Posts Tagged ‘Dollar’



By Albert Edwards, Société Générale, London 

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well

Read the rest of the story here  >  > >

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World economy: The China cycle

By Geoff Dyer – FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03

China-brazil trade
Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations’ commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure

Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.

Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.

The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.

Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.

China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.

“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”

BEIJING MEETS BRAZIL
Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.

About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.

Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.

Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.

Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.

“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”

Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.

Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.

Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”

If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.

China exports
Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.

There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.

GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson

The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.

The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.

The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.

If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.

Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.

China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.

As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.


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OPEC Reaching Comfortable Middle Age, Turns 50 Tomorrow With Oil at $75

OPEC Turns 50 Years Old
A ceremony for the new OPEC headquarters in Austria on March 17, 2010. Photographer: Vladimir Weiss/Bloomberg

The Organization of Petroleum Exporting Countries turns 50 years old tomorrow, having survived a tumultuous history of wars, embargoes and in-fighting. The world’s oldest and largest energy producer group is now enjoying prices close to the $75 a barrel level that its largest member Saudi Arabia considers “ideal.”
OPEC’s Timeline:
Sept. 14, 1960: The organization was born in Baghdad. The five founding members — Iran, Iraq, Kuwait, Saudi Arabia and Venezuela — created the group during a five-day meeting in the Iraqi capital, dedicated to “the coordination and unification of the petroleum policies of Member Countries and the determination of the best means of safeguarding their interests.”
Sept. 1, 1965: The group moved its headquarters from Geneva to Vienna, where its secretariat is now based. Between 1961 and 1971 the following six countries join: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria and Nigeria.
October, 1973: The six-month Arab oil embargo pitted OPEC’s Arab members against the U.S. and Israel in a politically-motivated suspension of exports that pushed prices above $12 a barrel. The Paris-based International Energy Agency was created in 1974 by consumer nations, in response to the oil price shock. Ecuador and Gabon join OPEC in 1973 and 1975, respectively, only to leave the group later.
Dec. 20, 1975: Ilich Ramirez Sanchez, known as Carlos the Jackal, took more than 60 hostages during a raid on OPEC’s Vienna headquarters to protest against treatment of Palestinians by Israel.
October, 1978: Protests and strikes in OPEC member Iran against ruling Shah Reza Pahlavi, deposed the following year in a revolution, cut the country’s oil production within three months to a 27-year low.
Sept. 23, 1980: Iraq invaded Iran in the first war between OPEC members. During the eight-year conflict, with its attacks on oil-tankers in the Persian Gulf, group production plunged to a 20-year low.
October, 1981: OPEC members agreed to maintain oil prices within a range of $32 to $38 a barrel.
August, 1985: Saudi Arabia abandoned the system of “posting” oil prices to one in favor of letting the retail value of refined products such as gasoline determine the cost of crude.
1986: OPEC members switched to a new pricing system in which futures contracts traded on exchanges in New York and London effectively determined the cost of oil shipments.
Aug. 2, 1990: Iraq’s invasion of Kuwait marked the second war among OPEC members. Repelled the following year by a U.S.-led coalition, withdrawing Iraqi troops set fire to Kuwait’s oil wells.
Nov. 29, 1997: At a meeting in Jakarta, OPEC raised production quotas for the first time in four years as the Asian financial crisis unfolds, sending prices as low as $10 the following December. Analysts often refer to the event as “the Ghost of Jakarta.”
June 24, 1998: OPEC was assisted by non-members including Mexico, Russia and Norway in cutting production as demand collapsed, helping revive prices. The coordinated action followed initial talks between Saudi Arabia, Venezuela and Mexico.
March 19, 2003: Aircraft and missile attacks on Iraq begin, followed by a U.S. and U.K. troop invasion that subsequently topples Saddam Hussein’s government in Baghdad.
Jan. 1, 2007: Angola joined OPEC, its first new member since the 1970s. In November, Ecuador re-joined the organization following a 15-year absence.
Sept. 10, 2008: Indonesia exited the oil group after becoming a net importer, leaving the total number of members at 12.
Dec. 18, 2008: OPEC announced the largest production cut in its history as the financial crisis sent prices plunging from a record $147.27 a barrel in July, 2008, to near $30 by the year- end. Oil prices then climb 78 percent during 2009.
Sept. 14, 2010: In happy middle age, OPEC turns 50, with oil prices near $75 a barrel and above $70 a barrel for all but two weeks of this year.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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this is the CNBC video of Erin Burnett’s spat with Michael Pento of Euro Pacific Capital on the merits of US Treasuries.

