Fear and loathing of the Fed

By Daniel Hanson

As the GOP primary heats up, it appears that Ron Paul’s “End the Fed” message is catching on. In South Carolina, Gingrich dove head-first into the Gold Standard fray, promising a “gold commission” modeled after the double-digit inflation-battling commission built by Ronald Reagan (that, coincidentally, overwhelmingly rejected returning to a gold standard, and had Ron Paul as a member).
Ron Paul, a subscriber to Austrian Economics, has been advocating a return to gold for years. Part of his argument is that gold’s meteoric rise signals impending doom for the dollar. Between the massive debt overhang and distrust of the Fed, Paul argues that people will lose faith in the U.S. financial and monetary system.
Noteworthy, then, are the returns on asset classes in 2011.

If, as Paul and Gingrich argue, we are facing economic doom, shouldn’t gold be at the top of the list? And shouldn’t interest rates be rising? And shouldn’t inflation be going through the roof?
Yet, as AEI economist John Makin notes:

First among the reasons for low interest rates is the fact that actual inflation has been coming down. U.S. headline inflation is almost a full percentage point below where it was about four months ago and it is expected to fall further toward midyear. Inflation in Germany is coming down and Japan is actually experiencing deflation… The negative shocks of 2011 including the Arab spring, Japan’s tsunami-nuclear disaster, the ugly midyear battle over the U.S. debt ceiling, and the 4th quarter intensification of Europe’s sovereign debt crisis, all contributed to elevated risk aversion. As inflation risks abate, the safe haven represented by high-grade government bonds looks even safer.  For households and firms wishing to hold a high level of very liquid safe assets another alternative is U.S. treasury bills that are highly liquid and continue to be favored assets.

In other words, inflation is low and dropping, interest rates are low and will remain so, and markets view U.S. sovereign debt as their safest haven. Maybe the gold-bug-predicted crisis is still yet to come?
  shareshare

The 5 things you need to know about the next Swiss Bank head

By Daniel Hanson

With the shocking resignation yesterday of Philipp Hildebrand as Swiss National Bank chairman, it seems clear that Thomas Jordan will be his successor. Here are the things you need to know about Jordan:
1. Jordan is an academic technocrat. He has a long academic CV but no private sector experience, putting him in company with many new European financial czars. His views on the Swiss system are the result of decades of literature review, but lack real-world perspective. Consequently, he has repeatedly shown little respect for actual business practices, like promising banks would have no trouble magically raising capital buffers to meet cautionary guidelines.
2. Jordan, a long-time Hildebrand ally, will only add fuel to the fires of opposition to the SNB’s current battles over massive reserve accumulation. Jordan has long urged a more aggressive reserve accumulation strategy, and the powerful political opposition to this move will grow under his tenure. The real takeaway here is that the SNB will continue to lose legitimacy as it fights this war of public opinion.
3. All signs point to Jordan being the architect of the Franc-Euro currency peg the Bank set up in September amid rising exchange rate concerns. Jordan was the principle defender of the peg in the media, established the public case for the legal framework of a peg, and dropped hints in interviews for months before the peg was announced about its possibility. Don’t expect a marked deviation from it.
4. Just like Bernanke, Jordan is terrified of deflation in 2012, and he is a major advocate of both inflation targeting and central bank coordination. Expect the SNB to undertake more liquidity operations with the Fed and ECB over the next months. Swiss voters should be concerned that, thanks to the SNB liquidity operations, the Swiss economy has chained itself to the eurozone. When the crash comes in Europe, Switzerland will feel the pain too.
5. Jordan’s push for more integration means that the scope of the de facto QE-3 currently being employed by the world’s central banks is only going to expand. In order to counter funding shortages, central banks have taken on more deposits and offered more loans. They have succeeded in supporting the liquidity of the world’s banks, but they have also engaged in credit allocation that makes them vulnerable to large-scale defaults. Jordan will only exacerbate this condition.
The short version of events is that anyone hoping for a change of direction in the post-Hildebrand Switzerland isn’t going to get what they want. Jordan will be more of the same.