Friday, June 19, 2009

Random Thoughts

Random Thoughts is a regular column with the aim of providing some interesting bits and pieces but does not give a holistic picture/view/outlook.

a) US CPI (from macroblog): "The chart below (hat tip to Brent Meyer at the Cleveland Fed) shows another interesting feature of yesterday's CPI release. Notice the clear downward shift in the distribution of CPI component price changes. Over half of the prices within the CPI market basket posted declines at or below 1 percent last month, up from an average of 29 percent in 2008, with a whopping one-third of the price index posting declines in May."
To me this highlights that an incresingly large area of goods and services is affected from disinflationary forces and the low headline number is not only down due to energy.

b) Guarantees, loan facilities and costs: the sums involved in the bailout measures are huge and also the costs involved are huge. However, guarantees, loan facilities/credit and costs are NOT THE SAME THING. If my local tv station or newspaper states: "Germany has spent EUR430bn to bail out the banks", then that is just not true. In fact they have provided capital injections (which is a real cost), much more money via credit injections (which is a cash-outflow for the state but no cost and we will only see in the future how much that really costs in the end) and finally a lot of guarantees (which is no cash-outflow and we will see how much it costs in the end). You can forgive the public and journalists for not knowing what they say but increasingly in the professional sphere the same mistakes are made as well. For example for this chart (Bailout Costs vs Big Historical Events) provided by the Big Picture - an otherwise very insightful blog - it seems that the aim was more to show a dramatic picture than to compare apples with apples: The post states: "This early Bailout Nation graphic shows the the total costs to the taxpayer of all the monies spent, lent, consumed, borrowed, printed, guaranteed, assumed or otherwise committed."
Again: you do not need to be an accountant to know that a guarantee is not the same as a cash-outflow via a loan facility and a cash-outflow is not the same as a cost. Furthermore, just because a loan facility has been established it does not mean that it has been drawn upon (otherwise the Fed's balance sheet would be much larger than it currently is). We just do not yet know how much the enacted (and potentially future) bail-out measures will cost. I personally see that buying the crappy Bear-Stearns assets can amount in a 100% loss but I fail to see how extending the swap lines with other large central banks such as the ECB can be stated as a cost...
Bloomberg provides an internet-based tool to view various programs and how much money has been drawn in each (but I do not know how up-to-date it is). For example out of the committed USD540bn for the money-market investor funding facility exactly USD0 has been drawn.

c) Brad Setser is pretty sure that China did not sell USTs in April and May: "China shifted from bills to short-dated notes in April rather than actually reducing its overall Treasury portfolio. It just so happens that China buys all its short-term bills in ways that show up in the US TIC data, but only a fraction of its longer-term notes in ways that show up in the US TIC data. A shift from bills to notes then could register in the US data as a fall in China’s total Treasury holdings and a rise in the UK’s holdings."

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