At least we know who will finance the US fiscal stimulus …
Last week, central banks added $12.14b to their Treasury holdings at the New York Fed (and perhaps more to other accounts — the New York Fed’s custodial holdings are an imperfect measure of the central bank demand), and $11.96b to their Agency holdings. The week before they added $7.13b to their Treasury holdings, and $7.30b to their Agency holdings.*
That works out to an increase of $38.5b in foreign central banks’ Treasury and Agency holdings at the New York Fed over a two week period — or about as much as sovereign funds have spent buying stakes in US banks over the past two months.
If central banks keep adding around $10b to their Treasury portfolio a week, the US will need to increase the size of the stimulus to meet central bank demand. Perhaps the second round of stimulus will be better targeted. And if central banks keep snapping up $10b of Agencies a week, the GSEs will have no trouble raising the funds needed to buy up a ton of jumbo mortgages. That also provides a form of targetted relief, just to slightly different group.
More seriously, the rise in central bank’s holdings of Treasuries and Agencies highlights something I alluded to earlier in the week — the bifurcation of sovereign demand between the some of the world’s safest assets (if you ignore currency risk) and some of the world’s riskiest assets.
Some central banks likely have decided that this isn’t the time to dabble in the asset-backed security market, or in the equity market.
And some sovereign funds seem to have decided that this is the perfect time to buy into their bankers, brokers and money managers.
* I used the change in the average level of central bank holdings, rather than the change in central bank holdings at the end of the reporting week for this calculation. Using the data for the close of business on Wednesday paints a slightly different picture.
With the stimulus package expanding the role of the agencies in the mortgage market, apparently even against the wishes of their regulator, one wonders whether central banks will begin to question whether agency bonds really are “safe”.
It’s odd. The stimulus package, while representing 1 per cent of GDP, still seems almost tiny in comparison to some of the macro numbers emerging around domestic housing and credit deterioration and associated with international imbalances.
Bifurcation = very blunt barbell asset diversification strategy.
I imagine that the Chinese and other who don’t especially like us don’t mind a bit providing more “alcohol”, as it were, for the alcoholic. Keeping the US drunk on over-spending and mis-spending may well fit their long range plans to ruin us. And most drunks are too far gone to refuse another drink when offered.
Central Bank purchases of agency debt are not sufficient to allow the GSEs to purchase a lot of jumbos. They are capital constrained and will need capital and debt in order to expand assets. They have already gone to the well for capital in Q407. If they go again they will find that the well has gotten awfully crowded.
But CB purchases of Ginnie securities will allow an unlimited expansion of FHA into the jumbo market. FHA doesn’t need capital – just the full faith and credit of taxpayers.
mort_fin –
thanks for the insight; i was too glib. i didn’t think about the GSE’s capital position.
Buying both speculative bank equities and Treasury and Agencies debt could be viewed as good hedging. If a few of the big banks fail, the flight to quality will boost the price of the government securities resulting in tidy capital gain. If the big banks thrive into recovery, the bank equity stakes will appreciate greatly, outpacing inflation and other, less distressed sectors. Maybe the two trends should be seen collectively as portfolio risk management?
“I imagine that the Chinese and other who don’t especially like us don’t mind a bit providing more “alcohol”, as it were, for the alcoholic. Keeping the US drunk on over-spending and mis-spending may well fit their long range plans to ruin us. And most drunks are too far gone to refuse another drink when offered.”
Highly possible- the Chinese may have learned a thing or two from the Americans, who got them hooked and drunk on US dollar holdings in the first place.
The world is now officially full of drunks. Something has got to give- both sides will definitely lose when that happens. Who loses the most though, depends on (a) who gets in a car wreck first (b) whoever has more to lose and is further from the world averages.
US should have used cheap financing to lure more talent back into the US, to rebuild its scientific educational system, to increase funding for scientific R&D and technology, to rebuild aging infrastructure. It could have kept both their ponzi scheme, and themselves, one step ahead of the game. Instead the money was frittered away in non-productive assets and consumption, with most going to Wall Street financiers who gained the most (on leverage) by getting people drunk on flipping properties.
Corruption killed various Chinese dynasties- the same is in line for the US. May be a fact of history and human nature. Break the linkage between wealth and gov’t- that is the key to the US staying ahead of the game. Can’t happen though- power agglomerates, power corrupts.
