Brad Setser

Brad Setser: Follow the Money

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

Look who is supporting the mortgage market …

by Brad Setser
December 29, 2004

No Surprise: the People’s Bank of China. The PBOC has shifted from buying treasuries (03) to buying mortgage backed securities (04).

From Reuters: “Make no bones about it, mortgages really went global in 2004,” said Arthur Frank, director of MBS research at Nomura Securities International. “Overseas investors had dollars to put to work and MBS were their vehicle of choice, offering them an attractive pick-up in yield over Treasuries …. “Foreign demand has certainly climbed over the years, but it picked up rapidly this year,” said Frank.

Net foreign purchases of MBS were $242 billion in mid-2004, up $19 billion from year-end 2003 and $35 billion more than 2002, according to Inside MBS & ABS, a publication of Inside Mortgage Finance. While data is not available yet for the second half of 2004, most analysts believe foreign investment in MBS gained even more momentum during that period.

The strong performance of the $4.5 trillion MBS market in 2004 can partly be attributed to buying from Asian portfolios and China’s central bank in particular, according to Steven Abrahams, fixed income mortgage strategist at Bear Stearns.

“U.S. dollar portfolios in Asia have made themselves felt this year in the U.S. rates markets, and perhaps in no sector more than MBS,” he said in recent research.

The Chinese central bank’s demand for mortgages is partly due to the climbing balance of dollars it has for investment. China’s reserves for the year ending in August grew by $131 billion, second only to Japan’s $272 billion increase, according to the International Monetary Fund. China’s reserves now stand at around $501 billion, while Japan’s are at $827 billion.” End Reuters.

Since the PBOC’s reserve accumulation likely surged in q4 2004, the amount of Chinese support for the mortgage market probably accelerated in the second half the year. China’s reserves are almost certainly closer to $600 billion than $500 billion now …

You might say the recent surge in housing prices was made in China … like many other gifts exchanged in the past few days.

27 Comments

  • Posted by calmo

    Maybe. Last word I heard was that the final week of Nov not only down is starts but prices. Just a blip? We’ll see. Your argument that as long as China finances these low mortgages home prices will continue to inflate, and like that other infinite view (the one expressed by GG about the capacity of Japan to intervene in fx) I have reservations.

  • Posted by General Glut

    Brad,

    I have long thought that the demise of the UK housing bubble this fall in the midst of the US housing bubble swelling merrily along with markedly poorer job/income foundations was mainly due to “sugar daddy support” from the Chinese. Now, is the PBC buying US mortgages over UK mortgages because they former are more attractive financially? Or because it’s a smarter way to carry out the real policy, which is support the dollar and maintain the peg?

    And how long do 1-year ARMs stay under 4.2% if rates on US Treasuries are rising precipitously?

    So many questions . . .

    Gen’l Glut

  • Posted by Ian A.

    Interesting find, given the Japanese central bank has a proclivity to the lower maturity/duration sector of the US Treasury market, I find it intriguing that the Chinese central bank is stepping up its purchases of longer duration MBS. MBS have a wicked duration and convexity profile, so if long-rates rise, the Chinese will suffer large losses. To me this is a signal that the Chinese are in no hurry to revalue the yuan or else they wouldn’t be extending the duration of their US portfolio.

  • Posted by brad

    ian — good point. But before I would accept your logic fully and conclude that a shortening of duration in China’s reserve portfolio would precede a move in the renminbi dollar, I would need to be convinced that the right hand of the central bank (the math whizes apparently being hired to manage China’s reserves) and the left hand (the policy making committee or whatever that decides on any changes to renminbi-dollar parity) are talking to each other. The reserve management unit may be as clueless as the rest of us, and just trying to outperform a treasury benchmark. i certainly don’t know.

    calmo — you caught me going for literary impact at the expense of precision. I was only trying to make a point about this year’s increase in housing prices (the point raised in the reuters story). Next year, even with central bank support at roughly its current level (a big assumption), I would expect long term us int. rates to rise a bit, and thus at least for the increase in housing prices to slow.

