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Re: [TNF] Bubble Everywhere

Warren,

I think your view of equilibrium between loan and savings, while valid
for the golbal economy, does not hold for the US economy because of
dollar hegemony.

Henry

See:
Stephen Roache on US savings

http://www.morganstanley.com/GEFdata/digests/20030707-mon.html#anchor0

Unfortunately, America’s national saving rate is plunging into the
danger zone. In the first quarter of 2003, gross national saving --
households, businesses, and government units, combined -- fell to 14.0%
of gross national product; that’s down 1.5 percentage points from the
year-earlier rate and fully 4.8 percentage points below the post-1960
norm of 18.8%. But that’s only the tip of the iceberg.

The problem is that most of America’s national saving now shows up in
the form of depreciation -- funds that are earmarked for the replacement
of worn-out physical assets. In the first quarter of 2003, such
depreciation accounted for fully 94% of total saving. That means that
the net national saving rate -- that portion of national saving that is
available to fund the actual expansion of productive capacity -- fell to
a record low of 0.7% of gross national product in the first period of
this year. That’s off sharply from the year-earlier reading of 2.3% and
is well short of the nearly 5% average of the 1990s and the 11% norm of
the 1960s. There are few macro gauges that tell us more about an
economy’s internally generated growth capacity. Sadly, America has all
but depleted its reservoir of net saving -- the sustenance of
longer-term economic growth.

This problem has profound implications for the US and the rest of the
world. Lacking in domestically generated net saving, America has had to
import surplus saving from abroad in order to grow its economy. In the
parlance of the accounting framework noted above, the US
saving-investment identity has been finessed by the willingness of the
rest of the world to provide the funding. In order to attract that
capital from abroad, America has had to run massive trade and
current-account deficits. In the first quarter of 2003, the US
current-account deficit hit a record 5.1% of GDP, or $545 billion (at an
annual rate) -- an annualized shortfall that must be financed by capital
inflows of slightly in excess of $2 billion per business day. Never
before has the world had to finance an external imbalance of that magnitude.

So far, it’s been a “free lunch.” That is, a growth-starved world has
been more than content to send its surplus saving to America without
demanding compensation for investing a disproportionate share of its
capital in dollar-denominated assets. But the United States is about to
up the ante on this arrangement. Courtesy of deepening fiscal deficits
in the government sector -- not just at the federal level but also for
states and localities -- there will likely be further downward pressure
on US national saving in the years immediately ahead. Morgan Stanley US
economist David Greenlaw calculates that fiscal stimulus worth about 1.5
percentage points of GDP will be implemented over the next four quarters
alone. That suggests that the federal budget deficit as a share of GDP
will surge into at least the 4.0% to 4.5% range by mid-2004 -- a
dramatic widening from the 2.7% gap as measured in the national income
accounts in early 2003. Barring the unlikely event of a spontaneous
resurgence of private saving, that implies America’s net national saving
rate could well test the seemingly sacrosanct “zero threshold” within
the year. And if that’s the case, the gaping US current-account deficit
will have to widen further, probably into the 6.5% to 7.0% zone.

In my view, a net national saving rate that falls to zero could well
represent a critical juncture for the US and for a US-centric global
economy. It’s one thing to reduce national saving below historical norms
and rely on the generosity of foreign savers to make up the difference.
But it’s another thing altogether to abdicate that responsibility
completely and turn over the funding of net investment to foreign
savers. And of course it doesn’t stop there. The “zero line” is just a
number. There is no reason why net national saving couldn’t go into
negative territory, pushing the current account even deeper into
deficit. Given the paucity of private sector saving and rapidly
deteriorating government deficits, that’s exactly what seems likely to
be in the cards within the next year.

That would be a dangerous first in the modern-day post-World War II era:
The engine of the global economy has essentially run out of fuel and
must now turn to the rest of the world for a supplement. In the end,
that doesn’t work for America and it doesn’t work for the rest of the
world. A negative net national saving rate leaves little doubt that an
ever-profligate US economy is on a collision course with its own future.
It unmasks the ultimate in “short-termism” -- a preference for current
consumption over the longer-term imperatives of investment. It’s a macro
outcome that can only be financed by ever-rising indebtedness -- both
domestic and foreign. America has record levels of private sector
indebtedness and is now increasing its claims on the world’s saving
pool. That perpetuates an exceedingly vicious cycle -- in effect,
forcing the rest of the world to keep saving in order to finance the
excesses of US consumption.

