Borrowing more, but borrowing proportionately less from the world’s central banks
Back when the US Treasury announced the TARP, a common assumption was that the rise in the United States need to borrow need implied that the US would necessarily need to borrow more from the world’s central banks. After all, central banks have been the main purchasers — on net — of Treasuries over the past few years. Now there is a sense that the world’s central banks are necessary to finance not just the Treasury bonds associated with the TARP, but also the large expected fiscal deficit – and indeed concern that central bank demand may not rise as fast as Treasury supply.
Just today the Treasury announced it expected to issue – on net – an additional $500b this quarter. That is a lot by any measure.
I would be surprised, though, if it is all bought by central banks. Or even if most of the new Treasury will be absorbed by central banks. For the first time in a long time, I suspect Americans — not the world’s central banks — will be the main source of new lending to the Treasury.
Why? The last few months have been marked by three trends:
– The scale of Treasury issuance picked up. A bigger deficit, the TARP and above all the Supplementary Financing Facility led to a nearly $780b increase in outstanding stock of public debt between the end of August and the end of October.
– The pace of central bank reserve growth slowed. I don’t yet have full data for October, but reserve growth unquestionably slowed dramatically last month as capital flows to emerging economies reversed. Most central banks are running down their reserves, not adding to them. See Korea. Or Russia. And unlike in q3 – when around $150b in Chinese reserve growth and $50b in Saudi reserve growth more than offset the fall in other countries reserves – I suspect that on net central banks reduced their total reserves in the month of October. That also is a big change.
– At the margins central banks shifted from Agencies to Treasuries. That shows up clearly in the Fed’s custodial accounts. Treasury holdings for foreign central banks rose by almost $135b from the end of August to the end of October – a very strong pace. Agency holdings fell by almost $60b over that period. That is one key reason why Agency spreads remain wide.
The net result, best I can tell, is that over the past two months Treasury supply grew faster than foreign central bank demand – so the share of Treasury bonds held by foreign central banks fell. I expect that trend to continue for a while.
I should actually add a fourth trend — one that mattered more in the year to August 2008 than in the last two months: The Fed has also been running down its own holdings of Treasuries, increasing the effective supply of Treasuries on the private market. A year ago it held about $800b in Treasury bonds. Now it has a little under $500b – but it has lent out about $200b of those through its securities lending facilities. This has had a similar effect to new Treasury issuance: it added to the supply of Treasuries circulating in the private market.
Indeed, the total increase in Treasuries in the market between August 2007 and August 2008 — i.e. before Lehman’s default triggered the current crisis and the huge surge in Treasury borrowing — has been quite large. Think $425b from the Fed’s balance sheet (an outright fall of $305b, and another $115b increase in securities lent out over that time frame) and roughly $400b of new Treasury issuance (see the monthly statements of the public debt).
The TIC data implies — if one assumes, as one should, that most private demand abroad really comes from central banks — that around $500b of this increase in supply was snapped up by the world’s central banks. But $300b was not.
And that was before the crisis led Treasury issuance to soar and central bank reserve growth to slow. There is no way central banks will buy most of the $500 billion in Treasury issuance in the third quarter. Not when so many are running down their reserves.
Two other points –
One. The estimates of central bank Treasury holdings – and China’s holdings – that I provided the Wall Street Journal’s Bob Davis are higher than those reported on the Treasury’s web site. That is intentional. The Treasury’s numbers will be revised when the next survey data comes in. I estimated the size of the likely revisions to provide a better sense of what China currently holds. The last revised data is point is now from June 2007 — a long time ago.
Two. Central banks hold relatively few short-term bills, relatively few bonds with a maturity over ten years and relatively few TIPS. That means the central banks hold a very large share of the interest paying notes with a maturity of between one and ten years.
What about next year. That is a bit harder to forecast.
We know that the Treasury will be issuing a lot of debt.
We also know that central banks cannot buy many Treasuries if they are selling off their reserves rather than adding to them. Sure, they can shift from riskier assets to Treasuries – as they have been. But if global reserve slows dramatically, central banks purchases of Treasuries also will slow.
