28-08-2002 02:11									#211
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"That gut instinct of yours makes we want to smash the wall in. Everything's good, little pinky fluffy clouds everywhere..."

Geez dude, you're dour.

"You can't run that deficit ferever. When you no longer do, you'll invest less or consume less. If you invest less, then net investment is about zero - and that means no output growth."

No, not forever. But I would guess that it's possible to run those deficits for a while, even if not at quite those magnitudes. (But then again, perhaps even at those magnitudes.)

"And foreign capital didn't flow into the US for the pinky fluffy clouds, but it wanted to play the bubble."

It flowed in for a lot of reasons, not only the bubble.

"Only during the bubble"

Well, maybe the 80% number. But then Europe has most often been 50%+.

Last edited by DanS on 28-08-2002 at 02:35

	28-08-2002 21:24									#212
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quote: Originally posted by Sten Sture The US is able to borrow money at 2% real. For 3% of GDP, please! Its immaterial. If you personally make 100k (after taxes) how big a deal is it to borrow 3k at 2% real? BFD.

You make two errors here, the first one is a minor one regarding the real interest rates:
The US is not borrowing at 2% real after all. The current rate on US 10 year bonds is 4.7%, inflation (currently 1% using the GDP deflator) will probably be around 2% during that period raising your forecast of the real interest rate by more than a third.
However that only applies to government borrowing, as I am sure you are aware the majority of borrowing is by corporations - here the 10 year bond rate is 6.5%.
Assuming 30% of the overseas financing is going to the government and 70% to business that gives a weighted interest rate of 6% - or 4% real, double what you were assuming.

The second (and far more important error) is that you are not taking into account that that 4% interest on 3% of income is added each year to the amount to pay - which means that although in the first year it will amount to 0.12% of income after 10 years it would be 1.04% (assuming a 3% rise in real income and 2% inflation over that period).

So after a decade your real income will have risen by around a third but your interest payments would have risen 12-fold, and your net debt will have gone from 3% of your income to 26%.

	02-09-2002 14:58									#213
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"We will continue, greatly to the annoyance of Roland , to be able to import vast amounts of capital."

Nope. Dollar recycling has its limits.

"The US is able to borrow money at 2% real. For 3% of GDP, please! Its immaterial. If you personally make 100k (after taxes) how big a deal is it to borrow 3k at 2% real? BFD."

BFD ?

"Geez dude, you're dour."

I'm realistic. You're a believer. I also think now that Greenspan really believes most of the crap he's uttering. I would not have expected such a level of intellectual degenration, not even in the US.

	03-09-2002 22:42									#214
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quote: Originally posted by Roland "The US is able to borrow money at 2% real. For 3% of GDP, please! Its immaterial. If you personally make 100k (after taxes) how big a deal is it to borrow 3k at 2% real? BFD." BFD ?

I think he means 'big ****ing deal' - however this shows an error of thinking which I showed up in my previous post

I also checked my data after the BEA released it's 'peliminary' estimate of GDP (as opposed to the 'advance' estimate) - and in Q2 foreign financing was not 79% of net investment, it was 91% !!!

	04-09-2002 01:08									#215
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quote: Originally posted by el freako You make two errors here, ...current rate on US 10 year bonds is 4.7%...

Uhh, lets see... You are assuming that the US Government borrows with the ten year treasury, which is a note, not a bond by the way. That is emphatically not the whole case. The ten year is actually a somewhat unused maturity. Most government borrowing is in much shorter maturities to take advantage of a (usually) positively sloped yield curve. The current average duration of tradable USTreasury (UST) debt longer than one year is 6.03 years. However, that is only 68% of the tradable debt, 32% is in Tbills which have an average duration of 0.39 years, making the weighted average duration of traded UST debt around 4.25 years. The yield on the debt at monthend was actually 2.88% nominal.

quote: However that only applies to government borrowing, as I am sure you are aware the majority of borrowing is by corporations - here the 10 year bond rate is 6.5%.

