buiter45_Jabin BotsfordThe Washington Post via Getty Image_jeromepowell

Economics

استقرار الأسعار مقابل الاستقرار المالي؟

Mar 20, 2023 Willem H. Buiter

نيويورك ــ عندما تندلع أزمة سيولة في السوق و/أو أزمة سيولة تمويل في وقت حيث التضخم أعلى من المستوى المستهدف، يصبح التوتر بين هدفي البنوك المركزية ــ استقرار الأسعار والاستقرار المالي ــ حتميا. في مثل هذه الحلات، أعتقد أن الاستقرار المالي يجب أن يأتي أولا، لأنه شرط مُـسبَـق للسعي بشكل فَـعّـال إلى تحقيق استقرار الأسعار.

لكن هذا لا يعني أن البنك المركزي ينبغي له أن يوقف أو يعلق سياساته المضادة للتضخم عندما تهدده أزمة مصرفية أو خطر مماثل يتعلق بالاستقرار الجهازي. يجب أن يكون التضارب بين هدف استقرار الأسعار وهدف الاستقرار المالي قابلا للإدارة باستخدام سعر فائدة البنك المركزي لاستهداف التضخم، ومن خلال استخدام حجم وتكوين ميزانيته العمومية كأداة سياسية احترازية كلية لاستهداف الاستقرار المالي. ويشكل التواصل الجدير بالثقة ضرورة أساسية لتحقيق الهدفين.

الواقع أن الاستقرار المالي في اقتصاد كبير متقدم لا يتأثر ماديا بزيادة قدرها 50 نقطة أساس في سعر الفائدة الاسمي القصير الأجل الخالي من المخاطر. بل يتأثر بعلاوة السيولة والمخاطر الائتمانية المترابطة واختفاء المشترين المحتملين والمقرضين في الأسواق المالية غير السائلة ــ عندما يهيمن تقنين الائتمان على كل شيء. أدار بنك إنجلترا هذا الأمر على النحو الصحيح في العام الماضي، أثناء فترة إحكام السياسة النقدية التي فرضتها السياسات غير المتماسكة التي انتهجتها رئيسية الوزراء آنذاك ليز تـرَس، عندما انخرط في عمليات شراء مؤقتة لسندات حكومة المملكة المتحدة الطويلة الأمد وعمل على تأجيل الإحكام الكمي من خلال مبيعات من الأوراق المالية الممتازة من قِـبَـل مرفق شراء الأصول.

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0 Comments on this paragraph, 28 Comments on this article

ron smith Mar 29, 2023

Another "old school" economist who believes (erroneously, as history shows) that inflation from sources extrinsic to the relevant economy can be tamed by punishing the working class in the target economy.

A more accurate solution, albeit outside the Fed's domain, would be to "punish" the rentier class by raising marginal tax rates on both income and non-working investments (translation: "not invested in business in which the owner had material input in the operation thereof").

If manufacturing of all sorts is brought back "on-shore," the Fed can exercise great control over the economy. If, instead, the tenants of Adam Smith are followed, the legislature will need to come to grips with the notion that economic sanity is more important than party loyalty, especially in times like these wherein one party is devoted to changing democracy into totalitarianism.
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vic lai Mar 26, 2023

The US-dollar-denominated US federal government treasuries, especially its short-term treasury bills, has traditionally been the world's most-seek-after safety financial assets, and also the most pristine collaterals in the Eurodollar repo markets of the global shadow-banking system.
But today, thanks to the US Fed's non-stop higher-for-longer rate-hiking cycle, many of those longer-term US treasuries lying in the balance sheets of many US banks have become relatively toxic assets, a bit similar to all those US subprime mortgages prevalent in the GFC of 2007-09.
---
If the Swiss government could go so far as cancelling the full market value of those AT1 bonds previously issued by now-underwater Credit Suisse, then one day in the future, when domestic inflation is also too high so that the US Fed could "print no more new money," the US may also do the same, by suddenly stopping to repay any interest or principal of her government treasuries owed to the foreign lenders (especially to those unfriendly foreign ones), or by suddenly confiscating all the US-treasury FX reserves of those foreign countries using some contingent excuses.
---
Today's China should grasp this golden chance to further propel her own central (not local) government treasuries to the status as one of the world's most important safety financial assets, and also one of the world's most pristine collaterals in the global shadow-banking sector, in the coming decades, especially from the future viewpoint of most of her friendly OBOR, BRICS, and Middle-East countries.
---
- vic lai Mar 26, 2023
  
