Brad Setser

Follow the Money

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More on the fall in private borrowing and the rise in the fiscal defict

by Brad Setser
June 2, 2009

The chart that supported my previous post attracted a fair bit of attention. But it was cobbled together at home and only looked at data over the past few years. With help from the CFR’s Paul Swartz, I looked at the quarterly data over a longer time period.

The story is clear. Government borrowing has increased dramatically. It topped 15% of GDP in the last two quarters of 2008. In 2007 and early 2008 it was more like 3% of GDP. But private borrowing has fallen equally sharply. Total borrowing by households and firms fell from over 15% of GDP in late 2007 to a negative 1% of GDP in q4 2008.


Negative borrowing by households and firms means, I think, that households paid down their debts in the fourth quarter.

It hardly needs to be noted that the fall in borrowing by households and firms in late 2008 was exceptionally rapid. A stronger economic cycle implied that the magnitude of counter-cyclical fiscal policy also needed to be ramped up.

The disaggregated data on borrowing by households and firms is also interesting. Household borrowing rose to record levels in 2003 and remained high through early 2006. Household borrowing fell in 2007, but for a time this fall was offset by a rise in borrowing by private firms. Borrowing by firms actually peaked in the middle of 2007 at a higher level than during the dot come investment boom. Chalk that up to a surge in leveraged buyouts and stock buybacks.


Both charts highlight the risk that worries me the most. In both the early 1980s and the first part of this decade, both the private sector and the government were large borrowers. And in both cases, borrowing rose faster than domestic savings, so the gap was filled by borrowing from the rest of the world. The trade and current account deficit rose. In the early 1980s, the US attracted inflows by offering high yields on its bonds. More recently, it did so by borrowing heavily from Asian central banks, together with the governments of the oil-exporting countries. But now yields are low (even after the recent rise in the yield on the ten year Treasury bond), and need to be low to support a still weak US economy. And China (and others) are visibly uncomfortable with their dollar exposure; banking on their continued willingness to finance a large external deficit seems like a stretch.

The challenge this time around consequently will be to bring down the government’s borrowing as private borrowing resumes.

Update: Household, household and government and total borrowing over time on a rolling four quarter basis:


And the quarterly data.


All data comes from table F1 of the flow of funds.

The downturn in total borrowing in the rolling four quarter sum reflects a low level of total borrowing in the second quarter (i.e. before government borrowing ramped up both to fund the fiscal deficit and to finance the financial sector). But even in the fourth quarter of 2008, total borrowing wasn’t up …


  • Posted by a

    Any chance to get the sum of the two graphs over time?

  • Posted by a

    Actually, a graph of the sum of

    1/ government + households
    2/ governement + households + firms

    since 1952 would be very welcome!

  • Posted by Richard

    Brad – isn’t the problem here not that government borrowing has replaced shrinking household borrowing but rather that it has tried to replace the reduction in the GROWTH of household borrowing?

    Households only actually reduced their net debt burden by your data in q4 2008. The change from 2007 was the decline in the increase in borrowing.

    So we have a government that is not just preventing deleveraging by making sure there is no net credit contraction instead it is trying to continue on the rapid credit expansion of the last few years – and look where that got us.

  • Posted by ReformerRay

    U.S. governmental response to reduction in credit and spending seems to be that a downward trend must be prevented from gaining momenteum.

    In contrast, I believe the large purchasing power available from the large Net Wealth in the U.S. will stop the economic decline. That did not happen in the decade of the thirties because the wealth that existed then was not widely shared, pensions did not exist, the governmental safety net did not exist, statistical data on what was happening did not exist and government at that time was not willing to help the private sector.

    Bernanke knows too much about what happened in the thirties and his opinion has permeated government.

    Things are much different today. Let the economy and the credit markets find their own comfort level. Momenteum will be arrested by bargain hunters.

  • Posted by Ryan

    @a – This graph has the sum going back from 1952. Didn’t make two, but could if you want. Or I can just send you the data table.

