Current Economy

[Guest Cameron]

The balance sheet run off will cut 2 percent of GDP. I would agree with you if the Fed wasn't doing what its said it was going to do.

How exactly will it cut off 2% of GDP?

 

I should have extrapolated more it would cut of the supply and demand of bonds by 2 percent of GDP, it would actually be 4 percent, as the 2 percent of GDP being cut off by the fed would have to be made up with 2 percent of a budget deficit.

[rb]

Maybe you should extrapolate more because that still doesn't make sense.

[Guest Cameron]

Credit isn't coming back as fast as the tapering per month is going to be. In essence the money that they were reinvesting back into the bonds isn't going to be there.

 

2% was a off the top calculation that was wrong. But based on their tapering announcement 175 billion a year won't be reinvested its going to hurt GDP growth.

[Guest Cameron]

It will also push up interest rates so an increase in debt service payments will stifle GDP growth

[rb]

Credit isn't coming back as fast as the tapering per month is going to be. In essence the money that they were reinvesting back into the bonds isn't going to be there.

 

2% was a off the top calculation that was wrong. But based on their tapering announcement 175 billion a year won't be reinvested its going to hurt GDP growth.

$179 is 0.9% of GDP. That's just a small tightening and yes somewhat higher interest rates but that doesn't mean you take out 2% of GDP. What's most likely to happen is the private sector picks up that slack and you have lower excess reserves not lower GDP.

[Guest Cameron]

Credit isn't coming back as fast as the tapering per month is going to be. In essence the money that they were reinvesting back into the bonds isn't going to be there.

 

2% was a off the top calculation that was wrong. But based on their tapering announcement 175 billion a year won't be reinvested its going to hurt GDP growth.

$179 is 0.9% of GDP. That's just a small tightening and yes somewhat higher interest rates but that doesn't mean you take out 2% of GDP. What's most likely to happen is the private sector picks up that slack and you have lower excess reserves not lower GDP.

 

You take 0.9% out of GDP.

 

Unless you think the private sector can adsorb 175 billion in bonds?

 

This includes just the Fed, if Trump runs a deficit of 1 trillion like some reports have said then the picture looks completely different.

[rb]

Credit isn't coming back as fast as the tapering per month is going to be. In essence the money that they were reinvesting back into the bonds isn't going to be there.

 

2% was a off the top calculation that was wrong. But based on their tapering announcement 175 billion a year won't be reinvested its going to hurt GDP growth.

$179 is 0.9% of GDP. That's just a small tightening and yes somewhat higher interest rates but that doesn't mean you take out 2% of GDP. What's most likely to happen is the private sector picks up that slack and you have lower excess reserves not lower GDP.

 

You take 0.9% out of GDP.

 

Unless you think the private sector can adsorb 175 billion in bonds?

Dude seriously try to think about this stuff for a bit before type. No it won't straight take out 0.9 of GDP. The Fed is not a direct consumer in the economy. Most of the money from QE went into excess bank reserves. As the taper happens most of the money will come out of excess bank reserves. That's how monetary operations work. So yes the private sector can absorb 175 billion in bonds no problem.

[Guest Cameron]

Credit isn't coming back as fast as the tapering per month is going to be. In essence the money that they were reinvesting back into the bonds isn't going to be there.

 

2% was a off the top calculation that was wrong. But based on their tapering announcement 175 billion a year won't be reinvested its going to hurt GDP growth.

$179 is 0.9% of GDP. That's just a small tightening and yes somewhat higher interest rates but that doesn't mean you take out 2% of GDP. What's most likely to happen is the private sector picks up that slack and you have lower excess reserves not lower GDP.

 

You take 0.9% out of GDP.

 

Unless you think the private sector can adsorb 175 billion in bonds?

Dude seriously try to think about this stuff for a bit before type. No it won't straight take out 0.9 of GDP. The Fed is not a direct consumer in the economy. Most of the money from QE went into excess bank reserves. As the taper happens most of the money will come out of excess bank reserves. That's how monetary operations work. So yes the private sector can absorb 175 billion in bonds no problem.

 

GDP is just a sum of all purchases, when you take 175 billion out of the equation someone has to make up that 175 billion. Your assuming someone is going to be there to make up for the loss in demand from the fed's tapering and I'm not.