  According to wiki,
  "The productivity paradox, also referred to as the Solow paradox, could refer either to the slowdown in productivity growth in the United States in the 1970s and 1980s despite rapid development in the field of information technology (IT) over the same period, or to the slowdown in productivity growth in the United States and developed countries from the 2000s to 2020s;
  sometimes the newer slowdown is referred to as the productivity slowdown, the productivity puzzle, or the productivity paradox 2.0.
  The 1970s to 1980s productivity paradox inspired many research efforts at explaining the slowdown, only for the paradox to disappear with renewed productivity growth in the developed countries in the 1990s.
  However, issues raised by those research efforts remain important in the study of productivity growth in general, and became important again when productivity growth slowed around the world again from the 2000s to the present day."
  ---
  If the view that the SVB-et-al fiasco per se is basically a Solow-paradox problem rather than a mini banking crisis in the US is not far from the truth, then today's US, and the rest of the world, sorely needs another 1990s-like high-technology revolution (say, the 4th Industrial Revolution) that can genuinely elevate the overall productivity level of humankind in the following decades.
  To me, the main problem here is that, except for those relatively few innovations like AI-propelled ChatGPT-et-al, which can immediately and non-trivially raise the productivity of many white-collar workers everywhere under the sun, any other ongoing new (Web 3.0) ICT technologies tend to be mostly a future replacement of both existing human hardware and software facilities, and so can't easily become self-liquidating or persistently profitable projects in the foreseeable future in our private profit-seeking free market.
  ---
  This problem, which is probably induced by the inescapable Law of Diminishing Marginal Returns (LDMR), may increasingly become a major productivity problem in most countries in the coming years.
  I don't know how to solve this problem.
  Do you ?
  ---
  Thomas Malthus's population-crisis thesis (a manifestation of the LDMR in the real world in the past centuries) has been rejected by human's increasingly vigorous innovation capabilities, especially in those advanced western DM countries.
  The true paradox today seems to me to be that, our coming innovation capabilities per se, especially that in the ICT sector, will also be subject to the unavoidable dictate of the LDMR.
  Perhaps a more entrepreneurial state in many countries on this planet in the coming years will enable human's future innovation capabilities to convincingly and fully beat the LDMR.
  ---
  - vic lai Mar 27, 2023
    
    According to a Chinese bookwriter, why does our world sometimes suddenly suffer from a regional food crisis, especially in those poor EM countries say disastrously being affected by a certain natural disaster ?
    Does this mean the total remaining amount of food of all kinds on this planet isn't enough to also feed those starving natural-disaster victims ?
    The answer is most probably no ------ the main problem is that the total amount of food isn't distributed evenly in every country under the sun, and perhaps even more importantly, emergency food can't be quickly delivered from the rich countries to the quickly-dying victims in those unfortunate starving countries.
    ---
    While the bank deposits are the money of the ordinary people in the street, the companies, and even the local governments, the bank reserves at the central bank's balance sheet are the money of our country's banks in which we deposit most of our money.
    For one reason or another, bank reserves in today's United States, and in many other (DM) countries as well, in most of the time are not distributed evenly in every big and small bank in the country.
    The few very big banks in that Animal Farm are almost always more equal than most of the SME banks there.
    So, when a non-trivial bank-run suddenly props up at a SME bank, this bank will have a much bigger chance of going bankrupt than one of the very big banks, and one undesirable consequence of this single bank-run is usually the further potential spreading of more and more bank-runs to other otherwise healthy but similar SME banks in the same country.
    Given today's highly-interconnected and highly-financialized world, the bank run in the US may quite easily and qucikly be transmitted to other countries also.
    The bank-run problem at SVB this time is further complicated by the rather big proportion of big company-depositors there whose deposits are mostly un-insured by the government.
    ---
    Since, up until today, no 2019 repo-spike at the Fed's balance sheet is repeated during the US's ongoing mini-SME-banking crisis, the 3 trillion dollars or so of the total bank reserves at the Fed's balance sheet should still have been enough to cope with the total market needs in both the US and the rest of the world.
    Also, perhaps a large part of the 2 trillion dollars or so currently sitting idly at the Fed's O/NRRP account can serve as a valuable buffer to quickly replenish the sudden shortfall of bank reserves in the US's banking system, especially if the number of both domestic and foreign financial institutions that are qualified to use this account is much reduced by the Fed in the near future.
    Which means, the total amount of "food" in the whole of the US's banking system should be enough today.
    The main banking problem now in the US is therefore whether enough "food" can quickly be transferred, through the help of the US monetary authority, from the food-rich big banks to some of the country's suddenly-starving SME-banks.
    ---
    Such inter-bank reserve transfer is now better than the creation of more new "food" by the central bank, because the latter will further invigorate the inflation monster.
    ---
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vic lai Mar 23, 2023

