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The Fed is trying to have its cake and eat it too. Having earlier tried to anchor market expectations of future low interest rates by pledging that policy would remain accommodative into 2015, Fed Chairman Ben Bernanke is now saying that the Fed will consider “a recalibration of the pace of its [asset] purchases . . . in light of incoming information.” So what’s Mr. Market to do? Sleep tight and let the data do what the data will do, or pounce on data rumors to front-run the “recalibration”? The Fed’s trying to fine-tune the pace of asset purchases is bound to give Mr. Market a bad case of the shakes, as “incoming information” has been extremely volatile throughout this economic recovery. As today’s Geo-Graphic shows, using the six-month average of employment gains to project the unemployment rate going forward suggests vastly different metrics of how close the Fed is to achieving its 6.5% unemployment-rate objective. If the average pace of job gains in the six months leading up to and including the March unemployment report had been extrapolated forward, the Fed would have expected to reach its 6.5% unemployment target in August 2015. Yet with just one additional month of employment data, an extrapolation of the six-month average gain in employment through April shows the unemployment rate falling below the committee’s 6.5% threshold in August 2014, a full year earlier. And the pattern over the past two months is not an anomaly. Using the six months of employment data available in November of last year, our projection had the Fed reaching its employment objective as soon as May 2014; but in January of this year, just two months after the November unemployment report, our projection doesn’t have the Fed reaching its objective until September 2015. Asset purchases are not a precision tool, so the idea of continuously “recalibrating” them to volatile economic data is a particularly bad one. Recalibration is a strategy in need of recalibration. Financial Times: Ben Bernanke Says Bond Buying Could Slow Wall Street Journal: Fed Leaves Market Guessing The Economist: Parsing the Federal Reserve The Guardian: Markets Rally as Ben Bernanke Backs Further Quantitative Easing   Follow Benn on Twitter: @BennSteil

On April 24, the Australian central bank announced that it would raise the proportion of its reserves devoted to Chinese financial assets from 0% to 5%, likely among the highest such allocations among world central banks.  Will other major central banks follow suit? It has been widely argued that the Chinese financial markets are too shallow to support such a move and that prospects for rapid internationalization of China’s currency, the RMB, are therefore limited.  But let’s look at the numbers. According to the IMF, the world holds the equivalent of $10,936 billion in foreign exchange reserves, and $3,442 billion of this is held by China.  That leaves $7,494 billion in reserves for the rest of the world.  If the rest of the world were to invest 5% of its reserves in RMB-denominated assets, that would represent $375 billion worth.  This would make the RMB the world’s third leading reserve currency (well behind the euro, and just ahead of the yen and pound sterling). According to the Bank for International Settlements, China has the equivalent of $1,248 billion in domestic general government debt outstanding.  So if the rest of the world plowed $375 billion into the Chinese government bond market, foreign official institutions would own about 30% of it.  Is that a lot? Not compared to what foreign official institutions own of the U.S. government bond market, which is 36%. Note too that the Chinese government bond market has been growing rapidly; it is nearly 50% larger than it was in 2010. It remains difficult for foreigners to invest in China owing to government restrictions.  Yet if the Chinese government were to open the doors to foreign central bank investment, its markets could accommodate 5% of world reserves and still have them be less dominated by foreign official institutions than those of the United States. Beijing Symposium Papers: The Future of the International Monetary System and the Role of the Renminbi Prasad and Ye: Will the Renminbi Rule? U.S. Treasury: Major Foreign Holders of Treasury Securities BIS: Statistical Annex   Follow Benn on Twitter: @BennSteil