“guest with the ICBC example — you hit the nail on the head. ICBC is very much state-owned, so there isn’t a deal that matches BoA/ CCB or goldman/ ICBC that doesn’t involve a major increase in Chinese state ownership of the US banking system…..”
Brad, I was being facetious- my point was there is essentially no state of the world which could disprove your arguments- the Chinese are guilty until proven innocent, so what’s the point of arguing ?
I believe if you would propose a compromise, we might be able to make progress. Pegs can and should stop when the US starts exercising fiscal discipline. Pegs cannot stop until that happens because the US is manipulating the world currency when it runs huge deficits- the peg exists to counter that very fact- its not rocket science to anyone outside the US. Up until now, there has been NO mention of the imbalances causes by US deficits, just imbalances caused by pegs.
The board generally dismisses Dave Chiang as a crackpot with far-fetched arguments, but the world is waking up to the USD Ponzi scheme. The peg is just makes it a lot more obvious these days.
The world is going to blow up when the scheme breaks down- fact is though, you know which country is going to get hurt the more. I would propose you use your influence in the US to find a compromise solution. You will not be welcomed for this in the US, because the rich already offshore a lot of their assets- they don’t care if USD goes to hell because they’ll offshore everything. You’re fighting a corrupt system- the hardest type of system to overcome.
Response to Guest on 2008-01-26 22:05:59
DC isn’t dismissed for arguments, he makes few, simply cuts and pastes toward a hate-filled end.
Who has the most to lose depends on what your goal is, if it is to maintain a system based on nothing but paper and numbers in computers then I guess you still believe in it. Paper when destroyed will not result in other paper being readily accepted. Simple, once the jig is up it is up and another will need to replace it. All know this. Paper will not be able to be replaced with other paper unless over many years a transition. A slow transition is required or the game is over, and paper will be left unable to be traded because, like God, one must have faith in it.
Understanding of required Faith will sustain or faith will be destroyed, barter would not be able to replace the complexity of the trading system. Protectionism will rise, and economies will transit to less consumption and import substitution.
The world as we know it is on the brink. What comes after is an Orwellian nightmare that noone wants to admit and all avoid discussing.
A recession is long overdue for the US economy to clean-out the malinvestments over the past two decade. The subprime financial and real estate bubble problems in the US Economy are entirely self-inflicted, not caused by foreigners. Capital has been massively misallocated into stupid Middle East wars and absurd McMansion housing that has destroyed millions of acres of productive farmland. The US should be raising interest rates for a “sound monetary currency” and to encourage savings which provide the base for long term productive business investment. A fiscal stimulus adding to the exploding US budget deficit is absolutely the wrong economic policy.
Hallo Guest
“..I believe if you would propose a compromise, we might be ..”
I believe we should first get the different perspectives of US, China, ..
1. Who has a problem?
US.
2. What does China has?
A fully running economy. (~11.2% growth)
I mean: different reality means different thinking. (besides all cultural difference)
3. Should we think, that the China-gov.-long term planings and plans in the field of economy, can be unterstood, by underlying (to the facts we know and don’t know) some monetaristic- or whatever western econ. model?
This i a very big problem.
It should be clear, that there are two perspectives:
a. the hospital-perspective: how can I help?
b. the perspective, that just wants to know, what is going on. The perspective, that understands, that the Chinese-people look in an other way on the things, than US-people does; and so for all. (And special for our friends of America: the perspective that you can just kill, what you don’t understand, will come to an end; because the money is running out and it is only sustainable for “good friendship” but not for the global-reality of 21 cenury)
4. Should we think,
a. that the job of China (and the others) is to help US?
They look in there books; and calculate.
(It seems, that the US global power goes down with more speed, than anybody thought: a slow down over several years or a stay down for years like Japan, will be a heavy setback in a time, when China has steady growth?)
b.Should we think, the world will help the country of Guantanamo and Abu Graib?
We will see it.
4. Are we at the moment at one of those points, where the global imbalance makes in short time a “big move”? Who many are still to come?
And so on.
I know, it is more acurate to the facts, if someone does not have a hospital-perspective.
