Showing posts with label Cheneynomics. Show all posts
Showing posts with label Cheneynomics. Show all posts

Tens of Trillions of Yen Later, Abenomics is a Dud

♠ Posted by Emmanuel in ,, at 2/23/2014 10:03:00 AM
The plight of the developed world is of massive interest to developing countries such as ours for the simple reason that, since we aspire to being developed status, what comes next is of consequence. Sadly, the examples of moribund Western Europe, North America (especially the hapless US), and Japan are not especially encouraging. As our nearest neighbor in Asia, Japan's plight is especially troubling. Could American-style helicopter-dropping and free-spending economic nihilism AKA "Abenomics" really revive Japan from its lost decades?

As we are learning, the answer is loud and clear: HELL NO! It's not as if some folks were exceedingly wary of the fantastical American delusion that currency debasement and unlimited deficit spending could revive an economy. However, in combination with shutting down any number of perfectly good nuclear plants, Japan is arguably worse off than before. Flatlining GDP growth--1% in Q4 2013--has been the status quo for over two decades, but now add to this mix (1) a gargantuan, punishingly huge budget deficit [as opposed to a merely unsustainable one] and (2) a snowballing trade deficit [those energy imports more than cancel out export increases] and their situation is clearly deteriorating:
Funny thing, though: All that cash hasn't solved Japan's problems. The virtuous cycle that aggressive BOJ policies were supposed to unleash still hasn't begun. A 20 percent drop in the yen isn't raising living standards, as hoped. Nor has it convinced companies to fatten paychecks. Whatever inflation Japan is feeling is the bad kind: Energy imports are boosting consumer prices and denting business and consumer confidence.
Instead, [Bank of Japan Governor] Kuroda's main achievement in his first year has been to settle a debate once and for all. Japan's big problem clearly isn't the amount of yen in the system but how it's used. Unless people borrow and banks lend, monetary policy lacks the multiplier effect that can revive economies. Besides, deflationary forces still abound -- from Japan's aging population to China's rising influence. Just as money can't buy you love, a wall of yen can't buy Japan prosperity. "Kurodanomics" just isn't enough.
Helicopter-dropping money is easy enough. However, long-advocated structural changes are harder to come by:
He must implement the structural reforms at the heart of his "Abenomics" program -- rewriting corporate taxes, lowering trade barriers, stimulating innovation, empowering women and opening the labor market. Otherwise, Japan's best chance in years to restore vibrant growth will likely fail like every other over try the last two decades.
Here, "opening the labor market" means bringing in folks for the simple reason that Japan is well and truly depopulating. Actually, Japan has been trying to attract skilled migrants, but the trouble is that this homogeneous and closed society has trouble attracting any sort of migrants for precisely those reasons:
National Institute of Population and Social Security research projects that the current population of 127 million will be 84 million in five decades’ time. The working-age population (15–64) will apparently fall by nearly half from today’s level of 80 million to 42 million. In short, 50 years from now, not only will the population have fallen dramatically but the labour-force population will have fallen even faster. The number of elderly people 65 and over will amount to 40 per cent of the population, causing substantial strain on Japan’s workers to sustain the non-working population.

For Japan, accumulating highly skilled foreign professionals has been more difficult than expected. This is made challenging because Japan has few features that can be considered appealing to foreigners as a migration destination, including a highly homogenous country with a language barrier that makes it difficult for migrants to have a rich social life.
The pressing need to generate homegrown power aside, there is no greater issue for Japan than that which they fail to address since it's a lot harder to than, say, increasing the national debt from 200% to 400% of GDP. The debt burden also makes you wonder why anyone would come to Japan to work off being a debt slave, but hey, these questions are the sort the Japanese really need to confront instead of playing foolish economic games that leave them worse off in the long run alike Abenomics.

Is US Suing S&P Payback for Ratings Downgrade?

♠ Posted by Emmanuel in , at 9/06/2013 09:30:00 AM
In run-of-the-mill stories, there are heroes and villains: I've been in this town so long that back in the city I've been taken for lost and gone and unknown for a long, long time. Today, however, we instead have two major baddies duking it out: the US government and credit rating agency Standard & Poors. It's the political economy equivalent of Aliens vs. Predator. Apparently, the US government was, like many, suckered into buying securities of dubious creditworthiness by inflated ratings slapped on them by S&P and its peers. So many years after the global financial crisis hit its peak, the United States sued S&P for misrating these securities earlier in 2013.
The plot is not that straightforward, though. Recall that S&P is the only major credit rating agency to have downgraded US debt from Triple-A status exactly two years ago. I argue that action was too little, too late anyway in that America's debt problems are only going to get worse due to fiscal mismanagement unmatched by any other country in absolute terms: anyone else owe $16.7 trillion?

It appears that S&P is now trying to absolve its past actions by accusing the US government of using the suit as revenge for its ratings downgrade:
Standard & Poor's Ratings Services escalated its legal battle with the U.S. Justice Department, accusing it of filing its $5 billion lawsuit against S&P in "retaliation" for the company's downgrade of America's debt in 2011. S&P's defense, made in a court filing on Tuesday, shows that the world's largest credit-rating company is digging in as it fights the Justice Department's Feb. 4 lawsuit, which accused S&P of misrepresenting its rating process in the years before the financial crisis [...]

The Justice Department "commenced this action in retaliation for [S&P's] exercise of their free speech rights with respect to the creditworthiness of the United States of America," lawyers for S&P wrote in court documents filed Tuesday in the U.S. District Court for the Central District of California. A Justice Department spokeswoman said in a statement that "the allegation is preposterous." S&P referred questions back to its Tuesday response to the U.S. lawsuit [...]
While this tactic is not unusual for those sued by the Feds, proving it is ludicrously difficult:
It isn't unusual for companies sued by the federal government to claim political payback, said some lawyers who have been following the lawsuit. S&P could eventually decide to drop the payback argument, they said, depending on what documents are unearthed during the discovery process or if the judge overseeing the lawsuit indicates that line of defense doesn't hold water [...]

[L]awyers also said that proving retaliation will be difficult for S&P. It will be an uphill battle to prove that there was direct communication between different government agencies [i.e., Treasury and Justice] and to indicate any such goal, as of the alleged retaliation by the government, the lawyers said. 
As with most half-truths, both villains are partly correct. I, of course, would state the facts of the matter thusly which casts both in a negative light: 
  • The United States deserves an even bigger downgrade than what S&P made given the true extent of its future liabilities. 
  • S&P provided deliberately misleading ratings since it was financially beneficial for it to do so.
In the end, that's all there is to it. The S&P conspiracy theory is too elaborate and veers too far away from coherence to be admissible. For this round, the US government villains at least have a logical case against the ratings villains. Besides, if the US government really wanted to hurt S&P, it could easily put it out of business

So, Why are China, Japan, ROW Dumping Treasuries?

♠ Posted by Emmanuel in ,, at 8/18/2013 11:34:00 AM
There is a debate going on here in the rest of the world concerning the United States. It isn't really whether American officials are trustworthy, but whether they are more of BS artists or ripoff artists. When it comes to foreign holdings of US Treasuries, it's arguably both: The United States likes to con others with "strong dollar" rhetoric as it runs unfathomable deficits and the dollar falls to some godforsaken level. There is a lie, and a large financial consequence to believing in such nonsense.

