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LinkedInI spent most of the first two quarters of 2008 marveling at the pace of Chinese reserve accumulation — which was topping $200 billion a quarter for a while (counting funds shifted to the CIC and the increase in the PBoC’s other foreign assets, i.e. China’s hidden reserves). That kind of reserve growth far far exceeded any number I expected to see. China probably won’t post that large an increase for calendar 2008, as reserve growth slowed recently (though we don’t really know by how much; the December number — which will undo the valuation losses from the euro’s fall in October — will be telling). But the total increase in China’s foreign assets — counting its hidden reserves — from September 2007 to September 2008 likely came close to matching the US current account deficit over that time.
I expect to spend the first few quarters of 2009 marveling at the size of the US fiscal deficit. If the CBO is close to accurate, the deficit will easily top $1 trillion this fiscal year (and this calendar year). The CBO estimate includes $400 billion to cover the estimated losses on the TARP and the cost of the Fannie/ Freddie bailout; that is part of their $1.2 trillion estimate. Obama’s proposed stimulus though isn’t included in their $1.2 trillion estimate.
Any way you cut it, the deficit will be very big. So, incidentally, will be the recession. The CBO is forecasting that output will fall by 2.2% without a stimulus, with unemployment rising over 9%. That is a big fall. And it is part of the reason why the CBO expects such a large deficit. Automatic stabilizers and all.
As a share of GDP, though, China’s reserve growth still takes the cake. $200 billion a quarter, annualized, is $800b — a bit over 20% of China’s GDP. $1.2 trillion isn’t even 10% of the United States’ GDP.
But it is unquestionably huge. Perhaps surprisingly, I would guess that it mostly will be financed by domestic US savings. The fall in the price of oil, absent a big rise in the non-oil deficit from a far larger fall in exports than imports, implies a current account deficit in the 3 to 4% of US GDP range …
I don’t think many expected a year ago that the US would be running this kind of deficit — or that the CBO could credibly forecast (p. 13 of its report) that the Treasury would be able to finance such a large deficit at a lower rate than it financed the far smaller ($455b) deficit in fiscal 2008. The CBO forecasts an average yield on the ten year Treasury of 3% in 2009, and a slight fall in the Treasury’s net interest payments (table 5, p. 16)
Brad,
If the Fed starts to monetize the national debt, do you think Chinese will continue to play along or take their money elsewhere?
“to cover the estimated losses on the TARP”
That’s interesting. They’re estimating the actual value of TARP lending will be formally written down by $ 189 billion this year?
It appears to me that the US is going on a revised model of the Japanese one.
Someone has to take on the excess supply, so will it be the US citizens/pensioners/funds.
Will there be stricter regulations restricting lifers,pension,state funds to a higher mix in AAA USTs and no more fanciful products that they have been dabbling in the past?
And I really doubt the Chinese reserves/GDP will be able to continue to grow at previous years astonishing pace.
If mortgage backed securities were AAA, I’m beginning to wonder if U.S. Gov’t debt is truly AAA?
Who rates U.S. debt? Moodys and S&P?
Setser: “I would guess that it mostly will be financed by domestic US savings.”
Of course, Brad. But What will happen with the imbalances?
With more than a half million usamericans going to unemployment every month, what’s the final solution, a war against Iran?
Scary, endeed!
Brad,
Not so deep thoughts.
Ilargi, from theautomaticearth.com tell it clearer.
The US lost 693.000 jobs in December, according to ADP. The official non-farm payrolls report is due Friday. And so we set the tone for 2009. The numbers for January are certain to be much worse. A lot of businesses held on for dear life in the last month of last year, especially retailers and their suppliers. Well, we know the shopping season was dismal. The UK expects that one in every seven stores will be empty by the end of this year. 60% of its 22 million jobs are in retail, meaning 2 million people could get laid off in retail alone. Supposing the same set of numbers would apply to the US, the country would shed 10 million jobs. Just in retail. By then, it’s not that important anymore whether 50% or 60% work in stores, whether the number is 9 or 10 million lost jobs. That is because if this scenario pans out, there are other things to worry about.