    I certainly don’t subscribe to the view that Asia will finance the US forever. Another year, maybe; two, possible, but unlikely; four — an increase in dollar reserves of $2 trillion to finance an expansion of the net US external debt from @30% of GDP to above 45% — no way …

  • Posted by glory

    couple good FT editorials on china today:

    http://news.ft.com/cms/s/16b5093e-5a08-11d9-ba09-00000e2511c8.html

    Manufacturers that think they can safely leave China to dominate low-end markets while they focus on value-added products are deluding themselves. China is a nuclear power with its own defence industry and recently put its first man into space. Industry is moving rapidly up the value chain.

    Because of its vast population of 1.3bn – a fifth of humanity – China’s rapid rise is not merely admirable in the way that the development of South Korea or Singapore was in the 1970s and 1980s. For rival manufacturers struggling to adapt, the combination of speed and size is little short of terrifying. Some analysts wonder if China’s unchecked growth will revive protectionism in developed countries and threaten the world trading system.

    Fortunately, China is an opportunity for its trade partners as well as a threat. In contrast to east Asia’s earlier “miracles”, China is opening its domestic markets and not building an export powerhouse behind a wall of protective tariffs. In spite of the yawning US trade deficit, China’s overall trade is largely in balance thanks to imports of raw materials and Asian-made components and machinery. And since more than half of China’s exports to the US are produced by foreign-invested factories, the pro-China lobby in Washington has proved more than a match for the protectionists.

    http://news.ft.com/cms/s/73c60f2a-5a07-11d9-ba09-00000e2511c8.html

    China’s growing economic might translates into more strategic power. Since the second world war, China has occupied one of the five permanent seats on the UN Security Council, but it has rarely exerted much influence outside its immediate neighbourhood.

    That is now changing fast. China is undoubtedly becoming a “strategic competitor” for the US, as George W. Bush tactlessly pointed out when campaigning for his first presidential term four years ago. China is modernising its armed forces and extending its diplomatic reach… China was recently caught sending a nuclear-powered submarine into Japanese waters.

    With the US distracted by the Middle East, Chinese leaders are not shy to fill the vacuum in Asia or further afield. President Hu has been courting governments in Africa, the Middle East, central Asia and Latin America in the hunt for the oil, gas, minerals and food that China needs.

    For the moment, however, there is no reason to disbelieve the leadership’s insistence that China wants a “peaceful rise” and is more interested in lifting people out of poverty than in regional hegemony. Each year, China becomes more connected to the rest of the world with a two-way traffic of business people, travellers and students. Tens of thousands of Chinese study at universities in the US, Europe and Australia, and Chinese in their millions will make up the next wave of global tourists.

    The real challenges for Mr Hu and Mr Wen lie at home. The Communist party is an anachronism, and its survival depends on continued economic growth and authoritarian power. In recent months, dozens of protests have erupted across China over religion, race, local government corruption and the removal of homes to make way for dams or property developments… As Napoleon predicted, China’s emergence from centuries of slumber has shaken the world. So far, however, the awakening is only economic. The political awakening is yet to come.

  • Posted by glory

    record corporate issuance this year is expected to be exceeded next, but increasingly ‘fixed income’ has become a misnomer as more issuance is now floating rate debt. it seems that that’s what investors want afterall and issuers are complying…

    i wonder since more mortgages are adjustable rate if MBS might join the trend? i think it says something when better terms are offered in order to keep issuing…

    so like taking it further maybe, the USG may eventually end up having to issue inflation-protected floating rate debt or something to continue to attract foreign central banks, i dunno :D

    cheers!

  • Posted by calmo

    Appreciate the socio-political overview that glory provides –an overview often missing in say Bloomberg reports and a perspective that I too often dismiss as ideological. The right and left handedness mentioned by brad above and reported elsewhere by western commentators about the Chinese mathematicians performing calculations to implement policy decisions made elsewhere may not be confined to just the Chinese side. The effect of this characterization is to paint the Chinese as either unaccomplished players (The $500M loss in derivative trading with that oil co is often cited.) or sophisticated professionals who are executing a devious plan to dethrone us.
    There are many more similarities than differences in the players it seems to me and the lack of transparency or subtle obfuscation by the press does not help.