[rb]

GDP is just a sum of all purchases, when you take 175 billion out of the equation someone has to make up that 175 billion. Your assuming someone is going to be there to make up for the loss in demand from the fed's tapering and I'm not.

2.2 Trillion in excess reserves be damned right? Or that number 5 scenario I was talking about. Where do you think those saving would go? Or that the Fed after all that work has lost it's mind and now has decided to screw the economy. So it will keep going on with the taper even if it sees that there's weakness in the private sector?

[Guest Cameron]

GDP is just a sum of all purchases, when you take 175 billion out of the equation someone has to make up that 175 billion. Your assuming someone is going to be there to make up for the loss in demand from the fed's tapering and I'm not.

2.2 Trillion in excess reserves be damned right? Or that number 5 scenario I was talking about. Where do you think those saving would go? Or that the Fed after all that work has lost it's mind and now has decided to screw the economy. So it will keep going on with the taper even if it sees that there's weakness in the private sector?

 

No I think they are going to have to lower the amount they are going to taper, I said earlier they will also have to lower interest rates.

 

I admire your optimism toward those running the fed, but there was a time when people thought Rudolf Havenstein was correct and didn't question his judgement.

 

[rb]

GDP is just a sum of all purchases, when you take 175 billion out of the equation someone has to make up that 175 billion. Your assuming someone is going to be there to make up for the loss in demand from the fed's tapering and I'm not.

2.2 Trillion in excess reserves be damned right? Or that number 5 scenario I was talking about. Where do you think those saving would go? Or that the Fed after all that work has lost it's mind and now has decided to screw the economy. So it will keep going on with the taper even if it sees that there's weakness in the private sector?

 

No I think they are going to have to lower the amount they are going to taper, I said earlier they will also have to lower interest rates.

They may have to. So what? The think is that you're arguing based on feelings. You feel that they will have to do this or that. The reality is that that indicators are pointing that the private sector should be able to absorb more tightening. The fed has tightened quite a bit and inflation has been stable. That's very promising. Of course the Fed will continue watching the economy and adjust course based on the data. It's what it does. But there's no indication of a disaster looming.

[rb]

 

Its not a risk of the people defaulting, its how long can Japan sell their public debt until the purchasers realize they aren't getting all of it back. Japans total debt to GDP is something like 600% of GDP and there is only four ways to overcome a debt burden, growth, inflation, repayment, or default. Specifically for their public debt Growth is out of the picture as we have seen as well as their population contraction. Repayment is out of the question since the government would need to run a surplus for more years than I care to do the math on while at the same time the private sector would have to run a deficit and when you look at the private sector debt burden that is out of the picture. So that leaves default and inflation and in this case actually firing up the printing presses.

 

The U.S and China own 3 out of the 10 trillion in japan public debt.

 

Sure - I agree that national debts (alongside personal debts) also are at risk here. The interesting thing is that there is collusion between other nations to prop up debt burdened countries to avoid 'contagion' .  We've seen this with Greece, who knows whats going on behind the scenes with  Italy and Spain.  And you mention how US and China are helping out Japan.  The global coordination of 'inflation' and debt support makes it difficult to know where the chips will fall in my mind.  I guess it depends on who blinks first.

Yea I'm sorry but this is just wrong.

 

US and China DO NOT hold 30% of Japanese debt. In fact total foreign holdings of Japanese debt are about 11%. US and China combines hold about 3.5% of Japanese debt and Luxembourg holds more Japanese debt than China. Most Japanese debt is held locally and JCB owns the biggest chunk.

 

http://www.mof.go.jp/english/jgbs/publication/newsletter/jgb2017_09e.pdf

 

On top of that Japan is the world's largest creditor. Holding $1.1T USD of treasuries alone on top of loads and loads of other stuff. Bottom line Japan does not have an international finance problem where other countries have to prop it up.

 

Japanese households also are not very levered (household debt to GDP is about 57%) and they tend to have a pretty high savings rate and lots of assets. It's important to keep in mind while the gov't debt is a liability for the government it is an asset for the private sector. Households can continue holding these assets(they're inter generational) or sell them and consume. If they decide to sell them and consume then you get growth, inflation, and tax revenue. All good. One the train gets going you can do some fiscal tightening as well.

