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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