Unfortunately you are mistaken in your assumptions again, one about the average maturity of corporate borrowing, and two about the majority of borrowing. Consumer borrowing dwarfs corporate borrowing, for an example, the mortgage bond market is the size of the corporate bond market and the USTreasury market combined. And those two are roughly the same size.

quote: Assuming ...overseas financing is going ... 70% to business that gives a weighted interest rate of 6% - or 4% real, double what you were assuming.

Besides assumption errors, the aggregate amount of Corporate borrowing is somewhat irrelevant to the extent of Treasury borrowing, and the afordability of such financing to the US Government. To be sure, the miniscule amount of net foreign UST ($US1.3B)purchases in the first half of this calendar year point to a relatively healthy level of internal financing.

quote: The second (and far more important error) is that you are not taking into account that that 4% interest on 3% of income is added each year...

Of course if the Government debt is being financed at 2.88% nominal and you have a 2% deflator, while the real GDP is growing north of 0.88%, the economy stands a very good chance of outpacing the Treasury debt since net tax revenue growth has a high correlation to real GDP growth. The figures you proposed for the result should actually be the other way around.

This is no social crisis, just another tricky day...

	04-09-2002 12:06									#216
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That's all nice pink fluffy clouds all over again. Well, no.

The current level of interest rates is irrelevant. The problem is that taking a rough 5 % real return on capital in the entire economy, US interest rates have been artificially low for a time and are even lower today. This goes all the way, from the fed short rates to structured risk "elimination". The flip side of that is asset bubbles and excessive spending.

While the banks and Freddies find that great, finance alone does not an economy make. The misallocation of resources has to be simply gigantic.

There is no pool of savings to support the US spending binge. The gap is bridged by Alan's confetti. He truly is the John Law of our time.

"The US is able to borrow money at 2% real."

Well the US could borrow at 0 %. Just take the printed money right to the treasury. Your point ?

	05-09-2002 00:23									#217
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I think Roland will like this article

http://moneycentral.msn.com/content...ecial=deflation

US and Japan - more alike than you think

	05-09-2002 06:54									#218
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Sten,

I probably am incorrect in some of the assumptions I made about the interest rates for financing the US's $500bn current account deficit (you seem to be confusing my argument about the affordability of overseas financing with that of governmental), I will certainly agree with your better-researched figure of 2.88% for government borrowing, however...

quote: Originally posted by Sten Sture Consumer borrowing dwarfs corporate borrowing, for an example, the mortgage bond market is the size of the corporate bond market and the USTreasury market combined. And those two are roughly the same size.

I'm pretty sure that Corporations will have to pay more for their debt than the government and consumers will probably pay more than the corporations so the real interest rate on all borrowing is probably considerably above the 2.88% you quoted (although what the rate is on foreign financing I have no idea but it's probably not too far from the rate for the whole economy).

quote: Originally posted by Sten Sture Of course if the Government debt is being financed at 2.88% nominal and you have a 2% deflator, while the real GDP is growing north of 0.88%, the economy stands a very good chance of outpacing the Treasury debt since net tax revenue growth has a high correlation to real GDP growth. The figures you proposed for the result should actually be the other way around.

Sorry but you're making a huge implicit assumption here yourself - namely that said debt is not being added to, however it is being added to (the current account deficit was 4.8% of GDP in the second quarter) - using your example of someone making $100,000 and borrowing 3% of their income each year (again with 3% real income growth and 2% inflation) then even if the interest rate was at japanese levels (0.02%) this hypothetical person's debt/income ratio (and so, with a constant interest rate their interest/income ratio) would have risen 9-fold after a decade.

Here is an example spreadsheet to show you what I mean, you can fiddle around with the assumptions but I think you will find that unless you put in extreme figures (negative nominal interest rates or inflation rates of over 1000% a year) that the ratio's of debt and interest to income will always grow unless the borrowing ceases.

