. Rather, it was because the global factor of the Fed on future QEs. But that has not limited the RBA from joining the force in making the noise that it thinks the dollar should be lower even when it was at 0.90 or lower.
The RBA should have known that it might have an influence on expectations when the dollar was really high and should have done better to play that role at those times!
Having argued that I fully understand that the RBA has its difficulties in targeting multi goals with only one policy tool that is interest rate.
2013-09-18
Complexity demands more monetary policy tools
Comments on Stephen Koukoulas "House price bull heaven", 18/09/2013, http://www.businessspectator.com.au/article/2013/9/18/property/house-price-bull-heaven
Leaving how the housing market price in Australia will develop and how the RBA will deal with that aside, it should be acknowledged that the current monetary policy tool is not enough to deal with both the broad economy and the asset markets prices with only uniform official interest rates applied to all.
The RBNZ policy development regarding housing lending as Koukoulas mentioned (New Zealand’s bold move against the housing bubble) partly mirrored China's approach and has some merits, though the approach of restricting the LVR is not an efficient economic policy because it lacks clear price signals for both lenders and borrowers. In another word, it is not really a market approach but a administrative approach.
A better policy approach is a market based on price, that is, by introducing and applying differential 'official' rates that could be applied when dealing with different situations such as the broad economy and the housing market.
That itself may raise some costs, but that may be a price that needs to be paid in dealing with complex situations. Otherwise, you may continue to have the sort of risks of the GFC to reoccur. Further, it is not too dissimilar to fiscal policies that have its own structural content.
Leaving how the housing market price in Australia will develop and how the RBA will deal with that aside, it should be acknowledged that the current monetary policy tool is not enough to deal with both the broad economy and the asset markets prices with only uniform official interest rates applied to all.
The RBNZ policy development regarding housing lending as Koukoulas mentioned (New Zealand’s bold move against the housing bubble) partly mirrored China's approach and has some merits, though the approach of restricting the LVR is not an efficient economic policy because it lacks clear price signals for both lenders and borrowers. In another word, it is not really a market approach but a administrative approach.
A better policy approach is a market based on price, that is, by introducing and applying differential 'official' rates that could be applied when dealing with different situations such as the broad economy and the housing market.
That itself may raise some costs, but that may be a price that needs to be paid in dealing with complex situations. Otherwise, you may continue to have the sort of risks of the GFC to reoccur. Further, it is not too dissimilar to fiscal policies that have its own structural content.
2013-05-01
Reappraisal of exchange rate regimes
Comments on He Fan “China must push ahead with exchange rate
reforms”, 30/04/2013, http://www.eastasiaforum.org/2013/04/29/china-must-push-ahead-with-exchange-rate-reforms/
The real appreciation of the RMB is much more than the 30
per cent since the exchange rate reforms of 2005 as mentioned in the post,
given that inflation in China has been far greater than that in the US.
Having an annual limit on the total movement of the exchange
rate has merits, although the exact figure can be hard to determine and it is
not necessarily asymmetry between the upper and lower bounds. It should ideally
be linked to some measure of equilibrium level of exchange rate, based on
relative inflation rates and trade situations.
In that sense, the 7.5% limits appear to be arbitrary, as
the author seems to have acknowledged.
In terms of sequence of reforms, removing trade distortions,
such as export subsidies and imports restrictions should probably take a higher
priority than exchange rate reforms.
Further, it is not necessarily certain that free exchange
rate regime is better than a fixed exchange rate regime if the effects of
exchange rate bubbles on the real economy are taken into account.
The advantages of monetary policy freedom must be balanced
with the distortionary effects on resource allocation in the real economy and
potentially damaging adjustments.
So far, people take the easy way, that is, monetary policy
freedom, but leave the blames of real damage to the markets to avoid
accountability.
That is not necessarily optimal for the world economy or
indeed any individual economies.
In my view there is a need for a reappraisal of exchange
rate regimes with a new framework in which both the effects of both monetary
policy and the effects of exchange rate on the real economy are taken into
account, and consider whether there are any new policy design for the
international system to work better.
There should be a system that has a set of well-designed
rules to allow countries to choose a fixed or flexible exchange rate regime and
should a fixed regime is selected how the system will adjust under a set of
agreed rules.
Such a system can and should include provisions that will
allow monetary flexibility for every country supported by a set of agreed
international rules.