  • Posted by Dale

    Isn’t this what Hyman Minsky said? That the U.S. government, since the Great Depression, has responded to downturns by increasing the level of public debt, and using the expenditures to replace private demand? In this way, depression is avoided, at thte cost of higher government debt and eventual higher inflation.

  • Posted by K T Cat

    Unfortunately, government borrowing, unlike business and personal borrowing, is insensitive to interest rates. The government budget is about as nimble as a fully loaded supertanker. By the time they feel the impact of running over and crushing the private economy through crowding out, manifested by higher interest rates, we’ll be miles behind them in their wake.

    Was that a sufficiently tortured metaphor?

  • Posted by a

    Ryan – Thanks very much. So basically the latest sum is near the high, which means IMHO that the U.S. globally is borrowing too much. What happens when it begins to borrow less?

  • Posted by MakeMeTreasurySecretary

    This economy is burdened with the cost of maintaining a global empire, perhaps the costliest ever. The society espouses a perpetual-growth philosophy. As a consequence, it seems that no matter what we do, the US (collectively) must borrow at a rate least 10% of GDP and must debase the currency at the controlled rate of about 1.5-2.0% per year. This has been going on for at least thirty years, with the usual ups and downs.

    So, in the long term, a 2-4% inflation is already baked in the cake. The hyperinflation and deflation scenarios are fun to think about, like some horror movies that make the blood flow faster, but are really unlikely.

    Make sure you read the latest epistle from the always thoughtful Paul Kasriel:

    Brad, you are great with numbers. Can you check to what extend the total borrowing correlates with national security related expenses (all numbers as percents of GDP)?

  • Posted by FollowTheMoney

    Excellent charts & additional input. With all the borrowing, and likely continued orrowing needed the world will soon need to ask.

    Is the U.S. too big to fail?

    My answer is yes, central banks around the world cannot take a severe decline in the dollar, however will the can the world continue to afford the cost of band-aids?

    I fear europe is going to get deeply hurt as Germany won’t be able to export much as the dollar is devalued. Is it just me? Or do we have completely disfunctional global monetary order in our presence?

  • Posted by FollowTheMoney

    By the way, Europe is destroyed if it becomes 1.5USD/1EURO. ECB will soon have to start printing to devalue it’s currency, for the sake of Germany!

    Geithner believes in a strong dollar? Thoughts?

  • Posted by Cedric Regula

    I just ordered a new leather sofa from China yesterday. Sorry Italy and Denmark, you were high bidders.

    Price was $680 USD plus $94 white glove shipping.

    I purchased this with the wealth effect, created by a treasury bond short.

    Interest rates on the long end are back to within a stone’s throw of the peak hit last week.

  • Posted by Cedric Regula

    Also, whenever the buck drops close to a percent or more in a day, I get an irresistible urge to tell everyone and post the chart.

    Today is another one of those days.

    We are now back to September levels. The was when Lehman touched off Credit Crunch II which was a even more virulent form than Credit Crunch I which began around Bear Stearns time.

    So the US as Safe Haven seems to be wearing off, at least for now, which is one of those good news/bad news stories….

  • Posted by bsetser

    follow the money —

    the correlation between gov borrowing and defense spending is imperfect. in the 50s defense spending was high (as a share of GDP) due to the cold war but eisenhower didn’t like debt/ deficits so it was financed out of current revenue (that helped bring down the ww2 era debt too). in 80s, a defense build up was combined with tax cuts, so that produced a rise in debts. some small wars/ police actions (Bosnia, Kosovo, etc) in the clinton era coincided with reduced gov borrowing. and W combined tax cuts and a new war.

    the rise in household borrowing though seems to have little to do with the cost of empire. normally tax cuts amid a war would put upward pressure on rates and thus inhibit household borrowing

  • Posted by don

    The really aggravating thing about the increase in government borrowing is that most of it came from bailing out financial institutions and legacy lenders, rather than to support aggreagate demand and employment.

  • Posted by Glen M

    Defense spending also has the highest multiplier.