I am fairly confident that if oil remains in the 60s, the central banks of oil exporting countries won’t be big buyers of Treasuries. The domestic demands on the oil exporters are too high. That isn’t a bad thing. It means more demand from the oil exporters for American, European and Chinese goods. Toyota now plans to export American made SUVs to the Gulf.
I am also fairly confident China will continue to buy Treasuries. China’s dollar peg has gotten tighter. And China is still running a large trade surplus — something that is unlikely to change all that much in the near term. Yes, Chinese export growth will slow — perhaps dramatically. But China’s “processing” imports and more importantly its commodity import bill will also fall sharply, limiting the fall in China’s trade surplus. A reduction in capital inflows should bring China’s reserve growth down. But absent a surge in hot money outflows, Chinese reserve growth will remain strong — over $100b a quarter. And if China isn’t willing to buy Agencies let alone riskier assets, it will continue to buy a lot of Treasuries.
Other emerging Asian economies are currently selling dollars to keep their currencies from falling. But if the market turns and pressure for appreciation reemerges, I wouldn’t be surprised to see some countries start intervening to keep their currencies from rising. Some countries — notably Korea — may need to rebuild reserves. And many Asian exporters probably also wouldn’t mind helping their exporters a bit with a weak currency either.
Nonetheless, central banks are unlikely to match the extraordinary pace of reserve growth that characterized much of 2007 and 2008. That though doesn’t necessarily imply that US Treasury rates will have to rise dramatically to induce private investors to absorb the increase in Treasury supply. Not so long as economic climate remains so bad. Yesterday’s data was awful. And the recent fall in consumption suggests that Americans will soon start saving a bit. Their appetite for risky assets has already fallen. That means more demand for safe assets. Investors who reached for yield in the boom times got burned; many may play it safe.
Consequently, whileCalculated Risk worries about fall in Chinese demand for Treasuries, I worry more that China’s steps to stimulate its economy won’t be vigorous enough. Right now, demand for the world’s goods seems to be falling fast . Demand for safe financial assets is not. And Treasuries — judging from their yields — are still considered safe. At the margin, I would rather see China step up its imports of goods and services than continue its current pace of Treasury purchases.
Instead of breathing a sigh of relief and letting taxpayers off the hook, Treasury Secretary Hank Paulson has taken to using the TARP as an all-purpose slush fund, bailing out the banks, and apparently in future providing subsidies to the automobile industry, local governments and anyone else with political connections who needs it. The result is that Treasury borrowing in the year to September 2009 is now estimated to be $2 trillion, around double last year’s level. Needless to say that too will damage the economy. TARP was a terrible and poorly implemented idea; no doubt that is why it is so popular with the political class.
However the bad economic idea for which support in the political class is most whole-hearted is that of excessively low interest rates, far below the rate of inflation. The financial crisis has been caused not by high interest rates, but by excessive leverage. The 3-month interbank dollar LIBOR peaked at 4.82% and overnight LIBOR at 6.87%, neither representing “tight money” in a currency whose inflation is still running at more than 5%. Even those who decry over-loose monetary policy as responsible for the 2002-06 housing bubble fail to identify its responsibility for the stock bubble that preceded it in 1995-2000. As for Fed Chairmen Alan Greenspan and Ben Bernanke, they are wholly unrepentant of their monetary profligacy, and to a large extent remain the heroes of the political class, in spite of the devastation they have caused.
It is this item of public education that must be stressed repeatedly by those who seek the welfare of the US economy. Deregulation was only a minor cause of the housing bubble and subsequent debacle; the true cause was excessive money supply creation by the Fed, which is not a private sector free-market entity but an agency of government. It is these lessons, that over-easy money will bring long-term disaster and that government has been primarily responsible for this as for so many previous crises, which must be taught to the American people. Only when voters have learned their lessons can we hope that politicians will no longer find political traction for cockamamie and damaging economic nostrums. The campaign against Greenspan and Bernanke, to get Bernanke fired and Greenspan de-deified is not an optional meddling in ancient history, it is the most crucial economic struggle of our time.
