Recent Posts

Sunday, June 28, 2015

The Role Of A Central Bank In Government Finance

The central bank acts as the key intermediary between the fiscal arm of the government (Treasury or Ministry of Finance) and the "non-central government sector", which includes the private sector, sub-sovereigns, and even the external sector (for example, foreign central banks). How the central bank operates largely determines the nature of the monetary system.

This article is an excerpt from the recently released eReport, Understanding Government Finance.

Monday, June 22, 2015

Summer Schedule

Apparently vacations have been on my mind. With two "national" holidays coming up shortly (one of the advantages of living in Quebec), I am moving to summer hours. I will probably be dropping to about one article a week (unless we get a full crisis situation going, in which case I will be exploiting the chaos). Moderation of comments will be slow over the next few weeks, as I hope to be out of internet range periodically.

I have started working on my second eReport. It will be briefer and more market-oriented than the first. The working title is Interest Rate Cycles, although it could turn into Understanding The Crash Of Summer 2015 if conditions warrant the change. It should be similar in style to my market analysis articles. I hope to have it ready some time this autumn.

Have a good summer,
Brian R

Saturday, June 20, 2015

Will The U.S. Treasury Market Get A Summer Vacation?

Chart: U.S. 10-Year Treasury Bond Yield


Despite rather panic-stricken headlines about bond market volatility, the 10-year Treasury Note yield is at a level which we saw in 2011, 2012, 2013, 2014, and almost in 2010. I was trained to call this a "trading range", but it is clear that I am not suited to write exciting headlines. The latest FOMC meeting verified that Fed policymakers are slowly coming around to see the world in the same way as the bond markets, in that there is absolutely no sign that U.S. economic growth is going to accelerate any time soon. Normally, one expects there to be some bond market fireworks a few months ahead of the start of a Fed rate hike cycle; the question is whether we have seen them already.

Wednesday, June 17, 2015

Greek Crisis To Interfere With Eurocrats' Vacations?

The Greek crisis is heating up again, with the Bank of Greece releasing a hysterical monetary policy report. Apparently all the problems were caused by elected politicians, and rampant mismanagement by the eurosystem had nothing to do with it. According to orchestrated leaks (which are designed to maximise the run on Greek banks), this weekend is allegedly a "drop dead" date, whereupon capital controls will have to be imposed if Syriza does not capitulate to the diktats of the institutions. The timing is somewhat plausible, as the eurocrats possibly believe that the fallout will be contained, and they will be able to take their vacations in August without interruptions.

UPDATE (2015-06-18):  The EU finance minister talks collapsed in acrimony. Apparently there will be a meeting Monday to discuss the situation. However, this weekend would be a convenient time to impose capital controls. Have a nice day. 

Sunday, June 14, 2015

How Should The Bank Of Canada Operate?

The Bank of Canada has asked for comments on potential changes on its operating procedures. Many of the potential changes appear to only matter to the central bank and its bank counter-parties, however others raise some philosophical issues about how central banks operate. I do not think that the Bank of Canada wishes to get into debates about the philosophy of central banking, but the reality is that when a crisis hits, we need a coherent view of what a central bank is supposed to be doing.

Wednesday, June 10, 2015

Economic Stability And The Size Of Government

In "Fiscal stimulus does not necessarily mean large government", Bill Mitchell dissected a debate whether "if you support austerity it is because you really just want smaller government and vice versa." Professor Mitchell argues that this is incorrect, although I would note one small qualification - the government cannot be too small for fiscal policy to stabilise the economy.

Sunday, June 7, 2015

Bond Market Volatility - Yawn

Recent bond market moves have triggered some rather excited commentary. Central banks allegedly have pumped up a bubble that will cause the financial markets to explode in some amazing fashion. The reality is a lot more sedate – the bond market is bracing for a Fed rate hike sequence that may hit this autumn (assuming that it is not delayed – again). Given that governmental interest rates are at levels that are completely unattractive for liability matching (outside of Greece!), no sensible asset allocator should care about a marginal repricing in bonds. The only reason you want to own bonds is an insurance against a selloff in equities (and other risk assets)  and a few rate hikes by the Fed is not enough to trigger an equity correction by itself.