  • Posted by Too Much Fed

    Some of this was covered at on 03-13-09, 11:44 AM

    Some quotes plus look at the charts:

    “Buried in the details of yesterday’s quarterly Fed Flow of Funds report is the collapse of the private credit market in Q4 2008 and attempts by the Federal Reserve and Treasury Department to compensate for the loss with government credit as the world’s largest lender of last resort.”

    “How can household borrowing be restored when unemployment is rising? The US economy desperately needs organic job creation to raise incomes from salaries, and high interest rates to motivate saving. (Household borrowing will never reach previous levels relative to income.)

    What will happen to GDP short term if credit supply and demand are not quickly restored? (GDP will decline precipitously. In the future a pool of savings more than credit will finance expansion.)

    What will happen to sales, income, capital gains, and property tax receipts as sales revenues fall with a decline in consumer and capital spending, incomes fall with rising unemployment, capital gains fall with declining asset prices, and property taxes fall along with property valuations? (Tax receipts will fall dramatically.)

    How can the federal government stimulate jobs creation with spending programs at the same time state governments are laying off employees in droves to meet budget restraints? (The government cannot “create” jobs, but can move them from one part of the economy to another, or from the future into the present when they are needed more. The net long term results is, however, negative. The only “solution” to the credit collapse problem is to not allow a credit bubble to develop in the first place.)”

    MY COMMENT: Did you hear that last sentence alan greenspan???

    There are others.

  • Posted by Too Much Fed

    Will we find out that the solution to too much lower and middle class debt is NOT more gov’t debt???

  • Posted by Too Much Fed

    FollowTheMoney said: “Geithner believes in a strong dollar? Thoughts?”

    Nonsense. The U.S. treasury and the fed want the dollar “strong enough” (or more accurately weak) to appease the bondholders.
    That would mean slight devaluation.

    The LAST thing they want is the dollar to actually appreciate and/or the trade deficit to come down because that probably means less debt is being created on the lower and middle class.

  • Posted by Too Much Fed

    FollowTheMoney said: “Is the U.S. too big to fail?

    My answer is yes, central banks around the world cannot take a severe decline in the dollar, however will the can the world continue to afford the cost of band-aids?”

    What about bankrupting the central banks, including ours (the U.S.)???

  • Posted by Yoda

    interest rate will shoot up in huge way, when government and private compete for the money pool. yep, interest rate will only go up from now on. to supplement government fiscal, they will need to print money.

  • Posted by gillies

    many of you presumably have a positive image of the united states – and yet read back and see what you are discussing. many dollars and dollar investments are held by people who, from national experience or exposure to different media than u s media, have no such positive image. what are they discussing ?

    geithner, bernanke, and co are known to be prepared to take extraordinary measures to respond to extraordinary events. this might reassure some, and give rise to high anxiety in others.

    suppose that the chinese are persuaded to sit tight ? it is not those who sit tight but those who are active in the market, today, who move the market, today.

    pictures of geithner in a chinese hotel suggest to people like myself, partly informed people, that geithner does not trust the market to find its own level. he looks like a young man explaining an inadvertant overdraft to his bank managers.

    if he is nervous, why shouldn’t we be ?

    your authorities talk as though all they have to do is ease off the ‘stimulus’ binge when inflation shows up. but have they got that long ? the figures will only tip them off in retrospect – but the bond market will tip them off in advance.

    in other words, deciding when to slam on the brakes may not be their call ?

  • Posted by locococo

    It isn t. So we sent Tim out.there – on a mission. But then he performs a stand up comedy act.

  • Posted by jonathan

    On another use of the data, if household borrowing stays negative for a while, we would see real impacts on aggregate demand. And, ignoring how the GDP line might move toward the borrowing % line with any sustained demand drop, if the household borrowing level stays below the trend line – say it goes to 1.5% and stays – then we’re looking at a long-term shift in global demand away from the US as consumer. That would have large effects on the government’s borrowing abilities & the dollar’s role, to focus on a thing that this blog is about.

  • Posted by locococo

    so now we move on to vote on gold

  • Posted by K T Cat

    Watching the borrowing numbers for the government go up and up and up makes you realize how much the private world relies on the good sense and concern of the government. There really is no limit to how much the government can print and borrow and spend.