http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10147
Brad,
the market is talking about a possibility in a massive selloff in USTs in the future, in view of the expansionary policies undertaken by Fed, the oversupply and the overall lack of demand by CBs and other names which have been supporting it in the past few years.
so far we have seen the USTs being bought by flight to safety money but over the recent weeks prices have dip and looking to test the downside.
trading talk aside, i am very concerned about the possibility of a massive selloff in the bonds, driving up the yield curve in the far end. the implications can be awry.
looking at China and India which have annouced substantial policies to prop up their domestic markets, it leaves much to wonder how long can they resist the temptation of selling their USTs to fund their policies?
i had the luxury of listening to ex Chairman Volcker in Singapore, and i was thinking about how would the current debacle change the outlook or the nature of Central Bank/ Sovereign Funds business going forward. Given the delicate balance required now in handling their reserves portfolio of USD and USTs, how would the Central Banks reshape their methodologies? We talked about diversification from USD into EUR and other currencies, with hindsight now, those seem to be a relatively wrong move. Would we see a diversification into JGBs or Asian Bonds?
Off-Topic:
Aerial Video Display of Chinese Airforce J-10A, J-11B, JH-7A Strike Fighters at 2008 Zhuhai Airshow
http://www.youtube.com/watch?v=iBZLghZ3-Tw
Until now, judging by Money Supply and Balance Sheet, the FED has basically exchanged Treasury Bond for Crap Asset from financial institution, without printing money.
Now that the T-Bond at the FED has are almost finished what do you think will happen?
They will start to print money with quantitative easing? They will require more bond from Treasury? Or the TARP already provide funds for FED operations in the next months?
Any thoughts?
But the logic of Brad’s argument depends upon people continuing to see Treasuries as safe.
In an interesting post, John Kemp, who has just joined Reuters as a commodities and currencies columnist, noted that the dash for safety had enabled the Fed to cope with the problem of its ballooning balance sheet by issuing a great deal of short term paper, a great deal of which is going to have to be refinanced quite rapidly. Placing this debt, he suggested, will prove ‘tricky’ and buying medium or long-term Treasuries in the current market ‘could prove a very bad investment indeed.’
‘Yields on Treasury securities [Kemp went on] are being artificially compressed by the flood of money seeking to avoid credit risk in the banking system and a safe home in the government debt market. But when the liquidity and credit premium eventually diminishes, as it must if the economy is to return to health, there is a risk yields will rise substantially, inflicting losses on anyone who bought them at more depressed levels.’
Moreover, he went on to stress, there would be a very great temptation to allow inflation to rise to ease debt burdens throughout the economy — and in particular to prevent mortgage debt acting as a continuing albatross.
The fact that deflation appears a far more serious risk than inflation at the moment is of quite secondary relevance to the risks taken by purchase of longer-term Treasuries. And this is of course true in spades for foreign holders, who must price in the risks of devaluation as well as those of inflation. The fact that inflation and currency collapse are not expected tomorrow does not make it a good bet for the Chinese to buy longer term U.S. debt today.
In conclusion, Kemp wrote:
‘Issuing debt denominated in foreign currency might be too much of a humiliation for Uncle Sam, but heavier issues of Treasury Inflation Protected Securities (TIPS) and a more explicit commitment to dollar and price stability might be the only way to reassure domestic and foreign investors that the government will not resort to a devaluation and inflation strategy to pay the bills and escape from recession.’
(See http://in.reuters.com/article/columnistNews/idINTRE49T5YD20081030.)
Brad,
The essence of your analysis is that US is now more dependent on hot money (private investors with short-term objectives, scared for now but sensitive to losses) than long term committment (long-term minded CBs using treasuries as currency reserves).
Is this a fair characterization? And if yes, wouldn’t it be riskier?