  • Posted by brad

    glory — China’s success is not built behind protective tariff walls, but certainly is being built with the help an implicit export subsidy (the expected loss on China’s dollar reserves). As you no doubt know, i am not found of the argument made by the FT and others that goes “but China’s trade is largely in balance.” With a huge surge in investment (up over 5% of GDP) and a negative terms of trade shock (oil/ commodities) and large capital inflows, China should be running a global 2-3% of GDP trade deficit, not an equal surplus — the gap as a % of GDP is equal to the US gap. It is true that China’s global surplus is a lot smaller than its bilateral trade surplus with the US. But that is largely irrelevant — like Martin Wolf, I think China ought to be running a global deficit at this stage in its cycle.

  • Posted by anne

    When we are in the midst of a market boom, there is little chance of focusing attention or opinion on the end of the boom. Of course we must so focus, but how?

    http://www.msci.com/equity/index2.html

    National Index Returns
    12/31/03 – 12/29/04

    Australia 30.0
    Canada 20.6
    Denmark 31.0
    France 19.3
    Germany 16.4
    Hong Kong 24.7
    Ireland 42.8
    Japan 13.0
    Norway 53.7
    Sweden 38.0
    Switzerland 15.7
    UK 19.4

  • Posted by glory

    yeah, i know… i was just posting the editorials as kind of a ‘benchmark of thought’ or market consensus on china right now, being the FT afterall. there was also phelps on the dollar the other day, btw…

    http://econlog.econlib.org/archives/2004/12/phelps_on_the_d.html

    but i think the point stands that china is opening its domestic markets (behind an implicit export subsidy, yes, but i also believe in preparation for an eventual reval) that has the potential for china to run the trade deficits that wolf, you and i think are necessary to rectify long-term global imbalances :D

    cheers!

    oh and the point that “half of China’s exports to the US are produced by foreign-invested factories,” does that actually mitigate the problem? the GDP vs. GNP dilemma was never satisfactorily resolved for me…

    http://www.bea.doc.gov/bea/ARTICLES/2004/01January/0104Ownership_based.pdf
    http://www.crookedtimber.org/archives/002373.html

  • Posted by brad

    a bit off topic, but if any reader of this blog knows a thing or two about european participation in the US corporate debt market, do chime in … I saw a report in either the FT or the WSJ suggesting that it was substantial, and want to learn a bit more –

  • Posted by anne

    http://www.nytimes.com/2004/12/31/international/asia/31china.html?ex=1105497402&ei=1&en=3efeed330159c316

    China’s ‘Haves’ Stir the ‘Have Nots’ to Violence
    By JOSEPH KAHN

    WANZHOU, China – The encounter, at first, seemed purely pedestrian. A man carrying a bag passed a husband and wife on a sidewalk. The man’s bag brushed the woman’s pants leg, leaving a trace of mud. Words were exchanged. A scuffle ensued.

    Easily forgettable, except that one of the men, Yu Jikui, was a lowly porter. The other, Hu Quanzong, boasted that he was a ranking government official. Mr. Hu beat Mr. Yu using the porter’s own carrying stick, then threatened to have him killed.

    For Wanzhou, a Yangtze River port city, the script was incendiary. Onlookers spread word that a senior official had abused a helpless porter. By nightfall, tens of thousands of people had swarmed Wanzhou’s central square, where they tipped over government vehicles, pummeled policemen and set fire to city hall.

  • Posted by anne

    My sense is that the rapidly developing but highly inequitable and tense domestic conditions in China are not being given enough attention. Only a highly secure Chinese leadership will further open financial markets to immediate international influence.