Or, is there a limit to global gullibility? Will the rest of the world continue to be held hostage to this "financial balance of terror"? As it turns out, the top two suckers--China and Japan--have actually been selling loads of dollar detritus in recent months. What's more, the rest of the world are following suit, intensifying movement away from greenback garbage:
China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June [there is a two-month lag with this data series], a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.
China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.
Bernanke spooking the markets by suggesting that the Fed will soon stop accumulating nearly unlimited Treasuries to lower borrowing costs is resulting in others' pre-emptive action to avoid near-term losses:
"The sell-off in Treasuries and Bernanke's tapering remarks are related," said Michael Woolfolk, global market strategist at BNY Mellon in New York. "Lightning doesn't strike in the same place twice, but Bernanke repeated his comments in June and that roiled the market."
He said the net Treasury outflow was the highest since at least 1977 when the government started compiling the data. June was the fifth straight month that foreign investors sold long-term U.S. securities, but the specific selling of long-term government bonds was the big turnaround as foreigners had bought $11.3 billion of Treasuries in May.
Are we reaching the outer limits to global gullibility in buying Treasuries? Given the aforementioned time lag in reporting the data, it will be interesting to note from forthcoming reports whether rising interest rates Stateside are driven more by Bernanke signalling the end of "money for nothing" policies or by central banks worldwide dumping Treasuries en masse.

Heaven knows, this world would be a much better place if the latter trend continues. Central bankers of the world, don't be afraid to dump those treasuries and teach America a lesson; in the end, only you will be responsible for your people suffering losses from hanging on to such worthless pieces of paper in their name.  

UPDATE: To be fair, the FT expects some bottom-fishing to buoy capital inflows into America in the next report.

In Detroit We Glimpse America's Future

♠ Posted by Emmanuel in , at 7/20/2013 03:50:00 PM
Just a city boy, born and raised in south Detroit
He took the midnight train goin' anywhere...

I have been to Detroit and it is not an experience I fondly remember. So, I do not question the motives of the protagonist in the Journey song above in leaving. Still, it was with some sadness that I heard this once-great American city declare bankruptcy only yesterday. In many respects it was the conclusion of the inevitable: years of outmigration and industrial decay had taken their toll on municipal finances. Contrast its decrepit state today with what it used to be. Despite the occasionally dodgy (non-)narrative, the documentary Detropia does a fine job of visually contrasting the city in its heyday with its present state. (PBS also has a neat photo essay on its faded grandeur.)

From a broader perspective, Detroit is also a microcosm of what ails America. Some will of course say that it's inevitable for unattractive cities to decay as these people forever on the move seek better fortunes elsewhere--such as in the non-unionized South. However, I would argue that removing yourself from Detroit only rewinds the clock by a few years from an inescapable American fate. That is, you can take the "midnight train" elsewhere, but you'll still end up in the US of A with all its woes. Let us now count the ways "Detroitification" is a portent for this country's future...

1. Decrepit infrastructure is a nationwide phenomenon - I enjoy video games featuring post-apocalyptic wasteland,and one of the best remains Fallout 3.  (With one of its expansion packs already set in Pittsburgh, perhaps Fallout 4 should be set in Detroit instead of Washington, DC.)  In real life, though, crumbling infrastructure is not isolated to Detroit but is a daily reality for most Americans. The American Society of Civil Engineers give the nation an overall mark of D+ [!], which is an unbelievably crappy mark in this age of grade inflation merited only by the most apathetic of students. The ASCE further estimates that the United States needs $3.6 trillion in infrastructure spending to maintain it in acceptable standards.

Given the current economic state of America--where economic growth is an oxymoron--it is hard to imagine massive federal or state outlays on the scale civil engineers believe is necessary. So, no matter how bad things are now, they are only likely to get worse. And, if everything everywhere is plain awful, there will not be an easy solution alike taking the "midnight train" out of Detroit when every other town looks like Dodge as the Yanks say.

2. Unfunded (and unpayable) liabilities keep mounting - One of the things which surely led Detroit to fess up to its fiscal depravity was a recent requirement for state and local governments to recognize unfunded liabilities, Depending on the assumptions you make--setting discount rates, life expectancies and so forth--local governments have a shortfall in what they owe pensioners ranging somewhere between $1 and $4 trillion. That sounds pretty dire already, but consider that the United States at the federal level has at least $61.9 trillion in unfunded liabilities by one fairly conservative estimate. Again, based on different assumptions, a former Fed governor put these at $85.6 trillion--in 2008.

Assuming no major tax increases or spending cuts are forthcoming--a most non-heroic assumption given the current state of American political paralysis--the only real cures at the federal level are effectively reneging on unfunded liabilities under some flimsy legal cover (unlike municipalities, the US government like all others cannot declare bankruptcy though) or eating away at them via inflation. Either way, the reputational damage will be huge.

It is also worth pointing out that there is this American proclivity for dumping unfunded liabilities on Uncle Sam. (As it turns out, estimates of corporate unfunded liabilities are also fairly huge.) The "GM solution" for dealing with them has of course been the government bailout, which leaves America on the hook for even more than already massive federal liabilities. Already there are suggestions that Barack Obama should fund another federal rescue a la GM for Detroit.
* * *

There will be much interest in seeing whether another federal rescue--this time of a city instead of a company--is forthcoming. Doing so would risk further bloating federal liabilities as all similarly troubled companies and municipalities resort to US government succour in the future. It will not be a pretty picture if and when the federal government is treated as a limitless dumping ground for corporate and municipal IOUs that cannot be honoured.

At present, nation-states do not have to report unfunded liabilities as corporations and now US local governments do. Still, who do they think they're fooling? Like America itself, Detroit has seen better days. The question for the rest of us is how to free ourselves of US-style misery before it drags us down to its level. Are we really as foolish as Detroit's lenders to believe that the US represents a good credit risk? Its problems are similar and differ only in terms of magnitude, where national problems are obviously far greater.

Not even RoboCop will save Detroit now...or the rest of America from "Detroitification."

UPDATE: French photographers Yves Marchand and Romain Meffre have an extensive photo collection entitled "The Ruins of Detroit."

IMF Agrees w/Cheney: Deficits Don't Matter for US

♠ Posted by Emmanuel in , at 6/05/2013 12:52:00 PM
Here we go again: for everyone else--especially the likes of Egypt, Pakistan and so forth, deficits do matter. But for the United States which (they say) has little funding its current account deficit, it's not really a problem. In essence it's the IMF approving of American deficits as per Dick Cheney's famous dictum that "deficits don't matter." To be exact, there's always the qualified economistic wording about how short-term fiscal consolidation is not required but rather stimulative policies to get the economy unstuck or suchlike. Instead, the real fiscal challenge for the United States is in the medium- to long-term when it must deal with its health care and pensions unfunded liabilities as baby boomers retire en masse:

Here is the IMF head honcho on the subject matter:
The U.S. economy would be faring much better were it not for the "self-inflicted" wound of tighter fiscal policy, the head of the International Monetary Fund said on Tuesday. "The U.S. is not doing as well as it could be, because of self-inflicted fiscal wounds. This year alone, fiscal adjustment will constitute an enormous 2.5 percent of GDP," IMF Managing Director Christine Lagarde said at the Brookings Institution.

She said the challenge was not the near-term fiscal outlook for the longer-term one, given the pressures of healthcare and Social Security spending. "The next couple of years are going to be quite positive looking. But if nothing is done about the medium and long-term horizon ... then the picture is a lot bleaker," Lagarde said. "This is the major challenge facing the U.S. economy today, and it must be met."
I am beginning to wonder when the medium- and long-term will arrive since they never seem to come when the IMF speaks about the US. It's in essence a free pass. Actually, the Yanks have a term for delaying the inevitable time and again in plain English: "kicking the can down the road."

