In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else
zerohedge.com
zerohedge.com
By analogy, this would be like alternative health folks pointing out the downsides of permanent antibiotic consumption, although antibiotics are usually only administered long enough to overcome the progress of disease. The Fed will certainly put up interest rates, almost certainly during 2010; I just think they're trying to hold off doing so to any substantial degree until growth hits a steady 3% and unemployment falls below 10%.
Close. How about this: reducing the deficit would be extremely painful and therefore postponed as long as possible, and then undertaken in a half-hearted manner.
How much of our current financial stability relies on banks having access to zero percent interest rates and being paid interest on the reserves they hold? How much of the apparent recovery is based on stimulus/deficit spending?
I hope the answer is "not much", but I'm afraid the answer is "a lot". Banks are sitting on reserves, not lending. The P/E ratio for the stock market is somewhere up in bubble territory. Unemployment may have bottomed, but it is still at terrible levels. We have states in the U.S. and nations in the Eurozone that are hinting at defaults.
I think with continued signs of instability, we'll continue to run high deficits (financed in part by Fed purchases). We'll undertake austerity measure when the living-off-debt chickens start coming home to roost. Not before.
I don't necessarily agree, but the argument is predicated on, amongst other things, the Fed not being able to raise interest rates and maintain steady 3% growth.
"There is nothing so normal as a temporary government program."
In any case, the best we can reasonably hope for is kind of a seasonal surplus, where the government runs a surplus during boom times and a deficit during recessions. That might average out to a roughly balanced budget over the course of 10-20 years. What really happens is that in boom times, the government rushes for ways to spend all their new tax revenues, and in recessions, the government looks for ways to run up spending in order to fix the recession.
The alternative would be a larger deficit, for which you'd sell more UST bonds, which the entitlement programs would then buy since they need a safe place to park their surplus. Voila, you're basically right back where we are now - entitlement surpluses funding a portion of the deficit.
We don't need a lock box, we just need a more accurate definition of deficit.
It's not clear that UST bonds are a safe place....
SS has made a lot of promises. It's unclear that they'll be satisfied. And, to be fair, there's no legal obligation to satisfy them.
The whole "we lent the money to the federal govt" angle will make it harder to fix SS.
It's a huge violation of the idea of a trust fund to invest that trust fund in loans to oneself.
That's what I meant by a more accurate definition of deficit. You could call it "gross deficit" for instance, just like "gross debt" includes intra-government debt.
> It's a huge violation of the idea of a trust fund to invest that trust fund in loans to oneself.
Not if you're the most stable investment. I can't envision a future where the US government decides it won't meet its debt obligations but SS and Medicare survive because they were prudently invested elsewhere.
Yes, it does.
Clinton benefitted from the end of the cold war and a repub congress. They couldn't figure out how to spend the "savings" fast enough. (A Repub president with a dem congress might have had the same problem.)
What "war" do you see ending that will produce comparable savings? (Obama is winding down Iraq on Bush's schedule.)
Then, the boom ended, as boons are wont to do...
You use "disprove" in a very odd way.
No one has said that tax increases necessarily kill economic growth. The claim is that tax increases hurt economic growth.
A dollar taxed (or borrowed) and spent by govt accomplishes something. A dollar left in the private sector accomplishes something else. Do you really think that the average govt spending is more valuable than the average private spending?
As far as the value of "average govt spending" vs "average private spending", it obviously depends. When the markets decided that the best use of capital was to build a massive oversupply of houses and condos that was not very valuable, when the government decides to fund more college tuition that's a pretty good investment in society's future. When private money decided to fund Brin and Page that was very valuable, when the government decides to spend billions on unneeded fighter jets that's not valuable at all.
There's no inconsistency.
We had the dot-boom, the cold war ended, and we'd thrown a lot of underpriced real-estate onto the market. Any one of those three would have produced significant economic growth. All three at once was a bonanza.
> As far as the value of "average govt spending" vs "average private spending", it obviously depends.
