A Glut Of February’s

Ben Bernanke saw it even before he took over from Alan Greenspan. Like his “maestro”, however, Bernanke didn’t really know what to make of it. So, while early in 2005 Greenspan told of his version as an interest rate “conundrum”, his successor a month later tried to add more dimensions and details to the same puzzle via recognizing its clear, and clearly related, monetary flows.

Both officials became aware – because it became overwhelming – that funds were flooding into the US especially mid-nineties onward. What they couldn’t figure out was where all this was coming from.

In their authoritative view, this could not have been an offshore dollar system operating way outside the control of the Federal Reserve and every domestic authority (including Treasury) because as the key domestic authority for monetary matters that would have been tantamount to admitting the Fed does not do what it tells everyone it does, and it isn’t a central bank like it has led the world to believe.

To conjure some explanation in lieu, Bernanke came up with his global savings glut. A flood of money from outside the US, only in his version it had to have been foreign savings converted (somehow) into dollars. For reasons he would never sufficiently explain, these savers apparently preferred to park all this spare cash in the safest and most liquid US$ assets. US Treasuries and such.

As noted a little while ago, Bernanke’s idea hasn’t aged very well. In fact, its plausibility didn’t really last more than a few years. By August 9, 2007, bye bye foreign money.

In terms of TIC figures, it so obviously sticks out; huge growing net positives before suddenly a shocking negative right on August 2007.

Foreigners – including private sources (above) and not just official accounts – had been steadily buying and bidding up Treasuries, domestic corporate bonds and agencies, along with US equities. It all came to a screeching halt that particular month when the entire global dollar system froze. Without the availability of dollars, there were none leftover to flow back in as they had before.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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