Monetary Policy and Bubbles
Neel Kashkari
616

President Kashkari. Thank you for posting once again. Am curious what you think of the following analysis by the Fixed Income Research Team at Credit Suisse. In their 18-Nov-16 Global Money Note #8, ‘From Exorbitant Privilege to Existential Trilemma’, they conclude:

Basel III restricting quantities and money fund reform clamping a main funding artery is turning the Fed’s world on its head. Quantity constraints will have to be relaxed if the Fed wants to have monetary independence and parity between onshore and offshore dollars.

Barring the scrapping of Basel III or the blanket exemption of reserves from the SLR, quantitative Eurodollar easing (“QEE”) for the world — the fixed-price, full-allotment broadcast of Eurodollars globally through the dollar swap lines — is the solution we need.

In a way, QEE is the missing piece in a mosaic where the ECB and BoJ continue with QE and investors in their jurisdictions are looking to fill their duration gaps with higher-yielding dollar assets on a hedged basis. But the private provision of FX swaps to hedge these flows cannot possibly keep pace with the public creation of euros and yen on mass scale.

Conclusions

Elephant-size €QEs and QQEs can only be countered by elephant-size QEEs by the Fed: the Fed needs to lend banks a hand and provide Eurodollars more cheaply to the world…

It’s either regulatory and monetary objectives or the Fed’s balance sheet size.

It’s either the cross-currency basis, the dollar or the next hike.

It’s either Lender of Last Resort or Dealer of Last Resort.

Take your pick…