26 March 2006

Excess Savings or Printing

PrudentBear.com - The One-Stop Shop for the Bear Case: "March 24 – Bloomberg (Matthew Brockett): “European Central Bank Chief Economist Otmar Issing comments…on money supply growth and asset prices: ‘You can’t ignore developments in money and credit.’ The issue of asset price increases ‘for me is one of the biggest challenges of central banks of our time: how to deal with that. We are far from final answers… One of the advantages of our strategy, which is now more and more recognized, is that there’s hardly any development in asset prices which can’t be’ connected ‘to developments in money and credit. So giving money and credit a strong role in your analysis is forcing you to take account of that…’ The ECB says it bases interest rate decisions on the two ‘pillars’ of analyzing the economy and money supply, and Issing has advocated a policy of ‘leaning against the wind’ to avoid asset price bubbles.”

Mr. Bernanke refers sanguinely to a “global savings glut,” while the astute Mr. Issing frets over a “large liquidity buildup.” Bernanke discusses conveniently ambiguous concepts such as “excess saving over investment rates.” But what, may I inquire, is the role played these days by “saving” in an integrated financial world of unconstrained Credit expansion and massive Financial Flows. And how might we define, account for and analyze contemporary “investment,” anyway? "

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