Unexpectedly, it's Janet Yellen, not Jerome Powell, that helped to bring the DJIA down by more than 500 points today.
This is probably due to Yellen's insistence of rejecting to formally and continually use the FDIC's insurance policies to keep bailing out the SME banks in the future.
---
According to a reporter in Chinese WSJ, given the recent highly-inverted yield curve, there's been not much an average SME bank in the US can do to improve its operating performance in the near future, since the average rate of return on long-term loans or investment securities (represented by the country's low long treasury yield, plus a certain risk premium) has still been (much) lower than its short-term weighted average cost of capital (WACC, represented by the Fed's high nominal policy interest rate, plus a certain risk-premium).
So, even though the US federal government, with the help of the FDIC, keeps insuring all the deposits of all US's SME banks in the (near) future, the fact that their bank deposits will keep losing (say to the big US banks) still can't be easily changed ------ the SME banks' ongoing "train crash in slow motion" can hardly be reversed without a faster normalization of the shape of the "riskless" treasury yield curve in the foreseeable future.
---
Furthemore, Yellen's new bill of coming full insurance of all deposits in all US banks will probably be met with keen resistance from the US Congress.
If the bill is passed, both the problems of adverse selection and moral hazard will pose serious threats to the national interest of the US people.
---
Comsider the following simplified but extreme example.
If all bank deposits are fully insured by the government, many US bank depositors will have no need to choose their own banks according to the banks' risk and quality, and they will simply choose the ones whch offer them the highest deposit rates.
Fierce competition among the banks may non-trivially prop up the operating costs of all the banks in the country.
Say I myself will set up my own bank, get a total deposit of say 1 billion dollars, and lent as much as possible to my wife's company.
My wife's company will hire my daughter as the company's CEO, who receives 300 million dollars as bonus per year.
After 3 years or so, the one-billion-dollar deposit is mostly gone, the loans of the bank won't be repaid, and so I file for bankruptcy.
The burden of loss of the 1 billion dollars of deposits will entirely be borne by the country's taxpayers ------ and the money has of course all gone to my daughter's pocket.
---
If the US government can't fully insure all the deposits of the country's SME banks, their deposits will keep migrating non-trivially to the big banks in the foreseeable future, so long as the yield curve remains inverted and the banking crisis keeps going, and so the train crash in slow motion still can't be avoided.
Unless
(i) the Fed lowers the policy interest rate to below 2%, which is lower than the average interest rate now gotten by most of the banks' existing long-term loan and security-investment assets, and
(ii) the Fed also stops her ongoing QT, and re-starts her QE operations,
the accelerating death of many of the country's SME banks in the near future seems quite likely.
---
The main mistake having been made by those US SME banks is that, during the pre-Covid low-interest-rate period, most of their long-term earning assets' interest rates had been fixed at a rather low level.
If those interest rates were mostly flexible, they would all have benefited from the Fed's current fast and non-trivial rate-hiking cycle, and the wealth of the banking sector wouldn't have transferred to the US's household sector.
---
If, so far as controlling the country's inflation rate is concerned, Jerome Powell should talk hawkish (to further suppress the inflation genie) and act dovish (because of the ongoing mini banking crisis), then, so far as controlling the ongoing SME-banking crisis is concerned, Janet Yellen should talk dovish (to prevent more and more inter-bank migration of deposits), and first act dovish (bail out as many SME-banks as possible) and later act hawkish (to mitigate the moral-hazard problem).
---
- vic lai Mar 23, 2023
  
  I'm no ICT-technology expert, but my current feeling is that, the US's latest SVB-et-al mini-banking-crisis is just a messenger honestly sending us the bad news of the country's ongoing slow and embarrassing transition in the ICT-internet field, from Web 2.0 to Web 3.0.
  ---
  Roughly speaking, Web 1.0 lasted from 1990 to 2004, Web 2.0 lasted from 2005 to 2020, and Web 3.0 just started from 2021onward.
  Web 2.0 is characterised by the our current use of smaller and smaller smart phones, and perhaps similarly, Web 3.0 will be characterized by the popular use of smaller and smaller Virtual-Reality (VR) equipment also.
  ---
  Problem is, Web 3.0 is also characterized by highly-decentrtalized blockchain technologies, in which, say,
  (i) the newly-cropped-up and fully-decentralized cryptocurrencies represented by Bitcoin are highly at odds with the US monetary authority's highly-centralized control of the country's US-dollar-denominated currencies and monetary system (who knows, the global hegemony of the US dollar may be much weakened in the future generation, if more and more innovations such as CBDCs continue to crop up and prosper), and
  (ii) many of the latest AI innovations, like ChatGPT, will have a very high probability of fully replacing our real world's hardware facilities and software human intelligence, and so will also be highly resisted by the country's big financial leaders, conglomerates, and ordinary blue- and white-collar workers.
  ---
  If the transition from Web 2.0 to otherwise highly-promising-and-profitable Web 3.0 had been very easy and smooth, SVB-et-al wouldn't have failed in such a way that we're all witnessing today, even given the recent adverse macroeconomic environment dictated by the Fed's ongoing rate-hiking cycle.
  ---
  - vic lai Mar 23, 2023
    
    One way quickly out of the current SME-banking mini-crisis in the US is for the Fed to enact a new round of QE, to help the SME-banks to more quickly and partially recover their current balance sheets which have much been damaged by the central bank's ongoing rate-hiking cycle.
    The suggested method here doesn't require the US Congress to further raise the debt ceiling of the federal government :
    ---
    A certain quota of new funds are newly raised by the federal government, through her new issuance of new treasuries to be bought by the Fed through a new round of QE, which are subsequently used to buy more or less the same amount of USTs and agency-MBSs now sitting at the balance sheets of those SME-banks which are now potentially in (big) trouble, all at a price that's the arithmetic mean of the par value and the current market price of those securities currently being held by the SME-banks.
    Say if the par value is 100 dollars and the market price drops to only 60 dollars, then the buying price here is 80 dollars ------ a suitable level of haircut here is conforming with the Bagehot Principle.
    ---
    Any SME-bank in the US will have the voluntary option to either immediately sell, or not sell, any or all amount of their impaired investment securities to the federal government.
    A large part (say 70%) of the new cash so raised by those SME banks has to be parked immediately at the Fed's bank-reserve account for say at least a year, earning the now rather-high IORB, to help them to cope with their depositors' sudden deposit-withdrawal in the near future.
    ---
    Hopefully, with the help of this method, together with the Fed's newly-installed contingent BTFP program, most of the US's SME-bank-depositors will be fully convinced that their SME-banks are no longer short of cash, and so there'll be no more bank runs in the country.
    Note that, doing so, the remaining debt level of the US federal government will also remain more or less the same as before.
    ---
    In short, the idea is to replace most of the old UST- and agency-MBS-debts (owed by both the US federal government and the government-related agencies to the SME-banks) by new similar debts (now owed by them to the Fed instead).
    When the accounts of the Fed, the federal government, and the agencies are all consolidated, it means it's basically a wash, both principal- and interest-paying-money is just leaving from the left pocket of the combined public sector to the right.
    ---
    - vic lai Mar 23, 2023
      
