Cooperative Central Banking

I awoke today to see several global central bank plutocrats (probably fresh from Davos) opine that "the era of cooperative central banking was breaking down." We had posted earlier in the Bernanke/Yellen exchange that "CBs were at core mission domestic institutions" and Yellen would look to re-establish this characteristic.

Regular readers are aware of our system seizure concerns. Put simply, the world is awash in "too many dollars" only until someone wants them. Vince Foster (@exantefactor) has dropped several timely and thought provoking posts on Minyanville as to the movement of Foreign Reserve Custodial holdings at the Fed. These movements have foretold the EM disruptions of last Spring and 2014.

CB fx res

As Gav and Hart indicated in their paper of 2006, "When fed custodial holdings drop countries running large CA/Budget deficits find it difficult to place debts into the system." In macroeconomics- The decline in US CA results in a monetary tightening for the rest of the globe. Suspend your disbelief for a second and consider that the Fed KNOWS THIS.

Tapering, forward guidance and the end of cooperative central banking can be viewed in a new light. OTHERS may find placing debts difficult, but the US finds it MUCH easier. Witness the disappearance of large supply and new FRNs this week alone. "Taper" can be seen as a delicate balance of "benefiting" domestically from the "consequence" of others. The exodus of  custodial holdings results in enough capital market disruption to lower US borrowing costs as the Fed pulls back. Talk about optimal control !

So far, the risky gambit is working. The market adjustments have not cracked the modest growth. Last Spring showed the Fed will up FG and rhetoric when they feel things are getting away from them. The question is, how long will "the others" allow themselves to be tossed around by this game.


2 thoughts on “Cooperative Central Banking

  1. michael swyter

    Loved this. 2 of my concerns about our debt don’t revolve around size to gdp but rather interest payments taking a larger portion of future spending when rates go up, and the competitive position of our debt when other countries rates go up faster than ours. Can you ease my pain?

    Secondly, FG is just that, words. It seems to me problematic because at some point the bond market may choose to lead rather than be lead. What I saw last May was that possibility, and a number of players being wrong footed which lead to more vol, which lead to more players being wrong footed which led to…..

    Thank you as always.

  2. joe smith

    Nothing the others can do to fight a cost competitive US position + improving domestic energy. EM works when US C/A expands from being demand of last resort. When it contracts, look out.


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