Looks like someone doesn’t like it when you poke a hole in their fantasy world…

The best part of the video, however, is not that.

It is when the other guest, Joseph Balestrino of Federated Investors, says:

Nothing is in a bubble when people want to buy it..”!!!  

Go tell that to the guys that were buying the NASDAQ/loading up on tech stocks  in January 2000 or (and, as they were probably the same old fools) buying/flipping homes in California, Florida, etc during 2007!!

Airtime: Tues. Sept. 7 2010 | :40:0 10 ET

http://plus.cnbc.com/rssvideosearch/action/player/id/1585891838/code/cnbcplayershare

Is U.S. Debt Junk? – CNBC.com

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>Oh, poor “Demonized Algos” !!!

Demonised ‘algos’ push the surge in FX trading

By Jennifer Hughes, Senior Markets Correspondent
Published: September 1 2010 00:04 | Last updated: September 1 2010 00:04

Since the infamous stock market “flash crash” of May 6, high-frequency, or algorithmic, trading has been unwillingly dragged into the political and regulatory limelight.
forex-trading-graphicSo far, however, attention has focused on the role of these high-speed traders in the equity market. Outside the glare of that publicity, it is less well known that on May 7, FX trading volumes reached records, straining the plumbing of these markets.
Some participants argue these strains were partially caused by algorithmic, or algo, traders.
Exactly how much of this can be attributed to algo trading is unclear. However, there is no question that high-frequency traders are a fast-increasing force in FX markets, which is sparking a fierce debate as to their value to the market.
On Tuesday, the Bank for International Settlements reported that average daily turnover in the FX market has jumped 20 per cent in the past three years to $4,000bn a day. Its survey was taken in April, so missed the May spike, which related to the eurozone sovereign debt crisis.
The BIS-reported gains were led by a near 50 per cent leap in spot trading – deals for immediate delivery – to $1,500bn a day. This jump was powered by increased activity from “other financial institutions”, a group that includes hedge funds, pension funds, some banks, mutual funds, insurance companies and central banks. This will also include algos.
While all categories of “other” could have increased their trading, it is likely a significant proportion was driven by algo traders, who favour the deep, liquid spot markets and particularly currency pairs such as eurodollar and dollar-yen, which between them account for 42 per cent of all currency trading.
The question for the FX market is whether high-frequency dealers improve the market by adding liquidity, or whether they are instead merely price takers who contribute little.
“Algos have been demonised, but they’re an important part of the growth story,” says David Rutter chief executive of Icap Electronic Broking, which runs EBS, the main FX interbank trading platform. “What we’ve found is that they add pressure at each price point so that instead of getting big price gaps on shocking news, trade is more orderly.
“With FX, there are a lot of other flows such as global trade, so there is good underlying liquidity that the algos can enhance.”
Algos initially appeared in FX markets almost a decade ago, attracted by the deep liquidity and increasing use of electronic trading. They were generally welcomed, particularly by banks looking to build their prime brokerage businesses. However many banks soon grew disenchanted when they found the fast-moving shops were profiting from banks’ own slow systems by exploiting brief, tiny price differences between rival platforms.
Some banks went as far as ejecting offenders from their platforms but banks’ views have since become more nuanced. They have generally reached an accommodation, helped by technological improvements which make it easier to monitor client dealings and offer client-specific prices.
“The facts are that algos have made the markets more efficient and have helped ensure there’s one virtual price,” says Jeff Feig, global head of G10 FX at Citigroup. “They do cause banks to be smarter and we’ve had to work harder to be more efficient, but that’s ultimately to the advantage of the end user.
“I think that to some extent, algos have pushed banks and the result has been enhanced transparency and increased liquidity.”
Algos mean many different things in the FX market. While high-frequency traders are the best known – typified by one senior banker as “five smart guys in a room in New Jersey,” – banks are increasingly adept at developing their own algorithms to make their internal FX deals more efficient. These “internalisation” trades too will have provided a boost to the BIS numbers.
Most players say algos are now a fact of life in currency markets.