David HK — not necessarily. If the short-term money now flowing into treasuries flows back into bank paper, the banks can pay back the fed, the fed can pay back the treasury and the treasury can reduce its bill issuance. financing the expansion of the deficit exclusively with bills does poses risks, but financing the expansion of the fed’s balance sheet with bills makes sense to me. some of the short-term flight to safety will reverse.
what disturbs me the most is the sense that the US should prefer demand for treasuries by foreign governments to demand for goods from foreign citizens. if demand for us goods and services materializes, that will support the us economy — and there will be less need for a fiscal stimulus. my concern right now is that demand for us exports looks to be falling off a cliff.
remember, the dollar has gone up over the course of this crisis — not done. that suggests concerns about the treasury’s long-run solvency haven’t been paramount in driving global flows.
Brad,
Don’t underestimate the ARB bid for treasuries if the effective Fed Funds rate stays anywhere near its current daily rate of .25.
The bubble that is now deleveraging started with the Fed’s low interest monetary policies which subsidized debt and rewarded speculation. The massive expansion of credit by the investment banks and hedge funds distorted the market by keeping the price of money “too low for too long” pushing savers into risky investments. That ignited asset-inflation in the secondary market and sent real estate prices skyrocketing. Now that foreclosures are steadily rising, the foundation for the scheme has eroded and the pyramid is crashing to earth.
Americans are scared and for good reason. Government policy is being concocted by a Mafia of right wing corporatists, Wall Street tycoons, and strident Chicago-school class warriors. Their interests are different then the people they are supposed to serve. Financial-industry rep Henry Paulson has devoted all his time to saving his banker buddies while maxed-out workers slip further into debt and destitution. Of the more than $1 trillion the Fed has spent to prop up the financial system, not one dime has gone to anyone who wasn’t a banker. It’s all gone to Paulson’s friends. Meanwhile, the economy is sliding into the most severe recession in the last 80 years and there’s no help in sight for homeowners who are underwater on their mortgages or about to lose their jobs.
The surest way to destroy the economy is to hand over control of the financial system to investment banks and speculators. That’s what transpired before the Great Depression and Wall Street has restaged the same coup today. By overturning critical market regulations, the investment alchemists have created a toxic stew of exotic debt-instruments, shadowy off-balance sheets operations, and opaque derivative contracts, all designed to avoid prudent capital requirements. The investment banks and hedge funds have been creating credit from thin air while supportive regulators in the Bush Administration have applauded from the sidelines. Now the monstrous equity bubble has imploded triggering systemwide deleveraging which has left consumers with little access to credit, soaring food and fuel costs, and an uncertain jobs market. Naturally, demand has suffered as people hunker down and try to prepare for the economic slump ahead.
http://www.counterpunch.com/whitney11042008.html
[...] Brad Setser suspects Americans–not the world’s central banks–will be the main source of new lending to the Treasury. [...]
[...] Brad Setser suspects Americans–not the world’s central banks–will be the main source of new lending to the Treasury. [...]
[...] Brad Setser suspects Americans–not the world’s central banks–will be the main source of new lending to the Treasury. [...]
Brad,
As most of the Chinese Treasuries are 1-10 year maturities, and most of the new financial-crisis-related Treasury issuance is less than one year, it appears that either 1) The Chinese are going to end up with a lot more very-short-term Treasury debt, or 2) The Chinese are no longer acting as current funders of our ever-expanding Treasury debt. What do you think?
Are Chinese monthly retail sales data releases reliable indicators for increased imported “goods and services?”
Brad- I dont know how US consumer is going to save if interest rates are at 1% and faliing constantly. IT implies maoney is going to sleep under matress and no deposits implies no credit aggravating the current crisis.
the fed has not sold its treasuries but swapped them for mortgage trash. this is how benny intended to keep his intervention sterile.
now with the rising supply of treasuries and the falling foreign demand, someone has to be buying those treasuries, and i suspect that will be the fed. yes, they will monetize them!
you point that most of the new t-bills acquirers have been domestic buyers. yes, but those have sold equities and commodities, commercial paper and parked their money in short term treasuries. i dont (and probably you too) expect this trend to continue for much longer, so there will be no domestic demand either. on the contrary, when money begins to shift toward riskier assets, there will be lots of added supply to the secondary market. and most of those are with maturities of up to 2 years.
on the private side, even rich people will curtail their buying given falling dividends and cap gains and business profits as well. count them off as buyers too.
so who else has the capability (cash) to buy treasuries but the fed?