Tim Geithner, I Dub Thee 'Pantywaist of Globalization'

♠ Posted by Emmanuel in , at 11/29/2012 08:32:00 AM
I've been meaning to make this post for four long, steenkin' years--and here it finally is. Perhaps Timmy thought he got away with stepping down soon as Treasury Secretary, but alas, I've pulled the trigger at the last moment. Anyway, this award is for continually being cowed in the China-bashing exchanges he finds himself in the middle of. In the past, I confess to poking fun at his responses to being made to perform admittedly unenviable tasks [1, 2]. How does piling on $1T in debt annually sound, for starters? My favourite, of course, being his repeated avocations of "strong dollar" policy despite continually asking China to revalue its currency. After all, wouldn't calling for the latter be a "strong yuan" policy that conversely implies a weak dollar is actually in effect?

At this point I guess we'll never know. Since moving from a strict peg to a managed float, the yuan has gained 25%. This doesn't mean that criticism has ceased, though. His soon-to-be former boss certainly kept harping on the currency issue throughout the recent US election. As it so happens, the US Senate requires the Treasury to report on the currency practices of America's trading partners. Eight opportunities have come to "do something" about China. Eight opportunities have gone to "do something" about China. As is usual during election years, Treasury delayed the release of the report scheduled for October for after the elections. And we got exactly the same thing:
The deadlines for the currency report to be issued are April 15 and Oct. 15 each year. But the Obama administration announced in October [this year] that it would delay the fall report until after meetings of finance ministers in early November. That decision also delayed the report until after the November election...

But Sen. Charles Schumer, a longtime Democratic Party critic of China's trade policies, criticized it. "This report all but admits China's currency is being manipulated but stops short of saying so explicitly," Schumer said in a statement. "It's time for the Obama administration to rip off the Band-aid and force China to play by the same rules as all other nations."
Not that the US will ever give up this issue:
Still, Treasury said the yuan remains significantly undervalued. It vowed to keep pressing Beijing to let the currency rise further to "level the playing field for American workers and businesses and support a strong, sustainable and balanced global economy."

The U.S. trade deficit with China reached $29.1 billion in September. It is running 6.8 percent ahead of last year's record pace. It has long been the largest U.S. trade gap with any one country.
Just as Susan Rice is the archetypal Ugly American, Tim Geithner is the archetypal Damp Squib in British-speak.Tim Geithner, for what will probably be the last IPE Zone post on you in your current capacity, I dub thee pantywaist of globalization.

Foreign Private Investors Dump Treasuries in Sept

♠ Posted by Emmanuel in at 11/16/2012 03:36:00 PM
MarketWatch alerted me to the fact that foreign private investors dumped the most Treasuries ever in the month of September based on Treasury International Capital System (TICS) data:
Foreign investors were net sellers of $18.3 billion of Treasurys in September, the largest amount on record, Treasury Department data released Friday showed. Overall, foreign investors bought a net $17.9 billion of long-term U.S. securities in September, down sharply from the $78.5 billion purchased in the prior month. This includes Treasurys, mortgage-related bonds, corporate bonds and equities. According to the data, China-based investors slightly increased their holdings of U.S. Treasurys in the month. Foreigners made net purchases of $23.4 billion of U.S. equities in September, up from $6.1 billion in the prior month
The official data is here if you want to see it. Here's hoping that private foreigners get rid of more of this dollar-denominated detritus in the near-term as we head towards the fiscal cliff and the inevitable downgrades of US sovereign debt. That should teach those current account deficit lovers a thing or two.

Bill Gross: QE1-3 Added No Savings or Investment

♠ Posted by Emmanuel in , at 11/04/2012 11:47:00 AM
In case you missed it, bond investing legend Bill Gross has just provided the most damning evidence that various Fed easing efforts have been worse than useless. You'd think all of this helicopter dropping of cash would encourage more investment which in turn would generate more jobs, but capital expenditures Stateside are actually dropping like a rock even if real interest rates are well and truly negative:

It is of course expected that Americans just keep spending their brains out since they can't help it. But, to put money aside for productive expenditures? You must be joking. We're talking about modern America here, an instant gratification society that hasn't had much to be grateful for as of late. And, where there's no investment there's no savings. Much has been made of laughably puny increases in consumer savings since the events of 2007, but if you add together government, business and consumer savings, the truth is that US net national savings are scraping all-time lows in negative territory where it's been the last three years:

I'd like to ask the Drezner wannabe USA#1 cheerleaders to explain these charts. Clearly, that has-been nation isn't investing in the future because...they simply have no savings left to invest. What a joke. Obama or Romney, their next leader will certainly reap the misery sowed by essentially non-existent investment. Given a non-existent future, it may be the "rational choice."

I'll leave Bill Gross to deliver the coup de grace:
All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production. Admittedly, the chart shows this downward spiral has been underway for decades, but financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick-started the real economy in the other direction. They have not.
Is it any surprise that, for more sensible young Americans, the "American Dream" is to leave America? Take your money and go--everyone else already did.

Of Obama's 'Retreat Dividend' and Condi Rice

♠ Posted by Emmanuel in , at 10/22/2012 09:39:00 AM
Dear readers, something most commentators missed in observing that the United States has now had four consecutive years of trillion dollar-plus deficits is that something remarkable has transpired: For the first time since 1955, US government spending has gone down--from fiscal year 2011 to 2012. Sure, moving from nearly $3.6T to 'just' $3.54T is not really an amazing feat in absolute terms--especially after considering the aforementioned deficits--but it's an improvement nonetheless.

Back during the last heyday of America during the Clinton administration, a number of commentators spoke of a 'peace dividend' emanating from the end of the Cold War that helped improve the US budget situation. Sure, there were other reasons for that nation's improved fiscal health, but cutting back on military spending played its part. And so it is that Obama has ever-so-slightly reduced government spending. However, instead of a 'peace dividend', what we have here is a 'retreat dividend' with the United States leaving behind the massive trillion-dollar-plus fiascos of Afghanistan and Iraq. %^&*ing up other parts of the world and chickening out when the opposition is too tough--and public opposition too much and bills too high--is typical Americrusader behaviour in this day and age. (Is contemporary US defence policy inspired by N.W.A.? Remind me to invest in Dre Beats if that's the case.) What even Obama's critics miss though is that there cannot be a 'peace dividend' here since we are reminded by news stories on an almost daily basis about how violent Afghanistan and Iraq remain. What a success.

This intro brings me to one of the architects of the Bush-era manoeuvrings, National Security Adviser then later Secretary of Defence Condoleezza Rice. In 2008 when I was a doctoral student at the University of Birmingham, I had the opportunity to attend a talk given by IPE stalwart Benjamin 'Jerry' Cohen at the nearby University of Warwick. At the time, he was launching his much-lauded history of our field, International Political Economy: An Intellectual History (which was in turn based on an RIPE article he published the year before). There is not much more I can about this book which is essential reading for IPE scholars or those with a general interest in the subject matter. While I regret that IPE is very much an Amerocentric and Eurocentric field, his description of it as such is accurate. At any rate, I was doubly miffed when I found out that the publisher Princeton University Press gave away copies of the book at the Warwick event since many of my colleagues came back with them. Grr!

Anyway, in the years since, I have met Professor Cohen and he is a very classy guy (and not a riffraff blogger like yours truly). It is with some shame that I now sheepishly admit to checking out this book from the library only now, but an interesting tidbit in the book concerns the encounter of Robert Keohane with a certain someone at an academic conference. Since Keohane is one of IPE's founders, he gets ample space in the book. On pp. 25-26, Cohen writes:
Another time, I witnessed him serve as a discussant for a research paper presented by a young woman just out of graduate school. Not impressed by her scholarship, Keohane tore her work to shreds, questioning her understanding of basic IR theory. I left the room thinking the young woman's career was over before it had begun. She had the memorable name of Condoleezza Rice.
Yikes! We must give props to Rice for persistence even if she 'made it big' for all the wrong reasons. Except in certain neoconservative circles, the rest of us recognize the Afghanistan and Iraq conflicts she helped oversee for what they are--unmitigated disasters. Still, it is heartening to know that an IPE guy foresaw the trouble with Ms. Rice from the get-go.

