Message Font: Serif | Sans-Serif
 
No. of Recommendations: 6
Seems like the one of the reasons Mr. Market has become anxious is the rise in interest rates, and fears of much more to come. And he has become even more depressed about Berkshire.

But--maybe I'm missing something here--this seems like good news for Berkshire. For one of two things seems likely: 1) Berkshire makes a lot more interest on its more than $100B of cash, or 2) the market declines to the point where Berkshire can deploy that cash for even far more attractive returns. Hard to see how it's a negative for the business.
Print the post Back To Top
No. of Recommendations: 15
For one of two things seems likely: 1) Berkshire makes a lot more interest on its more than
$100B of cash, or 2) the market declines to the point where Berkshire can deploy that cash for even
far more attractive returns. Hard to see how it's a negative for the business.


Probably depends on how long the situation lasts and why it's happening, but you're probably right.

The bigger problem, in my view, is that I have yet to be as convinced as everyone else that rates (other than short term ones) are rising much or soon.
I've been taking it as it comes rather than having expectation of change, and so far "lower for longer" has been the reality.
I see no firm evidence that rates can't stay low for an arbitrarily long time.

Jim
Print the post Back To Top
No. of Recommendations: 0
mungo: "The bigger problem, in my view, is that I have yet to be as convinced as everyone else that rates (other than short term ones) are rising much or soon."

I don't study it as diligently as you, but I have harbored similar concerns for several years. The problem is that you can appear to lose an awful lot of opportunity costs waiting to be proven right.
Print the post Back To Top
No. of Recommendations: 11
The bigger problem, in my view, is that I have yet to be as convinced as everyone else that rates (other than short term ones) are rising much or soon.
I've been taking it as it comes rather than having expectation of change, and so far "lower for longer" has been the reality.
I see no firm evidence that rates can't stay low for an arbitrarily long time.


As with any price (in this case interest rates) setting situation, the answer will be determined by supply and demand. Certainly there is no dearth of supply. In FY19, which starts in Oct. of this year, deficits are expected to exceed 1.2 trillion dollars. The Fed is going to dump another 600 billion of bonds on the market. The key question is exactly who is going to buy 1.8 trillion of government bonds and will they do it current rates? The situation will only worsen in the long run with exploding entitlement spending on baby boomers.

For most of the last decade we had central banks printing money to buy government bonds. But that is no longer the case with most of them pivoting to QT from QE. Not only will they stop buying, they will shrink their balance sheets by selling bonds.

The "Savings Glut" is mentioned frequently as the reason for low rates. I don't fully understand this issue. Exactly who are these entities with trillions of dollars of savings and will they be able to absorb this ever increasing supply of bonds? When the PBOC or BOJ expands its balance sheet to buy US bonds, is that included in the savings glut even though they are simply printing money?

I can't imagine households or corporations lining up to buy trillions of dollars of treasury bonds at such low interest rates. And central banks are no longer doing so or may not choose to do so for political reasons. So who is left? Wouldn't rates need to go higher to entice buyers?
Not arguing, just asking.
Print the post Back To Top
No. of Recommendations: 39
I've been on a local bank board for the past 30 years as the local one branch entity morphed through successive mergers into now being part of a truly big regional bank. Prior to 2007 it was commonplace to see efficiency ratios under 50%. Today getting into the 50's is considered excellent. The Net Interest Margin was much larger pre-2007 than today's significantly reduced spreads. Perhaps the most telling change is how loan demand is significantly less at the branch level than pre-2007. The recession took out the weaker players in the local market. The remaining strong players do not need loans. Banking makes money from weaker players that need periodic loans. Players in this case is referring to local commercial companies such as contractors, service companies and the like. Construction is not what it was prior to 2007. I travel the nation and see construction in the largest metro areas but not in the heartland where the other 50% of the U.S. population lives. In my county seeing a new home in the framing stage is a wow, haven't seen one of those in while kind of event. This is not to say we are impoverished or the local economy is going to hell. It is not going to hell. The local economy is stable and growing slowly. What is most worrisome in looking at the local branch's numbers and also the larger region's numbers is how loan demand is not growing. There are way more deposits than loans even now in 2018 and it was the opposite situation pre-2007.

Before going further, I must tell you I have made a lot of money buying financial stocks in the aftermath of the recession and am still holding those shares. However, I am not kidding myself with the prospects going forward. I do not plan to buy more. Rather, it is more like what our implied mentor, Warren Buffett, has been teaching us with his holdings in Coca-Cola and American Express et al. I look at our original investment and the returns we are getting on the original investment. All new cash is in a separate category for investment into future stocks with marvelous margin of safety aspects AND hopefully good business moats going forward.

Back to the banking aspect of this post, speaking from my local community perspective (my business travels gives me insight that it is happening in most communities) my feeling is there have been major shifts taking place under our noses over the past ten years that are leading to oligopoly and monopsony situations. Last week I read an article about agricultural equipment mechanics facing reduced wages and decreased opportunities because of dealer consolidations in their county somewhere in Minnesota. In my town the local non profits like the local YMCA, United Way and other similar organizations are no longer dealing with numbers of locally owned firms they once did prior to 2007 as the local firms have sold out to private equity firms or have merged with larger entities (community banks are now non-existent in our town). The employment is still here in aggregate numbers but the ownership is not.

This all winds back to the banking situation regarding commercial loan growth being flat. Banks are regulated utilities. They are all cutting back on brick and mortar locations in an increasing rate. The Millenials and upcoming Digital Natives do not darken the doorways of banks. They do not even use the teller machines as Apple Pay, PayPal, Square and other attendant electronic payment systems are their cash management system.

I don't think the world is going to hell in a hand basket. I also do not think the world is returning to the halcyon banking profit days of the 1990s either. Nor do I think blindly putting money into passive index funds here in 2018 is answer. My path forward is to hold what has appreciated and look upon it for its return on original investment (as Mr. Buffett does with Coca-Cola and American Express) and to put new cash into excellent margin of safety investment vehicles as opportunities arise.
Print the post Back To Top
No. of Recommendations: 0
Following are WFC's total earning assets, total loan and NIM in 2011 and 2016

2011 2016
Total earning assets $1102B $1711B
Total loan $757B $949B
NIM 3.94% 2.86%

Total assets grew at 7.6% and loan grew at 3.8% annually. If WFC grows total earning assets at the same 7.6% annual rate (except 2018), and NIM recovers to 3.94% in 5 years, total earning assets would be $2467B and net interest income would be $97B before tax, assuming the same 2016 non-interest income of $40b and non-interest expense of $54B (2018 estimate), total net income before tax would be $83B and $67B after tax, that's $13.74 per share. Assuming total earning assets grows at 4% annually and NIM at 3.94%, in 5 years, net interest income would be $82B before tax, with $40 non-interest income and $54B non-interest expense, after tax earning would be $55B, $11.2 per share. That's optimistic but possible.
Print the post Back To Top
No. of Recommendations: 2
Correction: assuming 55% efficiency ratio would be more appropriate. For the same assumptions above in 5 years:

7.6% annual growth rate of earning assets, ($97B net interest income + $40B non-interest income) * 45% = $61B income before tax, $50B after tax, $10 per share.

