Five unfinished thoughts

I’m in something of a ‘second child is four days overdue’ limbo at the moment.

This means that my natural tendency to check my phone every few minutes has been magnified by a factor of about one thousand and makes longer term thinking pretty difficult.

If it wasn’t for this distraction, I’d be writing a longer blog post at the moment. But given my current inability to concentrate properly, this will have to do. (I have to string sentences into things reassmebling posts over at the BBC).

So — here are five as yet unfinished thoughts on global macroeconomic topics that all fall into the category of “not fully developed, interesting to me and too long for a tweet”.

The bond “bubble”

Both Brad DeLong and Matt O’Brien have been kind enough to link back to this post of mine. Both urge caution over the word bubble. Both are, as ever worth reading.

I’d make two points in response. First, Brad notes that:

… does holding bonds entail accepting large long- and fat-tailed risks? Only if you must sell your bonds in the future. If you have the option to hold them to maturity, your risks are bounded and very small.

The worry, I’d argue, is that some investors will not be able to hold bonds to maturity. If the holders are funds that experience redemptions, then that isn’t an option.

Second, look at the UK and US ten year bonds yielding circa 1.6–1.9%. That’s a yield which doesn’t make a great deal of sense. One way to think about this is to consider a world of binary outcomes. Either the advanced economies face a future of secular stagnation/growth slowing/Japan style lost decades/tech stagnation/etc and they should be lower, or the advanced economies will eventually enjoy a more normal recovery and they should be around 4–5%. The current pricing may just reflect the fact that either outcome is still plausible?

The rising dollar

The popular consensus is that a rising dollar is a threat to global growth — especially in emerging markets. That may well be true, whilst the ‘original sin’ of government borrowing in dollars is less common nowadays the ‘new sin’ of private company borrowing in dollars (which may or may not be hedged) is very much alive.

But there’s oddity here. The US — and especially the UK — currently have rising current account deficits. And yet the dollar and sterling are both broadly strengthening. This may make those current account deficits persistent for longer.

In the medium to long run this could see a return of the kind of global imbalances that arose in the late 1990s to mid 2000s. But in the shorter to medium run it may be that the US — and to a lesser extent UK — consumers are providing some demand for a world economy which still needs it.

What international financial architecture?

This line from Andy Haldane caught my eye last week:

Turning to the global economic and financial system, it is here where the existing policy architecture may at present be most deficient. Some have gone further and argued that there is nothing at present that much resembles a global financial architecture at all (de Larosiere (2014), Haldane (2014)). Despite the crisis being the first truly global one, reform of the global financial architecture has been slow. (my emphasis)

Which to me poses a question: Is there really a global financial architecture at all? Or just a dollar based system run by the US on which the rest of the world piggy backs?

Because if there isn’t, then Stanley Fischer’s words last year become even more important.

My teacher Charles Kindleberger argued that stability of the international financial system could best be supported by the leadership of a financial hegemon or a global central bank. But I should be clear that the U.S. Federal Reserve System is not that bank. Our mandate, like that of virtually all central banks, focuses on domestic objectives

Ben Bernanke’s Blogging

I’m very much enjoying Ben Bernanke’s blog. But what is missing so far is an acknowledgement of the role of QE.

In general there isn’t much to disagree with in his post on why interest rates are low. The one thing I’d nit pick about — and it’s quite an important nit picking is this:

The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere. So where should that be? The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate.” (My emphasis)

Normally, there wouldn’t be much to take issue with there — but the three programmes of worth of QE — much of which was explicitly aimed at lowering longer term rates — suggests there is more to this story.

Greece

The Greek stand-off is once again coming to the boil. Mike Bird has a good run through of the ‘ugly scenario’ which ends in capital controls and likely Greek exit from the Euro.

The only thing I’d add is to remember the chain of events that led up to the last deal. There was quitea bit of panic after the second Eurogroup meeting broke up without a deal (and I’m still pleased with this post the morning afterwards) but faced with a quiet run on the banks, the Greeks signed up to a deal days later.

It may be that things are different this time but as the crunch point approaches again, don’t be surprised if Athens is once again suddenly prepared to accept terms that it viewed as unthinkable just days before.