      Through the above suggested method, the more the SME-banks voluntarily (or are forced by their leaving depositors to) participate in this security-selling program, the more the federal government is able to reduce her remaining amount of debts, albeit only slightly, owing to the required haircuts and the cancellation of all the future interest payments of those securities.
      ---
      To prevent the selling SME-banks from having to record a big amount of realized losses in the coming accounting period, the SEC may also allow them to amortize their realized losses in this year evenly to say the next 10 accounting years.
      ---
      - vic lai Mar 23, 2023
        
        Since a large part of the cash newly created by the Fed's new QE suggested upstairs can't leave the Fed's balance sheet in the coming year, the Fed's new round of QE will not add much additional inflationary pressure to the US domestic economy.
        Instead, it may mitigate the worsening liquidity-shortage problem in the country.
        ---
        A simple comparison of the (cash assets/total assets) ratio between the US's small and large banks shows that, the current ratio for the small banks has almost dropped back to the 2019 repo-spike level from the Covid-caused plateau, while that for the large banks still has a long way to go to reach that similar level.
        It means that, for various reasons, in the Animal Farm of the bank reserves stored at the bank-reserve account of the Fed's balance sheet, not all animals there are equal to each other ------ the large animals are (much) more equal than the small animals there.
        I mean, the large banks are now owning much more (excess) reserves or customer-deposits than the SME banks.
        And so, in the Fed's current rate-hiking cycle, only the SME-banks are required or forced to sell their (fixed-rate) investment securities at a big loss to help cope with their faster-than-expected deposit losses.
        ---
        The US monetary authority may give incentive to, or even force, the large banks to now replace the federal government in the above suggested method, by acting as the buyers of a suitable amount of the small banks' impaired securities, using the arithmetic-mean price (or any suitable price mutually agreed upon by both sides) as the transaction price.
        The large banks can then either
        (i) hold those securities to maturity, without incurring any principal losses, or
        (ii) require the SME-banks to buy the securities back from them some time later when the banking crisis fully subsides, say at the original transacted prices.
        The transaction losses incurred by the big banks in this accounting year can be amortized evenly in the next 10 years (which is tax-deductible), and can also be regarded by the big banks as a necessary evil to help quickly calm down the country's nervous SME-bank-depositors.
        ---
        The net effect is that, while the small banks' impaired securities are partly transferred to the large banks, the large banks' (excess) reserves are also partly transferred to the SME banks.
        Liquidity distribution among the small and big banks is therefore much improved.
        This time, no QE is needed, and hence no additional inflationary pressure will crop up.
        ---
        Today, the total bank reserves at the Fed's balance sheet is still enough to cope with the needs of the private financial markets, since, unlike in 2019, recently neither the Fed's policy interest rate nor the market's overnight repo rate has suddenly propped up to a level above the upper bound of the interest-rate corridor (IORB) controlled by the Fed.
        So, the (sorely-)needed redistribution of bank reserves or bank deposits suggested above, which will make the Animal Farm there (much) more equal than before, will not affect the overall (relatively ample) liquidity situation of the country's financial markets.
        ---
        
        vic lai Mar 23, 2023
        
        The Fed's current "hike and see" attitude is obviously once again at odds with the Wall Street's "wait and see" attitude, for the main reason that many US market participants are now worrying about the high likelihood that the Fed's non-stop rate-hiking will aggravate the ongoing SME-banking crisis in the country, which in turn may cause a countrywide credit crunch and the resulting worse-than-otherwise economic recession.
        ---
        Well, from the Fed's own viewpoint, it may not be a bad idea to use the current rate-hiking cycle not only to fight inflation but also to mitigate (or even pop) the country's increasingly precarious everything-asset bubble.
        Besides, the Fed's main worries today are still inflation and financial stability, not recession.
        So long as the US's countrywide banking and financial stability can still be maintained in the foreseeable future (the ongoing banking crisis is limited only to the country's SME banks, while the big banks are not much affected), despite the Fed's "hike and see" action, any coming economic recession so generated by the Fed's action can always be easily coped with by the central bank's subsequent rate-pivoting re-expansionary monetary policies.
        In general, the Fed's recession-fighting job is always (much) easier than her inflation-fighting job.
        ---
        In the early 1980s, the US economy fell into a rather deep economic recession, thanks to Paul Volcker's extreme rate-hikes at that time, which pushed the nominal FFR to as high as more than 20%, but the subsequent "Reganomics" had still been able to create a rather long Goldilocks economic environment in the country in the 1990s.
        The Wall Street people has yet to fully convince Powell's Fed that this time will be different.
        ---
        
