Posted on Monday, January 22nd, 2007
By bsetser
In 2006, the increase in the assets of the Social Security system ($185b) will almost certainly exceed the combined increase in the assets of the Russian Central Bank ($107.5b) and the Saudi Arabian Monetary Agency (on track for around $70b). The Social Security payroll tax (roughly $600b, counting the "disability portion" of Social Security) also raised more money than Saudi Arabia and Russia got from exporting their oil and gas (around $500b), even back when oil was at $65b.
And for that matter, the Social Security system's reserves (the Trust Fund) are twice as large as the reserves of China. The Trust Fund ($1,994b) is about equal in size to the combined reserves of China and Japan.
The Social Security system's Treasuries are just paper assets, you say. They aren't "real assets" It is certainly true that US Treasuries are nothing more (or less) than a promise to pay. They aren't secured by anything more (or less) than the full faith and credit of the United States. They are ultimately backed by the capacity of the US government to generate the necessary tax revenues to pay its obligations, or, should the US government opt to, its ability to borrow the needed funds in the markets.
Then again, Saudi Arabia and Russia also hold a lot of paper assets. Not necessarily the same kind of paper — Russia tends to shy away from US Treasuries for some reason. But it still holds paper of various kinds. Some of that paper is backed by mortgage payment streams – but nothing guarantees foreign government’s future ability to convert domestic US payments steams into external purchasing power.
And in a lot of ways, the domestic tax revenue streams that assure the ability of the US government to pay back its domestic debts look a lot stronger than the external revenues streams that ultimately guarantee the ability of the (US) the country to repay its external debts. Even after the Bush Administration's tax cuts, the gap between what the non-social security government takes in and what it spends is a lot smaller than the gap between what the US exports and what it imports. You can throw income from US investment abroad (relative to interest and dividends on foreign lending/ investment in the US) into the mix if you want — it doesn't change the basic equation.
Somehow, I think the debate over Social Security would be different if every statement on Social Security started with something like "Social Security, which ran a $185b surplus last year, is expected to continue to build up its assets until roughly 2020, when it will need to dip into its accumulated assets to pay currently promised benefits." Social Security will — per the CBO — first need to draw on the interest income on its assets in 2019, but the overall assets will rise for a few years after that. I wasn't able to find the precise estimate for when Social Security will need to start to draw on its actual assets, not just the interest on its assets.
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Posted in Fiscal Policy | 57 Comments »
Posted on Saturday, January 20th, 2007
By bsetser
That, at least, is how I read Premier Wen's statement at the Party's financial work conference. Wen:
China [will] take "comprehensive measures" to attain balance in its external payments while "actively exploring and expanding channels and modes for the use of foreign exchange reserves."
Like James Areddy of the Wall Street Journal, I suspect "exploring and expanding channels and modes" doesn't necessarily mean selling US dollar bonds and buying euro-denominated bonds, pound-denominated bonds or even bonds denominated in Australian dollar and Korean won. Nor does it necessarily mean that a higher share of China's new reserves will be invested in currencies other than the dollar, though that might be part of the goal.
What is does mean is that China is looking to shift away from a model where all — or nearly all — of its foreign assets are managed by a single institution (SAFE). Especially when that institution holds, I suspect, a portfolio that consists of a bunch of relatively similar instruments — dollar and euro-denominated Treasury bonds and dollar and euro-denominated mortgage bonds.
China is looking to set up an investment agency that can make equity investments. Perhaps more than one. The People's Bank of China wants to expand Central Huijin (the investment vehicle that manages the PBoC's investment in the state commercial banks), the Finance Ministry wants its own vehicle and no doubt there are other ideas floating around as well.
Richard McGregor spells it all out in the Financial Times:
… In five to 10 years, Beijing could preside over one of the world’s largest and most powerful investment agencies. The debate [over how to use China's reserves] thus far has irritated some economic policymakers who testily point out that the reserves cannot simply be spent as they represent assets on the central bank’s balance sheet. The government, or some agency under its control, would have to account for the funds in some fashion, perhaps through the issuance of bonds to the People’s Bank of China. …
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Posted in China | 29 Comments »
Posted on Thursday, January 18th, 2007
By bsetser
That is question Justin Lahart raises in his Wall Street Journal column.
His answer is a qualified yes. I would answer with a qualified maybe. Or maybe with a muted yes.