To me, all this smacks of a looming flashpoint. America’s negative net
national saving rate could well be the wake-up call to the rest of the
world that the days of US-centric global growth are nearing an end. The
denial won’t be easy to crack. In a mercantilist world, with
cross-border trade the main lubricant of growth, there is a great
incentive to ignore external imbalances -- in effect, to pretend they
don’t matter. In such a regime, nations are more than content to forsake
domestic demand and maintain undervalued currencies -- thereby exporting
goods, services, and surplus saving to consumer-led economies like
America. Some have argued that there is no limit to such an arrangement,
especially given America’s role as the world’s reserve currency. I have
my doubts. First of all, the dollar is no longer the world’s sole
reserve currency -- the euro is now an emerging alternative. Moreover,
reserve currencies do not deserve special dispensation from economic
fundamentals -- they can also become undervalued and overvalued. That’s
exactly what has occurred to the US dollar repeatedly over the past 25
years. And I suspect it’s about to happen again.

Warren Mosler wrote: 

This "recovery" is engineered by the Fed pumping
liquidity into the
economy, not by fundamentals.



They lowered interest rates a bit, but beyond that
there's no such thing as 'pumping in liquidity.'

  The problem of an

interest rate policy is
that its effectiveness has been diluted by
derivatives and swaps.



The problem is that for every $ borrowed there is a $
saved, and there are $3T additional (net) savings that
consists of govt debt held by non govt agents.
So dropping rates cuts non govt income somewhat.  And
the only channel for expanded agg demand from interest
rate policy is a sufficiently large propensity to
spend of borrowers vs savers to more than over come
that.


 The

Fed just released its minutes on the Discount Rate
meetings between
March 31 and May 1, 2003. The San Francisco and
Boston banks voted for a
quarter point cut in the discount rate on April 24
and the NY Bank voted
May 1 to cut half a point.  The Fed cut the DR
quarter point in June to
2% having kept it constant in May.  The FFR was cut
to 1%. A whole
percentage point spread is considered big, the norm
between the DR and
the FFR is normally half and point.  The basis for
the cut was given by
SF and Boston as "uncertainty in geopolitical
environment, persistence
in business risk aversion, and risks of a weak
economy."  The NY Bank
cited "unemployment, retail pessimism, lack of
business investment."

Interest rate policy in this complex financial
system tends to
neutralize its own moves, shifting the gain and pain
from sector to
sector and from market participants to other market
participants, while
stubbornly keeping 3/4 of the economy down.



Yes, partially for reasons I stated above.

  The 1/4

that is up
temporarily is viewed as signs of "recovery", giving
false hopes and
speculative moves.



Yes.  Only sufficient deficit spending can release the
fiscal drag dampening the US economy.  Japan has done
that and is on the mend.

w

 We have seen that happened in

Japan for more than a
decade. The difference is that in Japan, the
government absorbs the
pain.  In the US, the pain is passed on to the
public immediately, but
1/4 of them will keep the spending limping along.
The other difference
is that the US has a more aggressive debt culture
than Japan.  Just
don't get caught swimming without your trunk when
the tide goes out.

Henry C.K. Liu























 So, it


is not
surprising at all that the stock markets are


holding

up as
the bond markets are dipping.


Right, that's the recover story- Fed will raise 

rates

back from 'distress' levels to 'normal' levels 

quickly

as soon as the economy recovers for real.




   Henry's warnings are cogent, however.  If
rising interest
rates in Japan pull Japanese money home, the


dollar

could
really take a hit and all kinds of funny stuff


could

happen. 


Doubt the boj is ready to let the yen get strong.



Also, clearly the housing bubble is fragile as
mortgage
rates in the US have almost surely bottomed out.



True.



Why do we see references to "Bernanke 

stepping

in
to hold up the bond market.?"  The power on the


Fed

remains Alan Greenspan, not Bernanke. Is this 

more

Gang8 fantasies? 