[Guest Cameron]

GDP is just a sum of all purchases, when you take 175 billion out of the equation someone has to make up that 175 billion. Your assuming someone is going to be there to make up for the loss in demand from the fed's tapering and I'm not.

2.2 Trillion in excess reserves be damned right? Or that number 5 scenario I was talking about. Where do you think those saving would go? Or that the Fed after all that work has lost it's mind and now has decided to screw the economy. So it will keep going on with the taper even if it sees that there's weakness in the private sector?

 

No I think they are going to have to lower the amount they are going to taper, I said earlier they will also have to lower interest rates.

They may have to. So what? The think is that you're arguing based on feelings. You feel that they will have to do this or that. The reality is that that indicators are pointing that the private sector should be able to absorb more tightening. The fed has tightened quite a bit and inflation has been stable. That's very promising. Of course the Fed will continue watching the economy and adjust course based on the data. It's what it does. But there's no indication of a disaster looming.

 

I don't think there is a problem with them having to slow their tapering and lower interest rates, I have a problem if they do not realize they have to do it. You seem to forget there was a time when the Fed didn't think housing was in a bubble which led to this mess, did they make that decision based on feelings? because they clearly weren't looking at the numbers if thats the conclusion they drew.

[Guest Cameron]

 

Its not a risk of the people defaulting, its how long can Japan sell their public debt until the purchasers realize they aren't getting all of it back. Japans total debt to GDP is something like 600% of GDP and there is only four ways to overcome a debt burden, growth, inflation, repayment, or default. Specifically for their public debt Growth is out of the picture as we have seen as well as their population contraction. Repayment is out of the question since the government would need to run a surplus for more years than I care to do the math on while at the same time the private sector would have to run a deficit and when you look at the private sector debt burden that is out of the picture. So that leaves default and inflation and in this case actually firing up the printing presses.

 

The U.S and China own 3 out of the 10 trillion in japan public debt.

 

Sure - I agree that national debts (alongside personal debts) also are at risk here. The interesting thing is that there is collusion between other nations to prop up debt burdened countries to avoid 'contagion' .  We've seen this with Greece, who knows whats going on behind the scenes with  Italy and Spain.  And you mention how US and China are helping out Japan.  The global coordination of 'inflation' and debt support makes it difficult to know where the chips will fall in my mind.  I guess it depends on who blinks first.

Yea I'm sorry but this is just wrong.

 

US and China DO NOT hold 30% of Japanese debt. In fact total foreign holdings of Japanese debt are about 11%. US and China combines hold about 3.5% of Japanese debt and Luxembourg holds more Japanese debt than China. Most Japanese debt is held locally and JCB owns the biggest chunk.

 

http://www.mof.go.jp/english/jgbs/publication/newsletter/jgb2017_09e.pdf

 

On top of that Japan is the world's largest creditor. Holding $1.1T USD of treasuries alone on top of loads and loads of other stuff. Bottom line Japan does not have an international finance problem where other countries have to prop it up.

 

Japanese households also are not very levered (household debt to GDP is about 57%) and they tend to have a pretty high savings rate and lots of assets. It's important to keep in mind while the gov't debt is a liability for the government it is an asset for the private sector. Households can continue holding these assets(they're inter generational) or sell them and consume. If they decide to sell them and consume then you get growth, inflation, and tax revenue. All good. One the train gets going you can do some fiscal tightening as well.

 

I got the Chinese and Japan holdings of US treasuries mixed up with Japan debt.

 

Whats the likelihood they actually consume didn't the BoJ have a problem with that before, most of the Japanese companies I look at hoard a bunch of cash.

[rb]

I don't think there is a problem with them having to slow their tapering and lower interest rates, I have a problem if they do not realize they have to do it. You seem to forget there was a time when the Fed didn't think housing was in a bubble which led to this mess, did they make that decision based on feelings? because they clearly weren't looking at the numbers if thats the conclusion they drew.

Yes, here you actually have a point. Maybe the Fed does something bad like pull a 1937. That's a very valid worry, especially if they put someone dumb in charge of the Fed. Which is a real possibility now.