4% annual growth rate of earning assets, ($83B net interest income + $40B non-interest income) * 45% = $55B income before tax, $44.8B after tax, $9 per share.
Print the post Back To Top
No. of Recommendations: 1
I can't imagine households or corporations lining up to buy trillions of dollars of treasury bonds at such low interest rates. And central banks are no longer doing so or may not choose to do so for political reasons. So who is left? Wouldn't rates need to go higher to entice buyers?
Not arguing, just asking.


The Federal Reserve can always "print" the money and buy the bonds (sometimes hidden by having agents do it; e.g., the Bank of Belgium). If you or I did it, it would be called counterfeiting and you or I would go to jail. But if the Federal Reserve does it, it is OK. But in both cases, the result is the same: more inflation. The Working Group on Financial Markets (a.k.a. the Plunge Protection Team) could do it too, but now I think they are buying stock market index funds with the money. Maybe they stopped last Friday.
Print the post Back To Top
No. of Recommendations: 0
Inflation always and everywhere a monetary phenomenon? Looking at St Louis Fed M1 and M2 and some evidence. Huge spike in M1 coincides with collapse of the US dollar 2001-2008. But where's the inflation, professor?

Asset inflation no doubt about it but elsewhere?

Why does Berkshire keep finding itself in these tawdry General Electric and Wells Fargo management fiascos? Bad for the reputation. Risky

Anyway political risks finally being properly discounted. Equity markets as always a lagging indicator. What took so long to factor growing political tin foil hat hysteria? I dunno :)
Print the post Back To Top
No. of Recommendations: 0
Maybe interest rates will go up. Maybe not.

My point is that it is better for Berkshire if they do, so the greater-than-average decline in the shares over this past week doesn't make much sense to me. Maybe "the market" knows something else about Berkshire?

Even Buffett pointed out in last annual meeting that for Berkshire to grow 10% annually for next decade, a moderate increase in interest rates would be required.

As far as short vs long-term rates, as long as the short-term rates increase, that's fine for Berkshire, as they're never going to be much in long-duration. However, increases on the longer end would be more beneficial in tempering private equity (although there is already some benefit to Berkshire as private equity appears to have lost interest deduction with the new tax bill...whereas Berkshire generally pays cash).
Print the post Back To Top
No. of Recommendations: 4
My point is that it is better for Berkshire if they do, so the greater-than-average decline in the shares
over this past week doesn't make much sense to me. Maybe "the market" knows something else about Berkshire?


Well, though I doubt the price movement is anything rational, note that interest rates have been falling the last few days, not rising.
Two year and ten year have both pulled back from their recent highs Thursday and Friday respectively.
So...lower interest rates hurt Berkshire disproportionately?

I'll go with "random noise".

Even Buffett pointed out in last annual meeting that for Berkshire to grow 10% annually for next decade, a moderate increase in interest rates would be required.

This is an interesting thought.
But really, it would be a much more interesting and useful statement if converted into real growth.
I'm fine with 8% growth in book/share if there is zero inflation, but would be relatively unhappy with a 10% growth rate if it's accompanied by 3-4% inflation.
I point this out because it's not a rise in interest rates that's good for Berkshire, it's a rise in real interest rates.
And of course it's not the increase in book/share that does us any good, it's the increase beyond inflation.

For the last year it's not inflation but the currency move that's killing me.
Bigger price, but that's measured with tinier dollars. A trade weighted dollar buys 13.2% less stuff than at the start of last year.
So the rolling-four-quarter rise in (USD) book/share of +14.4% is really +1.2% in global purchasing power, no matter where you live.
Less the weighted average inflation rate among the US and its trading partners, so basically a small negative number.
The good thing is that such currency moves tend to be in large part transient or cyclical.
There are also good years, not just bad years.

Jim
Print the post Back To Top
No. of Recommendations: 12
Some more food for thought on interest rates.

Trump's budget director Mick Mulvaney confirmed the 1.2 trillion deficit number earlier today in an interview with Fox News. He said, "The additional spending could increase the deficit to about $1.2 trillion in 2019, and there’s a risk that interest rates will spike as a result".
https://youtu.be/8XaVF6FLmdo

For comparison, the deficits for the last 5 years (2013 - 2017) were 679, 485, 438, 585 and 666 billion respectively. Makes you wish for the late nineties when the govt ran a surplus for 4 straight years (98 - 01) and there was even talk of the dangers of the debt getting eliminated entirely.

The FOMC meetings are only to decide whether to keep raising the Federal Funds Rate. The Fed's balance sheet normalization plan is actually on auto pilot. 600 billion will roll off in FY 2019.
https://www.newyorkfed.org/markets/opolicy/operating_policy_...

That's a total of 1.8 trillion of treasury and agency bonds that the market has to absorb. Mulvaney actually says that last week's sell off was triggered not because the economy was overheating, but because the Treasury reached out to some of the primary dealers telling them to anticipate the additional debt. I thought that was a pretty incredible thing to say. Just for some perspective on this amount, it is twice the size of the Fed's entire pre-crisis balance sheet which stood at only 900 million in 2008.
https://fred.stlouisfed.org/series/WALCL

Will foreign buyers step in? If you look at current major foreign holders, the numbers don't look that impressive to being with. Only China and Japan currently hold more than a trillion of US treasuries. The other countries have only a few hundred billion each.
http://ticdata.treasury.gov/Publish/mfh.txt

The "2013 Bernanke taper tantrum" high, which was actually reached in Jan 2014, was 3.01 for the 10YR and 3.93 for the 30YR. The 10YR at 2.83 is almost there, whereas the 30YR at 3.14 has some ground to cover. I guess 3% and 4% respectively are the levels to watch.
https://www.treasury.gov/resource-center/data-chart-center/i...

Mortgage rates are at 4 year highs with the 30YR Fixed at 4.5%. How much higher can they go before the housing market rolls over.
http://www.mortgagenewsdaily.com/consumer_rates/835450.aspx

It will be interesting to see how all this unfolds. Whether buying or selling, it's a good time to put in some seemingly unrealistic limit orders. As the "low vol, low rates" regime unwinds in the coming weeks and months, I bet we will see more wild swings and surprising prices.
Print the post Back To Top
No. of Recommendations: 4
Makes you wish for the late nineties when the govt ran a surplus for 4 straight years (98 - 01) and there was even talk of the dangers of the debt getting eliminated entirely.