Obama, Bernanke, Stimulus & American Brattiness

♠ Posted by Emmanuel in , at 6/30/2012 03:38:00 PM
The New Yorker has an interesting new take on one of my favourite research genres, the search for the behavioural pathologies which account for terminal American decline, be it in health, income, wealth, life satisfaction or what else have you. Why should a clearly regressive society influence so much of what goes on in the rest of the world? It is not exactly news to the rest of the world that American parenting is as crappy as it gets, hence the search for solutions from more parentally enlightened societies [1, 2]. Nor is it news that American stewardship of the world economy is nearly as bad. Ultimately, these two are likely interrelated: While Bart Simpson and that Yanqui brat they caned in Singapore were all the rage in the nineties, let's just say things have gone downhill since then Stateside. In time, individual pathologies snowball into something unfathomably huge alike $1,000,000,000,000+ annual deficits whose momentum can hardly be arrested.

Recent anthropological research suggests these pathologies have their roots in households throughout the Land of the Free Loader:
Often, the [L.A.] kids had to be begged to attempt the simplest tasks; often, they still refused. In one fairly typical encounter, a father asked his eight-year-old son five times to please go take a bath or a shower. After the fifth plea went unheeded, the father picked the boy up and carried him into the bathroom. A few minutes later, the kid, still unwashed, wandered into another room to play a video game.

In another representative encounter, an eight-year-old girl sat down at the dining table. Finding that no silverware had been laid out for her, she demanded, “How am I supposed to eat?” Although the girl clearly knew where the silverware was kept, her father got up to get it for her.

In a third episode captured on tape, a boy named Ben was supposed to leave the house with his parents. But he couldn’t get his feet into his sneakers, because the laces were tied. He handed one of the shoes to his father: “Untie it!” His father suggested that he ask nicely. “Can you untie it?” Ben replied. After more back-and-forth, his father untied Ben’s sneakers. Ben put them on, then asked his father to retie them. “You tie your shoes and let’s go,’’ his father finally exploded. Ben was unfazed. “I’m just asking,’’ he said.
These vignettes are awfully similar to what you get in modern America. With the economy tanking again despite untold trillions spent to--erm...I'm not sure if these guys have achieved anything in the way of sustained progress--the proposed solutions once more involve spending massive debt-fuelled sums to silence this society of whingers. "As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate" says the fawning brat appeaser Ben Bernanke. Meanwhile, Obama largely ignores somewhat better parenting suggestions from the Budget Supercommittee he himself convened in fear of offending the juvenile sensibilities of the American electorate.

Obama and Bernanke are perfect examples of really poor American parenting as they indulge bratty behaviour time and again. Instead of being leaders, they are led by those who don't know any better who demand instant gratification. Just throw more money at the problem and hope it goes away, nevermind that these exercises in fiscal and monetary irresponsibility are becoming increasingly unaffordable and ineffective besides. As the bankers at the height of the subprime era understood, the likes of Obama and Bernanke innately reason that they'll be gone anyway as things sink into further oblivion. In other words, they fit right into contemporary America. It's alright, son, deficits don't really matter because there's a global savings glut. It's not really my fault that deficits have ballooned during my term, they're all Dubya's fault. And so on and so forth.

As before, my suggestion for these folks and their innate preference for appeasers is to just grow up and deal with it. Stop running massive deficits you expect others to fund. The rest of the world does not have infinite patience dealing with your tantrums as you suck up the world's capital and throw it out the pram. In the end, perpetual childhood being programmed into American youth is symptomatic of wider pathologies indicative of all-too-evident societal decline:
Or adultesence might be just the opposite: not evidence of progress but another sign of a generalized regression. Letting things slide is always the easiest thing to do, in parenting no less than in banking, public education, and environmental protection. A lack of discipline is apparent these days in just about every aspect of American society. Why this should be is a much larger question, one to ponder as we take out the garbage and tie our kids’ shoes. 
As ghastly as it is, observing the US self-destruct is not only useful but necessary for two reasons. First, the rest of us need to figure out how to refashion global governance in a way that is less dependent on these people who haven't the slightest idea of how to run a nation, let alone the world. We can make it without these infantile American whingers and should be better of without them. Second, their bad example is precisely that which we should seek to avoid--unless you want to as progress-free as they are, that is.

So, When Will S&P Downgrade the US Again?

♠ Posted by Emmanuel in at 6/24/2012 07:14:00 AM
Friends, there are certain certainties in life: Germany will do well in whatever international football (soccer) competition it enters, Lucy will pull the football before Charlie Brown can kick it; and the United States will inevitably get fatter and more indebted. Unless you read too many Paul Krugman op-eds--or Dan Drezner USA#1 cheerleading blog posts for that matter--you probably get the idea that deficits do matter.

Recently, S&P--which famously did the first deed in downgrading the bedraggled US of A among the three major credit rating agencies--issued an updated outlook on its sovereign credit risk. You will be unsurprised to hear that it remains likely to be knocked down a further peg or four in the near future. This also takes into consideration that no fiscal consolidation takes place alike the discontinuance of the infamous Bush tax cuts (as if the country has done so much better with them). From S&P, then:
Instead, our current (and previous) base-case fiscal scenario assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place indefinitely and that the alternative minimum tax is indexed for inflation after 2011. On the expenditure side, our base case assumes Medicare's payment rates for physicians' services stay at their current level, although we also assume that BCA11 remains in force. (This includes both the original caps on discretionary appropriations and the automatic spending reductions applicable in light of the Supercommittee's failure to reach an agreement.) Our base-case fiscal scenario also assumes annual real GDP growth of 2%-3.5% and consumer price inflation near 2% through 2016. Finally, this fiscal scenario presumes near-zero (nominal) short-term Treasury borrowing rates until 2015, at which point the rates climb by just more than 100 basis points, as well as a slower rise of about the same magnitude in long-term Treasury yields from their 2011 level of just less than 3%.
I am highly distrustful of credit ratings in general, believing that they are no substitute for conducting independent evaluation. For instance, assuming that the country grows in the 2-3.5% range is a stretch--which in turn implies that a credit downgrade is more imminent if it fails to reach this range up to 2016 (which is absolutely certain IMHO). At any rate, we get to the dirty business of assigning probabilities:
The outlook on our 'AA+' long-term rating is negative, reflecting our view that the likelihood that we could lower our long-term rating on the U.S. within two years is at least one-in-three.

Pressure on the rating could build if, in our view, elected officials remain unable to agree on a credible, medium-term fiscal consolidation plan that represents significant (even if gradual) fiscal tightening beyond that envisaged in BCA11 [the deficit reduction supercommittee]. Pressure could also increase if real interest rates rise and result in a projected general government (net) interest expenditure of more than 5% of general government revenue.

On the other hand, the rating could stabilize at the current level with a medium-term fiscal consolidation plan, or if the U.S. government makes faster progress toward reducing the general government deficit than our base case currently presumes.
So here are the takeaway points for you: (1) To maintain its AA+, S&P requires that the US tighten its belt beyond the measures the deficit reduction supercommittee believes is necessary, which in any case are not being implemented due to partisan deadlock. (2) Growth assumptions of 2-3.5% are wildly optimistic IMHO based on recent growth figures Stateside, making debt-to-GDP figures look even worse going forward.