	05-09-2002 14:03									#219
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quote: Originally posted by pchang I think Roland will like this article http://moneycentral.msn.com/content...ecial=deflation US and Japan - more alike than you think

Thanx. Fleckenstein is one of my favourite bears, I just thought he was banned from CNBC....

I did a trick on Kautilya once in one of the bubble debates. I took a good post-bubble analysis from the BOJ and put it in present tense ommitting Japan. Was perfectly clear I was talking about the US to anyone.

Still, I'm now at roughly 50:50 for the odds of the US doing a Japan. The scariest thing are all the clueless economists out there. It's simply ****in' unbelieveable.

	05-09-2002 17:03									#220
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Hehe, unfortunately the most vocal people that write on economics are predominantly journalists, and hence I often share your opinion. That doesn't mean that real economists are clueless though. Most share your concern, although I along with most professionals would still put the probability at no more than 1/3, for good reason. There are some parallels to post-bubble Japan, but also key differences.

What is your line of work Roland?

	05-09-2002 17:18									#221
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"That doesn't mean that real economists are clueless though."

Well if you do not include the clowns on the FOMC in those, and the clowns in the so called blue chip forecast, and those at the OECD and IMF, then yes....

Seriously maybe 5-10 % of economists saw this coming say 2 years ago. Given the track record of bubbles from the UK, German reunification and Japan, it's simply unbelievable.

	05-09-2002 19:53									#222
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Roland is really a law professor.

	05-09-2002 19:54									#223
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Yeah, econ is just a hobby after I've seen what gets taught as econ at university...

	05-09-2002 20:33									#224
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Sten, we call 10 year stuff bonds too. (and also the other stuff with a shorter maturity) 30 year stuff isn't very widespread in Europe AFAIK.

	05-09-2002 21:56									#225
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at what level? I found there was a huge gap between econ for 1st and 2nd year undergraduates and econ for upper classmen and graduate students. The big difference was the level of math involved.

	06-09-2002 12:08									#226
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"I found there was a huge gap between econ for 1st and 2nd year undergraduates and econ for upper classmen and graduate students."

Uhm... you know that neither of those criteria make any sense in our system ?

Undergraduate college is roughly our Gymnasium, correct ?

	06-09-2002 15:13									#227
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quote: Originally posted by Roland Yeah, econ is just a hobby.......

Yeah I got that. Don't be so down on economists, we are a misunderstood bunch.

	06-09-2002 15:23									#228
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If you were understood wouldn't it be even worse ?

Ar least that's the way it is for lawyers.

	06-09-2002 15:53									#229
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Hehe you have it easy, except for everyone thinking you are all amoral, moneygrabbing devil-worshippers.

But that I could live with. You see non-qualified people don't presume to barrage you every day with ill-considered and incorrect opinions on a subject you have presumably spent years and years honing your knowledge. The cross that economists have to bear is that _everyone_ has opinions, with precious few taking the time to understand whether those opinions have any merit or not.

I applaud those that do take some time to understand what are key issues for the world economy, but of course these people are sometimes the most annoying of all. A little knowledge is a dangerous thing.

	06-09-2002 15:57									#230
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"You see non-qualified people don't presume to barrage you every day with ill-considered and incorrect opinions on a subject you have presumably spent years and years honing your knowledge."

You need to work on the arcane qualities of economics. Works well with law - but then you get the "explain it in a way I can udnerstand", which can be worse....

Only exception is oddly enough EU law. Every one and his dog has an opinion on curved cucumbers.

	06-09-2002 16:12									#231
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quote: Originally posted by Roland You need to work on the arcane qualities of economics. Works well with law - but then you get the "explain it in a way I can udnerstand", which can be worse....

You know for a while I tried. After much futile debate the realisation hit me that most people don't want to understand the economic issues they are spouting off about. Instead, they are content to have strong opinions and thus seem intelligent, regardless of the inherent merit of the opinions.