There really was no surplus, at least in the way normal people would use that term. The Federal debt went up every year throughout that period. And anyone who was talking of the debt being eliminated entirely was quite out of touch with reality and history.
Print the post Back To Top
No. of Recommendations: 1
Zzorac,

I keep wondering what will be the “trigger” that causes a market panic. In 2008 it was a strange mortgage derivative nobody really knew much about. Could it be that the thing that causes a crash this time is simply a bigger than expected interest rise?

Or maybe a combination of unease over rising rates (which I think everyone thinks is coming) causes increased volatility, combined with some exogenous event that nobody really sees coming. That seems more likely IMO.
Print the post Back To Top
No. of Recommendations: 2
"Mortgage rates are at 4 year highs with the 30YR Fixed at 4.5%. How much higher can they go before the housing market rolls over.(?)"

Perhaps a lot higher:

https://fred.stlouisfed.org/graph/?g=NUh
Print the post Back To Top
No. of Recommendations: 5
<It will be interesting to see how all this unfolds.>

As Dick Cheney famously lamented, "Deficits don't matter."
I suppose we will see if that's true.
On top of a tax cut that will boost deficits by $1.5 trillion over the next 10 years, Congress last week passed a spending bill that could add an additional $300 billion in iou's.
According to the Committee for a Responsible Federal Budget, the spending deal and the tax bill could add $4 trillion to the national debt over the next decade.
Does anyone know of any economic theory that prescribes adding huge amounts of debt when the economy is at full employment? Keynes would suggest we are in for an expansion in the trade deficit, a falling dollar, and higher inflation.
And by the way the Shiller PE is currently 32 (The second highest in history.)
The current S&P 500 Price to Sales Ratio is 2.18 (The highest in history.)
Total Market Index to GDP comparison is about 138%. (During the past forty years, the TMC/GNP ratio has varied widely. The lowest point was about 35% in the recession of 1982, while the highest point was 148% during the tech bubble in 2000.)

Best Wishes to All,
Stable G
Print the post Back To Top
No. of Recommendations: 4
I bought a brand-spanking new home in the 1980's. My mortgage rate was 13% but the builder "bought down" my mortgage to 9% and I was thrilled. Actually at the time, even 13% wasn't considered too bad. My parents mortgage on a home they bought many years prior was 4%. I thought 4% would be unobtainable ever again. I guess it depends upon what we get conditioned to. I also bought 4-6 year IRA CD's for my wife and I from BAC yielding about 14%.
Print the post Back To Top
No. of Recommendations: 2
Hi, Broken Record here.

Makes you wish for the late nineties when the govt ran a surplus for 4 straight years (98 - 01) and there was even talk of the dangers of the debt getting eliminated entirely.


I'll let someone else do the job here. Please see:

http://www.businessinsider.com/how-bill-clintons-balanced-bu...

That's a total of 1.8 trillion of treasury and agency bonds that the market has to absorb.

Primary dealers, more or less, *have* to participate in Treasury auctions. There is no question of
"will the market be able to absorb". All that "limits" the amounts that can be bought in the auction
are total reserves in the system. However, reserves are more or less supplied on demand by the Fed
(especially in the case of Treasury auctions because the Fed is the fiscal agent of the government).

Please see:

https://www.newyorkfed.org/markets/pridealers_policies.html


What is interesting is the fact that the Fed has announced its intention
to drain reserves from the system. On the other hand, deficit spending (all other things being
equal) increases reserves in the system. However, both can (and will) be done - this is what bond
sales by the government, and the Fed roll-off, accomplish (drain reserves from the system).

The Fed and the Treasury work hand in glove. The Federal Government's bond sale operations should
really not be thought of as "borrowing" operations. They are "reserve and money supply management"
operations. Unfortunately, this trips everyone up because everyone thinks of "bonds=debt", this is
just unfortunate nomenclature when discussing U.S. Federal "debt" (which is nothing like debt of a
household or corporation).

Will foreign buyers step in? If you look at current major foreign holders, the numbers don't look that impressive to being with. Only China and Japan currently hold more than a trillion of US treasuries. The other countries have only a few hundred billion each.

Foreign governments do not issue dollars, only the U.S. government does. Every single dollar that,
say the Chinese, hold came from the U.S. in the first place (imports/exports). All that foreign
governments do is decide whether they want to hold these in the form of reserves at the Fed or in
the form of (higher interest paying) Treasurys. The only way the rest of the world can decrease its
holdings of dollars/Treasurys is by buying things from the U.S. (goods or the sort of scenario
envisioned by Buffett in his sharecropper society thought experiment).
Print the post Back To Top
No. of Recommendations: 4
Inflation always and everywhere a monetary phenomenon? Looking at St Louis Fed M1 and M2 ...

My tip: if you're interested in monetary phenomena, don't look at M1 and M2.
They don't give any meaningful information at all.
There is too hard a line drawn between some big things that are included and others that are not included but functionally nearly equivalent.

Look at divisia money supply instead.
Which, as it happens, has been growing rather smartly lately, after many years in the doldrums.
Up 5.24% in calendar 2017.
The trailing five year rate of change is up to +3.6%. Four years ago the trailing five year rate of change was only +0.4%/year.

Jim
Print the post Back To Top
No. of Recommendations: 4
All that "limits" the amounts that can be bought in the auction are total reserves in the system. However, reserves are more or less supplied on demand by the Fed (especially in the case of Treasury auctions because the Fed is the fiscal agent of the government).

Above doesn't sound right to me. Right now the Fed is not buying any treasury securities. All new supply in treasury auctions must be bought by other buyers.

What is interesting is the fact that the Fed has announced its intention to drain reserves from the system. On the other hand, deficit spending (all other things being equal) increases reserves in the system. However, both can (and will) be done

I don't think both can be done at the same time.

The Federal Government's bond sale operations should really not be thought of as "borrowing" operations. They are "reserve and money supply management" operations. Unfortunately, this trips everyone up because everyone thinks of "bonds=debt"

Treasury securities are debt. I am having trouble thinking of these as anything else.

If the Fed is able to successfully shrink its balance sheet, the treasury securities will end up being only temporarily held by the Fed. In this scenario, an argument can be made that the Fed did not monetize debt. Is this what you meant by "reserve and money supply management" operations? If so, it only applies to treasury debt held by the Fed which is a small percentage of total debt.

Debt as of end of last month stands at 20.493 trillion. This can be divided into 5.690 trillion held by intragovernmental entities and the rest (14.803 trillion) is classified as public debt.

Intragovernmental refers to agencies like the social security trust fund, medicare trust fund, military retirement fund and various other mostly pension funds attached to more than 200 federal agencies.

Public debt holders refers to Foreign holders, the Fed, mutual funds, state and local government, private pension funds, banks, insurance companies, individuals, corporations, trusts and estates, etc.