        vic lai Mar 24, 2023
        
        Economy without recession is like debt without default, or capitalism without bankruptcy, or Christianity without hell.
        This is bad economics.
        ---
        It's reported that the western mass media now increasingly doubts whether the SVB event was caused by the Fed's rate-hiking cycle or by the aggravating problems of the bank's own risk management.
        Since 2019, the Fed had already started to give several warnings to SVB concerning the bank's risk management.
        ---
        In 2019, the total asset of SVB was around 70 billion, and at that time the Fed had already given to SVB a warning about the bank's system of risk management.
        Next year, the bank's total asset further increased to 114 billion, and the Fed gave another warning to the bank, asking her to make the necessary amendment, and required her to be subject to the supervision of the banking regulatory authority.
        ---
        But those warnings hadn't stopped SVB from quickly expanding, and her total asset jumped to 209 billion in 2021.
        Since the bank's cash flow was then found to be in jeopardy, 6 more warnings were given by the Fed to the bank.
        Yet, the bank had still failed to correct her "mistakes."
        In July 2022, through an across-the-board auditing, the officials discovered that the bank had both management and risk-control problems.
        And so, subjecting to various limitations, SVB could no longer further expand her scale of business.
        In September 2022, the market value of her bond securities was already lower than the 15.9 billion figure recorded in her balance sheet.
        ---
        In the beginning of 2023, the Fed once again audited the bank, and again discovered problems.
        Later, the bank stopped functioning after two days of bank-runs, which subsequently led to the ongoing mini SME-banking crisis in the US.
        ---
        So, why did the Fed still allow SVB to expand her business after many problems there had already been discovered by her ?
        According to Murphy's Law, if anything can go wrong, it will.
        If the regulatory authority of the US banking system doesn't strictly enforce her regulations imposed on the banks of the country, the US will, one day in the future, like today's Switzerland, also become a "financial banana republic."
        ---
        
        vic lai Mar 25, 2023
        
        In many of the Fed's rate-hiking cycles in the past decades, there had been many capital outflows seriously hurting many of the EM countries, which were then quickly forced to raise theiir country's own interest rates to a very high level, to try to mitigate the increasingly serious capital outflow there.
        ---
        On the other hand, in the current mini SME-banking crisis in the US, which lately seems to have been arrested by the Fed's various standing and emergent lender-of-last-resort facilities, we seldom hear of any non-trivial deposit-rate-hiking preemptively performed by the country's deposit-losing SME-banks, which today are no longer subject to any deposit-rate-ceiling regulation imposed by the US monetary authority.
        ---
        If, during (only) banking-crisis time, most US's SME-banks more quickly raise their own deposit or CD rates (and much lower their credit-card interest rates), and most US's big banks do the exact opposite at the same time, the problem of non-trivial and persistent deposit losses at the SME-banks can be mitigated.
        ---
        
        vic lai Mar 25, 2023
        
        Given Janet Yellen's lately "un-insured" bank-deposit insurance delivered also to the country's rich depositors (with deposits above 250,000 dollars), the relatively quick overall calm-down of the depositors of the US's SME-banks observed today shows perhaps that,
        ---
        (i) there are now not many rich depositors with lots of money left behind in the SME-banks,
        (ii) most of the deposits of those rich depositors have aleady been transferred to either the big banks, or the Fed's much-higher-interest-paying O/NRPP account (and to the US treasuries with much higher yields), say through the help of the MMFs,
        (iii) most of the remaining depositors at the SME banks now each have deposits (well) below the 250,000 dollars threshold.
        ---
        Many of the depositors who ran quickly to SVB-et-al to get their money back were mostly big firm-depositors.
        Does the lately-observed quick completion of the "capital-outflow" at the country's SME banks (without any "capital control" there whatsoever) show that many US (non-firm) households are actually less rich than we used to think ?
        ---
        
        vic lai Mar 25, 2023
        
        Currently, many of the world's rich personal and institutional investors have been actively searching for the world's genuinely safe harbor-haven to park their own precious capital, away from the no-longer-riskless US federal government treasuries and the national government treasuries of the leading EU countries.
        ---
        Their latest choices seem to be gold, bitcoins, and even the US's high-tech stocks, revealing once again the fact that the world is currently sorely lack of safety financial assets, especially those supplied by the Asian countries.
        In particular, no common EU Fiscal-Union treasuries from the non-existent EU Fiscal Union are there for them to invest in, and China's "too-clever" central government has also "forgot" to issue much more safety-asset-like treasuries of their own (their local-governments' municipal bonds can't replace the safety-asset role that can only be performed by their central government's treasuries in this respect).
        ---
        Today's US DXY can't really reflect the current quickly-brewing banking problems both in the US and in many of the EU countries, since it's mainly determined by the interest-rate differential between the US federal government's treasuries and Germany's same-duration national government treasuries.
        Given the ongoing net capital outflow from both the US and the EU countries to the eastern Asian countries (especially to China), the US DXY, if the index of which is appropriately adjusted by a larger weight from say China's yuan, should be (much) lower than the recent figures we're now observing.
        ---
        The exchange rate between the US dollar and the Euro is now perhaps no longer the world's most important price anymore.
        ---
        
        vic lai Mar 25, 2023
        
        If SVB's premature death is (mostly) caused by her managers' bad interest-rate-risk managment skills, should the US further reform her banking system in the near future by introducing say highly-sophisticated AI-assisted automatic-running computer programming procedures, to completely replace all the human risk managers in all the US banks, in order to do all those strictly-according-to-existing-banking-regulation risk-management jobs ?
        The answer is, I think, probably no, due once again to the inescapable dictate of the Fallacy of Composition.
        ---
        Since those coming AI-propelled risk-management computer programs used by all the banks will most probably be very similar to each other, because
        (i) they are subject to the same future banking-regulation rules,
        (ii) in the initial development of those programs, the computer programmers are probably copying (or "learning") from each other,
        any sudden propping up of a liquidity- or credit-event in the US will immediately prompt all the banks to say sell (or buy) most of their existing financial assets at the same time, resulting in a massive fluctuations in those asset prices, with many resulting unintended adverse effects imposed on the rest of the US economy.
        It will be like the sudden arrival of the reckoning day when most of the stock-market participants for some reasons try to sell most of their stocks to the market all at once, hopefully without much lowering the resulting transaction prices, but eventually all in vain.
        ---
        