And you are right about explaining arcane things. Most of the time I can do a good job of cutting through the technical crap and explaining the heart of an issue, just something you get better at after teaching at university. However there are some points that although crystal clear to anyone with a good understanding of calculus are very hard to explain otherwise. In fact quite appropriately given the discussion above the dynamics of a deflationary spiral is one of these things.

	06-09-2002 16:17									#232
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"the dynamics of a deflationary spiral"

How is calculus essential for understanding the basic concept ?

	06-09-2002 16:56									#233
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I'll have a shot, because the basic points are easy. But understanding the dynamics and potential solutions to deflationary spirals (and why one macroeconomic outlook is similar or dissimilar to another) requires knowledge of the relevant models.

Let's take a story something like this. Country x has a huge boom in investment, which gets out of hand and capital is indeed misallocated. Now investment demand (a component of aggregate demand, which determines output, employment and the price level) is muted, at the same time as overcapacity due to prior investment leads to downward pressure on prices. A recession is a potential outcome, but it depends on the consumer sector. If the consumer can hold up aggregate demand whilst investment is flagging any downturn will be very brief and not that potent.

Country x is Japan and the US, but here the stories differ. Japan's bubble was widespread, including the property market. The US bubble was largely confined to one section of the stock market. When the Japanese bubble burst consumer weren't willing to hold up aggregate demand, and the deflationary spiral was allowed to start. Once deflation sets in it fuels itself.........there is no incentive to consume today if you believe deflation will continue........and it is characterising the role of beliefs in the story that makes it hard to explain without mathematics.

So the US bubble was not as widespread as the Japanese one, that is one of the key differences I alluded to earlier. The consumer was (and still just about is) doing a good job of holding everything. together. Another key difference is that institutionally Japan has problems........the BOJ blamed other govt institutions, and they blamed the BOJ. Noone wanted to take responsibility and get Japan out of the rut. Monetary and fiscal policy was woefully inept over the relevant period. Unfortunately the rut, once entered, is ever harder to escape.

The third difference is (was!) the state of corporate governance and the banking sector. The crisis was exacerbated by corruption here.

So (wow, long post, I hope this helps ), why is 50/50 on the US becoming like Japan too pessimistic in my professional opinion? Well a few months ago 1/10 would have been pessimistic, but things aren't quite as rosy right now. The formerly undisputed state of corporate governance in the US is now very much tarnished, there are signs that the bubble may have been slightly more widespread than previously thought. What is more the fed. is starting to make excuses, and the consumer is getting cautious.

However, the root causes still have a ways to go before looking anything like Japan. Personally I feel such a spiral cannot happen without some monstrous bad luck and policy errors that will not occur. I would say a 1/4 chance, maybe 1/3 if you catch me in a pessimistic mood. I'm not saying it can't happen........hell, economists believed liquidity traps were impossible 10 years ago.......but it requires a whole lot of sh1t to hit the fan yet.

	06-09-2002 17:36									#234
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I still don't see how calculus features there, but ok. Also I don't believe in liquidity traps or that deflation is Japan's real problem. But be that as it may....

"If the consumer can hold up aggregate demand whilst investment is flagging any downturn will be very brief and not that potent."

This does not take account of the supply side which suffers longer term from reduced investment levels. Also the US consumer has a very low savings rate, loads of debt and runs on asset inflation and equity extraction in housing. Neither are sustainable.

"Japan's bubble was widespread, including the property market. The US bubble was largely confined to one section of the stock market."

You do not think the US is in a housing bubble ?

"Another key difference is that institutionally Japan has problems........the BOJ blamed other govt institutions, and they blamed the BOJ."

And what was Alan's Jackson hole speech all about ?

"Monetary and fiscal policy was woefully inept over the relevant period."

How so ?

"The third difference is (was!) the state of corporate governance and the banking sector."

Replace Japan's banking sector with US structured finance and you have a similar situation.