Surely the above non-Fed holders think of treasury bonds as debt that they are owed. In any case, the reason I looked into this topic was to understand who buys treasury bonds and how interest rates could go up if these buyers demanded higher rates. The list of current owners gives us a good idea of who the buyers are. A lot of the demand, especially from government entities and regulation bound banks and insurance companies is probably price insensitive. But I can also see private buyers holding out until enticed by higher rates.

https://www.treasurydirect.gov/govt/reports/pd/mspd/2018/opd...
Print the post Back To Top
No. of Recommendations: 2
Above doesn't sound right to me. Right now the Fed is not buying any treasury securities. All new supply in treasury auctions must be bought by other buyers.

The Fed can't buy treasurys directly from the Treasury (although in eventual effect it
can via a roundabout mechanism). However, purchases of treasurys must be settled in reserves. When a
primary dealer (or even you) buy a treasury, the corresponding amount of reserves are removed from
the primary dealer's (or your bank's) account at the Fed.

The confusion seems to come because people tend to think that a treasury purchase settles in bank
deposits (it actually did, but the bank here is the Federal Reserve).

The simplest way to clarify is to think in terms of balance sheets (your banks/the whole private
banking system's). When you buy a Treasury, say, for $1000. On your bank's balance sheet
a *liability* of $1000 disappears. Now something has to change on the asset side (otherwise you
just increased your bank's net worth for doing nothing). The change is that on the asset side $1000
of reserves disappears.

That is, for the banking system as a whole, Treasury issuance results in draining of reserves (I am
ignoring accounts that the Treasury maintains at private banks, again for fine tuning reserve
management, in order to avoid unnecessary technicalities).

When the government engages in deficit spending, all other things being equal, this results in the
bank system getting more reserves - Treasury spending leads to a simultaneous credit to the bank
deposit account of the recipient and to that bank's reserve account at the central bank.

I don't think both can be done at the same time.

See above.

Is this what you meant by "reserve and money supply management" operations?

Exactly what I meant is that:

- federal deficits mean net credits to banking system reserves and also to non-government deposits
at banks;

- the Treasury works hand in glove with the Fed, providing new bond issues to drain excess reserves
(where excess is determined by the amounts in excess of the needs and desires of private banks that
start pressuring the Fed's overnight interest rate target);

- for this reason, bond sales are not a borrowing operation used by the Treasury, instead they are a
"reserve maintenance" tool;

I would like to address some of your other comments too, however I would like to wait and see if the
above makes any sense to you (there is no point in addressing some of the other stuff, especially
regarding government "debt", since if the above doesn't make sense what I am going to say there will
sound even more like the ravings of a madman).
Print the post Back To Top
No. of Recommendations: 4
Side note:

I tend to be a broken record regarding some of these issues related to sovereign debt,
money supply, loans creating deposits and the like. A lot of this tends to be counter-intuitive due
to framing problems. The nomenclature is just terrible - "deposits" (in aggregate nothing was
actually deposited anywhere), "bank loan" (the bank didn't give you temporary use of anything it
owned, or even intermediated between you and some other owner - it swapped promissory notes),
"reserves" (these are not buffer accounts to be dipped into on a rainy day*; "reserves" cannot be
"lent" out by a bank to a citizen), so on and so forth.

Most of these issues become crystal clear as soon as one starts looking at balance sheets (just
basic double entry accounting, nothing fancy) and changes in these. I think it was Minsky who said
something like, if you cannot put your reasoning in terms of a balance sheet there is a problem in
your logic.

The other difficulty that often arises is that people tend to think in terms of their own balance
sheets instead of aggregates (the private banking system as a whole). This is the same issue that
people encounter when thinking about financial markets in aggregate (active must underperform
indexing).

It might be useful to keep these things in mind when encountering a statement about money and the
like that seems totally counter-intuitive.


* - insert rant on allowance for loan loss "accounts" in bank statements here.
Print the post Back To Top
No. of Recommendations: 8
When the government engages in deficit spending, all other things being equal, this results in the bank system getting more reserves

Yep - in the current monetary system (where the US dollar is not pegged to gold), the dollar derives its value because it is the only thing the private sector can use to extinguish its federal tax liabilities. IMO, we need to run a long-term average federal budget deficit in line with long-term GDP growth rates (say ~3%) because that is the supply level that the private sector requires in additional currency and banking reserves to meet its need for the government's money. Whenever we dip below that level (or worse go into a budget surplus), we court US dollar deflation.

One way to think of deflation is that the US dollar strengthens vs gold (i.e., less supply of dollars vs demand for dollars causes gold to 'buy' less US dollars). So as they say in sports broadcasting, let's go to the replay and look at some data for the US budget deficit as a % of GDP during the surplus years of 1998-2001 and compare it the average gold price for that year.

(Deficit) (Deficit)
Fiscal /Surplus US GDP /Surplus
Year ($B) ($B) % of GDP Gold


1994 (187.8) 7,476.7 -2.51 384.0
1995 (144.3) 7,799.5 -1.85 383.8
1996 (110.5) 8,287.1 -1.33 387.8
1997 (2.7) 8,788.3 -0.03 331.0
1998 46.3 9,325.7 0.50 294.2
1999 105.9 9,926.1 1.07 279.0
2000 218.9 10,472.3 2.09 279.1
2001 81.7 10,701.3 0.76 271.0
2002 (204.2) 11,103.8 -1.84 309.7
2003 (400.2) 11,816.8 -3.39 363.4
2004 (378.3) 12,562.2 -3.01 409.7
2005 (297.6) 13,381.6 -2.22 444.7


The US dollar strengthened by 40% (compared to gold - but it wasn't just gold, look at oil and just about any other currency/commodity vs the dollar during this time) as the Federal budget went from deficit to surplus and stayed there for 4+ years. The US economy tipped into recession and the Federal budget started to go back into deficit. And sure enough, the dollar weakened again (gold rises back to $400/oz).

If you extend this data out into present day, the rough relationship continues to hold. I think TransverseSlice is correct and deficit spending is quite misunderstood even by the 'experts' because it feels so counter-intuitive to how households, firms and even state and local governments have to behave. That's not to say that deficits should be irrelevant, but "paying down" the Federal debt will bring on deflation. So be careful what you ask for.

wabuffo
Print the post Back To Top
No. of Recommendations: 1
<That's not to say that deficits should be irrelevant, but "paying down" the Federal debt will bring on deflation. So be careful what you ask for.>

Good point. But on the flip side, what would paying 6% interest on 35 trillion dollars look like?
Print the post Back To Top
No. of Recommendations: 3
the dollar derives its value because it is the only thing the private sector can use to extinguish its federal tax liabilities.