2013-04-02
RBA needs to move with major international central banks
Comments on Shaun Vahey "RBA: rates should hold, with a gradual return to neutral", 2/04/2013, https://theconversation.com/rba-rates-should-hold-with-a-gradual-return-to-neutral-13174
While the consensus view of unchanged rate this month is reasonable, the view of a higher side risk for rate to move in the next 12 months may be problematic.
A couple of reasons for the opposite view of a lower side risk for rate. One is that the next budge is likely to be contractionary and that is more likely to be followed by a more severe cut of government spending after the next federal election with a change of government.
Another is that international loose monetary policies will continue with increased forces as Japan has now joined the two other major industrialised economies, the US and the Euro zone. This international competition for loose monetary policy or race to the bottom will enforce the save heaven status of or attractiveness of the $A and may force it up further in value, putting further pressure on the Australian economy.
When everyone else is using unconventional monetary policy, it is too naive or silly for Australian monetary authority to continue the conventional way of its monetary policy.
While there is a risk for housing market to be further inflated, but that should be addressed through feasible policies, as opposed to the failed monetary policy to address more than one targets with only one tool.
It appears that it is now a time to have a review of macro economic policies including both monetary and fiscal policies to introduce new policy tools to improve the effectiveness of macro economic policies.
One way is to empower the RBA to have the ability to introduce a measure that can target lendings used in housing assets.
While the consensus view of unchanged rate this month is reasonable, the view of a higher side risk for rate to move in the next 12 months may be problematic.
A couple of reasons for the opposite view of a lower side risk for rate. One is that the next budge is likely to be contractionary and that is more likely to be followed by a more severe cut of government spending after the next federal election with a change of government.
Another is that international loose monetary policies will continue with increased forces as Japan has now joined the two other major industrialised economies, the US and the Euro zone. This international competition for loose monetary policy or race to the bottom will enforce the save heaven status of or attractiveness of the $A and may force it up further in value, putting further pressure on the Australian economy.
When everyone else is using unconventional monetary policy, it is too naive or silly for Australian monetary authority to continue the conventional way of its monetary policy.
While there is a risk for housing market to be further inflated, but that should be addressed through feasible policies, as opposed to the failed monetary policy to address more than one targets with only one tool.
It appears that it is now a time to have a review of macro economic policies including both monetary and fiscal policies to introduce new policy tools to improve the effectiveness of macro economic policies.
One way is to empower the RBA to have the ability to introduce a measure that can target lendings used in housing assets.
2013-01-29
Better economic policy means less central bank independence
Comments on Graeme Wells “Stiglitz is wrong to dismiss central bank independence”, 29/01/2013, https://theconversation.edu.au/stiglitz-is-wrong-to-dismiss-central-bank-independence-11745
The independence of central banks from government of the day has its merits, although a central bank should be more ideally subject to the overall coordination of an integrated economic oversight committee so the best combination of monetary and fiscal policies can be more easily achieved, as what is meant in economics.
This view on the independence of cantral banks is different from the conventional view of dependence in relation to government of the day.
Based on this criterion, Stiglizt's idea is not too bad.
The key is how to have a national economic oversight committee that serves the people as opposed to political parties that have their own political interests that can often be in conflict with the people's interests.
Further, how to deal with a government formed by elected political party members by such a committee also needs careful considerations.
But a national debate should be had on these sorts of questions. Without such debates, new and more effective economic governance is unlikely to appear.
The independence of central banks from government of the day has its merits, although a central bank should be more ideally subject to the overall coordination of an integrated economic oversight committee so the best combination of monetary and fiscal policies can be more easily achieved, as what is meant in economics.
This view on the independence of cantral banks is different from the conventional view of dependence in relation to government of the day.
Based on this criterion, Stiglizt's idea is not too bad.
The key is how to have a national economic oversight committee that serves the people as opposed to political parties that have their own political interests that can often be in conflict with the people's interests.
Further, how to deal with a government formed by elected political party members by such a committee also needs careful considerations.
But a national debate should be had on these sorts of questions. Without such debates, new and more effective economic governance is unlikely to appear.
An international strategic monetary gaming has begun
Comments on Stephen Koukoulas “Don't cool the world growth jets too early”, 29/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/global-economic-growth-GDP-stock-market-rebound-pd20130129-4DRQN?OpenDocument&src=sph&src=rot
The risks now are not on the side of cooling too early. Instead, they are on the side of pending worldwide inflation. In the new competitive loosing monetary policies internationally (at least in major western industrialised countries including the US and EU, and now Japan has joined), would any stimulating policies of such type have any effect on the real economies in those countries and the world as a whole?
