Search

The article reports on the stock market performance of India. It mentions that country's Nifty so and Sensex indices reached record highs at the end of November, and as to many fund managers desperate for diversification, India looks the most promising alternative. It also mentions that the central bank has been forced to raise interest rates in defence of the rupee impacting its domestic monetary policy.

The author speculates about whether paper money, no longer backed by gold, could lose its value if the world's major economies continue to run up debt. Given the dollar's role as a currency of last resort, some wonder if its decline heralds not just an economic adjustment by the United States, but a crisis of sorts in the value of paper money itself. Money in its present form is a relatively new invention. For most of human history money meant either gold or silver, either directly, or indirectly by means of the "gold standard" which meant, at least in theory, that all paper money was backed by gold. But it came to an end in 1971, when inflationary pressures in America caused the country's manufacturers to become uncompetitive and forced the country off the gold standard. Since then the world has relied on "fiat money", so-called because it is created by government fiat and is backed only by the promises of central bankers to protect the value of their currencies. It is the value of those promises that some are now questioning. Although central banks around the world still hold about 30,000 tonnes of gold in their reserves, many have been offloading their stocks over the years. Those who doubt the continued worth of paper money as a store of value point to two things. The first is that the price of gold has been rising even though official inflation is low. But the rise in the price of gold in particular has raised questions. The biggest of these--and the second main reason for concern--is the amount of debt that rich-country governments have been running up.

The author offers opinions on gold prices. A purchase of gold by India's central bank from the International Monetary Fund (IMF) has led to a huge increase in the price of gold as speculators feared that other Asian central banks would purchase gold as an alternative to American dollars. The author states that this is a possible indication of future inflation, but that a return by countries to a gold standard for their currencies is extremely unlikely.

The article discusses the efforts by various central banks to shift to electronic money and mobile payments from the use of paper money and their possible effects to the financial sector. Also cited are the proposed issuance of central-bank digital currency (CBDC) to allow central banks to retain control of their monetary systems, China's digital yuan, and Sweden's e-krona.

The article informs on a discussion paper recently posted on the Federal Reserve's website by Jeremy Rudd on inflation. It mentions that when firms expect costs to rise, they set higher prices, in both cases, inflation becomes a self-fulfilling prophecy. It also mentions that central bankers' task is to pin down expectations at a low, stable level, if they succeed, they can control inflation.

The article discusses tumbling value of assets held by the Bank of Japan and the Swiss National Bank seems a sure sign that central bankers have behaved recklessly and put their economies at risk. It mentions that the U.S. Federal Reserve is gobbling up corporate bonds, municipal paper and bank loans to firms of all sizes. It mentions that central-bank action and a broader appetite for relatively safe assets have inflated government-bond prices across the rich world.

The article focuses on Ben Bernanke, a former Princeton professor of economics who is awaiting Senate confirmation to replace Alan Greenspan as chairman of the Federal Reserve Board. At the height of the stockmarket bubble in 1999, he co-authored an influential paper with Mark Gertler of New York University which argued that central banks should focus on asset prices only insofar as they are likely to influence consumer prices. Targeting asset prices directly, his paper claimed, would create more, not less, instability. This suggests that a Bernanke Fed might be even less inclined to fret about soaring house prices than Mr Greenspan, who has only recently worried aloud about them. Everyone knows that Mr Bernanke, unlike Mr Greenspan, is a long-standing supporter of the idea that the Fed should set a public target for inflation against which it can be held accountable, as many central banks do. Mr Bernanke will doubtless nudge the Fed towards inflation-targeting. But the change is likely to be evolutionary rather than radical. His initial task will be to prove his inflation-fighting credentials and shake off a lingering reputation for dovishness.

There is concern that several years of low inflation have made central bankers complacent. Two days of heavy rain failed to dampen the spirits of most of the central bankers and economists who met last week in the Rocky mountain resort of Jackson Hole, Wyoming, for the annual symposium of the Federal Reserve Bank of Kansas City, one of the biggest jamborees on their calendar. Now that America's economy is picking up strongly, participants might be forgiven for feeling light-headed, especially at over 6,000 feet. Central bankers' success in reducing inflation over the past decade allows them to pat each other on the back. However, several of the papers presented at this year's symposium questioned whether monetary policy really has been that good -- or just lucky. A paper by James Stock of Harvard University and Mark Watson of Princeton University challenged the consensus view that the decline in America's economic volatility over the past two decades -- with longer expansions and shorter recessions -- was largely the happy result of better monetary policy. They concluded that improved monetary policy accounted for less than 10% of the reduction in volatility. Structural changes, such as better inventory control, the growing share of services in the economy and financial-market deregulation, have also helped to smooth the economy. But as much as half of the decline in volatility, the authors argued, was due to smaller economic shocks, such as changes in the price of oil, and so could prove temporary. If all this were not bad enough, another paper, by Claudio Borio and Bill White of the Bank for International Settlements, argued that central banks' focus on short-term inflation pressures did not guarantee financial and economic stability.