        vic lai Mar 25, 2023
        
        For some hard-to-understand reasons, it seems that, again and again, many Wall Street people have kept under-estimating the stubbornness of the inflation monster in the country , which so far has refused to go quickly back into the bottle.
        ---
        It's said that inflation per se is inflationary, especially when the price-wage spiral has been newly formed and embedded further and further into the people's future psychic expectation.
        Also, if the past inflation experiences of the US is any guide, today's Fed also needs a prolonged period of positive real policy interest rate to be able to fully force the inflation monster back into the bottle.
        Today, the Fed's real policy rate is still negative relative to the headline CPI inflation rate, and is barely positive (for a rather short period of time) relative to the core inflation rate used by the Fed.
        Yet, many US market participants have constantly been urging the Fed to stop, probably prematurely, her ongoing higher-for-longer interest-rate cycle, and to quickly start her rate-pivoting cycle instead.
        ---
        According to a Taiwan economist, if the real (policy) interest rate is inappropriately kept by the Fed at a non-high-positive (and hence non-inflation-fighting) level for too long a period of time during the current inflationary cycle, many US households will be induced or forced by the inflation monster to more quickly spend their cash on hand on real merchandizes or on real-wealth-sustaining hopefully-appreciating financial assets, thereby much increasing the country's average velocity of circulation of money as a result, and so, according to the quantity theory of money, keeping invigorating the inflation monster in the near future (with no concomitant and commensurate increase in the country's GDP).
        ---
        
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Thaomas H Mar 22, 2023

Financial stability v price (and employment) targets is a doubly false dichotomy. 1) financial instability would impinge on price and employment so is at least partially subsumed in the Fed's mandate. 2) Financial stability ought to be achieved through better prudential regulation, not departures from the Fed's price and employment targets.
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Manfred Störm Mar 21, 2023

When we know that inflation is sticky, why are we so impatient with seeing it drop in short term, it is not going to drop that quick, too many variables that need to adjust. Fed had rates at zero for two years, they have been above that for not even a year. It takes time, we need more patience. We had 10 years of low rates, two zero years. Give it time.
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vic lai Mar 21, 2023

It's lately reported that SVB's risk managers stopped hedging some or most of their security-investment portfolios in the beginning of this year, in conformity with the then widespread market expectation that the Fed would soon stop her rate-hiking cycle or even start pivoting.
They perhaps wanted to speculate and gain accordingly from this expectation.
---
The US's highly-sophisticated derivative markets, and the derivative instruments therein, like the interest-rate swaps, should have been able and enough to reduce much of the interest-rate risks borne by most of the country's SME financial institutions, and so the Fed's current inflation-fighting rate-hiking cycle shouldn't be disturbed by such consideration.
If the government helps some of the SME banks in trouble everytime she hikes the policy interest rate, then every time she lowers the interest rate those SME banks which gain as a result should in principle return all their gains back to the Fed or the US government.
This basically ends up requiring the US's monetary authority to fully take on the role of those good old interest-rate-hedging derivative products in the country.
It means a full nationalization of the market's interest-rate risks, which will probably be at the expense of the country's taxpayers.
---
Note that, in the interest-rate hedging derivative markets, the party and the counterparties are engaging in a zero-sum game, and so what one side loses the other side gains.
The US Fed only potentially needs to help the big-bank-dealer interest-rate-swap counterparties which, I think, should have been losing non-trivially in this rate-hiking cycle of the Fed, since they are now mostly the side which have been exchanging their flexible-interest-rate streams with their counterparties' fixed-interest-rate streams, and so are losing money most of the days.
---
- vic lai Mar 21, 2023
  
  In the past 15 years, with the US's treasury yield curve so close to the zero-lower-bound, the country's interest-rate-swap markets have become a no-brainer one-way bet, since the coming market nominal interest rate can only increase, but can no longer drop further, in the future.
  If in the coming years, the Fed's policy interest rate goes back to her good old normally higher positive territories, in conformity with the country's higher structural inflation in the same period, the country's interest-rate derivative markets can return back to its normal operations.
  ---
  It's said that, last Friday, in the US stock market, close to 3 trillion US dollars worth of derivative products were reaching their maturity and so the big players there have been working hard to prevent the stock indexes from falling too quickly and substantially as a result of the mini banking crises in the country.
  Which means, starting from this week, the small stock market investors in the US will have to become more defensive than before.
  ---
  - vic lai Mar 21, 2023
    
    If, this Wednesday, Powell's Fed well-intentionally chooses to stop, perhaps only temporarily, her ongoing rate-hiking cycle, so as to calm down the nervous US financial markets, then perhaps more and more risk managers of the country's SME-banks will receive the wrong "new forward guidance" from the central bank that the current policy interest rate is aready at its highest terminal level, and so the only way for it to change in the near future is going downhill.
    Then, perhaps many of them will, like their previous (perhaps speculative) SVB counterparts, start to quickly unwind many of their remaining interest-rate-hedging derivative instruments, and so if the Fed more quickly resumes her rate-hiking attitude or policy in the second-half of this year for some future reasons, many SVB-like bank failures may once again prop up in the US near the end of this year.
    ---
    The Fed's coming unchanged rate-hiking policy may be able to give the right signal to many of those risk managers that the ongoing SME-banking non-systemic mini-crises in the country is actually no big deal, and therefore normal banking businesses will be as usual in the rest of this year.
    ---
    - vic lai Mar 21, 2023
      