  • Posted by Rien Huizer

    Thanks very much, Brad,

    Looking at the numbers in a little more detail we see handful of very large moves that rae all related to develeriaging the investment system, replacing a big part of the shadow banking system and a general flight to quality (note that remarkable gain in small deposits (FDIC insured) that practically offsets the loss in large deposits. A rough consolidation of the treasury and the Fed (tables F 106 and 108) suggests that the federal gvt as a whole has taken on appr 1300 (Fed) plus 1360 (Treas) minus Treas deposits at the Fed (300) so roughly 2,5 trillon. Unlikely that will go up much further, except from the budget deficit (likely to increase if we look at the trends for personal and corporate tax as well as social security expenditure. The question than becomes: (a) how will those liabilities disappear? Easy:
    – half a trillion consists of currency swaps, representing no credit risk and
    – another half of discount window borrowings.

    Virtually all of that financed by reserves.

    The more worrysome parts are the equity and debt investments in the Treasury and to a lesser extent he Fed’s new loan portfolio (maiden Lane etc).

    So all in all, one should expect no more first order financial damage to the gvt balance sheet from all these interventions than -max- six months normal budget deficit. Wit interest rates low as they are and most of the incremental financing done at no cost (plus the Fed’s attractive spread) this looks actually much more affordable than many people think. The main concenrn appears to be the normal concerns in a recession, including the potential for industrial policy and protectionism emerging. The structure of these liabilities and their residence at the Fed suggets that the long term inflationary potential will be limited, tht is, if there is a recovery of private demand for private financial assets.

    One really wonders why the gvt did not make a little bit more of an effort to make Lehmann collapse more gently.

    Strangely enough

  • Posted by PM

    “many of you presumably have a positive image of the united states”

    Odd. I have never taken anything remotely close to an impression of a “positive image” from the vast majority of commentary on this (or any other) econ-related blog. It’s packed full of hand-wringing and gloating over American decline, and angry recriminations for any who suggest America is not at fault for essentially any economic problem in play today, and a deep underlying current of approval of perceived comeuppance.

    “if he is nervous, why shouldn’t we be ?”

    Because he’s a nervous man kowtowing when he should not be. The U.S. is making a grave error in allowing others – particularly China – to set the tone of discourse on these issues, particularly in its dealings with China. The Chinese are no more behind the wheel here than anyone else, they have no real capacity to change things except that we give to them by behaving in such a weak manner. We do not have to lecture, but we should not repeatedly portray ourselves as subordinate. This is one of the most bizarre things I can imagine us doing right now, and yet it is exactly what we are doing, and the more we do it the more emboldened the Chinese become, and the more emboldened the Chinese become the more their rhetoric manages to shake the markets, and the more their rhetoric manages to shake the markets the more we seem to kowtow to the Chinese.

  • Posted by FollowTheMoney

    Mr. Geithner needs to roll up the sleeves and represent the united states. it’s bad enough the Chinese are throwing around language as if the U.S. is on it’s way to a 3rd world.

    Mr. Geithner is not bringing up the fact that China is manipulating her currency, and he’s just being thrown the boxing ring by his creditors. I’d like to see Mr. Geithner stand up for the United States, and say look China, you are manipulating your currency, fix the problem or there will be consequences.

    Instead we have all sorts of influential Chinese commnentators completely disrespecting this great nation, students laughing at Mr. Geithner and the whole world wondering if the United States is serious about anything.

    It’s become a soap opera, but unfortunately no longer a comedy.

  • Posted by Cedric Regula


    Good points. I’ve been tying to keep in the back of my mind that there is some recovery value behind the bloated public debt and Fed balance sheet. It’s just a question of how much, how long we have to wait for it, and can we continue to finance our way there, without the economy cooperating that much.

    Makes me nervous.

