Wednesday, January 09, 2013

Learning to Be A Central Banker in 10 Easy Steps (Update)

Welcome Mark Carney! I am certain many people have been offering you advice on what to me appears to be a rather thankless task. Undoubtedly  your experience at the Squid will have given you the necessary sharp elbows and diplomacy to thrive, and your Canadian upbringing arms you with the right amount of earnestness for public service. Nonetheless, I thought you might find something worthy below in the primer  I penned for Mr Bernanke in the waning days of 2007. Best of luck in your mission! Oh, and one final piece of advice: No matter how seductive and enthralling you might initially find the quality of life here in Blighty (considering the digs the Old Lady will finance for you), DO NOT NOT SELL YOUR CANADIAN BOLTHOLE. The novelty wears off quickly and England all-too-quickly becomes Moosonee without the clean air and the blue Walleye...

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Learning to Be A Central Banker in 10 Easy Steps

Start with one policy - for example - interest rates. Place the policy ball in your right hand and begin by lowering rates. which causes the ball be tossed-up into the air, in an arc, and land in your left hand. Note how, when the policy ball is in your left hand and you raise rates, the ball returns in an arc to your right hand. Repeat several times to get the feel. (Note this doesn't work if you are left-handed)

Now with he first policy ball in your left hand, take a second policy ball in your right hand, say the value of the US dollar. Notice how when you lower interest rates while the PBoC, and other official buyers in BRICs and GCC countries buy Long Bonds, the 2nd policy ball, the Dollar, feels heavy as if it wants to fall to the ground. Exerting appropriate pressure, you must force it up to arc, after which it should fall back down landing in the left hand.

Now with interest rates in your left hand, and the FX value of the dollar in your right hand, try to toss the rates lower, and as they arc downwards, you will need to jettison the dollar. Be certain to avoid the common mistake of throwing up rates too high if the dollar is NOT falling.

After letting the dollar fall for a while (note the nice concave arcing pattern in the picture), you will need to catch it with your right hand firmly by attempting to pay some lip-service to a strong-dollar policy. This permits the official entities who are at once your friends and your enemies, to get off the hook by buying dollars under the premise that you do care about its value.

Warning: Under no circumstance should you allow the policy balls to collide by lowering rates AND letting the dollar fall. Or else you might ultimately have to raise rates, making the introduction of the 3rd policy ball very difficult.

Get the hang of things by practicing tossing the two balls, raising and lowering interest rates as required, and jawboning (and where necessary) letting the dollar fall to floor. See if you do this while reciting Humphrey-Hawkins-like testimony, and answering your wife's questions.

Now quickly, you will find a third ball in your hand whether your ready for it or not, for as rates have been raised to pay lip service to inflation and the falling dollar, the third ball, economic growth, needs to be tossed into the air. Be careful NOT to make the common mistake of walking in circles while juggling the balls.

Irrespective of how high you toss it, will begin arcing lower as the economy begins to falter. Just before you catch the falling economy with your left hand, you will have thrown the rates ball back your right, while the dollar accelerates its decline towards your left, such that you can start all over again. It is essential to avoid changing the policies in a staggered rhythm.

As the economy climbs back on its arc to your right, you will be catching interest interest rates with your left, having sent the dollar on a stronger trajectory with your right, before repeating the exercise. Be sure not to launch the interest rate ball too high or too far in front of you.

Congress at this point will be demanding that you pay the most attention to the economy ball, so you must learn to turn your back (on them), and see if you can juggle behind your back as in the diagram (right).

CONGRATULATIONS! You are now ready to set monetary policy for the largest economy in the world!!

NEXT WEEK: In your next lesson we'll introduce balls 4 and 5 in the form of a sub-prime crisis, and banking system solvency issues, just for fun!


Anonymous said...

Shouldn't those be pounds that are juggled?

Anonymous said...

Learning to juggle three balls is pretty straight forward...

Four balls? Not-so-much...

Anonymous said...

Anonymous said ...

It is possible to keep balls in the air until fatigue sets in :-