      While many US people are now worrying about their country's brewing banking crisis prompted by the demise of Silicon-Valley-related SVB, what they should actually be worrying about is the country's coming real crisis ------ the (relative) slow-down of the country's overall technological advancement.
      ---
      One obvious field in trouble in the US is the 5G area, which in turn has mainly been caused by the country's past laggard development in telecommunication-equipment especially relative to that in China, since from the point of view of the fast-profit-seeking US private entrepreneurs, without the help of the US's entrepreneurial federal government, the telecommunication-equipment industry has not been an attractive industry.
      ---
      Elon Musk's Starlink, for example, which is especially useful for both the US's farming population and the Pentagon's future global warfare, can hardly replace formally China's numerous densely-distributed and countrywide 5G (and her coming 6G) base stations.
      It now seems that 5G-technology has become a country's crucial entry ticket to the future global stage of further ICT developments of all kinds.
      What's really been important about 5G isn't its speed, but its volume of transmission, and the latter is the linchpin of the future further development of a country's industry-internet, AI-robotics, and IoT (the coming 4th Industrial Revolution may be led mainly by AI, medical nano-biology, and new battery).
      ---
      Today, if China sorely needs a company of her own like Netherland's ASML, then today's US also sorely needs not another Apple Inc. but a telecommunication-equipment company resembling China's Huawei.
      ---
      - vic lai Mar 21, 2023
        
        Crude oil WTI futures has recently dropped below 70 dollars, showing that, recently, energy is no longer one of the major supply-side factors which keeps propelling the US's general price level upward.
        Some other factors must therefore have been at stake in maintaining the country's inflation rate at a relatively high level recently, and they probably include the US's stronger-than-expected labor market, and the country's relatively strong wage-rate and rent growth, which are by no means easy for the Fed to subdue, since wages and rents are perhaps the country's two most sticky prices we can find.
        Which means, today's Fed has to solve two difficult problems (inflation and financial instability) at the same time, which requires diametrically opposite interest-rate policies for each of them.
        ---
        If both energy and the recovered global supply chains are no longer the major determinants of the US's inflation rate in the future, but the country's inflation rate still refuses to fall quickly back to the Fed's targeted 2% level, then we can perhaps roughly conclude that inflation is, according to the quantity theory of money, mainly demand-pulled, not cost-pushed.
        ---
        
        vic lai Mar 22, 2023
        
        Note that, if the past experience in the US is any guide, then we can quite clearly obseve that, while rising inflation in the country in the past would induce the Fed to start her rate-hiking cycle, a subsequent symmetrically drop in the country's inflation rate (disinflation) would not similarly induce the Fed to quickly start a new rate-reducing pivoting cycle ------ only a sudden and non-trivial liquidity- or credit-event, resembling the latest SVB-et-al fiasco, would "force" the Fed in the past to quickly (and usually prematurely) start her rate-reducing pivoting cycle.
        ---
        Originally, facing non-trivial deposit losses and hence bank-reserve shortfall, SVB could have raised enough replenishing capital, in a secretive manner, simply through the help of say some Middle-East rich institutional or personal investors.
        But Goldman Sachs may have deliberately advised SVB to openly sell some of her AFS investment securities at a rather big loss, and later further raised new stock capital through a formal information-disclosing roadshow, which eventually, with the "co-operation" of some scaring big and uninsured depositors, and the further help of lightning-fast electronic banking, ended up causing the bank to face a fatal bankrun ------ losing 42 billion dollars of deposits in only 48 hours.
        ---
        Note that 1 week before the SVB incident, Goldman Sachs also raised the target stock price of SVB from 284 US dollars to 312 US dollars, and even before that, the CEO of SVB had already started to sell his own SVB stocks.
        So, according to a Taiwan economist, the self-interested and short-sighted Wall Street people may have deliberately manufactured a mini SME-banking crisis in the country, by sacrificing SVB (and Silvergate), to force the inflation-fighting Fed to prematurely start her rate-pivoting cycle (in order to much reduce their current realized and unrealized losses from their own say USTs, MBSs and derivative positions).
        ---
        Powell's Fed beware.
        ---
        Which also means, instead of saying that the US is currently having a mini banking crisis, we should more correctly say that the US is now having a mini technology crisis.
        SVB is just a messenger delivering us the recent bad news in that part of the US's whole technology sector.
        The SVB's latest problem may have unfortunately been fully utilized by some people in the Wall Street to force the Fed to more quickly change her interest-rate policy.
        ---
        
        vic lai Mar 22, 2023
        
        Unlike in the past, the Fed's current rate-hiking (and QT) cycle has the potential to kill two birds with one stone.
        Both missions of inflation-fighting and everything-asset-bubble popping can potentially be accomplished by the Fed this time around, even though her doing so may also significantly prop up the chance of plunging the US domestic economy into a non-trivial recession, which in turn can almost always be salvaged by the Fed's subsequent rate-pivoting cycle.
        ---
        If this time the inflation monster can be put fully back into the bottle, and if many of the country's precarious and hanging-around asset-market bubbles (mainly a result of the Fed's past extremely loose monetary policies) can also be suitably subdued, the US, together with the coming probable realization of the 4th Industrial Revolution in the country, may be able to resume a prolonged Goldilocks-like macroeconomic environment in the coming few decades, and quickly-chasing China at that time may also be left far behind.
        ---
        