  • Posted by Brick

    The success so far of government spending seems limited, but the target was never to increase demand but to stop the decline. The problem is that the longer unemployment takes to turn around the more the government will need to borrow. It is servicing the long term interest on that debt which is of most concern to me as it takes an increasing slice of taxation revenue. The longer the government borrowing goes on the greater the need will be for cut backs in expenditure and taxations rises further down the road. There eventually comes a point when lenders will question the ability of authorities to take the action needed especially if yields rise and everyone is in short term treasuries. I don’t believe the government is anywhere near there yet, but the longer this goes on the more fears will rise.
    What I would like to see is the difference between firm deleveraging and household as I think there will be different messages coming from these two activities. I expect most households are not really deleveraging and this is occurring only for those forced to by availability of credit or by unemployment. The risk is that this will start to happen as unemployment continues. Firms I suspect are the main deleveraging actors and this can have a bit of a mixed message. This shows firms are cutting back on investment but also shows they are placing themselves in a stronger position. In effect they are enhancing the downturn to maximise opportunities in the coming upturn. The risk is that the government has shot its bolt at making credit available when it should have perhaps targeted infrastructure investment.

  • Posted by Rien Huizer


    I think that these figures show that (a) the gvt debt directly resulting from the financial crisis is quite manageable.(b) no deleveraging but hardly any growth in household debt and a return to 2003 levels of corporate bedt growth. It really depends on business cash flow (a likely victim of a recession) whether this really indicates business hitting hard financial constraints. Imo it could have been worse.

    All of this underlines, on the one hand, the need for great budgetary vigilance, in order to keep things at a relatively benign level, and a little more optimism about the severity of the recession for the economy as a whole (overcapacity industries like cars and housing excluded). But the market has discounted that already…

  • Posted by a

    “But we [the U.S.] should not repeatedly portray ourselves as subordinate [to China].”

    Oh but we are! As long as the U.S. stays a net importer from China, it will be subordinate. This, I think, is why those (including yours truly) were wrong in thinking China had the most to lose, on the theory that “you owe a bank 10k, it’s your problem; if you owe 2 billion, it’s their problem.” That only holds if you don’t still need money from the bank to prevent yourself from starving. If you need the bank’s money really badly, it’s your problem, no matter how much you owe them.

    By being a net importer, the U.S. is getting lots and lots of things from China for bits of paper, thus preventing a further reduction in its standard of living. As long as the U.S. stays in that position, China can dictate terms, because it’s up to China, not the U.S., to continue sending those goods. China *can* demand assurances tthat the U.S. won’t inflate away its debt, and the U.S. *does* have to grovel. The U.S. would’t have to do this if all it did was owe China money. The U.S. could inflate and that would be it. But given that the U.S. continues to need free stuff from China, it can’t inflate, because the Chinese would simply stop providing all that free stuff.

    People think that an end to China’s exporting will hurt China more than the U.S. China, certainly, would have problems in redistribution should that come to pass, but overall, it shouldn’t be poorer. Not sending goods to the U.S. in return for bits of paper only means it has fewer bits of paper and less work needed from its workers. The factory workers making the goods are getting fed, not by the bits of paper from the U.S., but from Chinese farms or foreign farms, the latter of which can still be paid with Chinese goods. So the factory workers can still get fed, as long as China redistributes correctly.

    It’s a bitch being a debtor *and* a net importer. That’s really the basic flaw IMHO in the economist’s model of the world, where having a debt and being a net importer are just minus signs in a formula, the mirror images of plus signs.

  • Posted by Ben, the drama Queen

    If I were you I would take a second, very good and deep look of the markets, before passing such judgments. Because if you did, you’d find ME in there deep, thinking I have to TANK the stocks and gold.

    As in _ Right Now!

  • Posted by piqued


    Is there a data source as to the dates the Fed enters the bond market to purchase? Do rates come down on the days they actually do QE?

  • Posted by locococo

    The US Geological Survey published some suspicious looking data as to the gold tonnage on its way OUT / US supposedly exported recently …

    +/- 12 times more as the upcoming vote sets out to release…

    Must have been a mistake.

  • Posted by K T Cat

    Follow, (W)e have all sorts of influential Chinese commnentators completely disrespecting this great nation, students laughing at Mr. Geithner and the whole world wondering if the United States is serious about anything.