 

You're also right about Greenspan & co screwing the pooch. However I'm optimistic that the risk of something like that is lower now. Remember that the Fed is concerned with unemployment and inflation. During the naughts unemployment and inflation figures were good. So from a Fed perspective it could be said that it was A-OK. There's still a lot of debate on why we were seeing those numbers and whether the Fed should have actually done something or if someone else should have intervened instead.

 

This time around if the Fed over tightens you'll see that reflected in unemployment and inflation pretty quickly. So the Fed will get clear signals that they're doing something wrong and should reverse course before they cause a lot of damage. Also a big risk is that the Fed and the Gov't tighten at the same time (the tax cut package while counter intuitive could do that). But again there should be pretty clear signals that something is wrong this time around. While it's not the best place to be  in... it's better.

[rb]

I got the Chinese and Japan holdings of US treasuries mixed up with Japan debt.

Yea that's not right either. China and Japan combined hold abut 11% of total treasuries pretty much evenly split between them and they are by far the largest foreign holders of treasuries. I think what you were going for is total foreign holdings of US treasuries. That's about 30%.

 

Whats the likelihood they actually consume didn't the BoJ have a problem with that before, most of the Japanese companies I look at hoard a bunch of cash.

Well that's really the perennial question when it comes to Japan. The Japanese are really stubborn savers. It looks like the consumption situation in Japan is improving but it looked like that at times in the past as well. So who really knows? I don't. Japan data is also hard to work with because of the demographics issue.

 

All i wanted to do is correct the record and point out that despite eye popping numbers that make for great headlines, Japan doesn't really have a problem financing itself and likely won't have a debt crisis. The rest? God knows. The current administration has put the pedal to the metal though and is not gun shy like past administrations.

All I wanted is correct the reco

[Cigarbutt]

A word about Japan. Each case is different but isn't it, in a way, a leading indicator?

In terms of proportion and perspective, the external balance is net+, in the billions of yens. OK.

In terms of public debt only, we are now in the quadrillion. ??? Trillion is between billion and quadrillion. Orders of magnitude in difference.

The numbers are SO large.

 

What is fascinating is that, even if the two piles are not really comparable (absolute and relative), Japan makes more money on the US government bonds it holds than it pays for its own public debt.  :o

I submit that holding a doctorate degree in economics may be detrimental when trying to explain that one. Believing in MMT may help.

 

How is Japan going to get the train going?

The public debt is essentially shifting from private hands to the central bank.

In my book, this is called explicit monetization. Even if this is not openly recognized as such at THIS point.

In terms of the I hold your debt and you hold mine concept, there is a game (and a song) called in my language: "jeu de la barbichette"

I looked it up and it does not really exist, as far as I know, in the English speaking world.

The best equivalent explanation I could find:

I hold you

You hold me

By our little goatee.

The first one

Of us two

Who will laugh

Will get a wee slap!

 

I agree that a possibility is that somehow, these seemingly huge imbalances may correct over time in a muddle through scenario. Fair enough.

 

Leading to the real estate bubble, a major problem was that there was an actual disconnect between the debtor (ie buyer with a poor record and poor prospects) who was buying an inflated asset and the creditor who bought the debt after various financial steps. The discount rates had come to have no rational meaning in relation to the underlying real asset.  The underwriting process was broken. This required a painful price discovery.

 

Now, massive parts of the global and inter-connected financial system are characterized by the same conceptual flaw. There needs to be price discovery.

 

Maybe this whole thing started way back (1971 and before) with the uncoupling to fiat money. In no way hoping for a return of the gold standard and I don't have the answers.

 

This experiment may take a very long time to bear its fruits. Hoping that it won't be grapes of wrath. But I decided to fasten my seat belt. Just in case.

 

 

 

[Guest Cameron]

I got the Chinese and Japan holdings of US treasuries mixed up with Japan debt.

Yea that's not right either. China and Japan combined hold abut 11% of total treasuries pretty much evenly split between them and they are by far the largest foreign holders of treasuries. I think what you were going for is total foreign holdings of US treasuries. That's about 30%.

 

Whats the likelihood they actually consume didn't the BoJ have a problem with that before, most of the Japanese companies I look at hoard a bunch of cash.