I vote yes.

Also, check out the plan we submitted to St. Croix
regarding the public housing authority at
www.mosler.org.  It should apply to most any


public

housing around the world.

Warren



Barkley Rosser
----- Original Message -----
From: "Gary Santos" <evs@xxxxxxxxxxxx>
To: <TheNewForum@xxxxxxxxxxxxxxx>; "EGroup PKT"
<pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, July 07, 2003 12:44 PM
Subject: Re: [TNF] Bubble Everywhere




The article below supplements what Henry just 

posted. I continue to wonder


if Bernanke is stepping in to hold up the bond 

market. Even as I write I
am


surprised that the rally in the stock market 

world

wide continues. Is the


liquidity coming from the bond market? The rally 

in the stock market is a


bet on the theory that inflation will increase 

real asset prices and as


liquidity is created from bond liquidation, more 

so if the Fed is
supporting


the bond market at these lofty prices, the rally 

in the market will


continue. Nick, do you have yields on the 10-year 

note going back several


years? It would be great if you could post them 

in

chart form.


Money has nowhere of real substance to go to but 

the choice of the moment


are stock market bets. I would think money will 

eventually turn to the


currency markets and another wild ride will 

develop. I think this is what


Henry means when he said that all markets are now 

trading markets. Money


will flow from one market to another. I would 

think that gold will benefit


as a consequence.

Any opinions out there?

Gary Santos



US Treasuries hammered for second day, Fed 

faulted

Thursday June 26, 4:37 pm ET
By Wayne Cole



http://biz.yahoo.com/rf/030626/markets_bonds_6.html

(Adds late prices, comment)
NEW YORK, June 26 (Reuters) - Treasuries were


hammered again on Thursday
as


a massive corporate offering from GM tempted away 

investors still smarting

from what they saw as the Federal Reserve's 

half-hearted easing in
monetary


policy.

The benchmark 10-year note shed over a point in 

price for a second day


running while yields shot to six-week highs above 

3.50 percent.


Yields have risen over 30 basis points since the 

Fed delivered its quarter


percentage point cut in interest rates, so 

undoing

much of the recent
easing


in financial conditions.

Meanwhile, such was the deluge of demand for 

General Motors Corp.'s


(NYSE:GM - News) bond issue that it was 

repeatedly

raised in size until it


totaled $17 billion, making it the largest 

corporate bond sale in history.


As a result, investors dumped Treasuries both to 

make room for the


higher-yielding paper and to hedge against 

adverse

movements in yields on


the deal.

"It's been another wild day," said J.P. Marra, 

managing director of


government bond trading at Lehman Brothers. "The 

GM deal was a big part of


the down-move today. It's such a lot of paper 

and,

what with investors
being


upset with the Fed, it's been a double whammy."

The market took further umbrage when minutes of 

the Fed's previous meeting


in May showed members played down the risk of 

deflation, so pushing out
any


chance of it adopting unconventional measures 

such

as buying longer-date


Treasuries.

Marra feared further pain for bonds in the short 

term, but also felt
yields


were nearing levels that would be attractive to 

many longer-term players.


"The Fed disappointed a lot of people but at 

least

it looks like keeping


rates around 1.0 percent for a long time to come. 

Now with the five-year


nearing 2.5 percent, it's starting to offer a 

compelling carry for


investors," said Marra.

The five-year note (US5YT=RR) lost a hefty 19/32 

in price on Thursday, so


forcing its yield to 2.45 percent from 2.32 

percent on Thursday and a
recent


record low near 2.00 percent.

The carnage was widespread, with the two-year 

yield (US2YT=RR) leaping to


1.40 percent from 1.29 percent and a trough of 

just 1.09 percent on


Wednesday.

The 10-year note (US10YT=RR) sank a full point in 

price for a yield of
3.53


percent from 3.41 percent. The 30-year bond 

(US30YT=RR) collapsed 1-18/32,


taking its yield to 4.56 from 4.46 percent.

MISUNDERSTOOD, AGAIN

The spike in yields will likely see mortgage 

rates

rise and could crimp
the


rush of refinancing that has been supporting 

consumer incomes. It can also


become self-feeding since holders of mortgage 

debt

will have less reason
to


hedge against prepayment and may sell some of 

their Treasuries, so forcing


yields yet higher.