Yep. In some circles the favored phrase is, "taxes drive money".

we need to run a long-term average federal budget deficit in line with long-term GDP growth rates

My perspective is that the only two principles that should determine a budge deficit/surplus are:

1) unemployment control;
2) price control;

Most of the teeth gnashing about deficits is rooted in applying completely inappropriate mental
models of household budgets and conventional morality to the federal budget.

Treasury debt issuance should be seen as purely a monetary operation and not a funding necessity
(the law that the Treasury can't run an overdraft at the Fed is an assbackward, unnecessary,
counterproductive, self-imposed constraint; ditto for the law that doesn't allow the Fed to buy
directly from the Treasury). Again, I think this is rooted in bad framing - I find
it very tough to get across that that the Federal debt is, essentially, the net financial wealth of
the private sector.

Actually, there is no compelling case for monetary operations like this either - it amounts to
massively distorting interventions in credit markets. The free market gangs should be aghast at this
- regulate the markets appropriately, but quit intervening in them without good cause.

Effectively, this should satisfy everyone - no silly notions of sovereign debt and how will we pay
it, the free market types are happy, the Keyensians are happy.

"Oh, but TS you are just bloody, effectively, printing money!"

"Damn right, I am!"

"But, but, but inflation....?"

Look at point 2) above! No one is saying that deficits are irrelevant and the government should be
allowed to spend without constraint. All that is being said is the whole rabbit hole of debt, "how
we are gonna pay for it", and "if I spent the way the federal government does" is a complete
misunderstanding of the situation.

as the Federal budget went from deficit to surplus and stayed there for 4+ years. The US economy tipped into recession and the Federal budget started to go back into deficit.

Yeah, the Clinton administration is lauded for running a surplus and making one and all prosperous.
The simple fact is that if the govt. sector runs a consistent surplus, the private sector must run a
deficit. Any money the private sector creates is offset by private sector debt (loans create
deposits). The total amount of debt servicing (principal + interest) will be greater than the
deposits created. If the govt. sector starts sucking out deposits (by running a surplus) you will
eventually get a deflationary death spiral.
Print the post Back To Top
No. of Recommendations: 2
Most of the teeth gnashing about deficits is rooted in applying completely inappropriate mental
models of household budgets and conventional morality to the federal budget.

Treasury debt issuance should be seen as purely a monetary operation and not a funding necessity



Mr Tsipras would have agreed with you, no doubt, until he saw how the interest payments could not just be made fron new government deficits, errr, I mean money creation.
Print the post Back To Top
No. of Recommendations: 4
Mr Tsipras would have agreed with you, no doubt, until he saw how the interest payments could not just be made fron new government deficits, errr, I mean money creation.

Again, completely inappropriate model! Actually a strawman.

Greece gave up its sovereign currency and effectively adopted a sovereign currency. This is a
completely different situation from a monetarily sovereign country like the U.S.
Print the post Back To Top
No. of Recommendations: 1
Greece gave up its sovereign currency and effectively adopted a sovereign currency.

Should say

Greece gave up its sovereign currency and effectively adopted a foreign currency.
Print the post Back To Top
No. of Recommendations: 0
Actually, I am a bit surprised no one has brought up Zimbabwe or Weimar Germany... yet.
Print the post Back To Top
No. of Recommendations: 4
My perspective is that the only two principles that should determine a budget deficit/surplus are:

1) unemployment control;
2) price control;


I generally agree with the mechanics of MMT, but this is where I get off the bus. I'm not sure (1) should be an explicit goal, i think economic growth should be. And (2) can be accomplished through other means (gold - not a hard peg but like Greenspan did keep it in a range between $300-$400 for the better part of twenty years by watching it and adjusting interest rates up and down accordingly).

I think deficits are outcomes of both tax policy and spending policy. I worry that MMT tends to lean heavily into the just-run-bigger-and-bigger-deficits until you get to a full employment nirvana POV. This encourages a certain type of political viewpoint that can favor Keynesian type spending stimulus rather than pro-growth tax cuts because of what I tend to view as MMT's static analysis of government finance. I don't think the two approaches are equal in terms of effectiveness, but MMT seems to think they are equal due to its fixation on the size of the budget deficit being the only thing that matters.

I keep an open mind and I'm always learning. So I try to take the best of MMT, but also pay attention to other schools of economic thought. I think when you combine the parts of each that seem to work you get to an overall better understanding of what's happening around us. No one has it all figured out, IMHO.

wabuffo
Print the post Back To Top
No. of Recommendations: 1
@wabuffo

I don't disagree with your position on MMT.

Personally, I am a fan of the two principles, but am not particularly rabid about it.

The issue isn't about the "correct" principles (or more broadly the role of government), but more
about the red herring of federal debts as inherently evil (and similar for deficits).

I wouldn't describe myself as an MMT adherent, but more as an observer pointing out that how they MMT gals say the system works is a pretty good representation of reality (as opposed to descriptions of the Federal govt. needing to find money from taxes and the like before they can spend - well, apart from the legal, and silly, self-imposed constraints resulting in things like the Treasury can print money but cant run an overdraft at the Fed).
Print the post Back To Top
No. of Recommendations: 1
@wabuffo

As an aside, it was several years before I realized that the whole description above went under the
term of art of MMT. I originally came at it from the angle of trying to understand how banks work
(the money is endogenous spiel). It took me an embarrassingly long time to realize that there was a
problem if one didn't introduce something else into the loan-create-deposit loop (the total
servicing on a loan exceeds deposits created bit). For the longest time I was convinced that it was
just basically ponzi finance (requiring constant expansion/refinancing and blowing up the moment
growth had a hiccup). I still worry about aspects of this (especially in the scenario of fiscal
surpluses), but someone had to point out to me that I was completely ignoring the government sector
in this description before I eventually ran into MMT (haven't ever read Mosler but have Randall-Wray and Minsky of course).
Print the post Back To Top
No. of Recommendations: 1
As an aside, it was several years before I realized that the whole description above went under the term of art of MMT.

I try to keep macroeconomics locked up in a cabinet and very far away from my investing work. But I sometimes feel like I need to understand macro better when something big like the Great Financial Crisis happens. The usual explanations (Nasdaq bubble burst, Greenspan was too tight/then too loose.) aren't very illuminating. And the micro stuff about subprime securitizations and CDOs seems too narrow. By luck, I stumbled onto Mosler who led to me Wray's books and that's where the light bulb went off for me as well.

I took the budget deficit chart on the previous post and added the trade deficit (Rest of the World's net saving in US dollars) as % of GDP during the same time frame and it just jumps out at you why the big mortgage bubble built up during the early 00s. You can just see private sector getting squeezed by these two unseen forces and having to borrow to finance their spending. Everyone talked about it at the time - using home equity as a piggy bank to spend more but no one could explain why it was happening (other than the usual moralizing). And on this chart you could just see it (household borrowing as a % of GDP). It really cleared up a lot of the macro for me. Even Buffett, who was warning about the trade deficit during this time IIRC, was only looking at one leg of what was really a three-legged stool.