"Well a few months ago 1/10 would have been pessimistic..."

I was at the 10 % chance back in 1999...

"but it requires a whole lot of sh1t to hit the fan yet."

Depends on what outcome you mean there. The US is due for some major rebalancing. The interesting question for me is whether the Fed can achieve a sort of low-growth equilibrium with all the crap they pull. The 50 % non-Japan is based on market forces overwhelming the Fed and getting a recession that liquidates all the malinvestment.

	06-09-2002 18:26									#235
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Some good points, some bad, and one awful one.

You are right on the points on sustainability in paragraph 3. The question is how imbalances correct themselves. If they do so in an orderly fashion a Japanese scenario is out of the question, period. Of course that is not assured........currencies overshoot on the way down........there may well be a fallout from property........Also, benign behaviour from the crucial oil market is by no means assured right now.

As to not believing deflation is Japan's problem, well, that's just silly. There are supply side issues, but these merely exacerbate the underlying problem. It is a demand side problem, period, and anyone who says otherwise is wrong.

"The 50 % non-Japan is based on market forces overwhelming the Fed and getting a recession that liquidates all the malinvestment"

This last paragraph is the awful bit. The notion that recession is somehow good because it removes the excesses of a boom is somehow karmic, makes sense right? Well, karmic it may be, but that does not stop it being catastrophrically wrong. And what's more it is a dangerous idea that must be dispelled at all costs. Bygones are forever bygones, current AD is what is relevant to potential double dips and in the extreme the dreaded deflation. The fed and monetary policy are the first line of defence against any slide into deflation - to believe otherwise is foolish in the extreme. I realise it is attractive to make comments about the useless fed, and how they are shortsighted etc........I like to do it myself at times .......but believe me the guys at the fed know far far more about these issues than any well-meaning law professors.

	06-09-2002 18:35									#236
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"As to not believing deflation is Japan's problem, well, that's just silly."

Quite categoric on your part, but Japan has put in a lot of demand. At points the consumer side got some traction, and vast deficit spending. Deflation also came a bit later (mid 90s). And if deflation is such a problem, what about the pre-1930s boom and bust cycles that saw deflation ? Why did the economy rebound ?

"This last paragraph is the awful bit."



You'e awfully conventional in your economics.

"Bygones are forever bygones, current AD is what is relevant to potential double dips and in the extreme the dreaded deflation."

With a messed up capital stock ? AD can hold you above water, but any recovery will lapse.

".....but believe me the guys at the fed know far far more about these issues than any well-meaning law professors."

Yeah, like the Fed knew so much more than Hayek in 1929, right ?

	06-09-2002 18:45									#237
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DrSpike, do you believe in the Taylor rule? What would you have to say on the fact that the BOJ and the Fed acted in exact accordance to it? (I'm not sure where I had seen that grapgh though)

And please, don't give me any of that "you're are wrong because I'm right" crap. I'm sure you are well capable of giving substantial arguments.

	06-09-2002 19:11									#238
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Hey Colon, you're back from GP-land ?

	06-09-2002 19:24									#239
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No, I'm still making use of George's crappy dail-up but I'll be leaving in an hour and a half.

BTW, we had a discussion about the impact of the index tracking strategy. Would anyone happen to know how much of the stock market funds that prescribe to this strategy control?

	06-09-2002 19:34									#240
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Hey you know it's good I've saved the first Irving-Fisher-thread to my HD. So you can find jewels of Fed competence from march 2000 by former member Wayne Angell:

http://money.cnn.com/2000/03/20/eco..._wallstreetwag/


"This economy can go on expanding for another nine years. This is a wonderful new era that couldn't have happened without a vigilant Fed. The Fed's expertise in developing the business cycle has reached a level where we no longer have the boom and bust after-effect of it."

"The wealth effect that comes from Americans getting wealthy in the stock market and the real estate market does tend to create a lot more economic activity and with that prices can rise."

And he's a bright fellow compared to McTeer...