Yup, it does. However, you're asserting that it doesn't, that govt spending is better. That's what it means to say that tax increases are good.
> When the markets decided that the best use of capital was to build a massive oversupply of houses and condos that was not very valuable
Not so fast. Fannie and Freddie and govt regulation etc had a huge role in that. I mention regulation because banks that didn't play were punished. Also, govt regulation was behind much of the securitization and "insurance". Fannie and Freddie was a double-hit - regulations basically forced banks to hold their stock, which pretty much guaranteed that they'd all have solvency problems when Fannie and Freddie hit the skids.
> when the government decides to fund more college tuition that's a pretty good investment in society's future.
Oh really? Do we have a shortage of women's studies majors? A significant fraction of college degrees are dead-weight.
The bulk of financial aid goes to tuition increases that it causes.
On the housing issue, we disagree very much on the cause of the problem. I believe the problem was the deregulation that allowed the creation of entities like AIG Financial Products which was probably the major sink of risks that drove the bubble, and also there was a catastrophic market failure that allowed Wall Street to run their companies into the ground for short term gain. But there's no way to deny that a LOT of private capital was directed at the building of useless condos.
AIG Financial Products sold products "encouraged" by regulators.
Regulators realized that there was some risk in securitized mortgage pools. However, they really wanted to be able to call them "no risk" investments so they could push them onto asset sheets and make them more popular among folks who they couldn't bully. (They were pushing cheap housing.)
The regulator's solution was "insurance", which they defined (regulators define what's acceptable for banks to hold as assets) and AIG (among others) sold.
Since "everyone" believed that the securitized mortage pools were "no risk", folks saw selling insurance as "free money". AIG did a lot of middleman work in this area as well as writing its own contracts.
> But there's no way to deny that a LOT of private capital was directed at the building of useless condos.
"free money" pushed by govt policy (through loans and the like) isn't private capital.
> My personal belief is that at the margins taxes have little effect on overall economic growth, especially when they are targeted at the upper income levels
The median worker in the US pays almost no federal income taxes. (They do pay SS and medicare, but the former is an okay investment for such people and the latter will be a train wreck for everyone.) As a result, they have no incentive to get value for money.
Note that the income of "the rich" is somewhat voluntary and fairly portable - that makes it quite volatile. That's why CA gets hammered every so often.
The question is not whether the Fed increases interest rates, it's how close the budget is to balanced.
http://en.wikipedia.org/wiki/File:US_annual_federal_deficits...
"Treasury bills are sold by single price auctions held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction, usually at 11:30 am, on the following Monday and settlement, or issuance, on Thursday."
He's also assuming america won't do anything about it.
I wonder if a CS article would ever receive any attention on a finance website.
A long time ago the HN audience consisted mostly of people who knew at least that much. That's no longer the case.
Every online community has this myth: that in the beginning all the members were as intelligent as Einstein, as humble as Gandhi, etc., etc., and that over time hordes of newcomers arrived and the quality fell drastically. But having been in on the ground floor of quite a few of them I can say with certainty that it's a myth.
Yes, it is verbose and very heavy on the jargon, but if you know the jargon i suspect it's clear enough. I suppose it also helps if you've been thinking about the same problem, who's going to buy the trillions in new debt the US federal government plans to issue in the coming years.
1) Another round of quantitative easing (Fed increases the money supply) This will lead to a dollar collapse, or at the very least, a severe dollar devaluation, which is generally not good for the economy.
2) Fed raises interest rates. With higher interest rates, more people are willing to buy treasuries, and so, there's more money coming in to pay the bills coming due in 2010. Higher interest rates are generally not good for the economy, particularly if it's already sick.
3) US Government engineers a stock market collapse, to send people scurrying to the safety of treasuries (and thereby allowing government to borrow what they need to). Of course, stock market collapses are generally bad for the economy.
So, in summary, I'd say they are predicting that the U.S. economy will have a rough 2010.