The article focuses on the Treasury-bond market. Ten-year Treasury yields touched 4.4%, on October 3rd, their highest in almost two months. Yields ended October 5th at 4.34%. What really drives yields? Fed-watching matters a lot at the shorter end of the spectrum. And concern about inflation is arguably the main determinant of long-bond yields. But the appetite of foreigners and especially foreign central banks has played a big role. Foreign banks have been buying more of other things, mainly higher-yielding bonds issued by government-backed agencies such as Fannie Mae, the mortgage giant. Some are choosing to buy in the secondary market abroad, which shows up in private rather than official flows. This may be especially true of many OPEC countries, including those with national wealth-management funds. On October 5th it emerged that Venezuela, perhaps for political reasons, had apparently transferred as much as $20 billion--most of its reserves--out of Treasuries and out of America. Indirectly, central banks' diversification out of dollars may also be boosting private-sector demand for dollar assets. Moving more into euros, they are helping to push down yields in Europe. Brad Setser and Nouriel Roubini, of Roubini Global Economics, a consultancy, reckon that central-bank buying at its peak could have dampened Treasury yields by up to two percentage points. And a new paper by Francis Warnock and Veronica Cacdac Warnock, of the University of Virginia, finds that if foreign central banks had bought no Treasuries over the past year, ten-year yields would be 60 basis points higher. A curious new trend in the eurodollar-futures market, however, hints that interest-rate hikes may end sooner than most assume.

This article focuses on United States Federal Reserve chairman Alan Greenspan, whose term ends in January 2006. At this year's meeting of the Federal Reserve Bank of Kansas City, a collection of central bankers and economists, distinguished even by the elevated standards of Jackson Hole, Wyoming paid tribute to Alan Greenspan's 18 years as chairman of the Federal Reserve. Greenspan gave warning that an unusually long period of economic stability might have encouraged investors to accept lower risk premiums and thus inflated the prices of assets, such as shares and homes. Moreover, Mr Greenspan, who until recently gave short shrift to the idea of a housing bubble in America, said that the property boom was an "imbalance" and that prices of homes could fall. He argued that in future the Fed will need to pay more attention to asset prices. Despite Mr Greenspan's caution, the gathering preferred to focus on his past performance. His chief examiners were Alan Blinder (a former vice-chairman of the Fed) and Ricardo Reis, both of Princeton University, whose paper concluded that "he has a legitimate claim to being the greatest central banker who ever lived". According to Messrs Blinder and Reis, the main ingredients of Mr Greenspan's tenure have been intellectual flexibility, scepticism of economic models and forecasts and a preference for discretion over formal policy rules such as inflation targeting. Mr Greenspan's Fed sees monetary policy as risk management, looking not only at the most likely path for the economy but at all the possible paths it might follow. In any case, Mr Greenspan's words of caution at Jackson Hole were surely an attempt to lean against the current housing boom. Perhaps he is showing more intellectual flexibility on how to respond to asset prices than Messrs Blinder and Reis give him credit for.

The article discusses America's current-account deficit and a prediction that the dollar will decline sharply. The dollar's latest slide seems to have been triggered by uncertainty about the presidential election and a flurry of comments from Fed officials. The dollar has fallen by over 30% against the euro since 2001, but its trade-weighted index has fallen by much less because of heavy intervention by Asian central banks, aimed at holding down their currencies against the dollar. Some economists argue that America can sustain its large current-account deficit for at least another decade, without a sharp fall in the dollar, because it will be happily financed by China and other Asian countries. In a series of papers Michael Dooley, David Folkerts-Landau and Peter Garber at Deutsche Bank have argued that the present arrangements resemble a revived Bretton Woods, the system of fixed exchange rates after the second world war. Currency intervention by Asian central banks helps to explain why America has so far been able to finance its deficit without higher American bond yields or a bigger fall in the dollar. George Magnus, an economist at UBS, argues that the parallels with Bretton Woods are superficial. One big difference is that in the 1960s the United States ran a current-account surplus and was a net creditor to the rest of the world. Today, America is the world's biggest debtor, which could undermine the dollar's role as an anchor currency. Another important difference is that, unlike under the Bretton Woods regime, most Asian countries have scrapped capital controls or where they still exist, as in China, they are leaky. Under Bretton Woods there was no real alternative to the dollar as a reserve currency. Today there is the euro, into which Asians could diversify.

Despite the murder of Zoran Djindjic, prime minister of Serbia, on March 12th, the secondary-market price of defaulted Yugoslavian government debt has remained buoyant, at 50 cents on the dollar. Speculative buyers of the debt, mostly loans already restructured in 1998, are gambling that the Serbian government will ultimately pay them more--pending, among other complications, the resolution of a dispute between the creditors' agent bank, J.P. Morgan Chase, and the National Bank of Yugoslavia. Will speculators one day show the same relish for Iraq's loans? Some believe that Iraq is a safer long-term bet than Serbia, because it has oil and is not (yet) hostage to a business mafia. All depends on how long the war in Iraq lasts--and on how a future government deals with its legacy of debt. Who gets repaid, and how much, depends on which creditors a new Iraqi government would need most to help rebuild its economy. Above all, bankers argue, to return to the international capital markets, Iraq will have to show that it is at least willing to pay something towards its properly documented obligations. Trading, or even holding, Iraqi paper is loaded with traps. Its validity can expire every few years, according to the statute of limitations in various jurisdictions.