The effects of loosing monetary policy in all the countries when they already face the liquidity trap are likely to be no effects on real outputs of those economies.
In the short run, they may boost assets prices such as the stock markets and cause hot money to flow to the major emerging economies to cause headaches to their economies. In return, the authorities in those countries will have to respond by taking measures to keep their exchange rates not rising too much.
In the longer term, international inflations are likely to rise significantly, causing policy makers headaches and forcing costly adjusts.
The world economy is having a wild run in the near future. In such a worldwide monetary policy game to compete with each other, who will be the winners and who will be the losers are unclear.
The game started with the Fed. It has now turned to a strategic gaming internationally.
The skills for relatively good policies in a country to win the game eventually are required not only for this stage of monetary easing, but also for the period in its wake to combat inflation and to continually stay internationally competitive.
In that sense, your concluding sentence is very insightful: “These market trends appear to be sustainable as the sensible policy makers have thrown their text books and ideologies out of the window and are willing to have policy settings that have, in broad terms, averted economic depression and are working to support economic growth.”
Australian authorities have to and must be ready for this.
The risks now are not on the side of cooling too early. Instead, they are on the side of pending worldwide inflation. In the new competitive loosing monetary policies internationally (at least in major western industrialised countries including the US and EU, and now Japan has joined), would any stimulating policies of such type have any effect on the real economies in those countries and the world as a whole?
The effects of loosing monetary policy in all the countries when they already face the liquidity trap are likely to be no effects on real outputs of those economies.
In the short run, they may boost assets prices such as the stock markets and cause hot money to flow to the major emerging economies to cause headaches to their economies. In return, the authorities in those countries will have to respond by taking measures to keep their exchange rates not rising too much.
In the longer term, international inflations are likely to rise significantly, causing policy makers headaches and forcing costly adjusts.
The world economy is having a wild run in the near future. In such a worldwide monetary policy game to compete with each other, who will be the winners and who will be the losers are unclear.
The game started with the Fed. It has now turned to a strategic gaming internationally.
The skills for relatively good policies in a country to win the game eventually are required not only for this stage of monetary easing, but also for the period in its wake to combat inflation and to continually stay internationally competitive.
In that sense, your concluding sentence is very insightful: “These market trends appear to be sustainable as the sensible policy makers have thrown their text books and ideologies out of the window and are willing to have policy settings that have, in broad terms, averted economic depression and are working to support economic growth.”
Australian authorities have to and must be ready for this.
2013-01-22
Premature to say "why rates have no further to fall"
Comments on Stephen Koukoulas “Why rates have no further to fall”, 22/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/RBA-Reserve-Bank-interest-rates-AUD-Australian-dol-pd20130122-46QQR?OpenDocument&src=sph&src=rot
While domestic economic condition and inflation is one thing, the international conditions are another totally different beast.
The recent few years in the wake of GFC indicates that the conventional wisdom or policy prescription is no longer the best approach, not just for the big players but also for Australia.
There is no ending to the quantitative easing policies in the US, EU or Japan as the last just embarked on this path under its new government.
In such an international environment, your analysis appears completely out of kilt with what the best policy really should be based on real world cases as opposed to the inapplicable conventional thinking at the moment.
One should never be mechanical in thinking and must know the limit of a particular line of thinking and adopt the best even it may mean you have to break with the tradition.
In this occasion, unfortunately, you seem to have fallen into the trap that most economists do in most of the time.
What would be the best policy for Australia? It should be the one to stay comparatively the same as those big players, do similar things (though not necessarily in the same manner) to keep Australia international competitive or to at least neutralise the international effects.
While domestic economic condition and inflation is one thing, the international conditions are another totally different beast.
The recent few years in the wake of GFC indicates that the conventional wisdom or policy prescription is no longer the best approach, not just for the big players but also for Australia.
There is no ending to the quantitative easing policies in the US, EU or Japan as the last just embarked on this path under its new government.
In such an international environment, your analysis appears completely out of kilt with what the best policy really should be based on real world cases as opposed to the inapplicable conventional thinking at the moment.
One should never be mechanical in thinking and must know the limit of a particular line of thinking and adopt the best even it may mean you have to break with the tradition.