  • Posted by anne

    http://flagship3.vanguard.com/VGApp/hnw/FundsByName

    Vanguard Returns
    12/31/03 to 12/30/04

    S&P is up 10.9%
    Growth Index is 7.4
    Value Index is 15.4

    Mid Cap Index is 20.3

    Small Cap Index is 20.1
    Small Cap Value is 23.6

    Europe Index is 21.1
    Pacific Index is 18.1

    Energy is 36.2
    Health Care is 9.8
    REIT Index is 31.0

    High Yield Corporate Bond Fund is 8.5
    Long Term Corporate Bond Fund is 8.2

  • Posted by anne

    http://www.msci.com/equity/index2.html

    National Index Returns
    12/31/03 – 12/30/04

    Australia 31.1
    Canada 22.3
    Denmark 32.0
    France 19.7
    Germany 17.0
    Hong Kong 24.3
    Ireland 43.4
    Japan 15.3
    Norway 54.5
    Sweden 37.9
    Switzerland 16.0
    UK 19.8

  • Posted by brad

    Anne — no doubt you are right: re domestic tension in China. Joe Kahn’s series in the NYT has been excellent (he briefly covered the Treasury in the late 90s, I met him once, I think).

    That said, China is a part of the world, and it cannot solve its domestic problems by exporting them. 25% y/y Chinese export growth to the US will have an impact on many small manufacturing towns in the US, not just the southern textile towns.

    the WSJ confirmed that China’s reserves rose to $542 billion at the end of october — up over $25 billion. that kind of pace simply cannot be sustained, even if $5 billion is valuation gains. by keeping its exchange rate low to encourage manufacturing production/ social peace (and in the process giving rise to domestic inequities), China is offering savvy investors a one way bet. you cannot do that in today’s world for all that long, i think.

    we will see …

  • Posted by s

    I understand that Japan is still not intervening in the foreign exchange market. So, who is buying all the treasuries?

  • Posted by brad

    s — good question. wondered the same thing myself. am working on answer — i think q4 data will show a surge in reserve accumulation in non-japan Asia (emerging Asia). Look at the data already out from the central bank of Korea. China’s reserves are clearly growing quickly too — check out the story on the int. page of today’s WSJ.

    Russia’s reserves also surged — as, no doubt, did the reserves of other oil producers, though the saudis and the gulf states may not choose to record the fx inflows associated with higher oil as fx reserves.

    Am pretty sure central banks reserve accumulation outside of Japan financed the uS in q4 — am less sure that these funds were going into the treasury market …

  • Posted by Billmon

    “China is a part of the world, and it cannot solve its domestic problems by exporting them.”

    But it can certainly try, at least for a little while longer.

    I have to wonder, though, whether the export strategy itself isn’t contributing to social tension. Yes, the exchange rate subsidy creates industrial jobs. And it certainly generates wealth for the entrepreneur class and the party kleptocrats who feed off them.

    But isn’t the net effect on China’s economy as a whole to squeeze domestic purchasing power? In PPP terms, Chinese wages are kept lower than they should be/need to be. Food, fuel and imported consumer goods are all more expensive than they should be/need to be. Public welfare and infrastructure spending is crowded out, because debt has to be issued to fund currency intervention, rather than build roads, hospitals, schools, etc.

    I mean, in old-fashioned Marxist terms, isn’t this basically about extracting surplus from China’s working class, in order to finance capital accumulation? Except a large part of that capital is in the form of accumulated foreign reserves, instead of than domestic plant and equipment.

    Or, to think about it another way, China is following the kind of domestic austerity policies the IMF typically prescribes for countries that need to solve a balance of payments problem – even though it doesn’t have a problem. And we all know how popular those policies are with the rank and file.

    Maybe forced-draft industrialization eventually will deliver the greatest good to the greatest number. (Stalin certainly thought so) But for the majority of Chinese workers struggling to survive in the rural and/or informal sector (like the porters who rioted in Wanzhou last week) it looks like a pretty raw deal in the here and now.

    If the leadership is really worried about domestic unrest, it could probably do more to defuse it by allowing the renminbi to rise and spending some of those $600 billion in reserves to stimulate spending and suck in more imported consumer goods.

