bank run blog

Perhaps because it’s Sunday, the Associated Press has published an extended news feature about the Almighty :

“The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.”

The article goes into unusual detail for an American media outlet, briefly describing how the US has alienated its chief international trading partners by successfully exporting counterparty risk during the bubble of the last decade :

“The loss of the dollar’s purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit — the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad — and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation’s nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.”

In a related story, the Guardian ran a piece from Reuters this morning, reporting that President Bush is being urged by other heads of state at the G8 conference in Japan to intervene to bolster the US currency in order to stabilize world markets :

“The Bush administration has come under pressure from abroad to take action to stabilise the weak U.S. dollar, another issue likely to come up during the G8 meetings at the lakeside resort of Toyako July 7-9, after complaints the weakness has contributed to soaring food and fuel prices.

‘In terms of the dollar, the United States believes in a strong dollar policy and believes the strength of our economy will be reflected in the dollar,’ Bush said when asked what world leaders could do to improve the economy and intervene to boost the dollar.

When pressed on potential intervention, Bush replied, ‘I just said, the relative strength of our economy will be reflected in currencies.’”

Associated Press : The buck doesn’t stop here; it just keeps falling

Guardian : Bush says backs strong dollar policy

Even with limited options available to them to halt the “disorderly unwinding” that they have been so determined to avoid, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke have apparently decided that public statements suggesting future action will be enough to influence world markets. CNBC is reporting :

“The U.S. Federal Reserve is hoping tough talk on inflation will do the job of moderating recent price increases, giving it room to avoid raising interest rates as the economy remains fragile.

The problem is that investors may try to determine whether the central bank is bluffing.

A failure to deliver on its implicit promise of tighter monetary policy could lead to increased financial market volatility and derail the tentative calm that aggressive Fed action has managed to inspire.

Futures markets have already begun pricing in chances of an interest rate hike as early as September, a prospect that many analysts think is far-fetched given the still-shaky state of housing and finance.”

In what appears to be a concerted effort, other prominent Fed members made similar statements in speeches around the country, according to Reuters :

“Top Federal Reserve officials on Tuesday hammered home the U.S. central bank’s determination not to allow inflation to get out of control, cementing views that interest rates will rise later this year.

The remarks by two regional Fed presidents followed hard-line comments on Monday from Fed Chairman Ben Bernanke that the U.S. central bank would “strongly resist” any deterioration in inflation expectations. Analysts and markets viewed the comments as a sign the Fed — like other central banks — was turning its sights on inflation.”

The Los Angeles Times is reporting that the campaign was effective in the short term :

“The Bush administration and the Federal Reserve are getting what they wanted: a big rally in the dollar and a drop in oil prices.”

The article describes an indirect attempt to stem the flow of institutional dollars to the commodities markets :

“Here’s the widespread view on Wall Street: The administration and the Fed looked around for a way to help pull oil back down, and they decided to focus on the dollar. If they can boost the greenback’s value they might reduce global investors’ and speculators’ appetite for commodities, which have been rallying in part because a weak dollar makes commodities look more appealing than other dollar-denominated assets.”

CNBC : Fed Is Hoping to Talk Down Inflation, Not Boost Rates

Reuters : Fed hammers home message against inflation

Los Angeles Times : Dollar jumps and oil sinks; bond market pays the price

Another round of rate cuts at the end of June is unlikely, and the Fed wants to telegraph this message to the markets clearly. The Associated Press is reporting: No more Fedspeak on further interest rate cuts :

“Sounding a gong couldn’t have made it clearer. Federal Reserve officials are putting out the word that further interest rate cuts are unlikely.

Fed Governor Kevin Warsh ditched the central bank’s cryptic word tangles and actually waxed poetic. ‘Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again,’ Warsh said, referring to the Fed’s key interest rate.”

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Agence France Presse noted that one of the ramifications of aggressive rate cutting is a weakened currency, which has in turn been driving up international oil prices, in an article headlined Wall Street faces bleaker picture amid oil surge, hawkish Fed :

“The market’s tentative rally began to unravel in the past week as crude oil shot past 130 dollars a barrel for the first time ever and briefly hit 135 dollars.

To make matters worse, the markets got a clear message from the Fed that it would not lower interest rates further without a ’significant’ weakening of the US economic outlook.

That came in minutes from the April Federal Open Market Committee meeting, which indicated that the decision to lower the base rate to 2.0 percent was ‘a close call.’

Deutsche Bank economist Joseph LaVorgna noted that the Fed’s inability to keep stimulating gross domestic product (GDP) growth with rate cuts could mean deeper trouble as energy prices surge.”

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The Fed has released its latest set of minutes, slashing its projections for growth, as analysts had expected. But an apparent disinclination to cut interest rates again soon disappointed the markets, according to the Associated Press :

“The Federal Reserve on Wednesday sharply lowered its projection for economic growth this year, citing blows from the housing and credit debacles along with zooming energy prices. It also expects higher unemployment and inflation.

Wall Street tumbled in response. But Fed officials, even with the more downbeat assessment, left the impression that they would not be inclined to cut interest rates further. The decision at the Fed’s last meeting on April 29-30 to reduce rates was a ‘close call,’ according to minutes of those private deliberations released Wednesday.”

Associated Press : Fed sees slower growth, higher unemployment in ‘08

Federal Reserve Board : Minutes of the Federal Open Market Committee April 29-30, 2008

Documents just released reveal that the members of the Federal Reserve Board are aware that they face a serious economic crisis, even if they downplay this knowledge in public statements. According to a report by the Associated Press :

“Even as the Fed battled in almost unprecedented fashion to stem a widening credit and housing slump, some members fretted over the possibility of a ‘prolonged and severe’ economic downturn. It was in that environment that they voted — with two dissents — to cut its most important interest rate by three-quarters of a percentage point to 2.25 percent. That action capped the most aggressive Fed intervention in a quarter-century.

Some Fed policymakers thought that such a widening recession could not be ruled out given the ‘further restriction of credit availability and ongoing weakness in the housing market,’ according to the meeting minutes that were made public Tuesday.”

Some members of the board are already realizing the limits of the Fed’s ability to manage the economy into a soft landing :

“The Fed found itself fighting a vicious cycle, where credit problems hurt the economy’s outlook which in turns worsens credit problems, the minutes suggested. There was ‘evidence that an adverse feedback loop was under way,’ the minutes said.”

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