(that is not against hospital-perspetive; there is joy too; but it should be differentiated from the “cool-spectator”-perspective.)
globumedes
Mr. Setser,
I would be interested in seeing your thoughts on Frederick Feldkamp’s November 5, 2007 public comment letter to the Federal Reserve criticizing a number of policy decisions by the Fed on mortgage and corporate securities and derivatives. Yesterday, Barrons highlighted a couple points from the letter, but didn’t print it.
I’d also like to read the letter.
Thank you. Sorry to be off topic.
Guest — the debate over casuality is a very contentious one. I personally have, over time, come to put more emphasis on policies outside the uS that have sustained large surpluses (saving most of the oil windfall, china’s peg, others’ peg, and the policies china has adopted to restrain domestic demand growth to keep the economy from overheating in the face of the strong stimulus from net exports) rather than policies in the US. Back in 2004 and 2005, I was more symmetric.
But since 2004 the US fiscal deficit has come down by about 2% of GDP, without bringing the current account deficit down (the adjustment in the current account is more recent). Oil plays a role. but a set of Chinese policies that pushed up China’s surplus also contributes. Basically, the fall in the fiscal deficit — in the absence of any change in the surplus of the rest of the world — opened up space for a surge in residential investment and more consumer borrowing.
I think Bernanke more or less got it right back in 2004 — if the US fiscal deficit was sucking in money from abroad/ pushing down investment globally, one would expect us interest rates to be higher. The US fiscal deficit then would crowd out investment elsewhere (and higher rates would induce more savings). THat in some sense was the history of the 80s — big fiscal deficits, high us interest rates, big inflows from the rest of the world and a us current account deficit.
That though doesn’t describe the world today. US rates are still remarkably low — and those low rates can be interpreted as the mechanism through which the large surplus countries induce more borrowing in the US and Europe.
Bottom line — my views on this have changed, and I don’t think adjustment can be done simply by the US. China also has to adjust its policy mix.
The main exception is energy policy — US steps that cut US demand would reduce global prices and thus the savings surplus in the energy exporters.
I also stand by my earlier comment about ICBC and the other state banks. Reciprocity would be much easier if China’s financial system and the US/ European financial system were a bit more similar. Balancing private investment in china with state investment globally is different than a world where private flows offset.
a shorter version of my previous comment would be:
the usual penalty for profligacy is higher interest rates. that hasn’t happened to the uS. Especially not to the US treasury, which can still borrow large sums from the rest of the world in dollars (i.e. on terms that offer no protection against further $ depreciation) at low rates.
I have put forward a couple of theories trying to explain why that might be so, but i am interested in other explanations. It seems an important point; right now the market is not sending any signals to the effect that the US government is on the verge of over-borrowing.
“…providing more “alcohol”, as it were, for the alcoholic… the Chinese may have learned a thing or two from the Americans”
or the british…
I think the U.S. needs a good spanking, make to go without dinner and stand in the corner for a while. I’m tired of this “world policeman” and “leader of the free world” nonsense. Let someone else do it and see where it gets ‘em. Meanwhile, let’s teach our kids to balance a checkbook and keep their zippers zipped. Without discipline, a nation self-destructs.
“i am interested in other explanations”
The conventional wisdom is that low interest rates are the result of current account surpluses that are in turn the result of a global savings glut – notwithstanding the fact that every surplus is matched by a deficit somewhere else. This logic on its own doesn’t stand. It assumes that pricing is determined by flows and only by flows, and that there are no non-flow pricing offsets to flow considerations. Also, the conventional wisdom puts the explanatory burden on international flow imbalances, rather than flow imbalances between global saving and global investment.
There are other factors:
a) Measured CPI inflation has been consistently low compared to the 80’s. This reduces not only the inflation premium in yields, but the inflation risk premium in yields. The inflation risk premium is actually a component of real rates (not of the inflation premium itself). So the result is lower inflation premiums and lower real rates, meaning lower nominal rates in total. As to why measured CPI has been low – that is a function of global competition which has developed far beyond that in the 80’s.
b) The general level of interest rates has cycled down with disinflation. As the general level has cycled down, so has the amplitude of Fed cycles. Both the market and the Fed have believed in the low inflation story. Successive Fed cycles have produced lower lows and lower highs.
c) Wage inflation, which is the sine qua non of a generalized inflation problem, has been well contained since Volker busted it.
d) Financial intermediation has obviously become more fluid, easily connecting deficits to surpluses, not only internationally, but across all sector breakdowns. The result unfortunately has not been CPI inflation, but asset price inflation and a credit crisis.
e) The one element of truth in the glut thesis is that central banks are highly concentrated in treasuries, which certainly doesn’t result in higher treasury yields. But this is an asset mix glut – not a global savings glut. And given the low yield anchors of both fed funds and 10 years (neither of which are target maturities for CB investment), the difference from a counterfactual is questionable.