In this occasion, unfortunately, you seem to have fallen into the trap that most economists do in most of the time.
What would be the best policy for Australia? It should be the one to stay comparatively the same as those big players, do similar things (though not necessarily in the same manner) to keep Australia international competitive or to at least neutralise the international effects.
2012-12-19
More global coordinations in economic policy requried
Comments on Stephen Grenville “Central banks have run out of answers”, 19/12/2012, http://www.businessspectator.com.au/bs.nsf/Article/Central-banks-US-England-BoE-monetary-fiscal-polic-pd20121219-34SAC?OpenDocument&src=sph&src=rot
It is more likely for monetary policy, such as the various forms of QEs adopted now by big central banks, to work if there is only one big ones to do it and most others didn't do it.
When all central banks are doing the same QEs all at once, then the effects in one country is offset by others in terms of lowering its exchange rates and raising its international competitiveness.
While at the moment this hasn't translated into global inflation, sooner or later it will occur, along with it, a possible race by central banks to rein in monetary policies to combat inflation and generate stagnant economies that will be a repeat of the stagflation in the 1970s following the first oil shock.
In a sense, the current situation has demonstrated that monetary policies have done more than they can do to achieve meaningful objectives and more than they should do. That is more than the limit of zero interest rate or the liquidity trap when only one faced that situation.
Given the current fiscal malaises in many advanced countries and the near zero effects of monetary policy and the longer term inflationary effects, now an even taller order is required of the global leaders and economic managers, that is, they must coordinate both monetary and fiscal policies and act just as the global is the one economy and they are managing that one economy as opposed to many individual and separate economies and competing against each other.
This requires that all major countries should have work together and design both fiscal and monetary policies together. It will be extremely difficult if not impossible outright. Otherwise, the global economy will be in doldrums for a long time to come.
It is more likely for monetary policy, such as the various forms of QEs adopted now by big central banks, to work if there is only one big ones to do it and most others didn't do it.
When all central banks are doing the same QEs all at once, then the effects in one country is offset by others in terms of lowering its exchange rates and raising its international competitiveness.
While at the moment this hasn't translated into global inflation, sooner or later it will occur, along with it, a possible race by central banks to rein in monetary policies to combat inflation and generate stagnant economies that will be a repeat of the stagflation in the 1970s following the first oil shock.
In a sense, the current situation has demonstrated that monetary policies have done more than they can do to achieve meaningful objectives and more than they should do. That is more than the limit of zero interest rate or the liquidity trap when only one faced that situation.
Given the current fiscal malaises in many advanced countries and the near zero effects of monetary policy and the longer term inflationary effects, now an even taller order is required of the global leaders and economic managers, that is, they must coordinate both monetary and fiscal policies and act just as the global is the one economy and they are managing that one economy as opposed to many individual and separate economies and competing against each other.
This requires that all major countries should have work together and design both fiscal and monetary policies together. It will be extremely difficult if not impossible outright. Otherwise, the global economy will be in doldrums for a long time to come.
2012-07-30
US monetary policy has lost its power
Comments on Robyn Harding "Bernanke is running out of magic bullets" 30/07/2012 http://www.businessspectator.com.au/bs.nsf/Article/US-Fed-Reserve-Bernanke-stimulus-eurozone-pd20120730-WNSLX?OpenDocument&src=sph&src=rot
Conventional monetary policies have done its appropriate jobs in managing the US economy and it is highly unlikely for it to be capable of doing more as long as the US economy is concerned.
Any further QE or lower the 0.75% rate will not produce any measurable effects on the economy, apart from benefits the banks and those financial institutions to make money by pushing the stock market higher.
It is now for fiscal policy to take its responsibility to put the US economy in a long term path to health.
Besides, the US and EU all have to adjust to the challenges out of the rise of large emerging economies and that means their relative living standard will not be as higher than the emerging economies as in the past.
That also means the real wage in those countries have to fall further to be internationally more competitive vs the emerging economies.
2012-01-27
RBA can further improve Australian welfare
Comments on Robert Gottliebsen “Don't
bank on mortgage rate cuts”, 27/01/2012,
http://www.businessspectator.com.au/bs.nsf/Article/Interest-rates-deposits-RBA-house-prices-Mike-Hirs-pd20120127-QVQZQ?OpenDocument
Thus reflects an anomaly with the
Australian money markets or at least in the effectiveness of RBA
monetary policy.