End result? Based on S&P's stated criteria compared to America's economic realities and political limitations, I would think that a credit downgrade in the next two years is an odds-on possibility. Even if the US is remarkably progress-free already, the momentum is on the downward path. And I believe that, given its fundamentals (or more accurately, the lack thereof), the pace of Americarnage should accelerate. Recall that as late as May 2010, Spain--yes, Spain--had a AAA rating.

It should be exciting to watch--as long as you fully divest yourself of Sammy's IOUs.

Putin's a Smart Guy: Worry About $, Not €

♠ Posted by Emmanuel in ,, at 6/20/2012 12:34:00 PM
Anglophone economic commentary about the euro usually veers towards the "I told you so" variety, nevermind that no one has actually wanted out of the EMU while many are still lining up to join it--including the most economically progressive economy that's still out of it. British Euroskeptic dyspeptics and their American wannabe counterparts aside, many recognize that the potential fallout from the US dollar is far greater given that it (unfortunately) is of more systemic consequence than the euro. Moreover, whoever said that being in a currency union absolves anyone of responsible economic stewardship? EMU members understood that they could no longer avail of devaluation strategies favoured by certain other countries (even though no one has ever devalued their way to prosperity).

So, it is refreshing to hear Vladimir Putin raise a concern many of us from the developing world have. Earlier on he was spot-on in describing the United States as a parasite on the world economy. Now he provides another good insight along similar lines: As far as we can tell, the Eurozone is getting serious about reining in fiscal deficits and whatnot...
"I am heartened by the approach of the European Commission, with whom we rarely agree, and of the key eurozone countries, to how they plan to resolve the problems they face," Putin said at a press conference at the end of the two-day summit of the Group of 20 powers in Los Cabos, Mexico. "We can expect the situation to change for the better, although institutional reasons of the crisis are still there," he said.
...whereas the United States is not, cannot, and will not...
But the Russian leader lamented the lack of clarity on the future of the US dollar, which makes for a sizeable share of Russia's reserves, after US elections in November. "If we keep (half of reserves) in dollars and US bonds, we would like to know what will happen with the dollar after the US presidential elections," the Russian leader said. "Their debt is 15 trillion!" he added with a bewildered pause. "What will happen with the world's main reserve currency? What should we prepare for? These are the questions that should be at the center of attention of the G20." 
For whatever character flaws you may ascribe to Putin, it makes eminent sense to rely less on the dollar as a reserve and vehicle currency when it is structurally biased towards devaluation (whereas the inflation-averse ECB's euro has always been biased towards revaluation). Hence the legitimacy of the earlier "parasite" claim wherein others are effectively being forced to hold detestable dollar-denominated detritus. The G20 or whomever should come to a sensible move to shift towards other alternatives: a basket of currencies or regional alternatives alike the yuan in the Asia-Pacific. Otherwise, we are all just waiting to go the way of progress-free America and its currency.

After all, the bigger they are, the harder they fall.

I Knew It: 61% of Treasuries Purchased by the Fed

♠ Posted by Emmanuel in , at 4/12/2012 09:08:00 AM
What do you get when you cross the soppy Bushite Lee Greenwood with Obama's pastor? For one thing, you get a more accurate (financial) portrayal of the current state of that benighted land:

I'm cowed to be an American
Where at last I know I'm unfree
And I won't forget Uncle Ben
Who sold me into debt slavery

You can modify the rest of the lyrics accordingly--especially with Jeremiah Wright's trademark catchphrase replacing the title of the Greenwood tune. Anyway, this lyrical reassessment was brought about by a TIME feature I read recently that revealed the lie behind the "deficit's don't matter because US borrowing rates are so low" favoured by assorted (and rather ignorant) USA #1-style cheerleaders who inhabit the blogosphere.

As it turns out, the Federal Reserve flow of funds report for the entire year of 2011 reveals how "strong" demand is in the "market" for US treasuries. With 61% of Treasury purchases accounted for by Federal Reserve buying, both terms in quotation marks are cast in doubt. Yes, we know that open market purchases of treasuries are the result of policy decisions. But no, we did not know the cumulative extent of these purchases viewed in annual terms.

The proper analogy is one I made before: It's like calling your kid a "great salesman" after setting up a lemonade stand....only for the rest to find out that nearly two-thirds of all his "sales" came from you. So it is when monetary authorities justify currently bedraggled  American finances via some variation on the "deficits don't matter because US borrowing rates are so low."

The questions I would like to see answered are following:

(1) If demand from foreigners for Treasuries is so great anyway since the US is providing a "safe haven" through "liquidity services," why is there a need for another arm of government to undertake such large-scale purchases? Why make the state do what the market would do by itself?

(2) Related to (1), there is also a concern about bloating the balance sheet of the Fed. Why needlessly do so if others would willingly lap up these securities?

(3)  Lastly, would rates be this low if the Bernanke Fed deemed it unnecessary to make purchases on this scale?

The upshot is that they are intervening so heavily because they know the market, left to its devices, will not likely depress Treasury yields to a similar extent. The market-clearing price is, in all likelihood, significantly higher. The unprecedented expansion of public debt is thus matched by the unprecedented gaming of the market for these securities. The corollary to unparalleled indebtedness is unparalleled subvention of market forces. There's no need for Obama's pastor to damn America in speech when you have monetary authorities doing so in deed. The latter is certainly worse.

I guess the joke's on you, factually challenged America #1 cheerleaders, for nobody's quite as interested in your dollar-denominated detritus than yourselves. On my part and the rest of us who don't support your folly, you're more than welcome to it.

Yanks Never Learn: US Imports Hit Record High

♠ Posted by Emmanuel in , at 3/10/2012 12:18:00 PM
This has to be the most ridiculous story I've seen all week long. One that once again demonstrates that you don't have to go much further than the Yahoo! News front page for IPE-relevant material. For all the hot air about "global rebalancing," the Yanks seem to be repeating the Bushite formula for Guaranteed Economic Disaster, with PIGs' pork seasoning for added flavouring to keep things current. We already know that after having run massive fiscal deficits which did not nothing other than make things ripe for a crisis, the US have upped the ante by running trillion dollar budget deficits for four straight years with no end in sight.

Others said, "well at least the current account deficit is getting under control." Which, unfortunately, is not really happening. The trouble with these people is that they do the same thing over and over again and expect different results. Just as a consumption binge was driving US "growth" in the run-up to the crisis, so we have another one going on now. The evidence is a return to skull-crushing external deficits to accompany the budgetary one. They don't call them twin deficits for nothing as US imports hit all-time highs:
The U.S. trade deficit widened more than expected in January as high oil prices and resurgent demand helped pushed imports to a record high, a Commerce Department report showed on Friday. The trade gap swelled more than 4 percent to $52.6 billion, the highest since October 2008. The department also raised its estimate of the December trade deficit to $50.4 billion, from its previous figure of $48.8 billion. Imports rose 2.1 percent to a record $233.4 billion. China accounted for a big share of the gain, with imports from that country rising 4.7 percent to $34.4 billion. 
For the chronologically-minded, the Reuters article reminds us of the last time the US began running these sorts of external deficits:
Goods imports reached the highest level since July 2008, just before the financial crisis caused world trade to plummet. Stronger U.S. demand also pushed imports of services, autos, capital goods and food, feeds and beverages to record highs. 
The overall point is this: the US economy has not really reoriented itself away from being consumption-driven. Although American exports are rising, they obviously aren't rising enough to offset runaway increases in consumption-driven importation.