Hallo
Fed rate and the USD 4bn/month hit (accelerating) for China;
A.
“.. To keep the currency stable, the People’s Bank of China buys almost all incoming foreign currency, and then attempts to “sterilise” the monetary impact by issuing renminbi bills to take the funds out of circulation.
“The US cut means China’s central bank will pay almost 200 basis points more on the bills it issues at home to manage its currency than it will get on purchases of US Treasuries.
“The PBoC pays about 4 per cent on its so-called “sterilisation” bills, while one-year US Treasuries now carry an interest rate of 2.07 per cent.
..
“But Hong Liang, Goldman Sachs China economist, calculates the PBoC is losing about $4bn a month on its bills because of the turnround in the interest rate differential over the past 18 months.
B.
“Both countries are likely to maintain their policy biases in coming months, the US cutting rates, and China lifting them, a trend that will intensify the pressure on Beijing’s currency policies.
“The trend is clearly accelerating as the reserves continue to grow faster than GDP,” she said.
C.
“..But further use of interest rates is constrained by Beijing’s tight management of the renminbi, a policy aimed at preventing it appreciating too rapidly.
The government fears more rate rises could attract speculative capital inflows, adding to already swollen foreign reserves, which stood at $1,530bn at the end of 2007.
D.
Despite this objection, the government’s commitment to fighting inflation means further rate rises are inevitable, China economists say.
E.
“Some economists argue the reserve losses are only on paper, but “at some point, that paper loss may result in a fiscal loss”, said Brad Setser, of the Council on Foreign Relations. “It certainly represents a fall in domestic purchasing power of China’s external foreign assets. Money held in dollars will end up buying fewer Chinese goods in five years than it does now,” he said.
http://www.ft.com/cms/s/0/8c23d2be-ca20-11dc-b5dc-000077b07658.html
globumedes
‘the stimulus’ is very reminiscent of ‘the surge.’ that is to say the failed policy pushed a little harder . . .
although sceptical about helicopter rescues, i do believe in the self righting qualities of capitalism. tulip manias end – but the price of tulips reverts to being decided by those who actually want to plant the bulbs in the garden buying from the growers and garden centres.
there needs to be an american embassy in shanghai – a kind of green zone, where stacks of economists and banks of computers mediate between the interests of the united states and those of china. all the world’s financial and computational ingenuity has been put into (legitimate) personal greed and outright fraud. a tenth of that effort put into balancing mechanisms for the global economy would go a long way to help. marry chinese long term perspective (election free) to american short term ingenuity and apply the mix to the global problems. unilateral self indulgence has run its course. your military do not police the world – they threaten it, but not half as much as they threaten your own economy and political system by sucking the lifeblood out of your tax revenues.
the world will go on. your obsession with the end game is psychologically unhealthy. you need to talk to somebody . . .
.
china has set up a swf to buy dollar denominated assets with dollars. if the dollar were to lose 30% and the dow jones 50% how would that make warren buffet a genius and the chinese a bunch of losers ? i just don’t get it.
sitting on a trillion cash and watching to guage the bottom of a bear market ? some people have all the fun. if those guys lie awake at night it is with sheer excitement.
all they need do now is buy a few billion yen and wrongfoot the carry traders, then move in and buy up everyone in the casualty ward.
and by the way – we know where bernanke gets his confetti. – there’s a red star on his helicopter.
.
