Monthly Archive for March, 2009


Is America recapitalising all the non-American banks?

The recent naming of the AIG counterparties [press release, NY Times coverage] reminded me of something and this post by Brad Setser has inspired me to write on it.

Back in January, I wrote a post that contained some mistakes.  I argued that part of the reason that the M1 money multiplier in America fell below unity was because foreign banks with branches in America and American banks with branches in other countries were taking deposits from other countries and placing them in (excess) reserve at the Federal Reserve.

My first mistake was in believing that that was the only reason why the multiplier fell below one.  Of course, even if the United States were in a state of autarky it could still fall below one as all it requires is that banks withdraw from investments outside the standard definitions of money and place the proceeds in their reserve account at the Fed.

And that was certainly happening, because by paying interest on excess reserves, the Fed placed a floor under the risk-adjusted return that banks would insist on receiving for any investment.  Any position with a risk-free-equivalent yield that was less than what the Fed was paying was very rapidly unwound.

Nevertheless, I believe that my idea still applies in part.  By paying interest on excess reserves, the Fed (surely?) also placed a floor under the risk-adjusted returns for anybody with access to a US depository institution, including foreign branches of US banks and foreign banks with branches in America.  The only difference is that those groups would also have had exchange-rate risk to incorporate.  But since the US dollar enjoys reserve currency status, it may have seemed a safe bet to assume that the USD would not fall while the money was in America at the Fed because of the global flight to quality.

The obvious question is to then ask how much money held in (excess) reserve at the Fed originated from outside of America.  Over 2008:Q4, the relevant movements were: [1]

Remember that, roughly speaking, the definitions are:

  • monetary base = currency + required reserves + excess reserves
  • m1 = currency + demand deposits

So we can infer that next to the $707 billion increase in excess reserves, demand deposits only increased by $148 billion and required reserves by $7 billion.

In a second mistake in my January post, I thought that it was the difference in growth between m1 and the monetary base that needed explaining.  That was silly.  Strictly speaking it is the entirety of the excess reserve growth that we want to explain.  How much was from US banks unwinding domestic positions and how much was from foreigners?

Which is where we get to Brad’s post.  In looking at the latest Flow of Funds data from the Federal Reserve, he noted with some puzzlement that over 2008:Q4 for the entire US banking system (see page 69 of the full pdf):

  • liabilities to domestic banks (floats and discrepancies in interbank transactions) went from $-50.9 billion to $-293.4 billion.
  • liabilities to foreign banks went from $-48.1 billion to $289.5 billion

I’m not sure about the first of those, but on the second that represents a net loan of $337.6 billion from foreign banks to US banks over that last quarter.

Could that be foreign banks indirectly making use of the Fed’s interest payments on excess reserves?

No matter what the extent of foreign banks putting money in reserve with the Fed, that process – together with the US government-backed settlements of AIGs foolish CDS contracts – amounts to America (partially) recapitalising not just its own, but the banking systems of the rest of the world too.

[1] M1 averaged 1435.1 in September and 1624.7 in December.  Monetary base averaged 936.138 in September and 1692.511 in December.  Currency averaged 776.7 in September and 819.0 in December. Excess reserves averaged 60.051 in September and 767.412 in December.  Remember that the monthly figures released by the Federal Reserve are dated at the 1st of the month but are actually an average for the whole of the month.


Another important point

Tyler Cowen writes, in the midst of a discussion of Keynes’s General Theory, spending multipliers and the velocity of money:

You can’t just take a partial derivative of an accounting identity and call the result a causal relationship.

[My previous posts on spending multipliers and the velocity of money.]


More on Northern Ireland vs. Israel/Palestine

After my last post on this, I’ve been listening to the responses of Sinn Fein to the recent murder of two guys in the British Army by the “Real IRA” and, believe it or not, thinking about the parallels with Islam.  There’s nothing particularly original in my thoughts, but I thought I’d put them up here anyway.

a) I think that many beliefs – and often more importantly, many practices that are based on beliefs – change only very slowly over time. Often, the practices retain importance even when the beliefs they’re based on have long since evaporated.

b) What’s more, beliefs – and practices – change much more across generations than within them, so that once you reach your first full set of beliefs at around the age of 20, they’ll change extremely slowly, if at all, over the rest of your life. Real change comes when children choose to differ from their parents. This sort of thing is not particular to ideas of religion or morality. There’s been some recent work showing that people’s attitudes to risk-taking are essentially shaped when they’re young.