Though I hate to make predictions, consider the situation at the moment Stateside to what it was right up to the breakout of the crisis when many economic commentators believed that things were just hunky-dory: Back then you had colossal budget and current account deficits plus a run-up in equity prices--record stock market index levels even--driven by money-for-nothing monetary policies. Add in other suspiciously good macroeconomic figures such as that for employment. And at the present time we have...exactly the same sorts of things.

Everything old is new again. Indeed, some people never learn. Another walloping of the US economy looks like it's in the offing, and it would be interesting to see the aftermath if it happens before the 2012 presidential elections. Yet sooner or later the US will pay a well-deserved price for its renewed prodigality--unless you're of the free lunch persuasion, of course.

Attn Deficit Lovers: Why China Should Rule World

♠ Posted by Emmanuel in ,, at 2/02/2012 08:39:00 AM
Balancing one's budget is the most fundamental money management task one faces. If there's eomething that so graphically illustrates Western decline, it is the inability to do anything other than run up massive debts that are a burden on future generations, all the while spouting all sorts of utterly contemptible free lunch stories of the "deficits don't matter" variety. Who knows? Maybe it's in the American genes.

With that in mind, it's heartening to hear that Hong Kong is having an old lady in a shoe-type problem when it comes to government finances. It has so many revenues it doesn't know what to do. Let's just say success begets success instead of the other way around. In contrast to various Western wasteleands alike the Washington wonderless-land, it's running out of ideas about how to redistribute a bountiful largesse. A fiscal surplus; what a concept:
The United States is shrinking its military and debating whether to cut social spending, raise taxes or both. European governments from Greece to Ireland are struggling to maintain payments to the unemployed and retirees. Japan is borrowing heavily to pay for earthquake reconstruction and care for a graying population.

And then there is Hong Kong.

Financial Secretary John Tsang announced a budget for the coming fiscal year that cuts income taxes, corporate taxes and real estate taxes. Household electricity bills will be subsidized, and people living in public housing will receive two months’ free rent.

Education spending will jump 7 percent. Senior citizens will receive an extra month’s pension payment; government hospitals will expand; and 10 billion Hong Kong dollars, or $1.29 billion, will be put in a special fund to help the needy buy medicine.

Perhaps most impressive, the budget is forecast to be roughly in balance – and Hong Kong’s budget forecasters have a reputation for consistently underestimating surpluses. The city, an autonomous region of China ever since Britain handed it back in 1997, has accumulated a rainy-day fund equal to more than a year and a half of government spending.

Hong Kong is running another large budget surplus for the current year, which ends on March 31, despite giving 6,000 dollars to each adult permanent resident. Economists attribute the bonanza to a series of factors: tight limits on senior citizen spending, no military spending and an economy that grew 5 percent last year, mostly because Hong Kong has cashed in on China’s economic boom.
Reuters has more on the specifics. It begs the question: Given the influence of Westerners at international financial institutions alike development agencies, what right do they have to teach LDCs about running a country? No one except the most imperceptive Yankee dolt would champion their nation spilling endless amounts of red ink as a global exemplar. No one respects a bankrupt since a bankrupt lacks self-respect by getting into such dire financial straits to begin with.

As a student of political economy, I humbly suggest that closer attention be paid to the China's example. Cheneynomic apologists aside, their money-management skills look far superior to those of their Western counterparts who still believe in the white man's burden via their laughable freedom 'n' growth shtick.

To paraphrase our very own Martin Jacques, what exactly is there to fear When China Rules the World compared to today's example of assorted Western spendthrifts and prodigals? It's a no-brainer. With which will you gain more spillover effects and positive externalities? Take your pick--do you want to be Atlanta or Hong Kong? Having something of a brain left, I'll go for the latter, thank you very much.

Should US Borrow More Given Treasury 'Demand'?

♠ Posted by Emmanuel in ,, at 12/02/2011 11:53:00 AM
To make a long story short, the answer to the post title is "no" contrary to what some IPE and economist types believe [1, 2]. At worst it is financially ruinous to do so and at best it is a very parochial assertion that there is limitless demand for US Treasuries out there. For, not only are there countries with significantly lower borrowing costs than the US, but they also have strong currencies that indicate continuing demand for assets denominated in their currencies unlike the slumping dollar which is near all-time lows on any number of indices. Those who think of the US as a "safe haven" obviously paint a very partial picture. Treasuries are just one asset class among many $ denominated assets. Foreigners also need to exchange their monies into dollars to invest in Treasuries.

Switzerland, Hong Kong, Sweden and Singapore that have both lower borrowing costs and currencies that actually hold their value unlike that of a certain North American nation do not take it as a signal to run up their debts as a "global public good." Even the most disingenuous American politician isn't mad enough to say "we're doing the world a service by running massive deficits."

This being an international political economy blog not a domestic economics blog spewing out Amerocentric regurgitations, I hold myself to a higher standard of looking at others' performance in issuing sovereign debt. Even the most cursory glance reveals their story does not hold up. Moreover, it goes unexplained in their version of events in which the world is flocking to American Treasuries how the currency that it's denominated in is slumping. It is simply not good social science to cherry-pick cases (limit yourself to n=1 America) or completely ignore the fact that foreigners would first have to change their currencies to that which your sovereign debt is denominated in. A more holistic picture suggests this simplistic low yields = limitless Treasury demand story is unwarranted.

On the other hand, an empirically verifiable and non-contradictory assertion is that the frequency of financial crises has increased ever since Richard Nixon dealt away with the dollar-gold standard in 1971. In other words, when the US no longer had its debt issuance levels constrained by the Bretton Woods system, we've had more instead of fewer financial crises. (The linked paper does not suggest their severity has increased, but remember that it was written prior to 2008/09--I'll give the benefit of the doubt to be charitable.) From this point of view, it is perverse that some call for unlimited American bond issuance if the goal is to stabilize the world economy since America being freed from such reins coincides with our, ahem, age of turbulence.

To properly apply the thinking behind Kindleberger's hegemonic stability theory, the current period when the US has been either unwilling or unable to keep the dollar-gold standard intact is marked by more frequent incidences of financial crises. There is no hegemon out there "stabilizing" anything, least of all itself. Moreover, a stable system of exchange rates was one of the things the hegemon was supposed to provide according to Kindleberger, not the mishmash of freely floating ones we have today.

A more cogent, logically defensible argument is that the dollar is now a liability to the international monetary system rather than an asset. Has the US channelled its resulting capital account surpluses in productive ways? I do not think it's far fetched to answer in the negative after the subprime crisis. Did the chances of a European crisis occurring increase in the aftermath of the US subprime mess? I do not think it's far-fetched to answer in the affirmative. Trouble in core Western nations is more suggestive of systemic breakdown than systemic assurance.

But deficits don't matter since interest rates are so low, right?
Go buy Dick Cheney's autobiography if it maximizes your utility, but I for one prefer social science to Cheneynomics.

Bernanke, Japan's Lost Decade & US Lost Century

♠ Posted by Emmanuel in ,, at 8/23/2011 12:07:00 AM
With the yields of Treasuries pointing towards the US re-entering recessionary straits, all eyes have turned towards the upcoming central banker jamboree at Jackson Hole this coming Friday. Although the Fed is supposed to be an independent central bank, the "new normal" of growth in the 1-2% range coined by PIMCO which even I find optimistic is not really a politically palatable status quo. It was not so long ago that central bankers were hailed as new heroes for licking inflation for good. Now, however, it seems they are being asked to perform superhuman feats in turning around the course of iceberg-bound US(S) Titanic. Nevermind that the first two rounds of quantitative easing failed to have lasting effects in obtaining sustained recovery, but many market participants are indeed clamouring for QE3. Such is the dysfunctional nature of US politics that meddling is called for at every turn. I, for one, disdain such busybody behaviour.

