Thursday, September 13, 2007

[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -30.0%]

- Big Ben & the savings glut. Ben Bernanke on the savings glut: "My reading of recent developments is that although some of the details have changed, the fundamental elements of the global saving glut remain in place. Most important, the emerging-market countries and oil producers remain large net suppliers of financial capital to global markets" [See Brad Setser's comprehensive review]. Dr. Bernanke is right, of course: custody and agency holdings are still growing at a healthy rate (+18.3%). But things appear to be changing at the margin — tonight we get the new weekly Fed balance sheet.

- Bank Credit Analyst on gold prices. "The precious metals complex (especially gold) is sniffing out more plentiful liquidity conditions". That's also the message sent by the energy complex, by the falling dollar and by the steeper Treasury curve.

- The Bank of England & liquidity conditions. Macro Man quotes the stoic BoE governor Mervyn King: "The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behaviour. That encourages excessive risk-taking, and sows the seeds of a future financial crisis. So central banks cannot sensibly entertain such operations merely to restore the status quo ante. Rather, there must be strong grounds for believing that the absence of ex post insurance would lead to economic costs on a scale sufficient to ignore the moral hazard in the future."

- On the futility of pumping liquidity. In a letter to the Financial Times, Robert Matthews, the chief economist of Wood Cottage Group argues that "the happy process of central banks implementing a sharply upwardly sloping yield curve" by "pumping liquidity into the system" may not work this time around. This is because "off-balance sheet mistakes" are likely to be marked to market immediately, i.e. not "over a period of four to five years".

- Liquidity as a figure of speech. From Alex J. Pollock, Resident Fellow, AEI, again to the Financial Times: "In short, liquidity is about group belief in the solvency of counterparties and the reliability of prices, reminding us that 'credit' and 'credo' have the same root. When no one is sure who is broke, and there is high uncertainty about prices, we will discover that liquidity has vanished, however plentiful it may recently have seemed".

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