If I can locate my data I might try to reproduce the table here.

Anyhoo - I'm sure this is a dry and boring topic for a BRK board, so I'll stop talking about it.

wabuffo
Print the post Back To Top
No. of Recommendations: 3
I am a bit surprised no one has brought up Zimbabwe or Weimar Germany...

The more amazing thing is that someone could get so far from common sense as to think that a government spending far more than it can reasonably raise in taxes will have no long-term negative effects on the economy, and that such common sense rules as living within your means only apply to individuals, businesses, and governments of countries that share a currency with others, but not at all to the US.
Print the post Back To Top
No. of Recommendations: 2
I try to keep macroeconomics locked up in a cabinet and very far away from my investing work. But I sometimes feel like I need to understand macro better when something big like the Great Financial Crisis happens

Hehe. I tend to agree (almost, but will contradict myself in a moment) about keeping macro-nonsense
away from investing, but when trying to understand banks/banking feel that it is hard not to run
into these issues. I partly also have a predilection towards anything that exploits invariants
(govt. deficit + pvt. surplus = 0, musical chairs, closed loops, etc.), probably due to a "misspent"
youth in very far removed (but fundamentally the same in basic approach) mathematics. So naturally
gravitate towards thinking about aggregates.

Anyhoo - I'm sure this is a dry and boring topic for a BRK board, so I'll stop talking about it.

Hey now! It's relevant! Berkshire has a decent slice of banking in its holdings, not to mention a
decent slice of the economy - it isn't small enough anymore to not be affected by the behavior of
the aggregate it is such a large part of!

Interesting too! What else are we gonna talk about? Queuing theory?!

=D

I get your point though. I am just happy that at least one other person on the board doesn't think I
have completely lost all my marbles.
Print the post Back To Top
No. of Recommendations: 9
The more amazing thing is that someone could get so far from common sense as to think that a government spending far more than it can reasonably raise in taxes will have no long-term negative effects on the economy, and that such common sense rules as living within your means only apply to individuals, businesses, and governments of countries that share a currency with others, but not at all to the US.

I guess many years ago I would have responded exactly as you have.

The problem with "common sense" is that it is often completely divorced from reality. Falling back to the "common sense" that the familiar model of household thrift describes government spending is relying on an article of faith without bothering to check if it is an apt description.

I have tried to explain why the household spending analogy/"common sense" is not appropriate when
looking at government spending. That this is partly due to a framing problem resulting from the
terms involved (thrift good, spending more than you take in bad, etc.). That the household spending
analogy IS appropriate for state governments, for nations that adopt foreign currencies, but NOT for
the federal government (or the Canadian government, or Japan, or U.K, or...) That in reality the
mechanics of a federal deficit are very different/counter-intuitive, this using the basic construct
of "keep track of balance sheets and see what happens".

I also don't think I have said anywhere that deficits (or surpluses) don't have effects on the
economy. In fact, quite the opposite. What I have tried to say is that consistent deficits are not
evil/bad inherently, that this "myth" has a lot to do with emotional reactions (such as yours) to
the connotations of a word like "deficit".

All of this doesn't make my description right, but simply appealing to "common sense" is hand waving.

Ah whatever, I doubt I am going to change anyone's mind. Doing this via forum posting is hard, if
only I had a blackboard and some RIMS chalk. I am effectively bowing out of this - I don't have the
energy.
Print the post Back To Top
No. of Recommendations: 0
The other difficulty that often arises is that people tend to think in terms of their own balance
sheets instead of aggregates (the private banking system as a whole). This is the same issue that
people encounter when thinking about financial markets in aggregate (active must underperform
indexing).



On numerous occasions, Buffett has provided "aggregate" explanations of why active investing must underperform indexing. Was he wrong?
Print the post Back To Top
No. of Recommendations: 1
Buffett has provided "aggregate" explanations of why active investing must underperform indexing. Was he wrong?

No, he isn't.

I used that as an example (not very clearly I admit) to point out that people have difficulty in
thinking about aggregate/closed loop (or I would prefer to call it "invariant based") arguments.

Buffett IS right, but people (my anecdotal impression) have trouble getting their head around the
aggregate argument and instead think it has something to do with efficient market hypothesis and the
like.

Buffet understands aggregate arguments very well (my impression) and he uses them all the time
(sometimes implicitly). Hot potatoes, trading can't make shareholders (in aggregate) richer by
itself, his missive (that wabuff alluded to) about the mechanics of trade surpluses/deficits (even
though he missed a larger aggregate as wabuff points out), Cinderella's ball, earnings sittings in
foreign jurisdictions not being an impediment to the likes of Google/Apple in practically using it
for repurchases or whatever, etc.
Print the post Back To Top
No. of Recommendations: 2
Purchases of treasurys must be settled in reserves. When you buy a Treasury, say, for $1000. On your bank's balance sheet a *liability* of $1000 disappears. The change is that on the asset side $1000 of reserves disappears.

Just wondering if there is something special about purchasing treasuries in the above description. If I purchased something else, or simply put cash in my pocket, wouldn't the same thing happen?

the Treasury works hand in glove with the Fed, providing new bond issues to drain excess reserves

Can you please elaborate on this. The amount of bonds issued by the treasury is determined by spending needs of the govt set in the budget. Congress decided how much to spend. Where does Treasury working hand in glove with the Fed to drain excess reserves fit into this?

I would like to address some of your other comments too, however I would like to wait and see if the above makes any sense to you

Yes, it does. Thanks for taking the time to explain. Please continue with your remaining thoughts on this topic. Hopefully your commentary will include the mechanics of how long bond rates change. I am not asking for a forecast. Just trying to better understand the mechanics of why these rates go one way or another in a treasury auction or in secondary markets.
Print the post Back To Top
No. of Recommendations: 1
Most of the teeth gnashing about deficits is rooted in applying completely inappropriate mental
models of household budgets and conventional morality to the federal budget.


During essentially all of the years the United States was becoming an ultra-Superpower, it was not running a deficit. During essentially all of the years that the United States saw its prior power slipping away, it ran a deficit. I guess I'm just too simple-minded.
Print the post Back To Top
No. of Recommendations: 0
Again, I think this is rooted in bad framing - I find
it very tough to get across that that the Federal debt is, essentially, the net financial wealth of
the private sector.



So how does that work when significant portions of that "private sector wealth" is transferred to China and other nations?
Print the post Back To Top
No. of Recommendations: 0
Exactly what I meant is that:
- federal deficits mean net credits to banking system reserves and also to non-government deposits at banks;
- the Treasury works hand in glove with the Fed, providing new bond issues to drain excess reserves (where excess is determined by the amounts in excess of the needs and desires of private banks that start pressuring the Fed's overnight interest rate target);
- for this reason, bond sales are not a borrowing operation used by the Treasury, instead they are a "reserve maintenance" tool;


It took quite a bit of pondering and looking up MMT on Wikipedia. Whether the theory is right or wrong, at least what you were trying to convey above has finally sunk into me.