    Maybe the leadership will eventually wise up and do just that. But the party and its clients in the business sector both have a huge investment in the current model – just as our own kleptocratic class is heavily vested in U.S. asset inflation and consumption-led growth.

    In which case China may be stuck in a kind of political feedback loop: The more the leadership tries to supercharge export growth by keeping wages and the renminbi low and consumer prices high, the more pissed off their people become. And the more pissed off the people are, the more desperate the leadership becomes to supercharge export growth – because they can’t or won’t risk changing the model, leaving export jobs as the only palliative for popular unrest.

    If that’s true, there could come a point where it takes more than just a few riot police to keep the Chinese end of BW2 running smoothly.

    what happens if China’s domestic troubles get out of control?

  • Posted by anne

    Billmon

    Interesting argument, but do not underestimate the Chinese leadership. I have been thoroughly impressed by the care they are takinbg in development policy, and even by the flexibility shown. I am thinking about your fine argument, and will try to respond in a short while. I am wandering about, so responding is not simple.

    Brad

    Remember that Brazil also is buying American debt.

  • Posted by brad

    anne — i looked at brazil’s november reserve accumulation, and it was a bit less than I expected –nothing like say Korea’s. Need to dig a bit more, and look at a longer time frame/ latam as a whole. Brazil is making net payments back to the imf, so that is tempering its reserve accumulation.

    billmon — interesting argument. As we in the US know, business savings can be an important component of national savings. Presume that some of the profits Chinese firms earn from an undervalued exchange rate are reinvested back into the economy, to fund China’s extraordinary investment rate. The weak exchange rate makes investment of capital in the external sector very, very profitable (while reducing labor’s real purchasing power), but part of the social compact is that the capital is reinvested back in the economy. The net effect is a rising tide, but one that lifts some boats much, much, much faster than others (chateau Zhang Lafitte, etc) … China combines aspects of a classic IMF austerity program (the undervalued exchange rate) with something is rather atypical for a country that has to turn to the IMF because it has lost access to private capital markets — very rapid credit growth and very high rates of investment. A most interesting combination.

  • Posted by Billmon

    “China combines aspects of a classic IMF austerity program (the undervalued exchange rate) with something is rather atypical for a country that has to turn to the IMF because it has lost access to private capital markets — very rapid credit growth and very high rates of investment.”

    The analogy is obviously flawed – I was thinking off the top of my head, so to speak. I just meant that the net effect of China’s growth model, like the net effect of an IMF structural adjustment program (well, a successful one, anyway) is to steer resources away from domestic consumption and towards the export sector, with the goal (explicit in the IMF’s case and implicit in China’s) of reducing external liabilities and/or accumulating foreign reserves.

    China’s obviously no basket case, and could, as Brad suggests, easily run a current account deficit of 1 or 2% of GDP – and probably should, given where it is in the development process. But instead it is forcefeeding domestic savings into fixed investment and the export sector, even as it also absorbs substantial capital inflows.

    To my obviously untrained eye, a lot of those domestic savings appear to be “forced” – through the manipulation of relative prices to favor production of capital goods and exports and disfavor production of consumer goods and imports. At the end of the day, massive subsidies to Chinese manufacturers and U.S. consumers (aka the dollar peg) have to come from somewhere, and that somewhere is the Chinese worker/consumer.

    I’m also assuming the exchange rate regime isn’t the only mechanism for giving consumers the shaft. I don’t know much about the Chinese equivalent of passbook savings, but I’d be willing to bet it functionally resembles the Japanese postal savings system circa 1955 – i.e. custom designed to pay miserable yields and steer cheap credit towards capital investment and away from consumer lending.

    Maybe these are smart policies – after all, Japan – or at least, Japanese industry – did well by them for many years. But in a poor country like China, it takes a pretty severe squeeze to produce the surplus for forced-draft industrialization. Unless people have been completely terrorized into submission (the USSR in the 30s) sometimes they push back, just as they sometimes push back when the IMF orders impoverished governments to cut food and fuel subsidies or slash teacher salaries in half. It’s not well remembered now, but Japan in the early stages of its postwar great leap forward was also a socially unrestful place – lots of strikes, demonstrations & riots, militant unions, a large and active Communist Party, etc. It took a number of years, and some sharing of the fruits of development, to create Japan Inc.