c) When somebody makes the discrete choice to turn to violence, it’s common to conclude that they are an inherently violent person (or, in the case of the radical Islamist stuff, operating under inherently violent beliefs). Contrary to this, I suspect that the violence emerges at a point of inflection (a “tipping point”) in how they cope with perceived opposition to their beliefs. It doesn’t matter if their beliefs are constant but their perception of society’s opposition to them is changing, or if their beliefs are changing and their perception of society is constant. At some point, the distance between their private beliefs and their perception of what the world is imposing on them becomes great enough for them to break from their previous behaviour and move to something disjointedly different. Violence from radical Muslims is one example, but so is violence from Republicans in Northern Ireland, or violence from working-class gangs in Northern England in the early ’80s.

d) There is an important difference between the distance between two two sets of beliefs and the level of opposition between them. Opposition might be more likely to increase when the beliefs are a long way apart, but it doesn’t necessarily have to. It is the sense of opposition that leads to the disjoint jump into violence.

e) Therefore, what brings about peace in the long term is long periods of calm. Calm with grumbling, certainly, but calm. The newly migrant family might stick out like a sore thumb, but so long as they are tolerated and they tolerate their new home, then their children (or their grandchildren) will eventually conform to the society they find themselves in.

I think the greatest victory in Northern Ireland was in convincing people to put down their guns for a while. The details of any particular agreement are less important, because the real details will emerge from the ground up as the people who had previously been spitting in each other’s faces find themselves (awkwardly, painfully) interacting with each other instead. Yes, the details of the agreement are what helped put the guns down in the first place, but that was all.

I read somewhere that before the recent crap in Gaza, Hamas had offered Israel a 30-year truce. Not a peace agreement. Not an acknowledgement of Israel’s right to exist. Just a truce. If it’s true, I think Israel made a mistake in not accepting it.


US February Employment and Recession vs. Depression

The preliminary employment data for February in the USA has been out for a little while now and I thought it worthwhile to update the graphs I did after January’s figures.

As I explained when producing the January graphs, I believe that it’s more representative to look at Weekly Hours Worked Per Capita than at just the number of people with jobs so as to more fully take into account part-time work, the entry of women into the labour force and the effects of discouraged workers.  Graphs that only look at total employment (for example: 1, 2) paint a distorted picture.

The Year-over-Year percentage changes in the number of employed workers, the weekly hours per capita and the weekly hours per workforce member continue to worsen.  The current recession is still not quite as bad as that in 1981/82 by this measure, but it’s so close as to make no difference.

Year-over-year changes in employment and hours worked

Just looking at year-over-year figures is a little deceptive, though, as it’s not just how far below the 0%-change line you fall that matters, but also how long you spend below it.  Notice, for example, that while the 2001 recession never saw catastrophically rapid falls in employment, it continued to decline for a remarkably long time.

That’s why it’s useful to compare recessions in terms of their cumulative declines from peak:

Comparing US recessions relative to actual peaks in weekly hours worked per capitaA few points to note:

  • The figures are relative to the actual peak in weekly hours worked per capita, not to the official (NBER-determined) peak in economic activity.
  • I have shown the official recession durations (solid arrows) and the actual periods of declining weekly hours worked per capita (dotted lines) at the top.
  • The 1980 and 2001 recessions were odd in that weekly hours worked per capita never fully recovered before the next recession started.

The fact that the current recession isn’t yet quite as bad as the 1981/82 recession is a little clearer here.  The 1973-75 recession stands out as being worse than the current one and the 2001 recession was clearly the worst of all.

There’s also some question over the US is actually in a depression rather than just a recession.  The short answer is no, or at least not yet.  There is no official definition of a depression, but a cumulative decline of 10% in real GDP is often bandied around as a good rule of thumb.  Here are two diagrams that illustrate just how much worse things would need to be before the US was really in a depression …

First, from The Liscio Report, we have an estimated unemployment rate time-series that includes the Great Depression:

Historic Unemployment Rates in the USA

Second, from Calculated Risk, we have a time-series of cumulative declines in real gdp since World War II:

Cumulative declines in real GDP (USA)

Remember that we’d need to fall to -10% to hit the common definition of a depression.


Integrating with Twitter

I’m not really sure about Twitter.  I don’t really see the point.  I guess the mobile-phone integration is a step forward, but still …

Anyway, I’ve just installed Twitter Tools so that my Twitter account will get an update when I post a new entry here on my blog.