[...] Brad Setser suspects Americans–not the world’s central banks–will be the main source of new lending to the Treasury. [...]
Brad,
what demand for US goods abroad? the only competitive companies are Boeing & Microsoft (and few other software ones).
exporting money is easier than exporting goods: no investment necessary in education, capacity, capable management, transportation etc.
and have you looked at the latest ISM survey? US manufacturing fell to 2001 level! that means for the past 7 years while the economy grew according to gov’t statistics over 17% (Q1 2001-Q3 2008), manufacturing (most exportable goods) has shrunk in devalued dollars (dollar index down 20%)! it looks like the US has been in a lost decade as well if GDP is measured in the dollar index.
Brad- What can US export. US exports consists of cars, oil shipped out and importing ever larger quantities. With airlines layinf off aircraft in every part of world, no orders for boeing either.
With stronger dollar, you cant produce cars. you will see hyundai cars cheaper by third in coming weeks. US car makers are headed towards bankrupcy.
In an October 29 post, entitled “What Does ‘Deleveraging’ Really Mean? Cutting $25 Trillion Of Debt”, Blodget looked at the American economic history of the past 75 years from a whole new perspective, graphing changes in the ratio of total credit market debt to gross domestic product (GDP) over this period.
Around 1920, this number stood at 170% – that is, $1.70 of debt for every $1.00 of GDP. The ratio soared to about 260 during the Great Depression, as GDP shrunk the ratio’s denominator, then, following World War ll, was essentially stable around 140 for almost 40 years, to 1986. It was then that the ratio began its stratospheric climb, topping out at 356 earlier this year.
From this perspective, the economic history of the past quarter century looks much different, and is much easier to understand. It was not Reaganomics, nor even Clintonics, that was responsible for all the prosperity since the 1980s; it was just Americans borrowing, being allowed to borrow, more than they ever had before, and then spending away the proceeds.
But now, the debt engine has stalled and is going into reverse. Blodget notes that about $700 billion of bank debt has been “written down”, has evaporated these past months. But that’s just the proverbial drop in the bucket compared with the amount he says debt must shrink for the ratio to return to the normal post-war levels in the mid-100s.
How much does Blodget say debt levels must shrink? $25 trillion – 35 times more than what has already been written down. Think of the current difficulties, multiply by 35, just imagine what that would look like.
It is obvious what is happening here – it’s a lender’s strike. For years, lenders have been giving away mortgage money cheaply, say at 5%, but after a year of the real estate inflation typical of this decade it would take $1.30, not the $1.05 the lender would get back, to buy as much house as the $1.00 bought the previous year. It was a losing game. Finally, the lenders walked away from the table, and the deleveraging plague commenced.
What can Obama do to get lenders to lend, to re-leverage? Maybe he can spur some growth with a fiscal stimulus, such as infrastructure spending, but that won’t necessarily get lenders to start lending again. He can put people to work pushing brooms or leaning on shovels and keep them from starving, but neither of these government-funded avocations will satisfy the real Joe-the-Plumber American definition and vision of prosperity – multiple big houses with big boats side by side with fast cars and/or monster SUVs in all their driveways; big, flat TVs and anything but flat expensive second- or third-trophy wives.
http://www.atimes.com/atimes/Global_Economy/JK06Dj01.html
DJC: What can Obama do to get lenders to lend, to re-leverage? Maybe he can spur some growth with a fiscal stimulus, such as infrastructure spending, but that won’t necessarily get lenders to start lending again. He can put people to work pushing brooms or leaning on shovels and keep them from starving, but neither of these government-funded avocations will satisfy the real Joe-the-Plumber American definition and vision of prosperity – multiple big houses with big boats side by side with fast cars and/or monster SUVs in all their driveways; big, flat TVs and anything but flat expensive second- or third-trophy wives.
Why not?
I think someone is comparing apples and oranges and getting totally bogus numbers. When you deposit money into the bank, that increases the amount of debt in the world, since the bank now owes you money, so just blindly looking at the amount of debt and saying this is bad, is not a good thing to do.
