Tuesday, September 18, 2007

[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -29.1%]

Alan Greenspan & inflation expectations; Moody's & "liquidity risk"; Brad Setser on the first financial crisis of the 21st century; is the "super-cycle" alive?

[1] The Greenspan debate: inflation, relative prices, or the price level? In yesterday's Financial Times interview, Alan Greenspan linked "the rate of change of prices" to "the rate of change of globalization". Thus, as the process reaches its end, inflation expectations are bound to increase (in the long run, the Maestro sees a 4.5% inflation rate as a likely scenario). Harvard's Ken Rogoff and Princeton's Alan Blinder both disagree: globalisation does not lead to changing inflation expectations, but rather to a new set of relative prices (Rogoff) or to a lower price level (Blinder).

[2] The Greenspan debate (II). "Technically", says Blinder, "this [i.e. globalization] changes the world price level, not the inflation rate. But because this effect is spread out over many years, it looks like a lower inflation rate". While Rogoff thinks that "the parameters are changing", Blinder appears to embrace the very bullish super-cycle thesis: "We are only beginning to exploit the opportunities for global economic integration in services".

[3] Moody's & "liquidity risk". The Financial Times's star reporter and editor Gillian Tett was on to something when she wrote, on September 6, that credit rating agencies would soon focus on liquidity risk: "The agency [i.e. Moody's] is looking at measures of so-called 'liquidity' and 'market value' risk that could be issued alongside credit ratings, which indicate the risk that an instrument will default".

[4] Brad Setser on the first financial crisis of the 21st century. Long and very interesting post by Brad Setser on the crisis in credit markets. Referring to central banks' liquidity injections aimed at SIVs, Brad writes: "Call it a twentieth-century solution to a twenty-first century problem. The central banks lend to the banks and the banks decide who else gets credit".

[5] Bullish outlook from the Asian Development Bank. From Bloomberg: "Developing Asian economies will expand faster than estimated in 2007 and 2008, and are expected to be able to weather any U.S. slowdown and turmoil in global credit markets, the Asian Development Bank said Monday. Growth in Asia excluding Japan and Australia is predicted to be 8.3 percent this year.The region will expand 8.2 percent in 2008, faster than an earlier forecast of 7.7 percent, according to the ADB". I pay a lot of attention to bullish arguments about a more "balanced" global economy: if true, volatility readings should come down -- which would be good news in terms of the Endogenous Liquidity Index.

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