Update: The Soft-Underbelly of US Power?
Things keep looking better and better (thanks to Matt for the link):
Financial Times, March 1oth 2005: Treasury yields shake off Koizumi comments
posted by Bill Petti at 8:33 PM
Thursday, March 10, 2005
Financial Times, March 1oth 2005: Treasury yields shake off Koizumi comments
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3 Comments:
Bill,
What think was missing from our previous discussion of the issue was a discussion of intentions. The FT reported that the market suffered a misperception, I do not agree that the market was confused one bit. It seems a bit silly to me that we do not consider the rationale behind Asian central banks signaling discontent with current US macroeconomic policy. While many may disagree with me, I would be the first to posit that this might have been a case of good ‘ole brinkmanship, you know rocking-the-boat. While critics are correct to point out that any drastic fluctuation caused by the selling of dollars or dollar denominated assets by central banks might lead to trouble not only to the United States but also the Asian economies themselves. But let us think back to the basics behind brinkmanship – generating a costly signal to show US policymakers that you mean business, rocking that boat a little to make your opponent a little nervous – if that was the intention of the actions of the Asian central bankers, then perhaps they were successful at sending their message along. And now to add the interesting speech by the Japanese Prime Minister about diversifying away from dollars even by the Japanese. This is getting really interesting – what this all hinders on is a change in policy or even a pronouncement of a policy shift by the Chinese, which is unlikely to happen in the immediate future.
More food for thought,
Matt
8:54 PM
Matt,
It goes without saying that I agree conceptually with what you are saying. The question is whether or not it is empirically correct. First, it would require political will on the part of S. Korea and Japan to take such a drastic, and potentially disasterous, step. If the dollar crashed as a result of their actions this would certainly harm their economies in the short run. While China has become a great importer of their products, the US is still a major market and if the dollar depreciates against the yen and the won this would harm their export sectors (to say nothing of the fact that China's renminbi is pegged to the dollar, wouldn't this also hurt Chinese purchasing power assuming they are dedicated to keeping the peg in the short term?). Second, their would seemingly have to be some coordination between S. Korea and Japan, since both states were responsible for verbal "gaffes" which lead to further pressure on the dollar. Third, the S. Korea signal was 'sent' in a single paragraph of a report from the Treasurey to the parliament--not the most obvious of public statements. This more fits the mold of a quiet diversification (which would have been in their interest befor their comments dropped the value of their dollar holdings) rather than a costly signal. The Japanese signal seems to fit your theory better, since it was done in public by the head of the government at an open parliamentary hearing. This is certainly a public, highly visible signal sure to make waves in the market, whereas the S. Korea comment seems more unintentional.
Either way it will be interesting to see whether this was an attempt by Asia to put pressure on the US to deal with the deficit (since domestically their doesn't seem to be any) or simply another example of how information (or misinformation) can kill...
5:07 PM
Bill,
As usual I don't find myself disagreeing with your logic. My intuition however is that there was something to this behavior. I am not online in that either - one of Roubini's recent posts suggests that he takes the same tac.
As for South Korea what might be unintentional was the drastic response they wound up with when the markets heard the news...however - the mere fact that there was any public statement at all about the diversification issue suggests that something is up to me. Market signalling is usually much more opaque then the kind of stuff we are used to looking at in security studies. The pain staking detail that goes into checking and watching statements before they are publicized particularly from Central Banks is what leads me to this speculation.
Unforunately, the empirical record will be hard to verify in this regard.
In more general news, if you look at the other FT reports about the US bond market - it is clear that we are digging our own grave regardless of what the Chinese decide. The yield continued to creep up (suggesting that the government is forced to increase interest rates while simultaneously the bonds are being sold in the secondary market for cheaper). We have some major economic adjustment ahead of us, even if all this strategic interaction between Asia and the US doesn't amount to much.
Later,
Matt
10:40 PM
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