The RBA should do what the Fed has been
doing recently, that is, to allow at least the four major banks to
borrow from it with their high quality mortgage backed securities to
make the RBA interest rate a really market rate that banks can
borrow.
This may include a revised definition
of deposits of banking institutions with the RBA, that is, the
reserve ratio to facilitate this, but still retain effective control
and effectiveness of monetary policy. So how high quality mortgage
backed security is accounted in such new definition may need some
thinking.
RBA officials need to consider this move to improve the Australian money market in terms of effectiveness. Arguably, Australian real effective interest rates can be lowered and hence welfare can be enhanced. This can be reasoned from the borrowing costs (the interest paid for borrowing at the international markets be our banks for example) that could be paid to the RBA so would be part of gain by Australians!
RBA should reflect why it has not done this earlier.
2012-01-07
Creativity needed to financially enhance Aussies
Comments on Bill Gross "Paranormal economic activity", 7/01/2012, http://www.businessspectator.com.au/bs.nsf/Article/global-economy-interest-rates-US-Federal-Reserve-E-pd20120105-Q7W3Q?OpenDocument&src=sph&src=rot
I think the flooding of money by ECB, BOE, and Fed will either be hoarded by those financiers that need deleveraging, or spill over to other more promising and less risky countries/markets by some international hedging operators, or both.
Maybe the Aussie stock markets and bond markets will be one of the destinations for those QE money supplies.
It will be self-fulfilling, if enough money is flowing into a better market, because the amount can be very large.
If I could get money from the US, UK, or EU, I would definitely invest in Australia, selecting a time when the A$ is a bit lower to come in and buy some shares and get out with a decent profit at a time when A$ is higher.
That would be a very excellent strategy.
The question Australians need to ask is why the Australian banks have been arguing that their financing costs from overseas financial markets are higher than the domestic money market where official interest rates are much higher than most of their counterparts overseas.
I was personally wondering that why there is no operators from Australia financiers to set up some bonds to be sold overseas and use the proceeds to provide cheaper loans in Australia.
Indeed, the Australian government perhaps should seize this opportunity to do so to benefit Australians by lowering the cost burdens for many Aussies who have mortgages or loans from the banks.
I think the flooding of money by ECB, BOE, and Fed will either be hoarded by those financiers that need deleveraging, or spill over to other more promising and less risky countries/markets by some international hedging operators, or both.
Maybe the Aussie stock markets and bond markets will be one of the destinations for those QE money supplies.
It will be self-fulfilling, if enough money is flowing into a better market, because the amount can be very large.
If I could get money from the US, UK, or EU, I would definitely invest in Australia, selecting a time when the A$ is a bit lower to come in and buy some shares and get out with a decent profit at a time when A$ is higher.
That would be a very excellent strategy.
The question Australians need to ask is why the Australian banks have been arguing that their financing costs from overseas financial markets are higher than the domestic money market where official interest rates are much higher than most of their counterparts overseas.
I was personally wondering that why there is no operators from Australia financiers to set up some bonds to be sold overseas and use the proceeds to provide cheaper loans in Australia.
Indeed, the Australian government perhaps should seize this opportunity to do so to benefit Australians by lowering the cost burdens for many Aussies who have mortgages or loans from the banks.
2011-12-05
What should monetary policy be?
Comments on Adam Carr “SCOREBOARD: Rates armoury” 5/12/2011, http://www.businessspectator.com.au/bs.nsf/Article/interest-rates-RBA-Reserve-Bank-markets-euro-crisi-pd20111205-P8RML?OpenDocument&src=sph&src=rot
I think it would be beneficial to have another cut in rates.
In a world full of uncertainties including possible an another financial/banking crisis, and with inflation not out of control, as well as relatively low activities everywhere except mining, Australia can afford to lower its official interest rates to benefit consumers as well as most businesses.
A good monetary policy is to balance the benefits and costs of inflation control, so the national welfare can be maximised.
I am not sure the current policy setting meets that criterion.
2011-10-29
Better mix of macroeconomic policies needed
Comments on Bill Evans “WEEKEND ECONOMIST: Racing to a rate cut”, 29/10/2011, http://www.businessspectator.com.au/bs.nsf/Article/Reserve-Bank-November-Meeting-rate-cut-25-bps-pd20111028-N39US?OpenDocument&src=rot
It is interesting that both official and market interest rates in Australia are much much higher than in most advanced economies.
