model simulations indicate that the past and projected expansion of the Federal Reserve’s securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1½ percentage points by 2012. In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.
Paul Cleary has not done himself any favours beating-up the product of The Australian’s latest FOI request of the Reserve Bank:
The decision to sell 167 tonnes of the bank’s reserves has cost the nation about $5 billion based on today’s soaring price of almost $1400 an ounce…
The RBA’s sales pushed the world gold price down to an 11-year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender.
The same amount of gold would be worth about $7.4bn today.
This analysis ignores two inconvenient facts. The gold was sitting on the RBA’s books at the Bretton Woods parity price, so the RBA booked a sizeable profit on the sale even at 1997 prices. The suggested $5 billion ‘loss’ ignores the return on the income producing assets the RBA purchased with the proceeds of the sale. It is likely these assets have underperformed gold recently, but historically, the real returns to gold have been negligible compared to other assets. As one of the world’s biggest producers, Australia is naturally long gold. There is no diversification value in relocating gold from the WA goldfields into vaults under Martin Place.
The 1997 RBA gold sale should give gold bugs pause. As we have noted previously, above ground gold stocks dwarf annual production, so the gold price is best viewed as a stock rather than a flow equilibrium. There is a certain irony in people who fear an over-supply of fiat money taking refuge in an asset in which central banks hold substantial stocks that could be dumped on the market at any time. At least one US think tank has advocated selling the US gold stock of 261.5m ounces to yield a quick and dirty profit for the US Treasury. The RBA was able to offload 167 tonnes without too much difficulty.
For a prophet, [Roubini’s] wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003.
Mr. Bernanke will speak to reporters at the National Press Club in Washington Feb. 3 , and take questions there…A month ago, Mr. Bernanke appeared on prime-time television on CBS News’ “60 Minutes” for the second time.
As the linked article notes, even Bernanke lags his European and Japanese counter-parts in holding regular press conferences. I make the case for an increased public profile for the RBA Governor here.
‘That’s an Eternity from Now’: The Day of Reckoning for the Tierney-Simmons Wager
John Tierney collects on his ‘peak oil’ bet with the late Matthew Simmons:
Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011…
When I found a new bettor in 2005, the first person I told was Julian’s widow, Rita Simon, a public affairs professor at American University. She was so happy to see Julian’s tradition continue that she wanted to share the bet with me, so we each ended up each putting $2,500 against Mr. Simmons’s $5,000.
Just as Mr. Simmons predicted, oil prices did soar well beyond $65. With the global economy booming in the summer of 2008, the price of a barrel of oil reached $145. American foreign-policy experts called for policies to secure access to this increasingly scarce resource; environmentalists advocated crash programs to reduce dependence on fossil fuels; companies producing power from wind and other alternative energies rushed to expand capacity.
When the global recession hit in the fall of 2008, the price plummeted below $50, but at the end of that year Mr. Simmons was quoted in The Baltimore Sun sounding confident. When Jay Hancock, a Sun financial columnist, asked if he was having any second thoughts about the wager, Mr. Simmons replied: “God, no. We bet on the average price in 2010. That’s an eternity from now.”
The past year the price has rebounded, but the average for 2010 has been just under $80, which is the equivalent of about $71 in 2005 dollars — a little higher than the $65 at the time of our bet, but far below the $200 threshold set by Mr. Simmons.
What lesson do we draw from this? I’d hoped to let Mr. Simmons give his view, but I’m very sorry to report that he died in August, at the age of 67. The colleagues handling his affairs reviewed the numbers last week and declared that Mr. Simmons’s $5,000 should be awarded to me and to Rita Simon on Jan. 1…
International Economy poses the somewhat loaded question to 30 pundits, including my CIS colleague John Lee. My answer would be ‘go back and look what happened in 1998-99.’ China has grown in importance since, not least to Australia, but Australia has already weathered a scenario in which East Asia and commodity prices crashed.
Not content with a monthly CPI, an article in Slate looks at the prospects for an even higher frequency CPI in the US. According to the article, the US CPI costs $US234m a year to compile at a monthly frequency, which works out at about US$0.75 per capita. The ABS tells us that a monthly CPI in Australia would cost $A25m a year compared to the $A10m it spends compiling the existing quarterly release, which works out at around $A1.11 per capita. There must be economies of scale in compiling the CPI. Otherwise, the ABS quote looks expensive, even at PPP exchange rates.
I recall a certain market economist in the late 1990s who would embarrass the ABS by pointing out the above-CPI increases in the cover price of the ABS CPI publication.
I make the case for a monthly CPI in Australia here.
When you buy commodities, you’re selling human ingenuity.
…Why bet against human ingenuity by buying physical commodities when you can bet on it by investing in the enterprises whose task is to remove the bottlenecks and lower commodity prices? So devote cash to the fixers, not the source: What I know is that I’d much rather buy the companies – for example the low cost integrateds, E&Ps and drillers – whose job it is to fix the world’s emerging energy problems than I would buy the energy itself.
I have an op-ed in today’s Age arguing that the government’s expanded support for the mortgage securitisation industry is of no benefit to retail borrowers. Henry Ergas makes related points in The Australian:
where is the evidence that the benefits from the subsidy outweigh its costs? Indeed, where are the estimates of just how large that subsidy is likely to be, and to whom it will accrue? And where is the analysis showing that what Australia needs is yet more lending on houses, this time funded by taxpayers?
Don’t waste your time looking, for the answers are nowhere to be found.
As Michael Stutchbury notes, the whole banking package was premised on Joe Hockey’s lies about the big banks. But what does it say about the government that it allows public policy to be driven by the cynicism and opportunism of a populist federal opposition?
The Year RBA Watchers Got an Involuntary Early Retirement
Ross Gittins, giving his traditional address to the Australian Business Economists’ annual forecasting conference:
It’s become a lot harder for you guys to predict now the nation’s economics editors have retired from the prediction game. But that’s the way the more loud-mouthed of your brethren seem to have wanted it.
Ross Gittins delivered a fascinating speech this week during which he gave me a subtle slap for forcing the RBA to stop tipping-off journos about the internal executive’s rate recommendations prior to its Board meetings, which in and of itself is an acknowledgement that demonstrates how right we were to push this line (our actions also brought about the demise of the former Shadow Governor, Terry McCrann, after the October meeting).
Gittins’ remarks effectively concede that the economic writers in question can’t play the prediction game nearly as well now that they have a more circumscribed relationship with the Bank. Glenn Stevens denies that Board decisions have ever been leaked, but there is a distinction between the outright leaking of a Board decision and the backgrounding and nudging of economics writers that previously took place.
Should Central Banks Publish an Official Interest Rate Projection?
The case for and against. Since the RBA already produces economic forecasts endogenised to an assumption about the future path of monetary policy, it would make sense to publish the cash rate projection as well. Changes in the projection would heavily condition the expected real cash rate and could even reduce the need for changes in the actual cash rate.