The more people save in a bank, the more debt there is in the world, since anything that a bank owes you is debt.
Twofish,
If what Americans really want is to once again be able to buy the big plasma TV with 500 high-definition cable channels, park their gas-guzzler monster SUVs in their driveways, and sit in front of it in the plush media room of their big McMansion house drinking a 6-pack of beer, isolated from the rest of the world reality by their big honkin’ security system, well, then it’s all downhill from here for the US Empire.
Brad, you are definitely right that it is far preferable for us (and the Chinese) that China stimulates its economy by investing in better health care and eduction, among other things, than buy US Treasuries.
I thought that the whole idea behind the Treasury/Fed initiatives was that the US Fed would buy the roughly 1 trillion of extra treasuries thus throwing fuel into the furnace of the economy.
DJC: If what Americans really want is to once again be able to buy the big plasma TV with 500 high-definition cable channels, park their gas-guzzler monster SUVs in their driveways, and sit in front of it in the plush media room of their big McMansion house drinking a 6-pack of beer, isolated from the rest of the world reality by their big honkin’ security system, well, then it’s all downhill from here for the US Empire.
Why?
DJC: If what Americans really want is to once again be able to buy the big plasma TV with 500 high-definition cable channels, park their gas-guzzler monster SUVs in their driveways, and sit in front of it in the plush media room of their big McMansion house drinking a 6-pack of beer, isolated from the rest of the world reality by their big honkin’ security system, well, then it’s all downhill from here for the US Empire.
Twofish: Why?
DJC: If you don’t understand why, then I recommend you max-out your credit card, and take a subprime negative amortization loan on the full current market value of your house. Spend the proceeds on Las Vegas vacations, fast cars or a monster SUV, and of course, a gold-digger girl friend outside your marriage. Why not? Life is short so why not enjoy it. One needs to keep-up with the rich and famous lifestyles of Donald Trump. LOL.
A personal footnote. I believe Obama is more serious than either Bush or Clinton.
Obama may not have all of the solutions to US Economic problems, but I believe he is more serious than either Clinton or Bush. Clinton dragged the US into the awful Monica Lewinsky sex scandal. During a Women’s World Cup soccer match in the United States while he was President, Clinton barged into the Chinese women’s team locker room. Bush’s behavior at the Beijing 2008 Olympics wasn’t much better. Several Chinese blogs circulated photos of “red faced” Bush who was obviously drunk at the Olympics, also hitting several US women volleyball players in the butt. I think Obama is likely to have better personal behavior than either Clinton or Bush.
Twofish: Why?
DJC: If you don’t understand why, then I recommend you max-out your credit card, and take a subprime negative amortization loan on the full current market value of your house. Spend the proceeds on Las Vegas vacations, fast cars or a monster SUV, and of course, a gold-digger girl friend outside your marriage. Why not? Life is short so why not enjoy it. One needs to keep-up with the rich and famous lifestyles of Donald Trump. LOL.
It would help if you answered the question directly. If your answer is that there isn’t enough wealth in the world to have every American (or for that matter every human being) live the American Dream then I disagree.
If you look at the list of things, the only item that is resource limited is the SUV, and we can create a electric powered hybrid for that. Everything else on the list can be created if you have enough factories, people, workers, etc. etc.
Twofish,
Why is “Joe the 6-pack Plumber” in deep trouble across America? Every credit card or Heloc mortgage should be labelled with the warning, “keeping up with the Joneses or Donald Trumps” is detrimental to your health and wealth. If the capital was invested in foreign dividend stocks or even education, it would be less of a problem. Instead the capital was wasted on stupid McMansions, SUVs, Game Boy video games, Flat Panel TVs, and other productivity sapping junk of little intrinsic value. I hope turning all of those McMansions into “bread and breatfast” operations works out for Joe and Jane six-packs across America.
To counter global recession, public works spending:
China considering 730-bln-dollar transport investment: report
http://afp.google.com/article/ALeqM5i7Jh6_wFkQVHcFB3XPdLQBAEEnFA
SHANGHAI (AFP) — China is considering a plan to invest five trillion yuan (730 billion dollars) in the transport sector in the next three to five years, state media reported Wednesday.