In China, the state media have started warning of social strife and mass protests, presumably in an attempt to stay ahead of developments. The country, which has about 4 times the US population, has already seen those 10 million workers fired last year. With another 7 million looking for work today, the officially projected 8% economic growth would create just 8 million jobs. The chances of meeting that target are zero; the economy is shrinking fast. On the other hand, much media maligned Germany saw its first net job loss in three years. There are 82 million people in Germany, about 27% of the US population. While the US lost 693.000 jobs in December, Germany’s loss was 18.000 jobs. Something tells me perhaps the Germans aren’t doing that poorly.
Obama warns of a $1 trillion US deficit this year. It’s obvious the deficit will be nearer $2 trillion, but you have to feed it to them bite-size. It’ll easily be more than ten times the 2007 deficit of $162 billion, in an economy with a rapidly shrinking GDP. Obama expects the deficit to remain over $1 trillion (read: way over) for many years to come. But in a stark warning to Obama and the US, the Financial Times reports that the first German (10-year) bond issue of the year failed. Yes that’s the country with the far more favorable job numbers. There are far less questions about German solvency than there are about the US, and you can bet that Washington pays attention to news like that.
The FT claims that $3 trillion in -sovereign debt- bonds will be issued globally, three times more than in 2008, as national governments frantically try to plug the behemoth size black holes in their budgets. But the paper is way too conservative; unless the failures come early and fast, total attempted government bond issuance will far surpass $3 trillion. The money has to come from somewhere. But common sense indicates that economic prosperity and bond markets move largely in sync.
Therefore, as economies worldwide plunge, the bond markets will provide hard and bleak proof that they do not constitute a bottomless well. The UK is about to be the next one to find that out. The US will soon follow. And as I’ve said before, we’re not yet talking about all the corporations, municipalities, states and provinces around the globe who rely on bond markets to fund their day-to-day expenses. What are all these hopefuls going to do? Offer double digit rates in a time when deflation keeps real interest rates below zero? That would be a slow suicide recipe. The market for municipal bonds in the US sort of ground to a halt last year, while corporate biond fared little better.
What’s more you need to look at who the big buyers are. You’ve got your pension-, mutual- and other funds, but they’ve all had suffered big hits last year. They’ll be lucky not to lose another 40-50% of their holdings. Not exactly the sort of party to buy 3 times as many bonds now. The other main buyers are foreign banks and governments, in particular Japan, China, Germany and the oil states. The first two have been the biggest buyers, but are now just trying to keep their heads above water. Their purchases will go down, not up. Germany needs to focus on the EU, and the Middle East will have its own set of problems if oil prices don’t start rising real soon.
So who’s going to finance Obama’s stimulus package? The only party left is you, but you already much poorer than you realize. Maybe if they don’t tell you that, you’ll play their game a bit longer.
I forgot the title:
“The name is Bonds. Obama bonds.
A dipper issue:
“Weapons And Iran Trained Fighters Smuggled Into Gaza”
http://www.moonofalabama.org/2009/01/weapons-and-iran-trained-fighters-smuggled-into-gaza.html#more
Good point troll, the problem is that the euro MSM is talking about porn industry seeking a bali out:
“Is the porn industry up next for a bailout? If porn titans Joe Francis and Larry Flynt have anything to do with it, it will.
Yes, ladies and gentleman, the titans of pornography are begging for a bailout. Joe Francis, creator of the “Girl’s Gone Wild” video series, and Larry Flynt, founder of Hustler, will ask Congress for a $5 billion bailout, according to TMZ.
Why does the porn industry need a bailout? Because apparently even porn is getting smacked by the recession.”
Globalization in full motion!
‘Perhaps surprisingly, I would guess that it mostly will be financed by domestic US savings.”
I agree. The question I have is, where will the excess Chinese savings end up? If it comes here, China will garner the bulk of the U.S. stimulus and the U.S. will just be left with bigger debt.
