Really great links - excess reserves - Krugman on China - Japanese trade surplus - the chances of a sizable upward shift in yields - scientific cover for Ron Paul

Brian P. Sack - NY Fed - "Chairman Bernanke discussed one possible sequence in his February 10 testimony. He suggested that operations to drain reserves could be run on a limited basis well ahead of policy tightening, in order to give market participants time to become familiar with them, and then could be scaled up to more significant volume as we approach the time for policy tightening.

Removing a portion of the excess reserves from the system ahead of increasing the rate paid on reserves is a cautious approach, as it should improve the Fed's control of short-term interest rates when it comes time to tighten monetary policy.4 To be sure, even at today's reserve levels, we would expect the interest rate paid on excess reserves to exert considerable pull on other short-term interest rates such as the federal funds rate or repo rates. However, we are unsure of the exact relationship between these rates and believe that it is likely to be tighter when the banking system is not as saturated with liquidity as it is today. Thus, it may be prudent to remove some portion of excess reserves before raising the interest rate on reserves."

Paul Krugman on China - "As Dean nicely puts it, “China has an unloaded water pistol pointed at our heads.” Actually, it’s even better: China can, if it chooses, throw some cold water on us — but it’s a hot day, and we would actually enjoy it."

Scott Sumner - "I seem to recall that back around 1970 the US government kept insisting that the Japanese trade surplus was caused by an undervalued yen. Then the yen was revalued 20%, but the “problem” continued. Then another 20%, then another 20%, then another 20%, then another 20%. The yen has now gone from 350 to 90 to the dollar. My math isn’t very good, but that sure seems like a lot of 20% revaluations. And the Japanese still run a current account surplus that is more than half the size of China’s surplus, despite having less than 1/10th China’s population. I think it’s fair to say that international economists have become increasingly skeptical of the notion that simply by manipulating nominal exchange rates you can eliminate current account imbalances that represent deep-seated disparities of saving and investing. But I guess hope springs eternal. Maybe this time it will finally work."

Brian P. Sack - NY Fed - "Moreover, looking out to longer maturities, the shape of the Treasury yield curve appears to incorporate not only expectations of policy tightening, but a decent-sized term premium on longer-term securities. Indeed, the term premium is well above the levels observed over most of the past several years, even though inflation is likely to be low and upside inflation risks are limited. This should help to diminish the chances of a sizable upward shift in yields."

George Selgin - central banks as sources of financial instability - Ron Paul will like this more than me - "The fact that the first central banks evolved from public banks established for purely fiscal reasons suggests that any stabilizing potential they harbored was unanticipated by their founders. That fact might simply mean that by a sheer stroke of good luck, institutions originally designed to serve governments’ narrow fiscal ends just happened to be ideally suited, given appropriate constitutional modifications, for scientific crisis management. I argue, however, that the public banks themselves were sources of instability and that their vaunted stabilizing potential was at bottom little more than a potential for self-discipline—a rather limited one at that."