The investments would include roads, waterways and ports, drastically boosting previous plans for investment, the China Business News reported, citing an unnamed source.
The plan partly overlaps with a previously announced proposal to spend about two trillion yuan in the sector between 2006 and 2020, the report said.
“The additional funds would be able to boost domestic demand swiftly,” the source was quoted as saying.
China is ramping up construction to stimulate the domestic economy and create jobs amid a slowdown in overall economic growth.
The global financial woes were instrumental in slowing growth in the world’s fourth-largest nation to nine percent in the third quarter, the lowest in around five years.
Last month, the State Council, or cabinet, approved a plan to spend two trillion yuan on construction of new railways by 2020. About 1.2 trillion yuan had already been allocated, state media reported.
DJC: Why is “Joe the 6-pack Plumber” in deep trouble across America?
Because the benefits and increased productivity of globalization have gone primarily to the rich. Median incomes and incomes among the poor have stagnated while incomes on the wealthy have undergone huge increases. This was tolerable as long as people believed that the wealth would “trickle down” but that didn’t happen.
DJC: Instead the capital was wasted on stupid McMansions, SUVs, Game Boy video games, Flat Panel TVs, and other productivity sapping junk of little intrinsic value.
The capital should have been used to boost wages among the poor and lower middle class so that they can spead earned money on McMansions, SUV’s, video games, and flat panel TV’s rather than using borrowed money. The point of increasing productivity is to boost standards of living. Throughout the 1990’s and 2000’s, there wasn’t a drop in productivity in the United States. The gains were just very badly distributed.
There is not a wealth generation problem in the United States and there is also not a overall national debt problem in the United States, nor is there a productivity problem. The problems are wealth distribution and financial system stability. So roll up the sleeves and fix the problems.
DJC: I hope turning all of those McMansions into “bread and breatfast” operations works out for Joe and Jane six-packs across America.
One second you are coming across as the champion of working class Americans, and the next second you are bashing them for spending too much.
“It would help if you answered the question directly. If your answer is that there isn’t enough wealth in the world to have every American (or for that matter every human being) live the American Dream then I disagree.”
the problem lies rather with those who have already lived the american dream, but not yet paid for it. also with those in many countries, this one included, who have imitated this lifestyle. also even those who held back from the maxed out lifestyle but nevertheless will suffer in the economic climate change that is in the course of being brought about by deleveraging – which is to say, the new world order of ‘cash on delivery’ which is going to rule from now on, this side of total and universal transparency (which would be fiercely resisted by many.)
good luck and best wishes to the president elect. i hope he moves quickly to appoint some competent men and women. there is the potential for bush, obama, and the g20 all to be overtaken by events if they do not move decisively.
Twofish: Because the benefits and increased productivity of globalization have gone primarily to the rich.
DJC: The entire US Economy is in trouble due to misallocation, waste, looting, and even criminal embezzlement of capital across Wall Street. Joe6pack was deliberately lured into the ponzi mortgage bubble scam by the Wall Street banksters. Instead of investment into industrial productivity, capital was grossly misallocated into consumption with consumer spending accounting for a record 70% of GDP, but industrial production collapsing to record low 12% of GDP.
Twofish: One second you are coming across as the champion of working class Americans, and the next second you are bashing them for spending too much.
DJC: Speak for yourself. You are the one that justifies Paulson’s $700 billion corporate welfare program for Wall Street banks. AIG has vaporized $140 billion plus in taxpayer capital that could have been used to rebuild the infrastructure of the United States. Instead the US Treasury under Paulson’s orders sends multi-billion dollar checks to his business partners at Goldman Sachs to cover counterparty losses from the AIG fiasco.
“the US economy in 2006/7 recorded its lowest rate of labor productivity growth in more than a decade, with growth in output per hour worked falling significantly behind the European Union, Japan, China and India” -
“If the U.S. had adequate productivity it should be most competitive compared to other nations and therefore produce trade surpluses. But, instead, the U.S. produces huge, record trade deficits” — 1985-2007 cumulative deficits totaled $7.4 trillion.