    The scoreboard doesn’t lie. Take away $1.8T of GDP and you have the real USA. We’re the folks you see running in to the PayDay Loans place very week because we blew through 14 days of pay in 10 days.

    Serious? Us? Hardly. Don’t worry, though. We will be.

  • Posted by Ben, the drama Queen

    Remember those green shoots? Got you.

  • Posted by Cedric Regula


    I’ve been reading the Across the Curve blog. Brad has a link to it on this page. He always says when the planed Treasury purchases are. 68B next week. I think the info is also posted on the official Treasury webpage.

    The Fed buys haven’t really made rates go down when they buy. But it may limit the increase.


    sábado 2 de mayo de 2009
    CHINA, ready to lead…?

    I have spent the last month travelling around ASIA to try to find an answer to this question. Just now, when we are in the middle of a global crisis, with almost all foundations of economy in danger, I wanted to answer myself about the role that each country is going to take to lead the world out of this recession period.

    I travelled to Hong Kong, Shanghai, Taipei and Seoul. I spent a certain time reading the local press, involving myself with their domestic issues, and watching and asking about the role of Hong Kong, China, Taiwan and South Korea in the future recovery process.

    China latests are focused on the opening of Shanghai Stock exchange listings to foreign companies, but still with the limitation of doing it only with yuan currency, and still being not convertible.
    Hong Kong, who belongs to China, but with a S.A.R. ( special administrative regime ) is deciding now its own future, since Shanghai and itself must now compete to become the financial centre of the “new” China.

    Taipei celebrates that for the first time in six decades, a mainland company, China Mobile is due to acquire a 20% stake in a local communications carrier, breaking with this step, the so long disputes among these 2 asian states. Nevertheless, some old nationalists from Taiwan see into this movement from mainland, the challenge of a new adhesion process, similar to the one carried with Hong Kong.

    And finally, Seoul is focused on recovery the way they best know. That is, working tough and smart to become again what two years ago it really was… an still unknown, but highly effective and productive capitalist economy.

    So, the answer to my question was not easy, but I think I can clarify some things that really matters to a global economy world.

    China strategy along the years has been to manufacture goods at a low work labour cost, and sell them mainly to the US and Europe. Now, with 1,3 billion people living in the mainland, they realise that their real market may be inside, may be domestic. But to go along with this change in the way exports are handled, is not an easy task… but you can see already some interesting movements, such as the recently signed collaboration with India, to get a chunk into the OUTSOURCING market, as well as, the already mentioned opening of Shanghai Stock index to foreign companies.
    So the path seems to be built ahead, but still with critical issues such as if yuan will become the reference currency, if it will be flexible against other international currencies, or even maybe, if China and its allies decide to launch a takeover bid against dollar and euro world supremacy.

    My opinion resides on the idea that in a not so long future, we will start looking at Shanghai index closings the same way we do it with Wall Street now.

    If China converges into a more open performance, USA supremacy as the first economy in the world may be in danger.

    China will try to joint Hong Kong current power and international presence, with Shanghai newest challenges. At the same time, it will break old and stupid disputes with Taiwan and even South Korea, to walk along a new asian world, capable of assuming the role of leading it.

    India will have to decide if it goes alone in this new era, with its 1,1 billion people and therefore, their impressive economic and social potential… or decides to take part with the US or with CHINA. That decision is going to become critical for India in the very near future.

    But, for sure, we do not expect China president to become a worldwide “prime time TV star” the same way the US does with its presidents. We will never know if China president has bought a dog called “Bob” to his daughters… we even won´t know if he has kids at home,… or if his wife is dating another men …

    We must expect a new role, focused on discretion, hard work, no discussions, but highly effective and consumer oriented strategies.

    If the US unveils its secret CIA files, … China will continue with its secrecy in domestic critical matters.
    If the US continues fighting muslims in Afghanistan, China will stretch its ties in a peaceful way with its long time disputed neighbors, trying to consolidate its presence in Asia.
    If the US continues with prime time interviews, China will present only specific topics of its politicians activities.

    This does not mean OPEN economies vs CLOSED ones, but it means, to be focused on real issues and leave marketing or branding for others.

