Friday, June 10, 2011

Tim Duy — Unemployment or Currency Crisis

Tim Duy of Fed Watch is a very savvy guy. He has a must-read post on the current thinking at the top, which is how to navigate between high unemployment and, no, not inflation, as many think, but currency depreciation leading to a currency crisis. Current thinking seems to be that unemployment has to be suffered in order to avoid a possible currency crisis.


Matt Franko said...

I dont get this.

He has a chart from FRED titled "Foreign Assets in the US: Net capital Inflow" and the units on the left hand y axis is "$ Billions".

So the title of the chart implies a flow, but the units indicate a stock. Right here something is fishy. If it was a flow, the y axis units should be some unit per unit time...

This is the way I look at it: it is a stock. It shows the net position of foreign assets in the US at A point in time. It is a stock. This guy is treating it as a flow of some sort?

He says; "That kind of shift in asset flows is sort of difficult to dismiss as irrelevant." It is not a shift in flows.

Looks like this net foreign position got marked down as time progressed thru the crisis by about $700B and went neg for a time.

This probably represents the fall in values of foreign holdings of FNMA, FRE, C, BAC, GM, all sorts of subprime paper, LEH, BS, FNMA Preferred, FRE Preferred, GE, WAMU, CCR, etc...

They took a $700B hit at a point in time, I dont necessarily see how this would create a currency crisis for the US, maybe the Euro yes (which it did at the time), but not the USD...

Then he says "pulled US out of the fire"... "look at Greece"...

I dont get this guy. Seems like he is treating a stock as some sort of flow...


Tom Hickey said...
This comment has been removed by the author.
Tom Hickey said...

I removed the previous comment because I erroneously jumped to the conclusion from the context that it was Steve Keen you are talking about since he has a quirky approach to accounting. MMT economists have called him out on it, but he persists anyway.

But after posting it, I saw that you are talking about Tim Duy, who is one of the top Fed Watchers. His work is considered first-rate, so it seems surprising he would be making a mistake like that. Why don't you go over to his place and ask him in the comments? It would be interesting to see his response.

Detroit Dan said...

Good catch, Matt!

Tom, I have great respect for your opinion, but Tim Duy's post was pretty thoroughly discredited by the respondents...

Tom Hickey said...

Dan, I didn't say I think that Duy is correct about a currency crisis looming. I said that he is savvy about the thinking at the top, and contrary to what many think, it appears that the concern up there is avoiding a currency crisis instead of addressing unemployment and lagging demand. Geithner has the president's ear perhaps more than anyone, and if he is pushing this, it is going to be at the top of the heap.

Tim Duy also seems to agree to some extent. In fact, a lot of people think that the inflationary effect that is not showing up in CPI is showing up as currency depreciation and the decline of the USD wrt gold.

I don't see the rationale for a currency crisis looming, and if that is the thinking at the top, then the US economy is in trouble. The antidote to a currency crisis is austerity, and that may explain why Obama is on the same page as the GOP in cutting the deficit, just not as severely and in different ways. This seems puzzling in light of unemployment, but if economic policy is being driven by fear of a currency crisis, then it is understandable.

In the video I posted of the interview with Jeffrey Gundlach, he also thinks that austerity needs to be on the table.

I was presuming that the folks running things were actually behind the falling dollar, in order to improve exports. It seems I was wrong about this and they are genuinely concerned about it. Yikes!

This is not a good sign.

Ralph Musgrave said...

To back his point about currency depreciation, Tim Duy relies on The Economist’s interpretation of a speech by N.Y. Fed president William Dudley. Unlike Tim Duy (apparently) I’ve actually read this speech by Dudley, and the relevant passage is nonsense.

Dudley claims, first, that the deficit forms 10% of GDP and that that cannot go on much longer. Oh yes it can: as Keynes, Milton Friedman and Paul Samuelson (enough big names for you?) pointed out, if the debt is too large, and a country wants to continue with a deficit, it can fund the deficit via new or “printed” money.

But assuming the deficit does decline, Dudley then claims this contribution to GDP must be made good by investment or net exports. The first mistake here is: what’s the division of GDP as between consumption and investment got to do with central bankers? The free market can sort that out.

Second, prior to the recession the contribution to GDP from the deficit was much smaller, yet the U.S. managed without massive net exports. So why would the U.S. need this big increase in net exports if the deficit suddenly returned to its pre-recession level in say a year’s time? Put another way, a big enough deficit will return GDP to its pre-recession level. As to the split of GDP between consumption, investment and net exports: leave that to the market.

Matt Franko said...
This comment has been removed by the author.
Matt Franko said...

Tim Duy has been nice enough and upright enough to respond to a comment I left at his blog on this issue. Here are his comments I will share with our readership:

"The numbers reported are indeed a flow – they are the net purchases of US assets by foreigners during the quarter, positive is an inflow. US citizens have an opposite sign (although during the crisis they repatriated assets), an outflow of assets.

The financial accounts are the offset of the flows created by the current account (trade deficit). A trade deficit of $40 billion a month requires a $40 billion a month financial inflows.

There is a separate report, the net international investment position, which is a a measure of the stock of foreign owned US assets, and vice-versa. This figure is impacted by the asset valuation.

Financial accounts are flows + changes in asset value = net change in investment position.

If financial flows are not sufficient to offset the current account deficit, the possibility of a currency crisis arises. Although now that I am thinking, about it, a better description would be a current account crisis (such is the challenge of writing at midnight). In such a circumstance one would anticipated a rapid currency depreciation. Greece, of course, can't have a currency appreciation.

Note also the steady inflow of financial capital from foreign central banks:

Note the spike early in the recession – this is foreign central banks compensating for private outflows. Without those official inflows, the US would not have been able to finance the current account deficit.

Matt Franko said...


I'd like to try to run this one out. I am going to try to get Ramanan's view on this because I believe he often comments on these BOP issues.


Matt Franko said...

Here is a link to the BEA data that Tim Duy's graph is based on. Go to line 55, seasonally adjusted.

It looks like it is a flow measure. It measures the change for the quarter in foreign owned assets in the US. And it breaks down the composition: looks like mostly US govt securities these days.

the latest qtr reported is 4qtr 2010, $270B.

As far as a currency crisis is concerned, the last time this graph went up to over 700B for a quarter, this was soon followed by the GFC in which the Euro was in free fall. At that point the Fed stepped in and offered unlimited USD to the Eurosystem and that seemed to do the trick as far as stabilizing the volatility in the exchange rates.

Staffing Supplier said...

In my opinion it is both, Until some radical reforms or measures are taken the situation will remain grim.