If the US doesn’t like things as they are it is up to it to make the necessary adjustments to the world as it is and not sit crying and whining by the side of the road. If it has lost its power to force the world to do its bidding, then it will simply have to use what power it has to change itself. The “savers” aren’t whining and crying; only the US is. May serve it right to discover what it’s like not to be in control of things. Like Argentina and Mexico and Brazil in the past. Good, overdue lesson. Shoe on the other foot, now, etc.
anonymous — at Ritholtz always reminds us, inflation now is a bit higher than in the 90s, not lower. y/y CPI changes have consistently topped 3%, and flirted with 4%. so i don’t quite see well contained inflation as an explanation for the fall in nominal treasury yields since the 90s.
I agree re that there has been a glut in CB demand for some particular kinds of treasuries, but the underlying source of that demand sure seems to be connnected with the rise in savings (v investment) in the big savings surplus countries — i.e. China and the oil exporters. both have seen savings rise faster than investment, and both now have negative real rates (domestically) as well. that seems fairly savings glut like to me.
guest — be careful, the US cannot keep other countries from buying fx to hold their exchange rate down, but it could either:
a) restrict domestic demand growth through policy, hurting the us and the world or
b) impose tariffs on countries that consistently resist exchange rate appreciation.
both would take matters into the united states hands. both also are non-cooperative acts.
gillies — i am obsessed with the end game because i worry we are heading there quickly; there are plenty of signs of growing stress in the global economy.
but one correction; the CIC was set up to raise RMB financing from domestic chinese savers and invest the proceeds in USD and euros. that is a policy choice, one that i think should be questioned.
one of the biggest puzzles to me is why the rest of the world has been willing to subsidize W’s foreign policy by buying up all the treasury bonds that have been issued to finance it. again, the world has a vote here — they don’t have to do this. tis China and the gulf’s choice to peg to the $ and hold so much of their savings in $.
i like the red star bernanke analogy by the way. it captures in a single image the two forces that have pushed us rates down.
Ritholtz is always reminding us because he’s always on the war path advertising headline versus core inflation. That’s another debate (he refers to core as ‘inflation ex inflation’), but I believe core inflation has been steadfastly lower recently compared to 15 years ago.
‘the usual penalty for profligacy is higher interest rates’
How droll. It surprises you that US profligacy seems to undermine international capital markets, perversely depressing interest rates to sustain the unsustainable. This is because you have nothing but contempt for our traditional American conservative family values such as Kinder, Küche, Kirche und most importantly, Kipper- und Wipperzeit. In our neo-Holyroman empire, we are preparing for a new and better 30 Years’ War, with our fierce Beltway Tross and Landsknechte, so naturally we must debase all currencies in the traditional fashion before undergoing the traditional famines, massacres, and plagues. Having subjected citizens to fanatical sectarian polarization, and consumers to a Schwedischen Trunk of soft credit, true believers must now defenestrate the foul heretics of the Setser blog.
Hallo
bsetser:
“..guest — be careful, the US cannot keep other countries from buying fx to hold their exchange rate down, but it could either:
a) restrict domestic demand growth through policy, hurting the us and the world or
b) impose tariffs on countries that consistently resist exchange rate appreciation. ..”
commentary:
c) impose tariffs on countries that doe not have international standards for production- and labor stuff: environement protection, pension-fond, health/accident-insurance, …
Yes. There are a lot of different possibilities and all of those can be explained in very rational ways.
“..hurting the us and the world..”
“..i am obsessed with the end game..”
commentary:
Yes, that is the price.
I believe, we all have to pay the price: now or later.
Or is there a way out through the winning of time?
What is needed in the capitalistic game, is a next solvent borrower to create the next bubble.
But there is nobdy and nothing? Endgame?
“..both would take matters into the united states hands. both also are non-cooperative acts. ..”
commentary:
Good point.
Means in reality: all will adjust and optimise their own portfolio; restriction here/there and everywhere.
“.. one of the biggest puzzles to me is why the rest of the world has been willing to subsidize W’s foreign policy by buying up all the treasury bonds that have been issued to finance it. again, the world has a vote here — they don’t have to do this. tis China and the gulf’s choice to peg to the $ and hold so much of their savings in $. ..”
commentary:
Maybe:
a. for Oil-princes: in times, where “econ-earthquakes” could quickly emerge, there is the situation, where US is a “save heaven”, in an environement of tumbeling countries (econ. and political)?
b. for China: they buy, because they want, that the machine is going on. Their total-calculation seems to be positive?
globumedes
ps. what I find am most asthonishing:
A devlopping country (GDP 07 ~3.195tril) can really play cards with the US (GDP 07 ~14tril.).
