Henrique Meirelles, Brazil’s highly rated central bank president, gave unusual insight into current thinking at the International Olympic Committee in a speech in Oxford the other night.

Diverging from his main theme on Brazil’s remarkable journey from economic basket case to emerging market superpower, Meirelles said that he had gone to Copenhagen last month as part of Rio de Janeiro’s successful bid for the 2016 Olympics. The reason: The IOC asked him to come.

Meirelles said that the IOC knew that Brazil currently had all the conditions needed to host the Games, but wanted to know about how predictable it was that this would carry through over the next seven years. “They wanted to know what is really happening,” he said.

Essentially, the IOC wanted to check with the top economic manager that the country’s finances will still be shining when the Games are held.

 Perhaps they were thinking of London 2012.

Conflicting signals from Fed speak have central bank watchers back to playing the word game, adding renewed weight to every nuance that can be gleaned from official speeches and pronouncements. There is good reason for the mixed messages. Fed policymakers face a tricky task trying to ensure their commitment to an accommodative stance while also having to assure investors and the public that they will remove the punchbowl before the party gets out of hand.

Eric Lascelles at TD Securities applies a little physical mechanics to the study of Fed chatter.  

The contemplation of signal-to-noise ratios is usually the exclusive domain of electrical engineers. But this subject has become of increasing relevance to economists due to the sheer number of Fed Governors and Presidents who are now proffering their myriad views on a daily basis. It has become increasingly difficult to separate what constitutes a reliable signal of future monetary policy from the inconsequential noise. The monetary policy signal-to-noise ratio is currently very low. This partly explains why expected bond market volatility remains so high – central bankers as a collective are not offering anything close to a clear path forward.

Lascelles errs on the side of dovishness, telling his readers to focus on what Chairman Bernanke has to say.  “The TD view remains that the Fed will surprise many in how long it manages to remain on hold, with a first hike coming in Q1 2011.”

Recent press reports alluded to the possibility that the Fed might be pondering some shift in its language, either removing or moderating its vow to keep rates low for an “extended period.” But former Fed Governor Larry Meyer, now at Macroeconomic Advisors, says all the talk about a verbal baby step toward tightening is just that.

We see an implicit cost-benefit analysis taking place when it comes to considering any discussion on language. The benefits (added flexibility) are unclear, in that a subset of the Committee may feel that the current language is sufficiently vague that it does not stand in the way of an earlier tightening, if warranted by prevailing conditions. On the cost side of the ledger, some members will be very worried about an adverse market impact from dropping either the “extended period” or the “exceptionally low” terms. Taken together, these cost-benefit considerations would suggest somewhat reduced odds that language issues will be prominently discussed at this meeting and an extremely low probability that the language will be changed.

Does that mean that allusions to a rapid eventual exit, first floated by Fed Governor Kevin Warsh, are premature? Not if the Fed feels it needs to dampen inflation expectations, which would be understandable with today’s GDP report reading for the third quarter coming in at 3.5 percent.

Investors will undoubtedly stay tuned.

Britain's pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it's not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative 'short' positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.              

 While the pound's inexorable grind down to parity with the euro captures the popular headlines, the Bank of England's index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years -- by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar's equivalent index has shed only about a third of the pound's losses since mid-2007, while the euro's has jumped about 10% and the yen's approximately 20% over that period.

There's no shortage of negatives -- Britain's deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it's the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound -- the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and  short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar. 

But recent data from the IMF on global hard currency reserves shows there may be a more disturbing exit of central bank reserve managers from the pound (no stranger to process of losing reserve currency status, as its pole position was ceded to the dollar after WWI).  Sterling's share of the almost $7 trln of world central bank reserves -- which are rising sharply again after a brief hiatus due to the credit crunch -- is being steadily eroded. 

Although nominal reserve holdings of sterling (the rise of which prior to the crisis was seen as a powerful supporter of both the currency and gilt market) did rise by more than $10 bln in the second quarter, they remain about $24 billion below the peaks of Q2 2008. What's more, Citi economist Michael Saunders estimates that once you adjust for revaluation effects of currency rate swings, central bank holdings of sterling actually fell in Q2 this year.  He reckons that, accounting for these adjustments, Q2 was the second consecutive quarter of net sterling sales by central banks and that the 4 billion pound drop in nominal sterling holdings was the biggest on record. Saunders concludes:

The huge inflows of global FX reserves into sterling and gilts have played a big role in financing the fiscal deficit in recent years. At present, the fiscal deficit is being wholly funded by the BoE, but sterling remains vulnerable and gilts seem highly vulnerable as and when QE ends.

