New Move: Operation Twist instead of Quantitative Easing

September 13, 2012, Ben Bernanke, Chairman of the Board of governors of the Fed and Chairman of FOMC delivered a press conference to talk about the monetary policy of this season.  The third round of quantitative easing came out without surprise due to the performance of the economic growth of the United States recently, and it was called by some bloggers as quantitative infinity instead of quantitative easing as it includes mortgage-backed securities purchase until “we see substantial improvement in the outlook for the labour market” said Bernanke at the conference. When asked how we exam the improvement, he didn’t give a clear measurement.  

In addition, he announced to continue operation twist as the maturity extension program.  With going long on long-term securities meanwhile going short on short-term securities, the fed extends the average maturity of the securities in the Fed’s portfolio. This movement downwards the pressure on longer-term interest rates while supporting short-term interest rate, making it move toward the shape of yield curve of Greek bond to some point.

The Greek yield curve last year, as there’s no statistics available this year, shows a complete twist as usual, the longer the maturity, the lower the yield curve due to the current financial crisis.

Well, maybe not this much, but kind of, here’s another graph that shows the different yield of bonds with different maturities.  The gap between long-term bond yield and short-term bond is dropping.

With the Operation Twist, investor no longer willing to invest on long-term securities as the yield is low and inflation is down the way.  They turn to invest on stock market and corporate bonds which booms the economy as the QE does. But with OT, there is no extra liquidity pumping into the system so that it won’t has too much pressure on inflation as QE.  

It is a very nice tool!

But what I am concerned is that the fed’s invest on long-term securities but can’t get the yield it deserves as the risk is high and the return is sensitive to interest rate, but the interest rate stays low due to its own policy, the cost is huge!

Where is the professional ethics of Economist on the issue of Diaoyu (Senkakus) Island?

(This picture is from Economist, 22^nd September, 2012)

Last week’s Economist used a picture of a recently most heated island as its cover—Diaoyu Island, also known as Senkakus Island in Japan. The story behind it is titled Could Asia Really Go to War over These? , talking about the debate between China and Japan on the issue which of them Diaoyu Island, or Senkakus Island, belongs to. Both countries insist their sovereignty of the island. The government attitudes and protest activities in both countries raised concerns on whether there is going to be a war between these two main Asia powers.

Such sensitive political issue should be carefully covered by a third-party in a very neutral way. However, this article revealed some unprofessional ways of arguing which disappointed readers’ authority to this journal’s reputation.

In first paragraph following the basic introduction, the author threw a sentence without a second thought—“One Chinese newspaper has helpfully suggested skipping the pointless diplomacy and moving straight to the main course by serving up Japan with an atom bomb." Well, such words may be a good tool to raise readers’ interest, or was the author trying to tell a joke? As a professional journal, shouldn’t there be a clear reference of the source of this sentence, especially when it has a dangerous tendency to exaggerate the anger of Chinese people? Along with the clear reference as convincing evidence, the reputation, circulation and quality of the “Chinese newspaper” should also be mentioned to give more evidence for the readers to judge. Still, I really doubt there will be such irrational words in a published newspaper under Chinese government’s eyes.

Moreover, this article tried to use a parallel between “China’s rise and that of imperial Germany over a century ago.” The argument is that “Germany felt that the world was too slow to accommodate its growing power, and crude, irrational passions like nationalism took hold. China is re-emerging after what it sees as 150 years of humiliation, surrounded by anxious neighbors, many of them allied to America.” The only similarity seems to be the rapid growth of the nation. According to such logic, any country enjoying a fast development through its people’s intelligence and hardworking will become a threat to the rest of the world. In face, China is only trying to protect its own territory, not expanding. And it is quite sarcastic for the author neglected Japan's imperial past.

Which country does the island actually belongs to? And why there emerges such situation now?

The sovereignty of the island remains to be an unsolved question because of the hazy decisions after the Second World War. The Island initially belongs to China which can be justified by many historical sources. For the history, an article with academic evidences from New York Times is a good reference. (http://kristof.blogs.nytimes.com/2012/09/19/the-inconvenient-truth-behind-the-diaoyusenkaku-islands/) Both the history and common law are disputed on this issue as both sides hold valid evidences. The Japanese Government has consistently adopted the so-called "equidistant medium line'' principle while “in international law, they have encroached upon China's territorial and oceanic sovereignty.” says China Daily.

The resource discovered under the water becomes another reason of debating, maybe the main reason to some extent. The Economist said, “The Senkakus row has boiled over now because the Japanese government is buying some of the islands from a private Japanese owner.” The Japanese purchase of the Island marks the sovereignty of the island which enables Japan to own all the resource itself. The main value of the island is the oil under the sea and the fisheries area which China and Japan agreed to use together in official document while Japan broke it as its military vessel hit Chinese fishing boat to sink.

Here is a link of the article in Economist

http://www.economist.com/node/21563316