Bank Research Consensus Weekly 10.24.11
Is Modern Central Banking Ancient History?
Manoj Pradhan, Morgan Stanley
Two of the three principles of modern central banking were designed for a regime that developed economies will not see for the foreseeable future. The principles - (i) inflation targeting improves growth prospects in the medium run; (ii) inflation targeting effectively means inflation forecast targeting; and (iii) a ‘conservative' central banker (i.e., one who dislikes inflation more than the average economic agent) can deliver lower and less volatile inflation - are almost unquestioned among the central banking orthodoxy. However, these principles were espoused in an era of low debt when monetary policy was the dominant force. In the era we now live in, where debt, deficits and deleveraging (a DDD regime) are the dominant drivers of the economy and policy - an era of so-called ‘fiscal dominance' - the first and the last tenets can cause more harm than good. Inflation targeting and an aggressive approach to taming inflation in such times can create more volatile inflation and higher sovereign risks.
FX: EUR Near-Term Risks Building
Sverre Holbek, Senior Analyst, Danske Bank
Two weeks ago, French President Sarkozy and German Chancellor Merkel pledged to deliver a “comprehensive plan” to tackle the European debt and banking crisis. However, since then, doubts have grown as signs of continued disagreement between Germany and France have persisted, and the rally in risky assets and pro-cyclical currencies is now showing signs of reversing.
Ceteris Paribus and Default Risk
John E. Silvia, Chief Economist, Wells Fargo
Two aspects of financial reporting appear regularly and, unfortunately, are very misleading to investors and decision makers.First, there is a tendency to associate a movement in one economic variable with the movement or lack thereof of another to suggest cause and effect. The latest misconstruction appeared this week with the argument that perhaps Operation Twist was working because the 30-year Treasury rate rose in value. Huh? Yes, that was our response.
United States – European Contagion
Chris Jones, Economist,TD Bank Financial Group
A glance at headlines this week and one could be forgiven for thinking that Europe’s fiscal crisis is on the verge of being solved. Today, European policymakers descended on Brussels to begin a series of talks over how to fix the continent’s debt woes. The hope is that leaders can come up with a credible plan to restore market confidence and secure the future of the common currency. But so complex are the problems, and so varied are the ideas that need to be reconciled, that those hoping for a grand bargain are likely to be disappointed.
Other Pre-screened Independent Contributors
J-Chart is an innovative charting and bias-neutral market analysis tool. Based on its proprietary theoretical concept and display of market price action, J-Chart provides a much clearer and unique insight into the market than conventional charting methods. This innovative charting and market analysis tool is designed to visualize market price action that constructs unique price patterns called "Equilibriums". Based on its "non-fixed time frame" concept and "Kinetic Equilibrium" application, J-Chart users are able to forecast markets' future movements with high accuracy.
Compiled by David Song, Currency Analyst
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.