It doesn’t surprise me that Germany would have financing troubles. I still forecast that they will have very serious problems, worse than the U.S., before this episode is over, as their exports begin to suffer. Their only hope is that other members of the euro bloc start to collapse first, so the euro falls. Right now, though, it is still overvalued and shows signs of staying so.
Hi auskalo, were you refering to “Iran’s Postmodern Beast in Gaza”, by Kaplan in theatlantic?
Thanks BTW!
I’m very surprised at your opinion that the $1.2 trillion Federal deficit will be financed by domestic U.S. savings. I understand your logic that the trade deficit probably will decline, but I still suspect that the bulk of the financing will come from printing money and/or foreign central bank legerdemain.
Hi troll,
I read and gave as a present several copies of “The Ends of the Earth: From Togo to Turkmenistan, from Iran to Cambodia–A Journey to the Frontiers of Anarchy”, a very very good book.
Later I read some quite good ones… But then I got very disappointed of his change of course.
I think that as he was getting older he tried to be in good manners with his family and go to the chapel every friday, rediscovering his lost faith.
And now, latter on, hi’s talking about postmodrnism in Gaza. A sign of our times.
@don: where will the excess Chinese savings end up?
Dear don, you should find an excessive cooker wife, or an excessive loving one, to rediscover the real meaning of excess!
Excess is not known to anywhere untill they pass the line to the other side. You know what I mean? or you are a begginer? or a monk?
Kisses of excess!
My God!
What’s the news that Paulson wants a disappearing of Fannie and Fredie and be replaced by “one or two privat entities” regulated as public entities.
What’s this if not surrealism or post-capitalism or pure nonsense!
I’m reading a newspaper in Europe.
What do you say, Brad?
My God!
This is better:
Waiting for Godot: Until workers begin buying stuff the economy is not going to pick up. And until workers pay their debts down – or have them forgiven – they are not able to buy stuff for they have no credit and little income. So we’re all sitting here, waiting. It could be a long time, pull up a chair.
Moral, Legal, Common: Part of the new stimulus program will give judges the right to change contracts. The history of Anglo-Saxon law is based on the sanctity of contracts; the contract between the ruler and the subject, contracts between traders, contracts that convey property, even marriage is a contract. There is a very long, slowly developed canon of laws supported by precedent, common sense and moral deliberation. Let’s toss that all away and force investors to lose money – even though half the populace doesn’t think it’s a good idea. It’s bound to strengthen the politicians economy.
Guarding the Guards: In a former life I was in the security business. When asked to provide armed guards, I always asked for a list of the folks whose death the client’s insurance covered. I’m not in that business any more. There’s at least one BART officer who isn’t either.
Another Day Another Dollar Billion: Fifteen billion, actually. From Paulson to his retirement fund at Citibank, $20 billion, plus big chunks to PNC Financial and Fifth Third Bankcorp to help them digest the banks they’ve gobbled up.
Buzz Off: Terrorists are hiding out in the swamps, training insects to carry plague or anthrax or tiny nuclear weapons into our cities Be afraid, please, please, be afraid! I liked it better when they were going to build nuclear bombs and drive them around in rental trucks spreading clouds of anthrax..
Takes One to Know One: The GOP insists that the stimulus not be rushed through Congress like TARP was. And the Patriot Act. They also insist that the funds be accountable and targeted, unlike TARP. And that the programs have definite endpoints, unlike Iraq. And they want most of it to go to business, just like always.
On the Square: The Chinese government anticipates “a period of mass incidents” as million of workers lose their jobs, university graduates remain unemployed, and economic growth falters. The government is expected to encourage domestic tranquility and is reviewing film from Tiananmen Square .
In the Shade: China’s LDK Solar declined 14% on weaker sales and reported that a planned increase in polysilicon production will be delayed. Does a similar fate await the billion dollar Hemlock Semiconductor project in Tennessee?
Einer Hat Es Befohlen: Turns out David Lereah, for all the time he was at the National Association of Realors, had a gun to his head and was forced to make all those silly predictions. He was, he said, just doing his job.