While one might argue that our economy is also much better than theirs, simply doing it masks a difficult policy questions. That question is: how can monetary and fiscal policies be more closely coordinated, as generally implied in economics textbooks, to achieve better and most desirable results.
I think fiscal policy should do much more to encourage people to work in regions and areas where labour shortage are the most severe, such as the fast lane areas of the so called 2 speed economy.
Taxation policy should be adjusted to do the job to give people more incentives to work in those region and areas.
Fiscal policy can be more flexible to target regions and industries sectors, while leaving the monetary policy to accommodate the whole economy.
I think there is a need to establish a national economic policy commission, so it can recommend to the government and the RBA on the best mix of the monetary and fiscal policies to achieve the best national outcomes and to benefit the consumers more, such as lower interest burdens on mortgages and other borrowings.
2011-03-15
China has some independence of monetary policy
Comments on Karen Maley “A seismic shift for China”, 15/03/2011, http://www.businessspectator.com.au/bs.nsf/Article/debt-deficit-emerging-economies-China-Wen-Jiabao-pd20110315-EXSXC?OpenDocument&src=sph&src=rot
This post shows both the author and Dalio had a poor understanding of China's use of reserve ratio as one of main methods to conduct its monetary policy in addition to its control of interest rates.
What China is doing is different from the conventional monetary policy prevailing in most western countries.
China's methods of conducting its monetary policy means it is not quite a free money market and there could be a need to ration credit one way or another, by banks.
But at the same time it also means it has its own independent monetary policy, unlike what Dalio's view is.
It is important to understand the facts and the mechanism of China's monetary policy to analyse how its policy should evolve, as opposed to simply apply conventional economics textbook approach to a different subject – the latter approach is wrong and gives the wrong conclusion.
This post shows both the author and Dalio had a poor understanding of China's use of reserve ratio as one of main methods to conduct its monetary policy in addition to its control of interest rates.
What China is doing is different from the conventional monetary policy prevailing in most western countries.
China's methods of conducting its monetary policy means it is not quite a free money market and there could be a need to ration credit one way or another, by banks.
But at the same time it also means it has its own independent monetary policy, unlike what Dalio's view is.
It is important to understand the facts and the mechanism of China's monetary policy to analyse how its policy should evolve, as opposed to simply apply conventional economics textbook approach to a different subject – the latter approach is wrong and gives the wrong conclusion.
2011-02-10
Current international monetary gaming
Comments on Karen Maley “Prisoners of global inflation”, 10/02/2011, http://www.businessspectator.com.au/bs.nsf/Article/China-US-global-inflation-Bernanke-pd20110210-DWS4D?OpenDocument&src=sph
A small point in the international monetary gaming.
While China may be regarded as having no monetary independency with its currency fixed to the $US according to the conventional economics textbook, China is not a conventional economic entity that operates as the conventional textbooks assumes.
For example, China tends to use credit control (and sometimes through administrative orders), as compared to interest control as the main tool of monetary policy to control money supply. So it has considerable room of monetary autonomy even with a fixed exchange rate regime. One can buy off the $US to increase money supply and reduce credits to reduce money supply at the same time with little expansionary money policy, should one wish to do so.
The second thing is that when the excessive $US flows to China, the Chinese monetary authority can simply shifts it back to the US by buying more US securities, or other countries securities. That translates the excessive international liquidity back to the US or to other countries.
So Bernanke can’t simply win out of this simple monetary game for two reasons. One is that inflation pressure will build up in the US and force him to act to raise interest rate and to reduce liquidity that is money supply. The other is that international pressure against loose US monetary policy will increase and international politics will come back to bite the US authorities to cease its loose monetary policy.
A small point in the international monetary gaming.
While China may be regarded as having no monetary independency with its currency fixed to the $US according to the conventional economics textbook, China is not a conventional economic entity that operates as the conventional textbooks assumes.
For example, China tends to use credit control (and sometimes through administrative orders), as compared to interest control as the main tool of monetary policy to control money supply. So it has considerable room of monetary autonomy even with a fixed exchange rate regime. One can buy off the $US to increase money supply and reduce credits to reduce money supply at the same time with little expansionary money policy, should one wish to do so.
The second thing is that when the excessive $US flows to China, the Chinese monetary authority can simply shifts it back to the US by buying more US securities, or other countries securities. That translates the excessive international liquidity back to the US or to other countries.