(Graphs by Scott Barber and IMF/Citi)

The Federal Reserve has gone on the offensive to sell its exit strategy to investors and the public, in the hopes that it can stall an increase in inflation expectations. The effort was first launched by Fed Board Governor Kevin Warsh, who argued in a Wall Street Journal editorial, followed by a speech, that when the time came for Fed tightening, policymakers might have to move quickly. Even Bernanke, whose Great Depression expertise usually pegs him as a dove, was particularly meticulous about describing the Fed’s stimulus-withdrawal tools this week, sending the bond market into a tailspin.

But with the unemployment rate rapidly climbing toward 10 percent — and expected to remain up there for the foreseeable future, some economists are telling Fed officials to hold their horses. Paul Krugman, in his blog, makes a vehement case for an ultra-dovish policy stance. He calculates that the ideal fed funds rate given current economic conditions should be, get this, -5.6 percent. In another post, he argues that even if the U.S. economic recovery is more robust than most believe, the Fed should still keep rates at rock-bottom lows for at least two years.

So where’s the case for monetary tightening? For some reason many Fed officials seem to view it as inherently unsound to stay at a zero rate for several years running — but I’m at a loss to understand what model, or even conceptual framework, leads them to that conclusion. One gets the impression of officials who have decided that they want to tighten, and are making up new conceptual frameworks on the fly to justify their desires.

Enter Thomas Pulley, economist at New America Foundation, who argues in the FT that a second Great Depression is still possible. He argues that continued deleveraging and an adverse feedback loop of rising joblessness and foreclosures will likely lead to a renewed contraction in economic activity.

There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.

Here’s a tip for anyone curious to know where the next generation of monetary policy tools is being dreamt up: Look north.

Sweden’s central bank – which brought us the world’s first official negative rate in July – took another swipe at economic groupthink this week in a paper that argued against a core principle of interest rate theory.

To wit: that savers would rather stuff cash under the mattress than place it in a loss-making bank account.

And with this paper the Riksbank may be sending a discrete signal to other central banks still searching for ways to boost lending in their economies that there's nothing to be afraid of cutting interest rates below zero. 

We already knew the Riksbank had no qualms about charging big banks -0.25 percent interest on their overnight deposits. But households? For Sweden’s Monetary Policy Department, it seems there is no fundamental difference between the way banks and savers behave in times of economic uncertainty — and no reason either would refuse a slight loss on their deposits.

“In practice, the mattress is not a realistic alternative for storing and handling large amounts of cash,” the authors, Meredith Beechey och Heidi Elmér, wrote in an economic commentary published this week.

Due to the cost of safeguarding money, they write, “the public may be willing to accept a slightly negative interest rate.” The real unknown is how much of a loss households and companies would be willing to suffer in exchange for this security.

Bankers worried about losing their bonuses might be well advised to consider a cost-benefit analysis of the contribution of their public sector colleagues.

Central bankers not only earn much less than their high-flying private sector counterparts, but over the last year have spent almost every second weekend in high-level, save-the-world meetings aimed at clearing up the mess created by Wall St and City banks.     

European Central Bank head Jean-Claude Trichet (who earns a mere 350,000 euros a year ) confessed to a group of student journalists that he spends almost every weekend working.

“My week often consists of seven working days, because we always have international meetings during the weekends,” he was quoted as saying by Germany’s Frankfurter Neue Presse. 

Trichet spent last weekend, for example, at the G20 meeting in London followed by a meeting of central bankers and regulators in Basel to thrash out a new framework for bank regulation.

One of the proposals: supervisors should make sure banks ”limit excessive dividend payments, share buybacks and compensation.”

Having wrapped up the two-day get-together in London, G20 central bankers moved down to the Swiss city of Basel (I counted central bank governors and officials from at least 9 countries onboard the same flight) to discuss more about the global economy for a two-day meeting.

The focus here again is the global economic recovery, which seems to be gathering momentum, and the timing of exit policy — which is essential in the future to avoid inflationary pressure.

