Daniel H. Neilson's blog

A correspondent sends us to a column of Paul Krugman's that asserts that "nobody understands debt". Fair enough. To my mind, this line stands out:

And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors.

By Daniel H. Neilson

As we prepare to digest the implications of this week's ECB move, it seems worthwhile to take a look at the monetary economics of fixed exchange rates.

There are two basic ways to hold fixed the exchange rate between the money of two communities: peg the exchange rate or create a monetary union. Read more

The ECB has always been the protagonist of the eurozone crisis story. At times it has seemed the arch-villain, coldly standing on principle even as the financial system crumbles around it. At other times it has seemed the hero in waiting, ready to step in at the eleventh hour to bring a moral-hazard-free end to the turmoil with its unlimited balance sheet.

What is becoming increasingly clear, however, is that the plot is taking a twist. The question is no longer whether the ECB is villain or hero, but whether it exists at all. (And today's collateral eligibility expansion doesn't resolve the question.) Let me explain. Read more

Bloomberg's reporters continue their diligent work looking back on the Fed's lending in the subprime crisis. Matt Yglesias, Yves Smith, Paul Krugman, and others have picked up the story. Meanwhile, the world looks ahead to the next development in the eurozone crisis. To read these crises correctly, liquidity should be front and center. It is missing in Bloomberg's work, and it is missing in European policymaking. Read more

By Daniel H. Neilson

Last week Goldman Sachs published a note in favor of the Fed's adopting a formal nominal GDP target, while Fed-watchers caught a whiff of a possible change in policy in the works. The proposal, specifically, is for the Fed to announce a target level for nominal GDP over the next 12 months, and to commit to undertaking asset purchases if it seemed that NGDP would come in too low. Scott Sumner, who has long advocated such a policy, felt vindicated, and other market monetarists also voiced their support. Even Paul Krugman seemed to think it might do some good. Read more

Focus on quantities

By Daniel H. Neilson

Debate continues over what is the right level for the dollar–renminbi exchange rate. I find it hard to see how focusing on this one price will lead to a productive outcome, politically or economically. Debating the exchange rate focuses the attention on the metric that guides policy. A better approach is to focus on the other side of the coin, namely reserve accumulation.

China's accumulation of US dollar reserves, mainly Treasury debt these days, is not a by-product of its exchange-rate policy. It is the exchange-rate policy. Read more

By Daniel H. Neilson

Can the renminbi displace the dollar as the world's international money?

Writing in the FT last week, Arvind Subramanian argues that, "sooner than almost anyone thinks," the renminbi will begin to take the dollar's place in that role.

[T]he renminbi could displace the dollar as the premier, reserve currency within the next decade or soon thereafter. Sceptics will scoff for two reasons.

First, even if China’s economy overtakes America’s, the renminbi’s rise could be delayed...

By Daniel H. Neilson

The U.S., in aggregate, acts as a bank to the rest of the world. The precise role of that bank has evolved over the course of the crisis. Read more

The first graph shows US financial flows over the past five years. The BIS recently reminded us to look at gross flows, which I think is good advice. Just so, the blue line shows increases in US liabilities¹ to the rest of the world, the green line increases in US financial assets abroad. The red line is the difference between them, plus a (sometimes considerable) statistical discrepancy. Read more

I am late to the party on the inventive use of copper by Chinese companies seeking alternative sources of funds. FT Alphaville and Michael Pettis had the story in the spring: Chinese companies would obtain trade finance to purchase copper abroad, warehouse it, and use the inventory as collateral to obtain letters of credit on Chinese banks, which could be used to fund investments totally unrelated to copper. Goldman says the authorities have cracked down on this scheme, as does Pettis.

On its surface the scheme seems to be just another way to access credit in a constrained financial system, a spigot that has now been sealed off. The urgency of the situation thus removed, it is worth giving this a deeper read. Read more