Europe Worried About Glut of Money Supply

Bloomberg's Fraher and Kennedy note that Europe and the US central banks are not on the same page. Europe believes that there is a glut of money supply, and the Fed persists in maintaining that everything is hunky-dory and under control, that these remarkable real estate price increases are merely the workings of a functioning banking system finding its new-technology sea legs. (See one of my previous posts for their argument, and see this one for my reaction.)

Bernanke will be present at a meeting next week in Frankfurt, hopefully to debate this matter. It will be interesting to see what he has to say there, and thereafter. How will he defend the US position? How long can the US deny what seems to be obviouser and obviouser? (Read the article.)


[Thanks to theage.com for the photo.]

Bickering Central Bankers

The Fed does not believe excess liquidity is the source of asset bubbles. (See my previous post describing the Fed's attempts to prove this.)

On the other hand, at least one European central banker seems to be talking otherwise. See this quote from Prudent Bear quoting Otmar Issing's statement published at Market News International:

' “Central banks are now realizing they must take global levels of liquidity seriously, the ECB’s former chief economist, Otmar Issing, said Friday. ‘I am concerned about excessive liquidity in the world,’ Issing told a conference for economic students here. This concern is shared by the current members of the ECB’s Governing Council, who have taken the lead in alerting other central banks to the risks at hand, Issing noted. ‘There is now increasing support of the view that excessive liquidity world-wide is fueling asset prices and is something which has to be taken seriously by central banks…This is a real concern.’” This afternoon from Market News International.'


[Thanks to art.com for the image.]

How can two such illustrious and learned groups be at such odds? That alone is enough to prove to me that econometrics is still a misused tool and economics is still in its infancy as a science.

Which Economist is Smart, and Which is Naive?

I'm amazed to read this kind of contradictory statements from what appear to be equally intelligent businessmen and/or economists:

"Drew Matus, an economist at Lehman Brothers, agreed that the Fed should be pleased. Yet he predicts that the central bank will still feel the need to raise rates sometime before the middle of next year."

And then you have this:

"Joseph LaVorgna, chief US economist at Deutsche Bank said the solid consumer spending numbers won't last as a slowing manufacturing sector will soon eat into personal income growth. 'The fed will cut rates next quarter,' he said."

And this:

" 'The Fed has to be pleased with the results,' said [Ken] Mayland [president of ClearView Economics]. 'There is evidence in the inflation numbers that those price pressures are reversing. This is another textbook example of how monetary policy works.'"


[Thanks to Corbis/The Economist for the picture.]

What's wrong with this picture? If the Fed is pleased to be sending such obscure signals, then they are indeed Machiavellian. (Extracts from Forbes.)

You can find out what I think of Fed policy in some previous posts (for examples, see here and here and here).

Finally: Some Straight Talk About the Weak Dollar

Bloomberg's Nguyen gives us some straight talk about the dollar.


[Thanks to solari.com for the image.]

When will people get it? It's either a pretty GDP curve or a pretty dollar curve, but you can't have both, at this stage in the game.

Who cares? Well, we'll find out, won't we?

$450 Billion Held Abroad

This release from the Fed has some interesting figures about the amount of dollar bills floating around outside the country. Total currency issued is reported to be $760 Billion. That means that about 60% of our printed currency is outside the country. Wow.

“ 'An efficient payment system and healthy economy require a sound currency,' said Federal Reserve Vice Chairman Donald L. Kohn. 'The Federal Reserve recognizes that the dollar is widely used outside the United States, and is deeply committed to preserving its integrity.' ”


Witness the dollar's "strength" over the past five years.
[Thanks to Yahoo Finance for this chart.]

Interesting that the Fed issued this statement concurrently with their FOMC statement keeping the target Fed rate at 5.25%. It's probably a coincidence, but I see these two statements as contradictory. On the one hand, the Fed champions a strong dollar, and on the other, the Fed states that the dollar takes a back seat to the world's perception of a strong American economy. Is this just another case of left and right hands not talking again? Or would it be more accurate to bring up the two-sides-of-the-mouth metaphor?

I'm With Bloomberg on Gold

Choy Leng Yeong at Bloomberg pretty much sums up my personal position in this article. Look for the dollar to wane as the Fed struggles with a stagnating effect on the economy side and inflationary pressure that won't go away on the other. When in doubt, do nothing. That'll be their motto, I suspect.


"Struggle" [Thanks to neowin.net for the image.]

Remember my other motto: "You can take gold out of the standard, but you can't take the standard out of gold." I hope I get credit for that little ditty in the history books.

China at a Crossroads

This article at the New York Times gives us a snapshot of a conflict going on in China between the free market and organized labor. [NYT 10/13/06 David Barboza, "China Drafts Law to Boost Unions and End Labor Abuse"]


[Thanks to textura.org for the image.]

Excerpts, with my bracketed comments:

"China is planning to adopt a new law that seeks to crack down on sweatshops and protect workers’ rights by giving labor unions real power for the first time since it introduced market forces in the 1980’s. [China has one labor union, the All-China Federation of Trade Unions, the Communist Party’s official union organization.] American and other foreign corporations ... have lobbied against it by hinting that they may build fewer factories here. It would apply to all companies in China, but its emphasis is on foreign-owned companies and the suppliers to those companies.

"Some of the world’s big companies have expressed concern that the new rules would revive some aspects of socialism and borrow too heavily from labor laws in union-friendly countries like France and Germany. [See my article for a description of this type of fiasco.] ... The Chinese government proposal, for example, would make it more difficult to lay off workers, a condition that some companies contend would be so onerous that they might slow their investments in China.... The proposed law is being debated after Wal-Mart Stores, the world’s biggest retailer, was forced to accept unions in its Chinese outlets.

"On Friday, Global Labor Strategies, a group that supports labor rights policies, is expected to release a report in New York and Boston denouncing American corporations for opposing legislation that would give Chinese workers stronger rights. [The New York Times couldn't resist looking immediately for an American defense of the European model, of course.] 'You have big corporations opposing basically modest reforms,' said Tim Costello, an official of the group and a longtime labor union advocate. 'This flies in the face of the idea that globalization and corporations will raise standards around the world.' [When will they get it? Because:]

"Until now, ... existing Chinese labor laws have gone largely unenforced, which has further complicated the debate here. Opponents of the proposed law argue that enforcing existing labor laws would be enough to solve the country’s nagging problems. Advocates respond that adopting new laws would set the stage for stricter enforcement.... [B]y the 1980’s, when the old Maoist model had given way to economic restructuring and the beginning of an emphasis on market forces, China began eliminating many of those protections — giving rise to mass layoffs, unemployment, huge gaps in income and pervasive labor abuse."


It will be interesting to see which tack the Chinese adopt in response to this pressure. If I could be a flea in the appropriate person's ear, I'd warn them to try to avoid the European labor model, in favor of a more open and responsible enforcement of reasonable and perhaps revised labor laws. ["Bzzz Bzzz."]