    Brad’s point about the implicit social contract -milk workers and consumers now, so that everyboday can enjoy a higher standard of living later – is also valid. But by continuing to accumulate massive piles of dollar reserves (which inevitably will have to be liquidated with heavy losses)isn’t China’s leadership breaking that contract, or at least bending it over double?

    I don’t know if the average street porter in Wanzhou or machine tool operator in Guangdong province necessarily understands exactly how they’re being exploited, but I’m sure they get the part about the rich and well connected getting richer and even more well connected while any wage gains they happen to see are quickly eroded away by inflation or extorted away by rapacious party bureaucrats.

    It just seems to me the most effective way for the regime to release some of the pressure might be to boost consumer purchasing power a little, rather than continuing full steam ahead with the forced-draft export-led strategy. And the easiest way to do that would be a renminbi revaluation.

  • Posted by anne

    Billmon

    When I settle in my travels, I will respond to your thought filled argument properly. Where I worry is in the gulf between macro policy and micro effects. China is slowly slowly slowly building to a more equitable development path by allowing for local redress of inequity. Marco change that does not allow for more redress will simply gobble up poorer Chinese. The leadership seems genuinely worried about this problem. I do not like this response but there will be more. Travel is taxing. Worrisome.

  • Posted by brad

    Billmon — My implicit social contract argument only takes you so far. The exchange rate regime means Chinese workers are giving up current external purchasing power. The question is what are they getting in return? The likely answer: higher taxes to recapitalize the central bank (not build infrastructure) once the central bank has to take losses on its dollar reserevs, and higher taxes to recapitalize the domestic banking system for the new round of bad loans it probably is making now — whether loans to finance a real estate bubble in certain coastal cities or loans to finance factories built on the assumption that the US market will keep on growing at 25% y/y.

    On net, I too think it is a bad deal for Chinese workers — they should have more current purchasing power, and smaller future losses on the state’s (i.e. the taxpayers) reserve assets.

    I think you can make an argument that West Germany benefited from an undervalued exchange rate, and an implicit social contract that had German firms reinvesting heavily in rebuilding Germany industry after WW2. But eventually, Germany started enjoying the results of its reconstruction: 6 week vacations and the like. And the emphasis was not on building up huge reserves, but rather in a world of more limited capital mobility, using (limited) foreign exchange from exports to buy capital rather than consumer goods … so there were important differences.

    On some financial questions, I am an old-fashioned financial conservative: IMF programs should be designed to cushion the blow of a necessary adjustment, not to avoid a necessary adjustment — sometimes countries do need to tighten their belts (case study, the USA, right now). Most countries that go through the IMF’s wringer either have too much external debt or too few reserves, and thus need policies designed to repay their external debt (or at least reduce the pace of external debt accumulation), or to rebuild their reserves.

    The irony, of course, is that China has an unvervalued exchange rate designed to encourage reserve accumulation even though it is in exactly the opposite financial position. China is a net external creditor (more external assets than debts), not a net debtor. And China certainly does not have to rebuild its reserves. It is not Mexico, which had only $5 billlion left in the bank in 94, or Turkey, which for some time owed more to the IMF than it had in reserves. China’s roughly $600 billion in reserves trail only Japan, and as a share of China’s GDP (600/1500 = 40%), China’s reserves are larger than Japan’s.

    Go back to the early concepts of the Bretton Woods two post war system: Keynes wanted to design the world’s financial architecture so that both surplus and deficit countries adjusted to correct a balance of payments imbalance. Surplus countries (China) would adopt policies to expand their economies/ increase their demand for imports. Deficit countries (uSA) would adopt policies to reduce their demand for imports (devaluation, tighter macro policies). Keynes wanted symmetric adjustment b/c he worried that if only deficit countries adjusted, the overall effect would be globally contractionary. With small emerging economies, that is not so much of a concern — though the US did its part to help Asia out of the 97-98 crisis/ support the global economy by acting as an “import market of last resort.” But with the US and China, it is worth returning to the orginal conception of symmetric adjustment …

  • Posted by DF

    All this reinforce the sketch I drawed on several occasions in here.