At this point, let us try and read the mind of Ben Bernanke. Central bankers are a conservative lot, but Bernanke has already been exceedingly adventurous in clogging up the Fed's balance sheet with mortgage-related assets of dubious quality in addition to near-ZIRP and the aforementioned quantitative easing involving purchases of government debt. As it turns out, aside from being a scholar of the Great Depression, Bernanke too has been an active commenter on turning around Japan's deflationary situation. While there are differences here and there--Japan's public debt is largely held domestically, Japan has a falling population and so forth--many now suggest that low yields on Treasuries portend America turning Japanese as the 80s song went.

Indeed, some credence for such a comparison comes from Bernanke himself. Trawling through the grisly entrails of Bernanke's history of academic writing and speechmaking, we glimpse his possible next moves after the non-events of QE1 and QE2. On 31 May 2003, Bernanke delivered a speech before the Japan Monetary Society of Monetary Economics. Aside from the now-familiar references to helicopter drops, he too describes Japan's situation in a manner which may be as good a description of present-day America after using a "find and replace" command to swap "Japan" with "United States":
Demand on the part of both consumers and potential purchasers of new capital equipment in Japan remains quite depressed, and resources are not being fully utilized. Normally, the central bank would respond to such a situation by lowering the short-term nominal interest rate, but that rate is now effectively zero. Other strategies for the central bank acting alone exist, including buying alternative assets to try to lower term or liquidity premiums and attempting to influence expectations of future inflation through announcements or commitments to expand the monetary base.

The Bank of Japan has taken some steps in these directions but has generally been reluctant to go as far as it might, in part because of the difficulty in determining the quantitative impact of such actions and in part because of the Bank's view that problems in the banking system have "jammed" the usual channels of monetary policy transmission. Ironically, this obvious reluctance on the part of the BOJ to sail into uncharted waters may have had the effect of muting the psychological impact of the nonstandard actions it has taken. Likewise the Bank of Japan has resisted calls to manage the value of the yen, citing its lack of authority to do so as well as the prospect of retaliation from trading partners.
What to do , then? A much-cited mimeograph by Bernanke while still at Princeton is on Japanese Monetary Policy: A Case for Self-Induced Paralysis? dating from 1999. Coming at the tail end of Japan's so-called Lost Decade, you can plausibly argue that this pre-Internet bust year was close to a turning point in the US economy as well. With income stagnant-to-falling in the subsequent years, it is little exaggeration to call the Noughties the US Lost Century. As you may have expected, getting out of a deflationary situation according to Bernanke involves parasitic behaviour in creating some inflation:
A problem with the current BOJ policy, however, is its vagueness. What precisely is meant by the phrase “until deflationary concerns subside”? Krugman and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation. Further, setting a quantitative inflation target now would ease the ultimate transition of Japanese monetary policy into a formal inflation-targeting framework—-a framework that would have avoided many of the current troubles, I believe, if it had been in place earlier.
Returning to the Great Depression, Bernanke opines that Roosevelt's key virtue was being amenable to trying anything to reverse the situation. In short, throw everything against the wall and see what sticks--a pretty apt summary of what he has (rather unsuccessfully) tried so far. That he remains aloof to his critics is thus easily explained...
But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended [my emphasis], but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.
Having read the above, if you're a betting person, wager on Bernanke making some reference to inflation targeting in an elevated range (say 3-4% in Fedspeak but more like 4-6% in practice or even higher[!]). Hyperactive monetary policy it will likely continue to be. After all, what would FDR do?

HaHaHa: Mathlexic Biden in China, Geithner Wannabe

♠ Posted by Emmanuel in ,, at 8/19/2011 10:18:00 PM
On 1 June 2009, US Treasury Secretary Tim Geithner famously elicited peals of laughter from Peking University students while blabbering about China's US Treasuries being a safe investment. As an aside, PKU students are sharp; after all, we at IDEAS have an LSE-PKU double degree programme with them. But anyway, a trip down memory lane...
"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s. His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
Ah that Timmy, always such a kidder. But wait, there's another PT Barnum wannabe in US government trying his comic stylings on the Chinese people. I guess it's good that some of the latter are the world's craziest fools, otherwise I don't quite know what sort of reception he would have received plying this nonsense. Today, 19 August 2011, Biden was fortunate not to face, say, smart PKU students and instead the usual inscrutable Chinese officials while doing his best Geithner impersonation:
Vice President Joe Biden told Chinese Premier Wen Jiabao that China has nothing to fear when it comes to its investment in U.S. Treasuries. Biden and Wen both expressed confidence in the U.S. economy, with the Chinese premier saying its stability “is in the interest of the whole world.”

“We appreciate and welcome your concluding that the United States is such a safe haven because we appreciate your investment in U.S. Treasuries,” Biden told Wen yesterday in Beijing, where he was on the second day of a nine-day trip to Asia. “I want to make clear that you have nothing to worry about in terms of their viability.”
And now for the punch line. The above aside, it's too bad Biden got his maths wrong by venturing that 85% of Treasuries are held by Americans when the figure is more like half by my calculations: [($9326.1T - $4499.2T)/9326.1T]=51.76%.
Biden said the U.S. will “take care” of U.S. Treasuries “not merely because China owns 8 percent of them, but because the Americans own 85 percent.”
Say what? After illiterate leadership during the George W. Bush era, we now have mathlexic American leadership care of Biden. If you needed more proof of how mediocre the US education system is, here's a nice example for you--VP Joe. At least America's poor economic performance is a bit easier to explain now. I sure do hope Michele Bachmann is an improvement, but I'm not banking on it.

Since the IPE Zone is a family-oriented blog, let me just say that debt is not the only thing these Yanquis are full of and leave it at that. What a joke.

World's Craziest Fools: PRC Buying Treasuries

♠ Posted by Emmanuel in ,, at 8/08/2011 12:03:00 AM

While flipping TV channels recently, I came across "World's Craziest Fools" on BBC3 hosted by Mr. T of A-Team and Rocky III fame. Basically, the show is a more sadistic version of "America's Funniest Home Videos" (do they still show that?) featuring CCTV footage and suchlike. A purported example is the 911 emergency call above from some, er, crazy fool who claims to have been assaulted by a deer he ran into and gave a ride in his backseat. It's a very weird story--play the clip and see for yourselves. (The sheer hilarity does make me wonder if it was scripted.) By fortuitous coincidence, I too was accosted by some pretty crazy fools online making ludicrous stories. You see, while browsing Yahoo News! recently, I was presented with 4 out of 10 stories dealing with how *incensed* the Chinese were by American sovereign debt being downgraded by S&P. Let me expand on this bit that I've begun to expound on in the previous post.

China's official news agency, Xinhua, has concocted a convoluted story that rivals the one in "Joe vs The Deer" above: While China's sense of urgency is evident, I'm afraid that their comic talents match those of the rather potty-mouthed "Joe." A theme I've harped on a lot is that China has no one but itself to blame for the United States' incredible debt accumulating run as its largest creditor. To make a drug culture reference, the pusher generously indulging the user in his debt fixes has no one else to blame for the latter's erratic behaviour.

However, the Chinese seem to twist this narrative thusly: By virtue of owing so much debt to the PRC, the US is supposed to be more responsive to Chinese pleas to moderate America's torrid pace of debt issuance as continuing to do so may impair Uncle Sam's ability to honour its obligations. This argument is inane for a number of reasons. First, alike holding debt rather than equity in corporations, China does not have an "ownership stake" in the United States. This has arguably been deliberate since it's politically more palatable to have China own (degraded) official IOUs instead of American firms that offer profits and technical know-how. Second, China is usually the first country to invoke principles of non-interference and non-intervention when criticized for its handling of human rights, coddling of various unsavoury regimes abroad and so on. Conversely, shouldn't the US be free to run massive deficits as it sees fit? It's only fair despite the obviously negative consequences for those suck--I mean, valued customers of Treasuries.