I was completely ignoring the government sector in this description before I eventually ran into MMT (haven't ever read Mosler but have Randall-Wray and Minsky of course)

Which Randall-Wray book would you recommend?

I am a bit surprised no one has brought up Zimbabwe or Weimar Germany...

Now that you brought it up, go ahead and tell us what you think :)

https://en.wikipedia.org/wiki/Modern_Monetary_Theory
Print the post Back To Top
No. of Recommendations: 7
@zzorac

I am guessing that at this point it is better (and, I admit, much easier for me) to let you read and
come up with the answers to your questions (in fact, the only ones I can even answer are the ones
related to reserve changes, deposit creation/movement and the like; these are pretty easy to figure
out on ones own as soon as you consider balance sheets).

As I told wabuff, I am not a rabid MMT adherent. The MMT literature is a useful reference mainly
because they get the involvement of the government sector in money creation right (the description
of the process isn't theory, it is fact, the "theory" comes in when you start trying to figure out
second and third order effects). I DO think that some of their policy prescriptions and theory as to
correct conceptualizations is correct, but in this thread we have mainly just been discussing the
factual bits of "what happens the instant blah is done". This latter bit is where you start
realizing that the "common sense" analogies with households are not applicable and that at the
sovereign level there are many effects that are completely counter-intuitive if one comes from the
"household spending" mental model.

As to things to read. The route I historically took involved trying to understand private banks (I
couldn't have cared less about deficits and the Treasury). Money creation in the private bank system
is an uncontroversial topic (it's only controversial among the populace that think that banks take
in deposits and then lend them out; partly because most textbooks still indoctrinate this myth).

I think the Bank of England did a great public service when they put out an "explainer" on this:

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

There is no fundamental difference, in this respect, between the US and UK (or any other central
bank based system).

Once this process is familiar, it is pretty easy to understand what happens when you throw the
Treasury into the mix. I think:

www.levyinstitute.org/pubs/wp_788.pdf

contains a decent and easily digestible description of all the mechanisms involved. The paper is
ostensibly about MMT, but most if is just factual description.

This would more or less cover understanding all the mechanisms and processes in place and the first
order effects of surpluses, deficits, Treasury issuances, etc. are (this is predominantly what we
have going on this thread). If one wants to actually read about MMT... most of my knowledge about
MMT comes from Randall-Wray's book:

https://www.amazon.com/Modern-Money-Theory-Macroeconomics-So...

Wray and collaborators also ran a blog long time ago with articles that explained much of their
ideas. An archived version of it can be found here:

http://neweconomicperspectives.org/modern-monetary-theory-pr...

Warren Mosler (and Cullen Roche to some extent) have also written about MMT, but I haven't read by
them. Wabuff might have some recommendations.

As to what I think about interest rates, inflation and the like? I am going to keep it short. I
think short term interest rates will be whatever the Fed wants them to be. Long term interest rates
involve expectations (as well as short term rates) and have a lot more to do with the "wisdom of the
crowd". I am not convinced that interest rate targeting actually accomplishes anything.

The latter statement brings us to the boogeyman of inflation. Here I think one would be served well
to carefully examine the usual narrative of how interest rates affect inflation. Even if one accepts
that the (broad) money supply affects inflation, the Fed itself will tell you (back to the original
thing about how banks create deposits via loans) that it doesn't control the broad money supply (it
can only create reserves, this doesn't affect the aggregate deposits sloshing around in our bank
accounts).

Quick digression. I am always pointing this out but it bears repeating. You and I "make" money by
working, providing services and the like. However, none of these actions change the aggregate amount
of deposits in the system. The only actions that do change the amount of these deposits are:

1) New bank loans (creates deposits)
2) Payment of bank loans (reduces deposits)
3) Government deficits (creates deposits)
4) Government surplus (reduces deposits)

Now in the calculation of net financial wealth of you, I, everyone else (again in aggregate), bank
loans offset deposits. If the govt. runs consistent surpluses, what must happen at some point? Note:
net financial wealth doesn't include real assets, but just remember we make payments using deposits
and not real assets.

Again, let me emphasize this is not to be conflated with a prescription that government should be
allowed to spend willy-nilly (there is a big difference between paying people to make statues of
Great Leader and paying people to fix roads and bridges). I am merely asking that one explore the
logical consequences of budget surpluses (wabuff has even provided some data and commentary to help
you along the way).

End of digression.

My personal view on inflation (or rather hyperinflation), which also summarize my views on what
happened in Zimbabwe and Weimar, is that this has a lot more to do with shocks on the production
side (the desperate money printing comes after).

I think I have written more than enough.
Print the post Back To Top
No. of Recommendations: 2
During essentially all of the years the United States was becoming an ultra-Superpower, it was not running a deficit. During essentially all of the years that the United States saw its prior power slipping away, it ran a deficit. I guess I'm just too simple-minded.

Actually, you really might be in this case. It is a bit silly to think that with something like this
causal effects are instantaneous (surplus = becoming superpower). There are some instantaneous
effects, and then there are effects that take time to reverberate through the whole system.

For one, let me point you to wabuff's post/data earlier in this thread. Let me also point you to
some other comments he makes (emphasis added):

I took the budget deficit chart on the previous post and added the trade deficit (Rest of the
World's net saving in US dollars) as % of GDP during the same time frame and it just jumps out at
you why the big mortgage bubble built up during the early 00s. You can just see private sector
getting squeezed by these two unseen forces and having to borrow to finance their spending.

Everyone talked about it at the time - using home equity as a piggy bank to spend more but no one
could explain why it was happening (other than the usual moralizing). And on this chart you could
just see it (household borrowing as a % of GDP). It really cleared up a lot of the macro for me.
Even Buffett, who was warning about the trade deficit during this time IIRC, was only looking at one
leg of what was really a three-legged stool.


Regardless, with both your data and wabuff's (neither of which I have checked, but do remember
looking at similar data) just because two things are happening concurrently doesn't mean there is a
causal relation. In fact, if feedback loops are long, you might be inclined to suspect something
very different.

Heck, if you want to infer causal from concurrent, I tell you what: from 1835 (the last time the
federal debt was 0) to now federal debt has expanded. What has happened to the quality of life in
America since then?

Let me throw the same thought experiment I have posed in this thread at multiple times to you again
(in slightly different form):

Say we freeze the aggregate amount of bank loans in the private sector at year end 2017 levels
(awesome right! Effectively everyone decides that in aggregate they are not going to increase their
debt levels). Heck, better: assume loans start running off (i.e., no new loan production, just
payments of existing ones).