He Said Then The Other Guy Said: Ukrainian reports that Gazprom sent but 92 million cubic meters of gas to Europe on Tuesday, down from about 300 mcm previously. Russia will, of course, claim that they have not reduced gas intended for Europe and that the shortfall is due to Ukrainian siphoning. It’s good to see the old traditions are being kept up. Happy New Year
All in Favor say Aye! “The current downturn is likely to be far longer and deeper than the “garden-variety” recession in which GDP bounces back quickly”. It’s becoming the popular view, so be careful.
Seeing is Believing: There are any number of charts comparing now to then and now to average and they’re pretty to look at. Print them out, shuffle and deal and see who gets the best hand.
@don: Appropos your previous comment, I’m not really concerned with nationalism. For instance, if there’s a very strong reason to believe that the export sector in India is going to collapse much further due to global protectionism then I would simply forecast much lower levels on the Nifty and that’s about it.
Definitive from CR:
I expect 100s of small bank failures over the next couple of years due to excessive CRE loan concentrations. I predict Bank Failure Fridays will be even busier in 2009 than 2008.
Brad: “But the total increase in China’s foreign assets — counting its hidden reserves — from September 2007 to September 2008 likely came close to matching the US current account deficit over that time.”
Sorry if this sounds stupid but I cannot make my math fit.
Rough figures for the past 12 months
- china has a c/a surplus of $ 370 (biggest chunk is the trade surplus $ 278 B)
- us has a c/a deficit of $ 700 B (biggest chunk is the trade deficit of $ 850 B)
Basically the Chinese central bank gets the excess dollars (dollars from the exporters minus dollars demanded by the importers = $ 280 B)
Now if we assume that the Chinese trade surplus only exists of $, something not true because it has a trade surplus with he euro area too, then China can at most invest $ 370 billion in US treasuries.
Nevertheless I constantly read that China finances the US trade deficit at a rate of $ 50 billion a month.
It looks to me the world as an entity is financing the US deficit. Link http://www.treas.gov/tic/snetusq.txt
Or do I miss something that is in the capital account of the balance of payments?
Geert — China has attracted large net FDI inflows over the last few quarters (that may be slowing) and attracted large hot money inflows in q4 07, q1 08 and q2 08. that pushed (in my view) real reserves growth, counting hidden reserves, up to the $700b range. i’ll have detailed data on this up soon in a post. I am waiting for the q4 chinese data but that may tell a different story as hot money flows have reversed.
Dr. Setser, you know what I have to say about household savings making up for the fiscal deficit. It doesn’t add up–unless you can provide another set of numbers to back this assertion.
Emmanuel — Goldman forecasts that the US private sector’s net savings will swing from a surplus of 1% of GDP at the end of q2 08 to a surplus of 9% of q4 09. i would have to go back and look but i think they are assuming that household savings rises to around 5% of disposable income (negative wealth effects + credit cosntraints). Private sector savings also includes business savings. But a core part of their forecast is something that you discount: a big fall in private investment, and not just in residential investment.
think of alcoa cutting capital spending, and a sharp fall in commercial real estate investment (read CR). i don’t think it is far fetched. my guess is that the CBO has a similar embedded assumption.
Point taken on investment. However, it is more likely that firm savings will go down as I have noted in the post linked above. With profits dropping in virtually all American industries, retained earnings are set to fall, not increase.
Comparing GDP to our overspending and then comparing it to CREDITOR nations like China or Japan is ridiculous, Brad. Stop it. You are making my head hurt.
It is like a drunken spendthrift comparing how he ‘saves’ money when comparing himself to a thrifty banker. China is a bank, the US is a bankrupt.
The US, unlike China or Japan, has overrun its trade by almost $8 trillion. This money is not a small amount even in Brad’s little universe. It is HUGE and GROWING EVEN BIGGER. Got that, Brad?
Please stop with the minimizing of what is wrong. The US cannot run trade deficits forever any more than it can run budget deficits forever. Period.