I had the pleasure of presenting “Central Banking East and West since the Crisis,” at a discussion hosted by the Shanghai Development Research Foundation (SDRF) and Friedrich Ebert Stiftung.
Key takeaways include:
- Much has changed in China and central banking in the last decade.
- Most analysis of central bank balance sheets fails to incorporate the impact of the People’s Bank of China (PBOC) on the provision of global liquidity. This is a critical error – especially as the Chinese yuan (CNY) moves toward reserve currency status.
- The Federal Reserve, PBOC, Bank of Japan, and Bank of England were early providers of global liquidity in the aftermath of the crisis. Yet, after 2011, central bank liquidity created distortions.
- Extraordinary monetary policies were far from costless.
- Analysis of speculative activity in futures markets after large injections of central bank liquidity reveals that:
- Speculative activity skyrockets.
- Net speculative long positions increase and push valuations upward.
- The volatility of investor positioning or investor switching behavior also increases.
- Removal of excess central bank liquidity remains one of the most formidable challenges for markets today.
For slides accompanying the presentation: www.CenterforFinancialStability.org/speeches/ShanghaiDRF_101518.pdf
On a parenthetical note, after over two decades of travel to China, this was one of my most extraordinary visits.