Well that's really the perennial question when it comes to Japan. The Japanese are really stubborn savers. It looks like the consumption situation in Japan is improving but it looked like that at times in the past as well. So who really knows? I don't. Japan data is also hard to work with because of the demographics issue.

 

All i wanted to do is correct the record and point out that despite eye popping numbers that make for great headlines, Japan doesn't really have a problem financing itself and likely won't have a debt crisis. The rest? God knows. The current administration has put the pedal to the metal though and is not gun shy like past administrations.

All I wanted is correct the reco

 

That can't go on forever at some point the BoJ owns the whole bond market. They snapped up 40% already (don't quote me on that, since my record for numbers hasn't been good :() If the Japan banks realize they aren't getting their money back and instead move it to other sovereign bonds then... Unless they force financial institutions to make their portfolio a certain percentage of their bonds like Greece is doing.

[rb]

A word about Japan. Each case is different but isn't it, in a way, a leading indicator?

In terms of proportion and perspective, the external balance is net+, in the billions of yens. OK.

Not OK. Japan's external + balance is not in the billions of yen. It's in the trillions of yen. 349 trillion yen at last count to be exact and growing. That's about 3.1 trillion USD.

[ICUMD]

Well and economy is a big and complex thing which means that you have multiple of these scenarios happening all the time. We're out of crisis mode so 1 isn't really happening so much anymore. You don't really want to have a lot of 2 because that weakens aggregate demand (AD) and in turn investment (I). We seem to have moved away from that for now. So what's going on is that you have a mixture of 2, 4 and now finally some sort of 5.

 

The economy looks to be chugging along and investment is picking up. Keep in mind that I responds to AD. If AD is depressed there's no need to invest so I is depressed. AD right now looks like it is somewhere in the vecinity of where it should be -unemployment is low, though lowish inflation is a bit of a worry. In response to this I is increasing. I is about 2% of GDP too low, so let's say that I increases by 1% of GDP C can go down by 1% of GDP. This means that households can pay down 1% of GDP nominal without affecting AD and in turn without hurting the economy. Throw in some inflation and productivity gains and the result is that households can reduce their debt to GDP by about 3-4% per year without bad things happening. That's actually not bad and that's kinda sorta what's going on right now.

 

 

AD - what are the determinants of AD?  I would think AD is determined by access to credit.  The general public is essentially spending their future income to make luxury purchases today.  Over time, I would expect to see AD decline as access to debt becomes more difficult.  If this is indeed the case, then what would be the leading indicators of such a scenario? 

 

a. Declining GDP?

b. Slowing money velocity?

c. Increasing defaults- credit card, home, auto.

d. Rising interest rates?

e. Declining Asset prices - ie. homes.

 

In my mind, there is no question that this will happen as the debt burden continues to grow and the interest payments consume increasingly more income.  This is inevitable.  The question is the time line.  I understand that governments and the fed will try and ease sudden movements, but ultimately - the debt has to be reduced and to do this with a debt fueled AD system seems to be impossible.  Also, much of the increase in debt has been to fund over inflated asset prices rather than to improve consumption.  As such, there is very little bang to the buck - regarding debt improving AD.  Hence the loss of effectiveness of each additional round of QE.

[Cigarbutt]

"Not OK. Japan's external + balance is not in the billions of yen. It's in the trillions of yen. 349 trillion yen at last count to be exact and growing. That's about 3.1 trillion USD."

 

I was wrong and you are right. OK.

 

Even if the magnitude of my mistake is large (not very precise), I would venture to say that the conclusions are still accurate.

The increase of public debt in the last 7 to 8 years matches the actual external debt.

If this central management is OK, how come the central bank has essentially become the public debt market and how come this is slowly morphing into crowding out of even their stock market?

Please show me how this is sustainable.

Are they trying to get the train running or aiming to take off without wings?

[rb]

That can't go on forever at some point the BoJ owns the whole bond market. They snapped up 40% already (don't quote me on that, since my record for numbers hasn't been good :() If the Japan banks realize they aren't getting their money back and instead move it to other sovereign bonds then... Unless they force financial institutions to make their portfolio a certain percentage of their bonds like Greece is doing.

Well you've nailed the 40% so yay. Also yes the government can make it's banks do whatever it likes. But if it borrows in its own currency as Japan does it doesn't really have to.

