Clive Granger, a great econometrian dies

Clive Granger was influential in my thinking about time series. Unfortunately, I only found his out after years of work. Rereading his research after practical application of time series analysis showed me the subtlety of his great mind. I will miss not seeing any more of his ideas.

Some quotes about Prof Granger:

Harvard economist James H. Stock put it more bluntly, telling the Los Angeles Times that "Granger gave us a rigorous way to distinguish between stupid and non-stupid relationships."

Working with Engle, Granger realised that not all long-term associations between non-stationary time series are nonsense. Suppose, as the American academic Kevin D Hoover explained, that the randomly-walking drunk has a faithful (and sober) friend who follows him down the street from a safe distance to make sure he does not injure himself.

"Because he is following the drunk, the friend, viewed in isolation, also appears to follow a random walk, yet his path is not aimless; it is largely predictable, conditional on knowing where the drunk is," Hoover noted. Granger and Engle coined the term "co-integration" to describe the genuine relationship between two non-stationary time series. Time series are "co-integrated" when the difference between them is itself stationary – the friend never gets too far away from the drunk, but, on average, stays a constant distance behind.

Bernanke becoming a bond vigilante?

Nothing like a declining bond market to wake-up a Fed chairman especially if they are holding a large portfolio. From the FT:

The Fed chief said large deficit-funded actions to fight the crisis – including the Obama administration’s fiscal stimulus – were “necessary and appropriate.” But he said “maintaining the confidence of the financial markets requires that we as a nation begin planning now for the restoration of fiscal balance.”

He said “near term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances.”

So what exactly will the Fed do? They can talk about discipline but this only makes the problem worse if the Treasury does nothing. They could stop buying Treasury debt which would be a good signal to the markets but then leads to further supply related rate increases especially in the mid part of the curve.

This could be a bigger problem than bank regulation.

Geithner the bond comedian

Upon stating to a student audience at Peking University that "Chinese financial assets are very safe", laughter broke out. His next joke was, "in the United States, we are putting in place the foundations for restoring fiscal sustainability."

China may become the new bond vigilante who is not drinking the Kool-aid. Now what is really funny is that everyone knows that the principal value of China's foreign reserves are at risk but there is nothing they can do about it. This is the real gallows humor.

Unfortunately, the market took the jokes more seriously as bonds continue their decline.

Geithner in China - show us the arithmetic

“I hope Geithner’s visit can soothe our nerves,” said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “The Chinese public is worried about the safety of its foreign- exchange reserves,”

Seventeen of 23 Chinese economists polled in connection with Geithner’s visit said holdings of Treasuries are a “great risk” for the nation’s economy, according to a Chinese state media report yesterday.

Geithner, 47, needs to show how the U.S. can prevent the value of China’s investment from being eroded by a weaker dollar or by the inflation that might be stoked by the stimulus money being pumped into the U.S. economy, according to Yu. “It will be helpful if Geithner can show us some arithmetic,” he said.

“I will, of course, make it clear that we are committed to a strong dollar, that we are committed to bringing our fiscal deficits down over the medium term to a sustainable place, to a sustainable level,” Geithner said in the briefing May 27. “We believe in a strong dollar. A strong dollar is in the U.S. interest.”


You wish more commentators would ask the same question in the US. Maybe the bond vigilantes know their math and have been sellers?