Here now are some choice quotes fro the Xinhua article. While many points made have borderline common sense, these had me scratching my head based on what I've mentioned:
China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets...

S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way...

International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.
Once more, China has no formal input whatsoever in US economic policy. While the US may be running itself into the ground, that's its sole prerogative. What can China really do? Let's return to Albert Hirschman's landmark 1970 book Exit, Voice & Loyalty. Even Wikipedia offers a nice summary of its thesis:
The basic concept is as follows: members of an organization, whether a business, a nation or any other form of human grouping, have essentially two possible responses when they perceive that the organization is demonstrating a decrease in quality or benefit to the member: they can exit (withdraw from the relationship); or, they can voice (attempt to repair or improve the relationship through communication of the complaint, grievance or proposal for change)...

However, the interplay of loyalty can affect the cost-benefit analysis of whether to use exit or voice.

By virtue of owning the most US Treasuries, my belief is that China has a misplaced sense of stakeholder loyalty partly derived from the hackneyed argument of there not being another asset class substantial enough to accommodate its still-burgeoning reserves, last seen at a previously unfathomable $3 trillion and counting. Yes, China has tried to diversify into owning US corporate equity, but its activities have often been blocked on specious "national security" grounds. Although it does voice pleas for fiscal discipline every now and then, they obviously fall on deaf ears and undermined anyway by continued Chinese purchase of Treasuries regardless.

For largely the same reasons, "international supervision" of US dollar issuance is rather far-fetched. While US monetary policy does affect many countries--especially China which has effectively pegged its currency to the dollar for better or worse--the real question is why it continues to do so given its divergent pressures at home of higher domestic inflation and whatnot. We've heard much about rebalancing towards a more consumption-driven Chinese economy, but it hasn't really happened yet, and one does have to wonder why China puts itself in a position of having to accumulate so much in reserves if such a change were indeed wished for.

I've mentioned this before, but the question remains the same: Who's the bigger fool, the free-spending fool or the other fool who indulges such foolish behaviour? If Mr. T were into IPE, I'd wager he'd choose the latter. Inspired by the unhelpful (and potty-mouthed) suggestions made in the above clip, China would probably get its mother----ing message across more clearly by threatening and keeping good on a threat of selling some of its stash of Treasuries this mother----ing time. Obviously, it should stop accumulating this stuff ASAP lest its sanity be questioned (and PRC officials be invited to future episodes of "World's Craziest Fools").

While I pity da fools in the PRC--or at least their official media as opposed to particular ministries--I wish they'd cane America for a change to show that this foolish behaviour has its limits. Sammy the fool hasn't sobered up via others' persuasion, so publicly selling off a few billion worth of Treasuries should be more of an eye-opener. Otherwise, subprime globalization will continue apace. Fool.

UPDATE: For another perspective, read Joseph Nye.

'Risk-Free' No More: S&P Downgrades US Debt

♠ Posted by Emmanuel in , at 8/06/2011 01:47:00 AM
When I was studying for an MBA sometime ago, the textbook 'risk free' rate of return was represented by US Treasuries, of course implying that the risk of default was virtually nil. After today, I guess they'll have to rewrite the textbooks as they've now been downgraded to AA+. You can say the US government had it coming, but I do believe that this is but another in a long line of what should be more and more humiliating stains against American honour (is there any left?) WSJ Marketbeat has Standard and Poor's statement replicated below, after which I'll chip in some (gratuitous, really) comments. First are the bullet points of the summary:
  • We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
  • We have also removed both the short- and long-term ratings from CreditWatch negative.
  • The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
  • More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
  • Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
  • The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Then you have the press release:

TORONTO (Standard & Poor’s) Aug. 5, 2011–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. Standard & Poor’s also said that the outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.

The act further provides that if Congress does not enact the committee’s recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO’s latest “Alternate Fiscal Scenario” of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO’s “Alternate Fiscal Scenario” assumes a continuation of recent Congressional action overriding existing law.

We view the act’s measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.

Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Standard & Poor’s transfer T&C assessment of the U.S. remains ‘AAA’. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers’ access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

Some thoughts from yours truly:

  1. This is but the first downgrade. As the text mentions, stabilizing at AA+ entails phasing out the extension of the 2001 and 2003 Bush tax cuts due to expire next year. With Republicans hellbent against "tax increases," the US is well on its way towards AA according to the criteria S&P has set forth;
  2. The other two major credit rating agencies--Moody's and Fitch--are made to look foolish not doing the same after the debt ceiling was raised and will likely have to sheepishly follow in the very near future;
  3. Yields on T-bills and T-notes may not necessarily jump significantly as a result as several commentators have pointed out. On current trends, they may probably fall even further. So what? This is more a reflection of dire prospects for the US economy than a reflection of 'safe haven' status;
  4. It will be interesting to see how Chinese leadership reacts. Given its past behaviour, there will be much bellyaching but not much action in terms of diversifying out of souring US paper. Excuses such as Treasuries being the only substantial asset class large enough to accommodate PRC holdings will then be trotted out irrespective of the more fundamental question of why they have accumulated so much in reserves in the first place;
  5. Considering how much turbulence the markets had this week, just wait till we begin next week. Perhaps there will even be a relief rally now that the deed is done, but I'd wager that volatility will be even higher in any instance;
  6. Speaking of which, watch out for what happens with repurchase agreements or repos. Discomfort with holding Treasuries post-downgrade may spell liquidity problems in this crucial $4 trillion market next week;
  7. Knock-on effects on municipal bond issues are likely as well, further harming state and city finances which are necessarily less protected by exorbitant privilege than federal finances;
  8. If I were a cunning instead of a po-faced sort of American official, I wouldn't have pleaded with S&P to rethink its calculations. Instead, I'd have hinted at major credit rating agencies being in danger of having their status as nationally recognized statistical rating organizations (NRSROs) threatened. After all, barring agencies from rating the most liquid capital market (read: dollar-denominated) on the planet would terminally impair their line of business. This power I always assumed would keep the rating agencies from downgrading US debt, but hey, it's nice to be proven wrong. Then again, it's never too late for America to start applying such pressure. Hey, if even Italy harasses rating agencies...
All in all, a fair initial outcome as the Reinharts noted a few days ago in spite of the lame debt ceiling deal. Consider it a downpayment for even worse things to come for both those insensible enough to issue jillions of these papers and those who buy them unthinkingly. You fully deserve what you have coming and I have no sympathy for you as enablers of subprime globalization.

UPDATE 1: Chinese authorities have begun throwing a tantrum about this downgrade as per point 4. As always, however, the question is what they're going to do about it. With recent history as our guide, the answer is next to nothing. Despite such complaining, the honest truth is that China by virtue of holding the most of this dollar detritus is the world's largest enabler of such characteristically irresponsible American behaviour. Contrary to what they imply, the PRC has no substantive input--real or implied--in US economic policy. In Hirschman's schemata, it has no voice but may have a perverse sense of loyalty. But if it wants to teach America a lesson, exit is the only viable option: first in trickles, and if no changes are forthcoming, then in droves.

UPDATE 2: It's apparently worse than what point 1 suggests in that a downgrade to AA or worse is threatened by S&P in the very near future:
We see at least a one-in-two likelihood that we could lower the long-term rating by one or more notches on the U.S. within the next three months and potentially as soon as early August — into the ‘AA’ category — if we conclude that Washington hasn’t reached what we consider to be a credible agreement to address future budget deficits