Unlike the equity market, which is split into hundreds of stocks, they believe the FX world’s focus on a relatively small number of currency pairs means it would be far harder for a single group of participants to move the market significantly, intentionally or otherwise, as some watchers fear happened during the “flash crash”.
“Also trading can happen anywhere there’s an electronic execution system and a volatile market,” says Alan Bozian a former FX banker and now chief executive of CLS Bank, the FX settlement system. “The question is, which markets adapt well and I don’t think it’s necessarily the stock market.”
FX markets have proved generally good at adapting. Systems such as CLS, introduced years before the financial crisis, have helped minimise settlement risk and since May, participants have been working again to improve their processing systems to cope with increased volume.
Significantly, for a market that is very much built around a hub of big banks, the BIS report showed that, for the first time, interaction of the main banks with “other” financial institutions overtook trading between themselves.
This could be a pointer to the market of the future, where banks are likely to remain the hub, but as much for their trade processing abilities as for their liquidity.
This would allow the winners to build profitable volume without taking on huge trading risks – suiting the current regulatory mood.
“The banks want to continue being the price providers, but they’re getting much more interested in the infrastructure and improving that,” says Mr Bozian. This evolution is likely to apply to high-frequency trading too.
Mr Rutter believes algos are only in their “late teens” in terms of development. “The early algo trading was about super-fast dealing and chasing inefficiencies. That’s largely gone,” he says.
“Now its about math and science being thrown at the market – there’s a rich pool of data and I think we’ll see algos evolve so its not just about milliseconds, but about longer-term predictive math.”

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Socialism and communism: the same thing

The Property Rights Alliance’s latest International Property Rights Index ranks Venezuela 123rd out of 125 nations, below Zimbabwe and Cuba and above only Ivory Coast and Bangladesh.
This index reflects what is obvious for the vast majority of Venezuelans: that over the past eleven long years, their property rights have been ignored.
This sad story started with the “rescue” of agricultural land on the pretext of fighting against the latifundios or large estates. But that did not prevent the government from snatching properties of all types and sizes, many of them modest and clearly productive. And now, the latest amendment to the Lands Act introduces so many justifications for expropriating a plot of land that, in practice, it eradicates private ownership of agricultural land.

Then came the expropriation of a large number of companies with the excuse that they were supposedly “strategic.” Using this rationale, the entire oil and electricity sectors, a large part of the telecommunications sector, and companies in basic sectors and companies engaged in food distribution and a whole series of associated activities were nationalized.
Meanwhile, in the cities, the authorities were encouraging squatters to invade and take over plots of land and buildings that were in strategic locations or were allegedly abandoned or being remodeled.
At that time, experts warned that the attack on property was not only aimed at large landowners or corporations and that, sooner rather than later, the regime would go after small landowners and owners of small businesses, as this was an attack on the foundations of the Venezuelan economy and against people’s freedom to engage in the economic activity of their choice, progress, and have the means to meet their needs without depending directly on the government and its handouts.
This has become more than clear in recent months. At the end of 2009, President Chávez ordered the expropriation of buildings in downtown Caracas housing dozens of small businesses, with the result that hundreds of ordinary workers were left without a job. Another group whose rights have been restricted is that of the concessionaires in municipal markets that have come under the aegis of a mayor sympathetic to the government. Today, these small merchants cannot dispose of the businesses they have built up, they are forbidden to transfer and even bequeath their concessions, and they now have to comply with conditions that make their continuing in business unviable, and meanwhile they are being harassed and threatened.
Just this week, a small shoe store was suddenly evicted in downtown Caracas. The excuse was the expropriation of Edificio Gradillas, a building that belongs to the Episcopate. The shoe store’s elderly owners, who had been in business for more than 40 years, were left out on the street along with their three employees and 14,000 pairs of shoes.
 