        vic lai Mar 22, 2023
        
        According to Investopedia,
        "The Glass-Steagall Act was passed in 1933 and separated investment and commercial banking activities in response to involvement in stock market investment.
        Combining commercial and investment banking was considered too risky and speculative and widely considered a culprit that led to the Great Depression.
        Banks were mandated to choose either commercial banking or investment banking activities.
        The Gramm-Leach-Bliley Act eliminated the Glass-Steagall Act's restrictions against affiliations between commercial and investment banks in 1999, which some argue sparked the 2008 financial crisis.''
        ---
        Currently, both the US's excess financialization on steroids (prompted by free-market neoliberal economics) and the US commercial banks' mixed-business model (prompted by fiercer competition from the European banks) should have combined and contributed to the ongoing mini SME-banking crisis in the country.
        ---
        On the asset side of the balance sheet of a typical commercial bank in today's US, the growth of security investment assets has been (much) faster than that of her good old bank-loans, especially in the last few years when the Fed practised unlimited pandemic-QE to prevent the arrival of another Great Depression in the country.
        Given the Fed's sudden unexpected rate-hiking cycle, the pace of revaluation of a bank's loan assets is (much) slower than that of her investment securities, and so the market volatility of the latter is much more quickly transmitted to the net asset value in the balance sheet of that bank.
        ---
        Putting the volatile security investments and the relatively stable loan portfolios under one roof, many of today's commercial banks in the US, whether big or small, are now facing the same problem that, during the Fed's rate-hiking cycle, the quickly and non-trivially deteriorating investment-banking part of them will very easily and quickly bury also their much-larger-scale normal commercial-banking businesses.
        ---
        
        vic lai Mar 22, 2023
        
        According to the same Taiwan economist, the US and European monetary authorities have learnt a lot from the GFC of 2007-09.
        ---
        The salvaging of Bear Sterns in the US (through the help of JPMorgan Chase) during the GFC is very similar to the salvaging of Credit Suisse in Europe (through the help of UBS) recently, which is usually the case during the first stage of a potential financial crisis, in which the monetary authority has always had the necessary remaining funds to help the first major bank in big trouble.
        The rescuing of BS cost the US Fed 30 billion US dollars (delivered to JPMorgan Chase), and the share price of BS dropped like free-fall from 70 dollars to only 1 US dollar, and the final takeover-price was 2 US dollars.
        ---
        With the following fall of Lehman Brothers in the US, its subsequent potential salvaging by the US monetary authority at that time was met with great resistance from the US Congress, since the new rescue operation would've cost the taxpayers an estimated 200 billion US dollars.
        The subsequent fall of LB then started the GFC mainly in the north-Atlantic regions, which eventually ended up costing the US taxpayers as much as 700 billion US dollars (3.5 times the original 200 billion dollars) just for writing the first rescuing check !
        And the rest is financial history.
        ---
        To solve also today's too-big-to-fail or moral-hazard problem (head, the bank shareholders and senior managers win, and tail, the taxpayers and depositors lose), today's US monetary authority chose instead to save only the bank depositors of SVB-et-al, to prevent the potential contagion of bank runs from spreading to other healthy commercial banks.
        ---
        Hence, this time is really different, because a valuable lesson has been learnt, and so the monetary authorities both in the US and in Europe will be widely expected to also keep saving the coming failing major big (and perhaps also the SME) banks (if any) in their countries.
        ---
        
        vic lai Mar 22, 2023
        
        The Fed's inflation-fighting mission may be harder to accomplish this time, due to the current observation that the US's overall household sector seems to have emerged from the present Covid-crisis basically unharmed, and has actually become better off today than before the crisis.
        ---
        This is because,
        (i) thanks to the US federal government's massive Covid deficit-spending, mostly in the form of transfer payments delivered to the US household sector, together with the Biden administration's recent school-fee-exemption program, the overall balance sheet of the US household sector has so far actually improved relative to the pre-crisis period, or has deteriorated at a speed much slower than otherwsie.
        In other words, the improving overall balance sheet of the US's household sector has come mainly from the fast concurrent deterioration of the US federal government's own balance sheet.
        ---
        (ii) many house-buying US households have already mortgaged their new or old houses to their SME-banks at very low fixed mortgage rates in the pre-Covid years.
        It's discovered recently that, believe it or not, more than 90% of such US banks' residential-house mortgage loans are now having fixed mortgage rates !
        Which means, the US house-buying households mostly remain unhurt in the Fed's current rate-hiking cycle, but many
        interest-rate-unhedged US SME-banks, resembling today's SVB, are now seriously being hurt by the same cycle ------ wealth is de facto transferring non-trivially also from the SME-banking sector to the US household sector.
        In other words, the US household sector's overall balance sheet is now gaining, but mostly at the expense of the deteriorating overall SME-banking balance sheet.
        ---
        Besides the above observation that the US's household sector is not being hurt by the country's quickly rising house-mortgage rates, especially for those old house-buyers,
        (a) relative to the Pre-Covid years, the average wage of an ordinary US family has so far increased by more than 20%,
        (b) many bank deposits of the US households have already been transferred to much-higher-interest-paying non-bank-deposit investment instruments, such as the federal government's treasuries and the MMFs.
        ---
        That's why the current mainly-consumption-propelled US domestic economy has remained quite resilient so far, and that's also why the country's inflation genie this time can hardly be forced by Powell's Fed to go quickly and fully back into the bottle.
        ---
        
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