The mood is decidedly more positive this time than the last time they met in Basel, where they warned that unprecedented attempts to stimulate economic may fail to bring a sustainable recovery.

G10 chairman and ECB President Jean-Claude Trichet will give a briefing on Monday.

Trichet has recently been sounding as if he expects a double-dip recession, as our European affairs columnist Paul Taylor suggests here.

Finance ministers from the G20 are meeting in London on Friday and Saturday to discuss the next steps in battling the world’s worst economic and financial crisis since the Great Depression.

Reuters correspondents from around the world will be at the event, taking you behind the scenes and and providing unprecedented coverage through this live blog.

Finance chiefs from the G20 meeting in London on Friday and Saturday are likely to be in a slightly better — or at least more relieved — mood than they were last time they got together.

The world economy is still in a mess and the financial system is far from running normally. But — and it is a big but at that — fears of global economic collapse have dissipated. This is in no small part as a result of the actions of groups such as the G20 which endorsed coordinated intervention into the marketplace.

So much so, in fact, that much of this weekend’s discussions will touch on the so-called exit strategies that countries will need to get themselves back out of the stumulus and bailout business. With markets in mind, they are likely to be coy about it.

The G20 itself, meanwhile, is taking on a higher and higher profile as a result of both the global crisis and the rise of China, India and others to economic prominence. In a special report, Brown Brothers Harriman says that the G20 will soon eclipse the G7 as the most important economic policy making gathering.

It argues that it is in the G7’s interest to do so because it stops the solidifying of an emerging market bloc and waters down Russia’s role, following the latter’s now permanent presence as part of an extended G8. 

Here’s an unscientific poll about whether the G20 or the G7 now carries more clout. As ever though, your comments welcome on what this weekend’s meeting should achieve.

Five things to think about this week:

CENTRAL BANKERS IN A HOLE
-- The global economy and financial system appear on the road to recovery but that is in large part due to unprecedented official stimulus that will have to be withdrawn at some point - the questions investors want answered are when, and how.  Central bankers no longer appear to be quite as shoulder to shoulder with one another on coordinated policy as they were last year in the aftermath of Lehman's collapse.
 

CHINA STOCK WATCHING
--  It is August, liquidity has dried up with the summer holiday season in full swing, and investors are palpably more cautious about the economic outlook now than they have been for months. It is against this backdrop that that the Chinese stock market is emerging as the focal point and driver of all other asset markets. The Shanghai Composite technically slipped into bear market territory earlier last week, shedding 20 percent in the two weeks from Aug. 4 to Aug. 19 on profit taking from the 90 percent surge this year. There is no major Chinese economic data scheduled for release this week, leaving thin markets at the whim of sentiment in what is a notoriously volatile stock market.
 

GROWTH FOUNDATIONS
-- The United States, Britain and Germany unveil revised estimates of Q2 economic growth. Revised GDP figures rarely garner much attention but with initial estimates from Germany, France and Japan earlier this month all showing that these countries exited recession in the last quarter, investors will be looking for further evidence the world economy has turned the corner. The hard data is stronger now than it has been for some time but is the global economy building a solid base for recovery, or is it more likely to buckle were authorities to begin withdrawing the massive fiscal and monetary stimulus?
 

ABNORMALLY NORMAL MONEY MARKETS
-- A veil of normality continues to cloak interbank money markets, with Libor at record lows and some closely-watched measures of money market health like Libor/OIS spreads and the TED spread almost back to levels seen before August, 2007. But that is only thanks to authorities' liquidity injections, guarantees and asset purchases worth trillions.  Banks have hoovered up this free or ultra-cheap money but still are not feeding it into the real economy, with lending to business and households still patchy at best. Euro zone M3 money supply figures for July are expected to show another slowdown in the rate of growth, to 3.3 percent on the year from 3.5 percent in June.
 
SAFE AS HOUSES?
-- Figures will show how the U.S. housing market, the epicentre of the global financial crisis, is faring four and a half years on from its peak. The Case/Shiller house price index is expected to show the annual pace of price declines slowed again in June, fuelling the belief that the market has bottomed.  But the number of foreclosures is high as the U.S. labour market remains weak, and the national housing market stock remains high by historical standards. Economists say there will be no sustainable recovery of the financial system and economy without a durable recovery in the US housing market.