 

Your scenario of the Japanese private sector not wanting to hold Japanese bonds is unlikely to happen. But that's not a problem either because of money flows. Let's run with that scenario. Here's a good way to picture how it works. Let's say you have only 2 countries. Japan which uses Yen as it's currency. The second country is RW (rest of world) and it uses RWD as its currency.

 

Now the Japanese private sector get's pissed of at the government and doesn't want to buy bonds anymore. It exchanges its yen for RWD and buys RW bonds instead. But now the thing is that RW has a bunch of Yen. It can't use them in RW because things are denominated in RWD over there. RW can do only two things with its Yen. It can buy Japanese assets - essentially Japanese bonds - so no funding crisis for the JP gov't. Or it can buy Japanese goods with it - the it increases JP exports and AD pushing the economy towards capacity so growth, revenue, etc.

 

This is not restricted to Japan. Works for most countries that have functioning economies (no supply problems) and which have independent central banks and borrow in their own currency. It doesn't work for Greece because Greece doesn't have the latter. 

[Cigarbutt]

"Now the Japanese private sector get's pissed of at the government and doesn't want to buy bonds anymore. It exchanges its yen for RWD and buys RW bonds instead. But now the thing is that RW has a bunch of Yen. It can't use them in RW because things are denominated in RWD over there. RW can do only two things with its Yen. It can buy Japanese assets - essentially Japanese bonds - so no funding crisis for the JP gov't. Or it can buy Japanese goods with it - the it increases JP exports and AD pushing the economy towards capacity so growth, revenue, etc."

 

In order for this to work, you need relatively fixed terms of trade and exchange rates.

Remember that Japan has a massive net liability in yens on its balance sheet.

In substance, they're essentially at the helicopter money stage.

Japan has very special attributes and that has, unfortunately, allowed going down this path.

 

One day, everything is fine as "they" will do whatever it takes and will provide unlimited support.

Then you wake up and buy your bread in the morning because it will be more expensive than in the afternoon and you start carrying your cash with a wheelbarrow.

My opinion: not a recipe for success for the current economy.

 

[rb]

"Now the Japanese private sector get's pissed of at the government and doesn't want to buy bonds anymore. It exchanges its yen for RWD and buys RW bonds instead. But now the thing is that RW has a bunch of Yen. It can't use them in RW because things are denominated in RWD over there. RW can do only two things with its Yen. It can buy Japanese assets - essentially Japanese bonds - so no funding crisis for the JP gov't. Or it can buy Japanese goods with it - the it increases JP exports and AD pushing the economy towards capacity so growth, revenue, etc."

 

In order for this to work, you need relatively fixed terms of trade and exchange rates.

Remember that Japan has a massive net liability in yens on its balance sheet.

In substance, they're essentially at the helicopter money stage.

Japan has very special attributes and that has, unfortunately, allowed going down this path.

 

One day, everything is fine as "they" will do whatever it takes and will provide unlimited support.

Then you wake up and buy your bread in the morning because it will be more expensive than in the afternoon and you start carrying your cash with a wheelbarrow.

My opinion: not a recipe for success for the current economy.

It was a stylized model on international money flows. Yes there are added layers to that but you want to move one layer at a time. I think i prefaced the thing with it's unlikely to happen.

 

Your idea of an advanced economy going from deflationary stage to wheelbarrows of cash over night is ridiculous. Yeah, it's your opinion but not based in any fact of economic model or any empirical data for that matter.

[Cigarbutt]

You are right, the timing is impossible to predict or forecast. Think Kyle Bass.

The description was only to convey that this complex financial structure is based on trust.

The Imperial Palace will not disappear overnight but confidence can vanish.

Some people thought the Berlin Wall would never fall.

The model did not consider that as a viable option.

I may be wrong but we clearly are in uncharted territory.

 

Yeah and it's only an opinion.

Story:

I visited the Chicago Federal Reserve 4-5 years ago.

There was a gentleman who was retired from a senior position. He was the guide. Nice man.

One of the attractions of the exhibits was some kind of game where economic data would appear on a screen and the participant had to adjust dials (ie interest rates) in order to control the economy. The gentleman thought that the game was really funny. Funny thing, I left terrified. You're right: only an opinion.