Benn’s new book The Battle of Bretton Woods has been called “the gold standard on its topic” by the New York Times, “a triumph of economic and diplomatic history” by the Financial Times, and “a superb history” by the Wall Street Journal.  But Eric Rauchway is having none of it.  He’s dinged the book twice now, its only two negative reviews—first for the IMF’s Finance & Development and then, in an extended dance remix version, for the TLS. Wade through the snark-infested waters, and you’ll find that Rauchway has two substantive complaints: that Benn doesn’t understand the gold standard, and that he bases his account of Harry Dexter White’s role in the crafting of the FDR administration’s 1941 “Ten-Point Note” ultimatum to Japan on “fake” documents.  Serious stuff. So let’s start with gold.  “Contrary to Steil’s account,” Rauchway writes, “monetary gold stock did not generally move across borders.” Now Rauchway is not an economist, but presumably he can read. During “the years 1880-1913,” Benn writes on page 20, “governments around the globe had allowed an unprecedented degree of activity within and between their nations to be regulated by the market-driven transfer of gold claims across borders (the physical stuff itself just shifted around in central bank vaults).” Whoops.  Next? . . . Rauchway quotes Benn as writing that Bretton Woods was “an economic apocalypse in the making.” Here, dear readers, is what Benn actually wrote on page 334: “Harry White’s creation, in [Robert] Triffin’s rendering, was an economic apocalypse in the making.” Get a sense that there’s a pattern forming here?  Moving right along . . . Rauchway takes specific issue with Benn’s claim that under the classical gold standard “when gold flowed in [the authorities] loosened credit, and when it flowed out they tightened credit,” arguing that this is “at odds with historical evidence.” Oh? Today’s Geo-Graphic provides the historical evidence.  Let’s see what it shows . . . During what Rauchway describes as “the heyday of the gold standard,” we can in the top two figures see that long interest rates did indeed tend to rise when gold was flowing out of the United States and fall when gold was flowing in.  This is particularly clear in the 2-year moving average figure on the right. Rauchway goes on to say that theoretical models which have countries losing gold when they import more than they export were not realized in practice. Really? Check out the bottom two figures, showing the relationship between net gold movements and net merchandise imports.  Again, the relationship is exactly what Rauchway denies: net merchandise exports tend to move with net gold imports, which is, again, particularly clear in the 2-year moving average figure on the right. Economics lesson finished.  On to history . . . The Battle of Bretton Woods, according to Rauchway, claims that “[Harry Dexter] White caused the attack on Pearl Harbor.” Uh, no. Benn’s book claims that White authored the key ultimatum demands contained within the Ten-Point Note (and not the entire “Hull memo of November 26,” as Rauchway wrongly puts it), and that a wartime Soviet intelligence operation codenamed “Operation Snow” was engaged to motivate White, with the aim of “provok[ing] war between the Empire of the Rising Sun and the USA and to insure the interests of the Soviet Union in the Far East,” according to GRU military intelligence colonel Vladimir Karpov.  Benn writes on page 58 that “The significance of Operation Snow lay not in White acting as he did because he was so prodded, and certainly not in acting against what he believed to be American interests; rather, it is that the Soviets believed that White was influential and impressionable enough, and that conflict between the United States and Japan was important enough, that they chose to use him in pursuit of their aims.” Rauchway writes that Benn’s “historical backup [is] a book by Jerrold and Leona Schecter called Sacred Secrets (2002).” He then invokes historians John Earl Haynes and Harvey Klehr to argue that “the documents on which the Schecters relied for their discussion of White” are “fake.” Oh boy . . . After reading Rauchway’s TLS review, Haynes and Klehr wrote the following to the journal’s editors, which was published on April 26: We are flattered that Eric Rauchway mentioned our article in Intelligence and National Security (October 2011) in his review of Benn Steil’s The Battle of Bretton Woods.  In that article we noted the use of what evidence indicated were faked documents in Gerald and Leona Schecter’s Sacred Secrets.  (We assume the faked documents were foisted on the Schecters by unscrupulous Russian sources.)  We are also flattered that Steil relies heavily on our work on White’s espionage.  But, our account does not, as Rauchway suggests, undermine Steil’s story of White’s treachery or imply that he was bamboozled by fake documents.  In fact, Steil cites the Schecters only once in his whole book. Ouch. Foreign Affairs: Red White Standpoint: The Moneybags and the Brains Bloomberg Echoes: How Dollar Diplomacy Spelled Doom for the British Empire NPR: Examining Bretton Woods