Next, the government decides to start running surpluses come hell or high water.

What must happen eventually?

This isn't actually just a mere thought experiment: look at wabuff's post for one of the things that
has to give in a situation like this.
Print the post Back To Top
No. of Recommendations: 1
Now in the calculation of net financial wealth of you, I, everyone else (again in aggregate), bank
loans offset deposits. If the govt. runs consistent surpluses, what must happen at some point? Note:
net financial wealth doesn't include real assets, but just remember we make payments using deposits
and not real assets.


Should say:

bank loans offset deposits that they created

The importance of the difference lies in the key role played by the only other game in town.
Print the post Back To Top
No. of Recommendations: 2
When the government engages in deficit spending, all other things being equal, this results in the bank system getting more reserves

Yep - in the current monetary system (where the US dollar is not pegged to gold), the dollar derives its value because it is the only thing the private sector can use to extinguish its federal tax liabilities. IMO, we need to run a long-term average federal budget deficit in line with long-term GDP growth rates (say ~3%) because that is the supply level that the private sector requires in additional currency and banking reserves to meet its need for the government's money. Whenever we dip below that level (or worse go into a budget surplus), we court US dollar deflation.

One way to think of deflation is that the US dollar strengthens vs gold (i.e., less supply of dollars vs demand for dollars causes gold to 'buy' less US dollars). So as they say in sports broadcasting, let's go to the replay and look at some data for the US budget deficit as a % of GDP during the surplus years of 1998-2001 and compare it the average gold price for that year.


(Deficit) (Deficit)
Fiscal /Surplus US GDP /Surplus
Year ($B) ($B) % of GDP Gold


1994 (187.8) 7,476.7 -2.51 384.0
1995 (144.3) 7,799.5 -1.85 383.8
1996 (110.5) 8,287.1 -1.33 387.8
1997 (2.7) 8,788.3 -0.03 331.0
1998 46.3 9,325.7 0.50 294.2
1999 105.9 9,926.1 1.07 279.0
2000 218.9 10,472.3 2.09 279.1
2001 81.7 10,701.3 0.76 271.0
2002 (204.2) 11,103.8 -1.84 309.7
2003 (400.2) 11,816.8 -3.39 363.4
2004 (378.3) 12,562.2 -3.01 409.7
2005 (297.6) 13,381.6 -2.22 444.7
2006




The US dollar strengthened by 40% (compared to gold - but it wasn't just gold, look at oil and just about any other currency/commodity vs the dollar during this time) as the Federal budget went from deficit to surplus and stayed there for 4+ years. The US economy tipped into recession and the Federal budget started to go back into deficit. And sure enough, the dollar weakened again (gold rises back to $400/oz).

If you extend this data out into present day, the rough relationship continues to hold. I think TransverseSlice is correct and deficit spending is quite misunderstood even by the 'experts' because it feels so counter-intuitive to how households, firms and even state and local governments have to behave. That's not to say that deficits should be irrelevant, but "paying down" the Federal debt will bring on deflation. So be careful what you ask for.

wabuffo
Print the post Back To Top
No. of Recommendations: 0
yikes - please ignore previous post. I was going to post something using my previous data and accidentally submitted the message instead of previewing.

wabuffo
Print the post Back To Top
No. of Recommendations: 5
Warning - lots of data.

As I mentioned in a previous post, here's the data that relates the deficit spending by the US Federal government as a percent of GDP. This is the amount of additional currency + reserves that flow into the private sector. But the US private sector has to share that additional money with the rest of the world that wants to net save US dollars and US dollar assets by net exporting to us.

So to take 1994 as an example, the US deficit (public sector) was 2.51% of GDP which was equal to the private sector's surplus. But the rest of the world got 1.63% of that - leaving 0.88% of GDP remaining as US private sector net saving.

I've also included US household sector debt (mortgages + other consumer loans) % of GDP from the Federal Reserve's z1 report. I think it fairly shows how, first, the budget surplus, and second, the growth in the trade deficit (after China's 2001 WTO entry + oil's price rise in 2004-2008) squeezed the US household sector (but also US business sector too - not shown to keep data table simple).
                                                    US Pvt
(Deficit) (Deficit) ROW Sector Household
Fiscal /Surplus US GDP /Surplus Net Saving Net Saving Sector Debt
Year ($B) ($B) % of GDP % of GDP % of GDP % of GDP
A B C=(-A)-B
1994 (187.8) 7,476.7 -2.51 1.63 0.88 61.5
1995 (144.3) 7,799.5 -1.85 1.46 0.39 63.1
1996 (110.5) 8,287.1 -1.33 1.51 -0.18 63.6
1997 (2.7) 8,788.3 -0.03 1.60 -2.10 63.9
1998 46.3 9,325.7 0.50 2.31 -2.81 64.9
1999 105.9 9,926.1 1.07 2.91 -3.98 66.5
2000 218.9 10,472.3 2.09 3.85 -5.94 68.7
2001 81.7 10,701.3 0.76 3.64 -4.40 73.1
2002 (204.2) 11,103.8 -1.84 4.06 -2.22 77.3
2003 (400.2) 11,816.8 -3.39 4.39 -1.00 81.7
2004 (378.3) 12,562.2 -3.01 5.03 -2.02 86.0
2005 (297.6) 13,381.6 -2.22 5.57 -3.35 89.5
2006 (220.5) 14,066.4 -1.57 5.73 -4.16 94.2
2007 (183.2) 14,685.3 -1.25 4.84 -3.59 96.5
2008 (471.4) 14,549.9 -3.24 4.68 -1.44 96.6
2009 (1,839.7) 14,566.5 -12.63 2.56 10.07 94.8
2010 (1,439.5) 15,230.2 -9.45 2.83 6.62 89.1
2011 (1,361.6) 15,785.3 -8.63 2.82 5.81 84.8
2012 (1,124.9) 16,297.3 -6.90 2.62 4.28 82.5
2013 (699.1) 16,999.9 -4.11 2.06 2.05 80.0
2014 (727.7) 17,735.9 -4.10 2.11 1.99 78.7
2015 (296.8) 18,287.2 -1.62 2.38 -0.76 77.7
2016 (897.2) 18,905.5 -4.75 2.39 2.36 77.6
2017 (692.3) 19,738.9 -3.51 n/a n/a n/a

Where are we now? It will depend on the US actions on both the fiscal front (tax plan, future spending plans) + its trade negotiations and their potential effects on future trade deficits. Although savings rates have increased (due to 2009-2012 deficits and lower oil prices/less imports), my opinion is that we may still be too close to the knife's edge as 2015 showed. If you believe tax receipts may surge due to the tax plan's effects on growth, we may get smaller short-term deficits. Thus, the private sector may not have de-levered enough. We'll see.

FWIW,
wabuffo
Print the post Back To Top