I think the only path to pursue is for the US to produce higher quality & lower cost, goods & services. Somehow this playing field needs to be leveled.
It should be economically advantageous for creditor nations, and for the world economy, if creditor nations operate with trade deficits: deficits proportionate to their creditor status. I.e., the deficits should be large enough to enable the nationals of debtor nations to acquire a sufficient amount of foreign exchange to enable them to service thier international debts.
And during Greenspan’s 1% FFR, the “expansion coefficient” or money multiplier, doubled in 6 years. I.e., if the FED used the FFR as a “guide post”, it was certain to backfire.
There are 5 interest rates that the Fed can directly control in the short-run; the Discount Rate charged to bank borrowers & the Primary Credit Rate for the PDCF, ABCP, ABCP MMF, & MMIFF.
The effect of Fed operations on all other interest rates is INDIRECT, and varies WIDELY over time, and in MAGNITUDE.
PRODUCTIVITY GROWTH RATES – - 56 year down-trend – the traditional measure
“In 2006 the U.S. had a total merchandise trade deficit of $836 billion, while Japan & Germany produced a cumulative trade surplus of $314 billion ($168+$146). That’s a whopping $1.2 trillion worse relative trade performance for the U.S., in JUST ONE YEAR, with just 2 nations”
DJC: Instead of investment into industrial productivity, capital was grossly misallocated into consumption with consumer spending accounting for a record 70% of GDP, but industrial production collapsing to record low 12% of GDP.
But you’ve had 1-3% growth in total factors productivity over the last decade due to IT spending. Manufacturing has shrunk, but most of GDP comes from IT services which are part of the reason that IT has grown. Information technology tends to be very capital lean.
I don’t think that the US has had a consumption/investment misallocation at all. The misallocation has been a wage/lending misallocation.
Twofish: One second you are coming across as the champion of working class Americans, and the next second you are bashing them for spending too much.
DJC: Speak for yourself. You are the one that justifies Paulson’s $700 billion corporate welfare program for Wall Street banks.
Because I happen to believe that in combination with higher taxes for the rich and more government spending on public goods, that the bailout will encourage saving by the lower and middle classes and increase their standard of living.
I think that bank managers should be wiped out, but if you bash banks you end up bashing depositors. So I think what the government should to is to bail out the banks but fund the bailout from the rich through higher taxes on incomes and capital gains.
The trouble with “let the banks fail” is that you are punishing the less bad banks and all of the CEO’s that have been fired get to keep their money. If you tax them, then the money ends up in the hands of middle class and poor people who can then buy flat screen plasma TV’s with them.
The problem I have with your views is that they are incoherent. I really have no idea what you are for or against, because one moment you support one thing and then next moment you support a policy that is logically inconsistent with what you supported a second ago.
It’s the sort of the thing killed McCain’s campaign.
Brad,
I suspect that you are seeing a temporary fall in US Treasury holdings by foreign Central Banks due to the currency swaps. Several of the countries with recently weakened currencies just got US Treasuries and are using them to strengthen their currencies.
The South Korean central bank, for example, is currently strengthening the won, but it will go back to its long-term policy of weakening the won, by accumulating dollar reserves, so that they can steal more market share for Korean comapanies competing in the depressed world markets.
They want their currency to weaken, but not so quickly that it causes their own businesses to default on loans payable in dollars.
I don’t share your concern about U.S. interest rates getting too high. The latest GDP report from the BEA said that US inflation (price index for GDP) rose by 4.8% in the third quarter which means that 6 month treasuries are now earning -4% interest right now and 10 year treasuries are earning -1%. Since when are negative interest rates desirable?
Howard Richman
http://www.tradeandtaxes.blogspot.com
Does that mean that you expect higher long term rates for US bonds, a higher spread with short term rates ? Or do you think asian creditors will ask the fed to raise its rate ?
[...] to fund that? You could issue T-bills. But as Brad Setser points out fundamental changes in the T-bill buyer market make that a risky [...]
[...] to fund that? You could issue T-bills. But as Brad Setser points out fundamental changes in the T-bill buyer market make that a risky [...]