    Jose Luis Revilla Escudero
    WW Shares, Inc

  • Posted by Mark

    Why is the focus always on the borrower? I see charts all the time of debt broken down into household, firms, governments, etc.

    For every borrower there is a lender. Why is there so little attention paid to the liability side of the financial system? Does it really make no difference if the end lender (without intermediaries) is an individual, a pension fund, a billionaire, or sovereign wealth fund?

    As a layperson, and student of finance I am completely baffled by this seeming blindness.

  • Posted by anon

    The trend comparison is quite valid.

    But isn’t there a little bit of apples and oranges here? Shouldn’t you also be considering changes in private sector financial assets and netting against liabilities? Then the two series are more directly comparable for net flow of funds.

  • Posted by anon

    e.g. 2007 Q3, Q4 household borrowing totally offset by household lending

  • Posted by anon

    Krugman leaves a somewhat disembodied, unexplained conclusion regarding ROW flows. He’s correct of course, but seems to infer it from the difference in changes tracked by your public/private graphs.

    The actual data (mirroring the current account) clearly show a big decline in net borrowing by the US from ROW combined with a smaller liquidation of US assets with ROW.

  • Posted by anon

    Any idea how to interpret the massive increase in funding corporation flows (borrowing and lending) in Q4?

  • Posted by Winslow R.

    Krugman wrote “Where’s the money coming from?”

    From Krugman’s title I thought you finally had figured out how the monetary system works and where money comes from.

    Given how smart Paul is, I just don’t believe he doesn’t know. Though from what he writes, he’s not telling anyone.

    You’ve posted some pretty good stuff so was just hoping you did too and were actually spreading the word.

    No one needs to borrow from China.
    A properly functioning Treasury/Fed can peg any interest rate it desires as long as there is the political will.
    The political will is largely determined by the exchange rate of the dollar and what will help our banksters.

  • Posted by Jim Caserta

    I guess I”m late because comments 1&2 captured my sentiment. A graph of the sum would be a dagger through the heart of the argument.

  • Posted by anon
  • Posted by anon

    from your immediately previous post:

    “As households and firms rediscover their animal spirits and start to borrow more, the amount the government borrows needs to fall. Otherwise, total borrowing would rise, and the amount that the US needs to borrow from the world would rise.”

    This looks quite wrong based on the data series you are following.

    These are credit market series; not net surplus or deficit series.

    The total net borrowing series from F1 is far more volatile than the capital surplus series. This is because these credit market series are incomplete pictures of the entire flow of funds. There’s much more to net out in a complete analysis.

    Your graph is more coincidence than complete analysis. Interesting that Krugman used this based on your graph.

  • Posted by bsetser

    jim — i thought i had added those graphs, but i guess they aren’t showing up

    anon — you are right, these are credit market series (though they capture more than “market” borrowing i think, also bank lending), not surplus or deficit series. Not sure though where that takes you …

  • Posted by bsetser

    anon — someone in the past suggested that you need to aggregate the funding cos and the broker dealers, which sort of makes sense …

  • Posted by anon

    “Not sure though where that takes you”

    Just to point out its not totally accurate to associate the difference in government and private sector credit series with net capital inflows – although you make a qualification about equity not being included, there’s a lot more than equity that’s not included:

    e.g. of difference in range of items:
    Have a look at F.107
    Compare line 20 (credit component within ROW net financial asset acquisition) with line 13 (total ROW net financial asset acquisition)
    huge difference in size
    similar distinction for liabilities

    materially, you may be capturing the important relationship, but will that always be the case … ?

  • Posted by Ted Kaehler

    Please add in venture capital. Perhaps the dot com bubble will appear as a total borrowing peak,and the housing bubble as another.
    Perhaps the Fed should set a target of (government borrowing + personal + business + venture capital) = a fixed percentage of GDP. The government could lower its borrowing and raise interest rates when a bubble is forming.

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    Having been a part of the Online Universal Work Marketing team for 4 months now, I’m thankful for my fellow team members who have patiently shown me the ropes along the way and made me feel welcome