What went “wrong” for the US?
from that opium wars link:
“…trading in goods from China was extremely lucrative for Europeans and Chinese merchants alike. Due to the Qing Dynasty’s trade restrictions, whereby international trade was only allowed to take place in Canton (Guangzhou) conducted by imperially sanctioned monopolies, it became uneconomic to trade in low-value manufactured consumer products that the average Chinese could buy from the British like the Indians did. Instead, the Sino-British trade became dominated by high-value luxury items such as tea (from China to Britain) and silver (from Britain to China), to the extent that European specie metals became widely used in China. Britain had been on the gold standard since the 18th century, so it had to purchase silver from continental Europe to supply the Chinese appetite for silver, which was a costly process at a time before demonetization of silver by Germany in the 1870s. In casting about for other possible commodities, the British soon discovered opium, and production of the commodity was subsidized in British India. Between 1821 and 1837 imports of the drug to China increased fivefold, as the demand for the equalizing of the trade balance reversed a previous decision by the British authorities to respect the Qing government ban on the drug…”
sound familiar?
re: “core inflation has been steadfastly lower”
CPI is over 4% and dallas fed prez — “I have no intention of being party to any action that might shake faith in the dollar.” — fisher has advocated trimmed-mean measures (as opposed to core)…
http://www.dallasfed.org/data/pce/index.html
http://www.clevelandfed.org/research/inflation/us-inflation/mcpi.cfm
…all of which are accelerating, or as ned davis points out: “those who use “core inflation” argue it is more accurate since it does not include the monthly swings in food and energy, which can be volatile. If it is just month-to-month distortions, why has year-to-year Personal Consumption Expenditure (PCE) inflation been above core PCE inflation for 57 out of the last 63 months (90%)?”
Excellent work, but most analysis seem to miss the point. The business tax incentives and tax payer rebate checks are a diversion.
Lets mail the working stiff a one time $300 check, while we give $150K and a hall pass to the buyers and banks that got us into the mess.
Where’s the beef? The pea is under the pod called the GSE loan limit increase from $417K to $729K for one year.
The more stringent FNMA, FHLMC limits are raised for one year, while the less stringent FHA limits are raised, permanently.
According to California Sen. Barbara Boxer’s office:
On the average $650,000 jumbo loan balance, a 30-year fixed rate mortgage, the lower rate (-1%) on the “conforming” GSE jumbo would result in an average $417 per month savings, every month for 30 years!
Thats a $150K subsidy which amounts to white collar welfare for rich homeowners and speculators.
Millions of 1, 2, 3 & 5 year interest only & teaser jumbos will be reset this year. Calculations estimate if only 1 million default after a FHA refi, this will result in a $260 billion cost to the taxpayer within 2 years.
There is nothing preventing Countrywide and other lenders from refinancing their delinquent and defaulting “liar loans” with the GSE’s under this program.
In effect tax payers will be subsidizing the banks and borrowers with non conforming jumbo loans: California 35%, New York 19.5%, New Jersey 13,5% & DC 21.5%
This stimulus package is despicable, digusting, a disaster and a disgrace. Should it pass and be signed into law as currently drafted, its constitutional legality needs to be tested.
At a minimum, it is a violation of the GSE charters infringing into the “primary” mortgage markets. I urge you to contact your House & Senate reps to have the loan limit increase provision stricken from the bill.
http://naybob.blogspot.com/2008/01/barney-frank-hr-1852-sb-2338-economic.html
OK, with only a paltry M.A. in economics from a state school, I tend toward simple ideas. Since the Fed stopped tracking M3, I lean on http://www.shadowstats.com. They show M3 running at above 10% since early ‘07 and more recently at 15%. Can’t the surge in commodity prices be rather more simply linked to monetary inflation and the stimulous package an extension of loose money? Since we produce so little of the “stuff” we consume the stimulous is almost by definition a bump in the current account deficit. With the dollar drop taking serious hold (despite the aforementioned foreign CB appetite), isn’t large inflationary pressure somewhat predestined for at least the next few years? We’re voting for a president and the only one talking seriously about sound monetary and fiscal policy has been written off as a kook (ron paul). Where’s the middle class to turn here?