The oil exporters have shown a high propensity to save over the past few years (though that seems to have changed in 2006). So the overall stock of global savings should fall by a bit. But only by a bit. Some of the lost saving of oil exporters will be offset by rising saving in oil importers. And while some oil importers don't save much (the US), others (China) do.
I am not sure whether there is a global savings glut or a global drought in non-residential investment or a bit of both. But I am quite confident that there is a savings glut in China. Savings seems to be above 50% of China’s GDP – which is nuts. And most of that isn’t household savings. There is no investment droughtin China.
There is also clearly a savings glut in the oil exporting countries. Lahart – drawing on work by Higgins, Klitgaard and Lerman of the New York Fed – notes that the oil exporters saved about ½ the surge in their oil export revenue over the past few years. The result: the current account surplus of many oil exporters surged to over 30% of their GDP.
Actually, as Higgins, Klitgaard and Lerman demonstrate, there was a surge in government savings in the oil exporting countries. In almost every oil exporter, most oil revenues go to the government. Overall national savings went up because the government opted to save rather than spend a large share of the oil revenue. Fiscal surpluses soared. Oil stabilization and investment funds got huge influxes of cash. Some of those funds are managed by central banks, whose reserves soared. Some are autonomous investment funds – the new 800 pound gorillas of the market. A new paper by my friend Ramin Toloui of PIMCO has all the details — or at least almost all of them. I doubt any one has a better sense of how the oil savings surplus has been invested.
China and the oil exporters are big enough to have an impact on the global economy. Their individual savings gluts seem to have combined to create a world with lots of spare savings – and plenty of liquidity.
But if oil prices and oil revenues are falling, so should oil state savings. Bye-bye glut.
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Posted in oil | 46 Comments »
Posted on Thursday, January 18th, 2007
By bsetser
I suspect I am in a minority of one, but I liked Bernanke’s speech in Beijing better than his testimony today.
Bernanke is always reality-based; his testimony was well-sourced. And like Mark Thoma, I appreciated that Dr. Bernanke noted that a fiscal deficit can be closed by raising revenues as well as reducing expenditures, and that is fundamentally a political choice.
So my concerns are more about the relative emphasis placed on different points.
I agree with Mark’s argument that the speech lumped together Social Security and Medicare a bit too much. The “entitlements” framing implicitly suggests cutting Social Security benefits are a solution to a set of fiscal pressures that do not primarily stem from rising Social Security benefits.
That matters, because, among other things, Social Security is among the best insurance programs low wage Americans have against technological change – or intensified global competition – that cuts into their earnings late in their career. it is a rare bit of existing "globalization" insurance.
Bernanke implicitly noted that Social Security has a large current cash flow surplus by highlighting the difference between the unified deficit and the on-budget deficit. The gap is largely the surplus in the Social Security system. But that point could have been made explicit – and connected to the points Bernanke makes about the aging of the baby boom. The whole point of raising payroll taxes in advance of the baby boom was to help minimize the need to increase payroll taxes when the baby boom retires.
Of course, paying the Social Security system back when the baby boom retires requires changes in other parts of the government – whether higher taxes or less spending.
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Posted in Fiscal Policy | 42 Comments »
Posted on Thursday, January 18th, 2007
By bsetser
I am generally tend to see the glass as half empty, not half full. But even I think that the Chinese Ministry of Commerce’s willingness to recognize something that some American economists are still (sadly) struggling with – namely that China’s very large and very rapidly growing trade surplus bolsters the case for additional RMB appreciation – is good news.
Dan Drezner. Until China lets the RMB appreciate on a broad trade-weighted real (i.e. adjusted for inflation differences) basis, I am not going to worry about the possibility that relative prices don’t have any impact on trade flows. I am just going to applaud any sign that China might be willing to allow a bit of real appreciation.
In 2007, the dollar is appreciating against both the yen and the euro and the RMB is appreciating against the dollar (so much for the basket peg), which means that there might be a bit of broad based real RMB appreciation for pretty much the first time since China first allowed a bit of "flexibility" into its exchange rate regime.
Remember China now trades as much, if not more, with Europe as with the US – and the RMB decidedly hasn’t appreciated in either nominal or real terms against Europe since mid 2005. And for that matter, the RMB’s nominal appreciation against the dollar since mid 2005 has barely offset ongoing inflation differences, let alone made up for the difference in US and Chinese productivity growth. China’s real effective exchange rate remains well below where it was in 2000. It should be a lot higher.
