Friday, August 17, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", August 15

- Fed's Treasuries holdings: $796.6bn (+$17.9bn)
- Other central banks' Treasuries holdings: $1,244.0bn (-$3.9bn) (*)
- Other central banks' agency securities: $760.9bn (+$2.3bn) (*)
- Mackinlay's Global Dollar Liquidity Measure: $2,800.4bn (+$16.2bn)

(*) Off-balance-sheet items

Yesterday's weekly Fed balance contains lots of information. Let us review it carefully, because it may be important. The first thing to note is a new all-time high in our Global Dollar Liquidity measure: $2,8 trillion. The annual rate of change is back above 15%, courtesy of the Federal Reserve's injection of liquidity. The best way to look at it is through the dramatic weekly increase in bank reserves held at the Fed (a component of the monetary base). This item grew by more than $18bn to $23.9bn. Needless to say, such a move occurs only at fairly rare intervals — September 2001 is a case in point.

Now let me speculate about what is going on with foreign CBs. We know that the Brazilian central bank and others continue to accumulate Treasury and agency securities at a blistering pace (see Brazil's new record). So why has the amount of Treasuries held in custody at the New York Fed declined by almost $10bn over the last month? My take is that China's diversification policy is gaining momentum. This would seem to fit nicely with yesterday's rumors about Bear Stearns selling part of the company to the Chinese. Now, ladies and gentlemen, if this is indeed the case, it's nothing short of ... revolutionary!

Thomas Barnett & globalization 2.0
My favorite global political analyst is Tom Barnett, author of the bestselling book The Pentagon's New Map. War and Peace in the Twenty First Century (Putnam, 2004). [See his fast-paced blog]. According to Barnett, today's globalization is not, er, your uncle's globalization. More and more, it is shaped by the so-called New Core players: China, India, Russia, Brazil, etc. Recently, Tom came up with an interesting analysis of global liquidity. (Actually, it is a short review of Michael Pettis: "Sovereign Wealth to the Rescue: Massive global reserves will chase the bears back to their dens," Wall Street Journal, 9 August 2007). His take: "The key thing is keeping the money on the table". Isn't what the Bear Stearns talk is all about? [Warning: Barnett's optimism can be infectious].


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