Monday, October 29, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", October 24

- Fed's Treasuries holdings: $780.6bn (-$3.1bn)
- Other central banks' Treasuries holdings: $1,234.1bn (+$3.9bn) (*)
- Other central banks' agency securities: $796.5 (+$8.5bn) (*)
- Global Dollar Liquidity Measure: $2,811.2bn (+$9.3bn)

(*) Off-balance-sheet items

[1] A wedding party in Tuscany: on Chianti wine & the euro. On Wednesday evening Claudia and I finally made it to the Tuscan village of Pietraviva, about 20 miles from Siena. Our friend's wedding party took place on Thursday near the village of Pogi, and by Saturday evening we were back in Amsterdam. Now, Bill Luby is the financial blogosphere's wine specialist. Although I know next to nothing on the subject, I will say this: the Dievole Novecento Riserva Chianti Classico 2001 was ... spectacular. The Dievole company, by the way, is a fine example of Italian entrepreneurs fighting the strong euro with their only remaining weapons: creativity, innovation, risk-taking.

[2] More on Chianti wine & the euro. By turning old and inefficient farms into lavish, lucrative wine-tasting facilities, these entrepreneurs are transforming the Tuscan landscape. Dumping the lira in favour of an international reserve currency was always going to be a risky venture: damaging bouts of exchange rate appreciation —like the one we are witnessing right now across the eurozone— would inevitably occur. The minute you cease to act as an exporting periphery, you have no choice but to turn yourself into a center of growth and innovation. One can only hope that many more Italian entrepreneurs will follow the example of Tuscan wine producers.

[3] Weekly Fed balance sheet watch. Another impressive performance, and a clear sign of resilience in the world economy. Our Global Dollar Liquidity measure registers a $9.3bn increase — taking it to a new all-time high of $2,811bn. This, in turn, translates into a 14.6% annual rate of growth. Note the striking absence of the Federal Reserve as a provider of domestic liquidity, which brings the growth rate of its stock of Treasuries (a proxy of the monetary base) to less than 3%. Will euro bulls take note?

[4] Great Moderation Watch: Jeff Immelt & global liquidity [Liquidity @ Financial Times]. "In the world as a whole", says Jeffrey Immelt, the head of General Electric, "there is still a lot of liquidity". Here, Mr. Immelt refers to global macroeconomic liquidity. But there's more on the subject of market liquidity. First, the GE capo mentions SWFs: "The impact of sovereign wealth funds is considerable". Second, and crucially important in terms of the Great Moderation thesis: "China and India will shield GE from US downturn ... If you consider the problems in the credit markets, they will not have an impact on the vast majority of GE's business. In other words, the overall effect on GE will be limited". Bingo! No wonder Peter Marsh concludes: "[Immelt's] comments will be welcomed by adherents of the theory of 'decoupling' ... in which growth in the world becomes the key component of economic expansion". [Peter Marsh: "China and India will shield GE from US downturn, says Immelt", Financial Times].

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