So Bernanke can’t simply win out of this simple monetary game for two reasons. One is that inflation pressure will build up in the US and force him to act to raise interest rate and to reduce liquidity that is money supply. The other is that international pressure against loose US monetary policy will increase and international politics will come back to bite the US authorities to cease its loose monetary policy.
2011-02-07
Bernake will have more international opponents to its policy
Comments on Karen Maley “Bernanke's inflated rhetoric”, 7/02/2011, http://www.businessspectator.com.au/bs.nsf/Article/Bernankes-inflated-rhetoric-pd20110207-DTS77?OpenDocument&src=rot
I think international monetary game is not played just between the two largest economies, namely the US and China.
The US can use loose monetary policy as a tool to try to export its domestic economic problems.
China can use nearly fixed exchange rate to counter or neutralise this effectively competitive devaluation.
For China, while inflation can pose a serious problem, its effects can be partially offset by rapid wage increases, albeit it will be a double edged sword for even higher or persistent inflation in the future.
So the end result in terms of the relative competitiveness between the two countries does not change much.
But the effects will be felt by the US and China in terms longer term inflation in both countries.
Further, any countries with flexible exchange rates can feel the effects of low $US and the rmb on their economic growth, even though they may have a problem with deflation as opposed to inflation.
Rising commodity price is inevitable, as a means of international adjustment to income realignment as a result of the rise of large emerging economies and their rise demand for almost everything.
How that income realignment will affect the international economic structure and employment is yet to be seen.
It may be that the unemployment will be persistently high in the US for some time to come. That, through its impact of its fiscal affairs, can further erode the international competitiveness of its other industries.
I think international monetary game is not played just between the two largest economies, namely the US and China.
The US can use loose monetary policy as a tool to try to export its domestic economic problems.
China can use nearly fixed exchange rate to counter or neutralise this effectively competitive devaluation.
For China, while inflation can pose a serious problem, its effects can be partially offset by rapid wage increases, albeit it will be a double edged sword for even higher or persistent inflation in the future.
So the end result in terms of the relative competitiveness between the two countries does not change much.
But the effects will be felt by the US and China in terms longer term inflation in both countries.
Further, any countries with flexible exchange rates can feel the effects of low $US and the rmb on their economic growth, even though they may have a problem with deflation as opposed to inflation.
Rising commodity price is inevitable, as a means of international adjustment to income realignment as a result of the rise of large emerging economies and their rise demand for almost everything.
How that income realignment will affect the international economic structure and employment is yet to be seen.
It may be that the unemployment will be persistently high in the US for some time to come. That, through its impact of its fiscal affairs, can further erode the international competitiveness of its other industries.
2011-01-06
China's liquidity issues
Comments on Yiping Huang "China 2011: risks are from liquidity not liability", 2/01/2011, http://www.eastasiaforum.org/2011/01/02/china-2011-risks-are-from-liquidity-not-liability/
A few minor points.
Firstly, in terms of housing prices in China, it is interesting to note that the Chinese government has been talking down the prices and attempting to get them down significantly.
While a government engineered fall in housing prices is good news for buyers, it is not that good for house owners. Whether the approach is politically viable or sound in the longer term is yet to be seen.
The government had the responsibility of keeping housing prices in check in the first place. It failed to do that and now it is forcing them down and directly creating losers and winners because of its past policy failures. Isn’t that interesting?
What the government should do is to manage the bubble over time, rather than to burst it suddenly.
Secondly, in terms of liquidity, it has been reported that the Chinese authorities are either considering or have already allowed the direct deposit of foreign currencies overseas by Chinese exporters, that would reduce the pressure for the authorities to deal with them, lowering liquidity and increasing the degree of the limited monetary autonomy.
The authorities should consider allowing most Chinese to buy foreign currencies and consume or invest overseas that would further reduce the autonomous pressure on liquidity of future trade or current account surpluses.
In terms of the hot money, it is interesting that Chinese stock markets have performed poorly relative to others, including the US. Where has that money flown to or what has it bought?
There is also report that the IMF is considering to relax its stance on control of international capital flows that may make it easier for authorities to deal with international ‘hot money’.
Thirdly, in terms of inflation and the Chinese authorities’ monetary policy approach, what is the target or are the targets? Clearly public concern is the CPI because it affects their lives, whether it is due to structural or not. While there is a point to dealing with unhealthy speculative activities if appropriate policy tools are available, the government’s administrative measures are a step in a backward direction.