Incidentally, my calculations suggest that if China’s q4 export and import growth rates continue through 2007, China’s 2007 trade surplus will be closer to $300b than to $200b. Stephen Green is more cautious, but he projects a $60b increase (from about $180b in 2006). I am pretty sure the Chinese know this as well. 25-30% export growth and a $1 trillion export base produces big numbers. Really big numbers.
China’s de facto export subsidy (Oops. distortion. Oops. Subsidy for the global consumption of Chinese goods) is having a big impact on the world economy.
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Posted in China | 25 Comments »
Posted on Wednesday, January 17th, 2007
By bsetser
At least not the croissants at Cafe de Flore. Or the eggs, coffee and salad, which are rather on the expensive side. There is cheaper option: the bakery just around the corner on rue de Saints Peres (I think). I spent a year as a cash-strapped student at Sciences-Po (which is also around the corner) back in the days of the franc fort.
I thought, though, that the headline that accompanied the Porter/ Landler article was a bit off. It could have been titled "High prices force American tourists in Europe to cut back on pricy European goods (like coffee, croissants and eggs)." That is adjustment.
Or it could have been titled "The dollar remains strong against Asian currencies, hindering broad adjustment." The authors quite rightly note that the both the euro and the dollar are strong v. the yuan and yen. And they supply a couple of anecdotes illustrating how European companies are responding to the strong euro by relocating production to China.
That is adjustment. Just not the kind of adjustment the global economy needs. Right now, when the dollar falls, the global economy adjusts in large part by locating even more production in the low cost part of the dollar zone — i.e. China. That lets China export more. It also allows China to finance the US more. The rise in China's surplus offsets the rise in the United States' deficit — the overall deficit of the dollar zone doesn't change much, even as the US deficit rises.
Of course, ultimately, it is the US — not the dollar zone — that needs to adjust. The US deficit needs to shrink. China's surplus doesn't need to rise more. Ask the PBoC.
More generally, the evidence strongly suggests that the recent stabilization of the US non-oil trade deficit is very tightly linked to the dollar's fall. US exports are way, way up since 2003. That is the way most economist would expect a weak dollar to impact the trade balance. The impact of a weak dollar on imports — higher prices can offset lower volumes, or those selling to the US may cut their margins to keep their market share — is more ambiguous.
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Posted in U.S. trade deficit and external debt | 36 Comments »
Posted on Wednesday, January 17th, 2007
By bsetser
I guess all TIC releases are frustrating, but I found today's release especially frustrating. Total net monthly inflows — $75b — are just enough to cover the current account deficit (which is running a bit under $900b). Though, consistent with recent trends, net long-term inflows ($58b) weren't quite large enough to cover the deficit. Foreign demand for US long-term debt and equities was strong ($107.5b), but so was US demand for foreign assets ($39b in November). Incidentally, net inflows are a bit different than the difference between foreign and US purchases because of an adjustment for principal repayments on agencies and mortgage backed securities
But that isn't the frustrating bit. The frustrating bit is that the split between private/ official flows simply doesn't make sense, nor does the geographic breakdown.
Even if you use Morgan Stanley's estimate for global reserve growth ($600b) rather than my estimate ($750b), the world's central banks added, on average, about $50b a month to their assets in 2006. Oil investment funds are getting another $10b a month. So there is — roughly speaking — at least $60b a month in official funds flowing into either the US, Europe or Japan. That isn't really in question. If you don't trust me, look at the statistical data tables in the IMF's WEO.
November was a reasonably strong month for global reserve growth. That also isn't really in question. Look at the reserve data from the BRICs in November …
So if the world added $60b plus to its official assets in November, how come only $9.1b of that shows up in the US data? The US data shows $6.5b in net official purchases of US long-term securities (Temasek seems to have been selling some US equities, accounting for the net official equity outflows while China clearly accounts for most of the $3.6b in official purchases of "corporate debt). Official institutions bought $7.7b of Treasury bills, but cut their holdings of other short-term securities by $1.8b and (implicitly) ran down their US bank accounts by about $3b.
I don't think anyone realistically thinks official institutions only put $10b or so into the US and US dollars while putting $60b into other markets and other currencies. So official funds — whether directly (custodial bias) or indirectly (dollar bank accounts lent out to hedge funds and private equity funds and others seeking leverage) — are behind some of the private inflows.
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Posted in central bank reserves | 14 Comments »
Posted on Tuesday, January 16th, 2007
By bsetser
Morgan Stanley has launched a new global reserves monitor. Their weekly has a bit more detail than in the online version. I can hardly complain though. I have a bit more detail hidden behind the RGE firewall than I put on the blog.