Then there is the case of Friosa, the largest food distribution company in Bolívar state that was intervened in May this year for 90 days. During that time, sales fell by 70% and working conditions were adversely affected. The workers have publicly shown how the company’s facilities and vehicles have been allowed to deteriorate and even how food that was going bad was being used to provide meals at the basic companies, but all their protests have been to no avail. The intervention has been extended for another 90 days and now anyone who protests runs the risk of losing his job.
 
As Fidel said: socialism and communism are the same thing.
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Volcker Dishes Dirt On The Federal Reserve
Steve Forbes, 08.23.10, 07:00 PM EDT

The giant of a man who once headed the Fed says the central bank needs to be careful with excess liquidity.

Head of President Obama’s Economic Recovery Advisory Board Paul Volcker says the Federal Reserve worried needlessly about deflation in the 1970s when there was excess liquidity.




Steve Forbes:
And let me ask you about your old institution, the Federal Reserve.
Paul Volcker: I never talk about the Federal Reserve.
Forbes: OK, I’ll ask it anyway. Do you think their excess liquidity in the early part of the decade was much of a contributing factor in the financial crisis?
Volcker: That’s a very controversial area. There’s a lot of liquidity early in the decade. I’d trace this whole episode back importantly to the imbalance in the world economy, and that’s what we are suffering from now. This was not an ordinary recession we went through. It was a basic structural problem where we became very consumer-oriented, very import-oriented. That matched consistent desires, not just to China, but other countries and Asia that were willing to produce to satisfy all our consumption. They were willing to hold our dollars. Everything was very comfortable for a while. They held our dollars. They exported, we imported. We consumed, they produced. Trouble was, it couldn’t last. Now that that façade has been cracked, so to speak, and we’re in a big recession, we’ve got to make some kind of an adjustment to get a better balance back in our economy.
That is very tough. We have to have more investment. I think more manufacturing. We’re never going to become a major manufacturing nation, relatively speaking. It doesn’t have to be as weak as it was. We’ve got to do more. We’ve got to be more competitive in exports and do less consumption. At some point, we’ve got a problem with government spending as well, as you well know.
Forbes: Have you told the president that?
Volcker: No, I think he understands it.

Forbes: But on the excess liquidity, it seemed in the 1970s, before you came, we had a bad bout of excess liquidity, that brings about excesses. I mean, certainly was an impetus, for example, on money market funds, was in reaction to that. And wasn’t this excess liquidity a contributor too to the disaster we had?
Volcker: All right. You say excess liquidity. I think in retrospect, there’s certainly excess liquidity. How much of that was, in some sense, a direct reflection of Federal Reserve policy and how much of it is a reflection of this willingness of our suppliers to hold dollars at very cheap, very low levels of interest was very comfortable while it lasted. How much the Federal Reserve could have done about that is a question.
I guess you can say they didn’t try very hard to counter it. But I think the mistake the Federal Reserve made is they are unduly worried about the prospects of deflation at that particular period of time. So they were pretty slow to —
Forbes: Respond?
Volcker: To respond, yeah.

Volcker Dishes Dirt On The Federal Reserve – Forbes.com

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