The article offers business news briefs. The U.S. President Barack Obama's administration announced changes to the country's financial regulatory system in a white paper. Mervyn King, governor of the Bank of England, stated Great Britain's central bank needed more power to settle its regulatory responsibilities. The European Central Bank reported that losses at banks in the euro area could increase by $283 billion by the end of the year 2010.

The article focuses on the European Central Bank (ECB). The bank has been less aggressive than the U.S. Federal Reserve Board in its efforts to mitigate the global recession, cutting interest rates but not directly purchasing assets such as commercial paper as the board has done. ECB head Jean-Claude Trichet may propose a limited version of that policy at the bank board's April 2, 2009 meeting.

The author speculates on the reason why worldwide bond yields are low, and reminisces about the time when bond market 'vigilantes' patrolled central banks. The author suggests that globalization has had a negative effect on the market. The author cites a paper by Carsten Valgreen, which highlights the banks of Iceland and Latvia as case studies.

The article discusses whether communicative central banks make financial markets lazy. The United States Federal Reserve stands far beyond legislators' political reaches. But these days, the chairman needs little persuasion to talk. Alan Greenspan's Humphrey-Hawkins testimony, as it is still called, delivered on July 20th and 21st of 2004, was his 24th speech of the year. In an interview with the Wall Street Journal published on July 15, 2004, Tommaso Padoa-Schioppa, one of six members of the executive board of the European Central Bank, argued that central banks now talk too much. Padoa-Schioppa, however, thinks central banks are guilty of oversteering the markets. The same argument is set forth, in equations, by Jeffrey Amato, of the Bank of International Settlements, Stephen Morris, of Yale University, and Hyun Song Shin, of the London School of Economics, in a number of recent papers. Amato, Morris and Shin worry that today's loquacious central banks play this role in the financial markets.

Last year, Zimbabwe became the first country to run out of its own currency. Despite triple-digit inflation, President Robert Mugabe forbade the printing of high-denomination banknotes, as he apparently believed that this would cause inflation. The problem was solved when someone persuaded him that if the central bank issued high-denomination bits of paper called "bearer cheques", with an expiry date, this was somehow different from printing money. Mugabe has appointed as governor of Zimbabwe's Reserve Bank a man who understands both economics and how to handle an aging despot. Since he took over in December, Gideon Gono, a former commercial banker, has brought inflation down from over 600% to a mere 450%. He did this by clamping down on the wholesale looting that emptied the national coffers last year--for example, when politicians took advantage of a loopy official exchange rate to buy hard currency at giveaway prices and spent their windfall profits on mansions in South Africa. Buoyed by this success, Mr Gono has accumulated vast powers, including that of determining who gets credit. Ordinary banks have to deposit half their assets with the central bank, at zero interest, as a statutory reserve. However, they can retrieve this cash and lend it to companies the Reserve Bank deems "productive", at a knock-down 50% interest rate: in other words, super-cheap money for approved borrowers.

The article discusses the important role of economic institutions in monetary policy.From Latin America to South-East Asia, emerging economies that peg their exchange rates have suffered financial crises with alarming frequency in the past few years. Advisers of all sorts have urged them to let their currencies float on the foreign-exchange markets, and instead direct their monetary policy towards an inflation target. Swayed also by the success of inflation targeting in many developed countries, since 1998 at least ten emerging economies have taken this advice and have formally adopted inflation targets. Such intervention may make perfect sense, says a recent paper by Corrinne Ho and Robert McCauley of the Bank for International Settlements. Because exchange-rate fluctuations have a bigger impact on inflation, trade and financial systems in emerging economies than they do in developed ones, intervention may help those countries achieve their inflation objectives. The authors find that the "pass-through" from exchange rates to domestic prices is greater in emerging markets than in developed ones, because of poorer countries' often greater dependence on commodity trade. Ms Ho and Mr McCauley also find that pass-through is higher in countries with a history of high inflation and currency crises. Financial markets, which are underdeveloped in many emerging economies, are vulnerable to wild exchange-rate fluctuations. The central bank can use "sterilised" intervention: after selling its own currency and buying dollars to hold the exchange rate down, it can sell bonds to mop up extra domestic currency, rather than let it seep into the money supply and thus risk higher inflation.

Addresses the concerns facing electronic-money, as discussed in a paper by economist Benjamin Friedman of Harvard University. Reason provided by Friedman towards Central banks controlling of short-term interests; Argument provided by the economist Charles Goodhart on e-money; Information on real challenges to central bankers in an e-money world

This article looks at the continuing devaluation of the American dollar and asks how much longer it will remain the world's premier currency. Speculative selling of the dollar is at an all time high and many think it may be on its way out as the top world currency. The dollar has lost one-quarter of its value since 2002 and currency reserves worldwide are stuffed with dollar assets. If central banks begin to dump their dollars, the trouble could really begin.