To be honest, I was quite happy when the big investment banks were — generally speaking– ignoring global reserve growth. Imitation can be considered a form of flattery, but competing against a bank with Morgan Stanley's resources isn't easy. Over time, I suspect that they will produce a product that I cannot match.
Stephen Jen and Charles St. Arnaud's work shows that global reserve growth remained quite strong in 2006. And given that Stephen Jen likes to emphasize "diversification across instruments" rather than "diversification across currencies," I suspect they also think dollar reserve growth remained strong.
I agree on both poinths. However, for what it is worth, some of the numbers I am looking at remain a bit different that those that Morgan Stanley is circulating.
Morgan Stanley estimates 2006 global reserve accumulation was around $600b, after adjusting for valuation. That seems a bit low to me. I am looking at a total of more like $740b. Morgan Stanley doesn't count the non-reserve foreign assets of the Saudi central bank and I do. But even without the increase in Saudi foreign assets, I am looking at global reserve growth of about $675b for the year.
As importantly, I believe global reserve growth (counting Saudi foreign assets) picked up slightly over the course of 2006, rising from a $700b annual pace in the first half of 2006 to a $800b annual pace in the second half of the year.
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Posted in central bank reserves | 14 Comments »
Posted on Tuesday, January 16th, 2007
By bsetser
Best I can tell, Social Security is in the best financial shape of any federal program. It is in far better future shape than Medicare. And it is in way better shape than the portion of the government that isn’t financed by the payroll tax. That part of the government has a $434 billion deficit. Social Security, by contrast, has a $185b cash flow surplus.
Social Security’s revenues exceed its expenditures – and will continue to do so for several years. Its financial assets are growing – they will top $2 trillion at the end of this year. Sure, it will need to draw on the interest on those assets in about ten year — and a few after that, it will need to tap the principal as well. But wasn't that the point of building up the Social Security system’s assets?
Consequently, I don’t see why 2017 is a date that causes the social security system any trouble – no matter what Lori Montgomery and Nell Henderson write in the Post.
“Social Security surplus will begin to shrink in 2009, as the baby boomers start to retire. It is it estimated that the fund will dry up completely in 2017”
The Social Security trust fund won’t dry up in 2017, according to any projection. Or even 2018 or that matter. That is when the CBO now projects Social Security benefits will first exceed payroll tax revenues (spreadsheet here). In 2018, Social Security will have to use the interest on its assets to cover its projected benefits. No big deal.
Dean Baker has more.
2018 is – by contrast – a date that could cause the rest of the government a bit of trouble. That is when the rest of the government has to stop borrowing from the Social Security system and — shockingly — start repaying the Social Security system.
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Posted in Fiscal Policy | 34 Comments »
Posted on Monday, January 15th, 2007
By bsetser
China’s reserves reached $1,038.7 billion ($1.0387 trillion) at the end of November – an increase of $29 billion over October. China then added another $27.6b in December, bringing its reserves up to $1,066.3 billion ($1.0663 trillion) at the end of the year.
That is a “headline” increase of $247.3b for the year. Adjust that total for the rising dollar value of China’s estimated holdings of euros and pounds, and the valuation adjusted increase is about $222b. That would be a bit under China’s estimated $240b 2006 current account surplus.
In the fourth quarter, China’s reserves increased by about $78b. That sounds impressive. It certainly seems to have generate some concerns inside China. Jiao Jinpu of the PBoC warned that:
The problem of excess liquidity in the financial system cannot be solved in the short-term and will continue this year as the country's trade surplus keeps expanding and US dollar depreciation causes more capital inflows into China. He noted that the central bank will face increasing difficulty in setting monetary policy, as a narrowing China-US interest rate gap limits room for the PBoC to adjust interest rates.
But to my mind, the PBoC actually got off easy in q4. A $78b increase in Chinese reserves in the fourth quarter is actually on the wimpy side. A 20% euro/5% pound/ 5% yen portfolio would have increased in value by about $9b – so the valuation adjusted increase is around $69b.
China’s trade surplus was $68b. The current account surplus tends to be about $15b larger (on a quarterly basis) than the (custom’s) trade surplus. China tends to attract about $5b in (net) FDI inflows a month, or $15b a quarter. Sum that up, and China’s foreign assets should have increased about $100b in the fourth quarter.
Roughly $70b of that appeared on the PBoC’s balance sheet. But $30b didn’t.
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Posted in China | 27 Comments »