    We are now witnessing the results of the policies initiated in the 80′s : liberalisation of capital flows.

    external imbalances :

    Investment flows have rushed from developped countries to countries with lower wages and devalued currencies. IMF programs have been designed to promote export led growth. The substitution of imports by local producers has been highly criticized. Better Chile than Brasil.

    The problem of course is that you can’t have only exporting countries ? Export led growth can not last forever.
    Where does demand come from.
    Answer : the USA mostly, europe a bit.

    Internal imbalances :

    Profits have surged in OECD economies.
    The reason ? Real wage growth has been reduced. wages/value added ratio has fallen. Liberalisation of trade, anti union laws and tax reform have helped to produce this reduction of real wage growth.
    Besides the reduction of real wage growth has a deflationary impact. It helped reduce inflation.

    Where does spending come from then ?
    Well, consumers can reduce their savings. THey can borrow. Especially if the value of their assets has risen.
    Lower interest rates can help to acheive this result. Good news, reduced inflation allows to reduce interest rates. Besides, asset price inflation sterilise money creation.
    Money has been created on a huge scale in OECD countries with absolutely no inflationnist impact on good prices.

    So this has been the perfect world for asset holders : inflating asset prices, stagnant good prices …

    And where are we now ? Interest rates can not fall anymore. Debt approaches a ceiling.
    Companies hold huge amounts of cash, but have little profit opportunity because their is little increased spending ahead. Instead of investing in new production capacities, companies get ready for a new concentration frenzy.
    States and companies (in europe much more than in the USA) will have to deliver expansive promises in the coming years (retirement entitlements, health programs)…

    My bet is that the papy boom, massive retirements ahead in the 10 years coming will have a deflationnary impact.
    Workers leaving the workforce with a huge wage, will not be replaced or will be replaced by younger workers earning a much lower wage.
    This will leave holes in social programs, and further reduce spending.

    If you think their is a huge US federal deficit, just try to figure out how it would get with 2 years of an even mild recession (-1%)…

  • Posted by Eric

    with consumer debt at 11 trillion- gov debt at 9 trillion and unfunded liabilties obviously much higher( medicare, social security,Pension guarentee)
    it is unlikely that without the chinese buying MBS and treasuries ( I heard they were responsible for appx 95% of the buying last quarter) that interest rates would be much higher being the largest debtor nation out there. We are due for a recesiion and Katrina and Rita don’t help.
    Real Estate is dropping in price and inventory has doubled the last 6 months to almost all time record levels of the early 90′s.
    The housing ATM machine is being cut off and with short rates moving higher and a flattening yield curve this has made even the exotic short term fixes harder to help people get into overpriced homes. You can build for about 1/4 of what it costs to buy.
    Consumer spending will drop off a cliff once poeple can’t sucj the appreciation outta their homes. Here in california 80% of mortgages are interest only, 60% are 0 down and of the remaining that do put something down appx 60% are borrowing money to do so. The real estate market has exhausted itself by itself. People simply can’t afford median priced home in cal of 660,000. (less than 10%)
    This has largely been made possible by Fannie and freddie creating a liquidity bubble by buying all the notes away from the banks, which basically makes banks justa bunch of salesman trying to make a commission. They simply don’t care if people can pay because they won’t be the ones to suffer after they sell them away to fannie and freddie. The Chinese will get left holding the bag and the pensions and mutual funds that fannie and freddie recollateralize and sell to will get hit as well. Once this starts to happen people will be selling bonds and MBS causing interest rates to spike right into all the ARM’s that will be coming due in a year or 2. The ARMS will adjust not only to higher interest rates but also to Principal and interest too.
    This will not end pretty.

  • Posted by Guest