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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (8422)	2/21/2004 3:12:24 PM
From: NOW	Respond to of 110194

does any of that make sense to you? not me.

To: Crimson Ghost who wrote (8422)	2/21/2004 5:34:41 PM
From: ild	Read Replies (1) \| Respond to of 110194

Money and Credit By OTMAR ISSING FRANKFURT -- There is a broad consensus today that central banks should maintain price stability to keep inflation low. This is reflected in the mandate given to the central bank in many countries. The objective is normally specified in terms of an index of consumer prices, and there are very good reasons for this practice. Purchasing power is undermined by an increase in consumer prices, so a constant index of consumer prices maintains the real value of money over time. With stable prices, money serves society best as a unit of account, a medium of exchange, and store of value. Any index of consumer prices covers only a segment of prices in an economy -- although an important one. Prices of assets like real estate or equities are excluded by definition. For most of the time this is not seen as a problem -- quite the opposite. Monetary policy can only control the development of goods prices over the medium-to- long term. But in times of large movements of asset prices, debate always starts on whether this concentration of monetary policy on consumer prices alone is appropriate or not. Asset price developments have an influence on spending decisions by companies and households. A rising value of one's house makes one richer and might encourage additional consumption. Higher stock prices reduce the cost of equity financing and might contribute to increasing investment. The opposite will happen with falling asset prices. This "wealth effect" will finally, via changes in expenditure, have an influence on the development of consumer-goods prices and should therefore be included in inflation and growth projections by central banks. * * * There seem to be strong arguments that central banks should not target asset prices, and only assess their development in the context of their potential influence on goods prices. To start with the problem of judgment: First, in contrast to goods prices, there is no simple measure for the dividing line between "inflation" or "deflation" for asset prices. An assessment of the fundamental value of an asset price would be needed. A positive and negative deviation from this fundamental value could then be labeled asset price inflation and deflation, respectively. Needless to say there is no consensus on such a "benchmark" against which deviation of current prices could be measured. Second: Current prices for assets like real estate and stocks contain all relevant information and reflect best the market's assessment. It seems difficult to claim that a central bank has a better knowledge on the correct level of asset prices than the market. Third: Irrespective of the judgment on the appropriate valuation, central banks do not have the instruments to control the development of asset prices. But even if they could control, there would still be strong arguments against. Private investors would feel invited to speculate at lower risk and thereby to exploit any commitment by the central bank -- we call this moral hazard. For all these reasons, central banks around the world agree that they must not target asset prices. Even in the case of extreme high valuations of assets, a situation in which most observers would agree that the prevailing level of asset prices is not sustainable -- think of the situation when a few acres of land in a capital was supposed to be worth the value of California -- there are strong arguments that a central bank should not try to "prick the bubble." The interest rate increase required to prick the bubble in times of collective exuberance would inflict heavy losses on the real economy. The negative consequences for the reputation of the central bank following such policy would be more than obvious. All this is the consensus view. But can central banks just leave it at that and reject any responsibility? I grant that it is a tough challenge to identify an overshooting of asset prices at an early stage. And to repeat, no central bank should pretend knowledge it cannot dispose of. Nevertheless, we have repeatedly experienced situations in which market participants found it more rewarding to follow a trend than to bet against it despite their own view that the development was not sustainable. It is worth noting that with hindsight, i.e. after the collapse, almost everybody seems to agree that a "bubble" has burst. Is it not difficult, then, to accept the argument that it should be totally impossible to make any judgement ex ante? Should it not be the role of central banks to communicate concerns in an appropriate form and thereby to try to contribute to a more sober assessment of asset price developments? Huge swings in asset valuations can imply significant misallocations of resources in the economy and furthermore create problems for monetary policy. Not every strong decline in asset prices causes deflation, but all major deflations in the world were related to a sudden, continuing and substantial fall in values of assets. The consequences for banks, companies and households can be tremendous. Moreover, in a situation of deflation, monetary policy is exposed to the "zero bound" problem -- nominal interest rates cannot be reduced below zero, and therefore lose effectiveness. Prevention is the best way to minimize costs for society from a longer-term perspective. Central banks are confronted with this responsibility, but there is no easy answer to this challenge. So far, only some tentative conclusions can be drawn. First, in their communication, central banks should certainly avoid contributing to unsustainable collective euphoria and might even signal concerns about developments in the valuation of assets. Second, the argument that monetary policy should consider a rather long horizon is strengthened by the need to take into account movements of asset prices. Finally, it should not be overlooked that most exceptional increases in prices for stocks and real estate in history were accompanied by strong expansions of money and/or credit. Just as consumer-price inflation is often described as a situation of "too much money chasing too few goods," asset-price inflation could similarly be characterized as "too much money chasing too few assets." A central bank cannot control the use of money, but it can try to control its supply. In other words, the risks associated with asset-price inflation and subsequent deflation are an additional reason for paying close attention to money and credit. Thus, a monetary policy strategy that monitors closely monetary and credit developments as potential driving forces for consumer-price inflation has an important positive side-effect: it may contribute at the same time also to limiting the emergence of unsustainable developments in asset valuations. The European Central Bank has adopted such a monetary policy strategy in which the continuous analysis of money and credit plays an important role. I am far from claiming that we have found a definite solution to the problem of how to deal with asset price developments. But the need always to assess the development of money and credit carefully, and to reflect on how the result should be taken into account when deciding on setting the central bank's interest rates, is at least a permanent admonition to be vigilant. As societies accumulate wealth, asset prices will have a growing influence on economic developments. The problem of how to design monetary policy under such circumstances is probably the biggest challenge for central banks in our times. Mr. Issing is the chief economist of the European Central Bank. Updated February 18, 2004 online.wsj.com Credit Bubble Bulletin, by Doug Noland Issing v. Greenspan prudentbear.com

To: Crimson Ghost who wrote (8422)	2/22/2004 11:42:52 AM
From: russwinter	Read Replies (1) \| Respond to of 110194

Excerpt from Walter Deemer interview, this week's Barrons: "At this point we are getting a broad based bull market in metals. It's not just gold, Not just nickel. Not just lead, zinc. Not just platinum. Usually that indicates that the market senses inflation ahead. There's a conflict between Dr. Copper (the PhD in economics) and the bond market. When there is a conflict between the two, Dr. Copper usually knows more than the economists. It's saying there is a period of inflation rather than deflation lying ahead."