The reluctance to using interest rates as the main tool of monetary policies is a poor approach given that it robs from those who have deposits that earn interest.
A few minor points.
Firstly, in terms of housing prices in China, it is interesting to note that the Chinese government has been talking down the prices and attempting to get them down significantly.
While a government engineered fall in housing prices is good news for buyers, it is not that good for house owners. Whether the approach is politically viable or sound in the longer term is yet to be seen.
The government had the responsibility of keeping housing prices in check in the first place. It failed to do that and now it is forcing them down and directly creating losers and winners because of its past policy failures. Isn’t that interesting?
What the government should do is to manage the bubble over time, rather than to burst it suddenly.
Secondly, in terms of liquidity, it has been reported that the Chinese authorities are either considering or have already allowed the direct deposit of foreign currencies overseas by Chinese exporters, that would reduce the pressure for the authorities to deal with them, lowering liquidity and increasing the degree of the limited monetary autonomy.
The authorities should consider allowing most Chinese to buy foreign currencies and consume or invest overseas that would further reduce the autonomous pressure on liquidity of future trade or current account surpluses.
In terms of the hot money, it is interesting that Chinese stock markets have performed poorly relative to others, including the US. Where has that money flown to or what has it bought?
There is also report that the IMF is considering to relax its stance on control of international capital flows that may make it easier for authorities to deal with international ‘hot money’.
Thirdly, in terms of inflation and the Chinese authorities’ monetary policy approach, what is the target or are the targets? Clearly public concern is the CPI because it affects their lives, whether it is due to structural or not. While there is a point to dealing with unhealthy speculative activities if appropriate policy tools are available, the government’s administrative measures are a step in a backward direction.
The reluctance to using interest rates as the main tool of monetary policies is a poor approach given that it robs from those who have deposits that earn interest.
2010-12-30
Bernanke's QE effort applaudable
Commnets on Karen Maley “Primed to pop in the US”, 30/12/2010, http://www.businessspectator.com.au/bs.nsf/Article/Primed-to-pop-in-America-pd20101230-CLT7U?OpenDocument&src=sph&src=rot
Ben Bernanke's idea of creating an asset effect is a good one, though it requires a concerted effort by all relevant US authorities to put the best effort for it to work. The condition can be very difficult to be met.
Should the Fed's single minded effort not work, then the consequences would be more serious than without such effort.
But when the economy is in a crisis situation, and there is no other conventional means to get it out of that predicament, then one is attempted to do something novel.
Another way to achieve that goal is for the authorities to purchase foreclosed houses with a predetermined rule that can stimulate the house market by putting a floor under.
It may be difficult to implement it, but should be more effective.
There might be a middle way to combine QE and house purchasing to stimulate both equity and house markets.
In this sense, the different authorities must work together cooperatively while still not to undermine the independence of the Fed or monetary authority in terms of monetary policy.
They are all possible new macroeconomic ways to deal with the balance sheet recession or possibly more serious depression. The US is now in a similar situation to Japan's in the 1990s.
This crisis or more enduring economic recession requires new policy prescriptions. Bernanke has been trying to do that from the monetary policy point of view.
I wish him good luck on his innovative endeavour.
Ben Bernanke's idea of creating an asset effect is a good one, though it requires a concerted effort by all relevant US authorities to put the best effort for it to work. The condition can be very difficult to be met.
Should the Fed's single minded effort not work, then the consequences would be more serious than without such effort.
But when the economy is in a crisis situation, and there is no other conventional means to get it out of that predicament, then one is attempted to do something novel.
Another way to achieve that goal is for the authorities to purchase foreclosed houses with a predetermined rule that can stimulate the house market by putting a floor under.
It may be difficult to implement it, but should be more effective.
There might be a middle way to combine QE and house purchasing to stimulate both equity and house markets.
In this sense, the different authorities must work together cooperatively while still not to undermine the independence of the Fed or monetary authority in terms of monetary policy.
They are all possible new macroeconomic ways to deal with the balance sheet recession or possibly more serious depression. The US is now in a similar situation to Japan's in the 1990s.
This crisis or more enduring economic recession requires new policy prescriptions. Bernanke has been trying to do that from the monetary policy point of view.
I wish him good luck on his innovative endeavour.
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