That is an outcome analysts assume the Fed would 

want to avoid and there
was


talk in the market that officials were perturbed 

by the jump in yields.


"Apparently the Fed thinks it's been 

'misunderstood' again," said one
trader


at a primary dealer. "Well, if they just said 

what

they mean instead of


obscuring it in central bank speak, we wouldn't 

have these problems."


He suspected Fed board members would soon be 

offering calming words to the


market, trying to pull yields back down, and 

noted

Chairman Alan Greenspan


would have a perfect opportunity to clarify their 

policy when he testifies


to the House in mid-July.

Meantime, the market would be extra-sensitive to 

the flow of economic data


fearing that any signs of strength will reduce 

the

chance of further
policy


moves, conventional or otherwise.

Thursday's numbers were too mixed to offer much 

of

a guide. Weekly jobless


claims came in at a lower than expected 404,000, 

but first quarter gross


domestic product growth was revised down to 1.4 

percent from an already


sluggish 1.9 percent.


http://bonds.yahoo.com/rates.html
U.S. Treasury Bonds
Maturity Yield Yesterday Last Week Last Month
3 Month 0.77 0.75 0.73 0.94
6 Month 0.90 0.88 0.89 0.96
2 Year 1.32 1.29 1.28 1.23
5 Year 2.55 2.48 2.40 2.26
10 Year 3.70 3.65 3.51 3.34
30 Year 4.72 4.68 4.55 4.39




----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>;


<a-list@xxxxxxxxxxxxxxxxxxx>;


<TheNewForum@xxxxxxxxxxxxxxx>
Sent: Monday, July 07, 2003 11:48 PM
Subject: [TNF] Bubble Everywhere




The burst of the equity bubble produced the bond 

bubble and the housing


bubble. As investors fleed the stock market, 

funds poured into bonds,


bidding up prices and lowering effective 

long-term interest rates.  As


the Fed lowered Fed Funds rate targets, low 

mortgage payments pushed up


housing prices, producing a housing bubble. The 

burst of the bond


bubble will threaten the housing bubble, the 

bursting of which will


exacerbate aggregate demand in construction, for 

labor, for home


appliances and supplies, which will in turn 

affect corporate earning


which will torpedo the current "recovery". The 

collapse of the Japanese


bond market will also force the Japanese to sell 

US Treasuries, adding


to the problem. The smart money is already 

borrowing short term,


through the repo market and its related 

instruments, to invest in


10-year treasuries. Another debt bubble is 

building.


Bubbles are now pathological. Fund managers are 

all forced to respond


to quarterly results. Herd behavior is a given. 

The aim is to beat the


market, not to invest in the market. S&P Fixed 

Income Committee has just


recommended a cut back of 5% on 10-year bonds in 

fixed income


portfolios, in response to falling bond prices. 

The 10-year bond is now


a terminal instrument in that the rate advantage 

in the currenct


deflationary period is not expected to 

compensate to the price fall due


to eventual inflation over its 10-year life 

span.  Thus 10-year bonds


are now a short-term trading instrument, not a 

long-term investment


instrument. In fact, if you do not follow the 

market daily, you have no


business being in the market. So long to the 

long term investor.  When


all investments are short-term, it is a trader's 

market, turning the


economy into a horse race. The difference is 

that in a horse race, the


betting odds on a horse do not affect its 

performance. That is not true


in an economy driven by equity and credit 

prices.  The whole market can


bet on the wrong sector and make it a winner in 

the next quarter, but it


may finish last in the race.

Wealth preservation is now a losing game. Asset 

is becoming a


liability.  Income is all.


Henry C.K. Liu


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=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
340-719-8804 Fax
Primary email contact:  mosler@xxxxxxxxxxxxxx

__________________________________
Do you Yahoo!?
SBC Yahoo! DSL - Now only $29.95 per month!
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=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
340-719-8804 Fax
Primary email contact:  mosler@xxxxxxxxxxxxxx

__________________________________
Do you Yahoo!?
SBC Yahoo! DSL - Now only $29.95 per month!
http://sbc.yahoo.com



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