J. Bradford DeLong's Blog, page 2168
October 25, 2010
W00T!! W00T!! W00T!!!
Something I never in my wildest dreams thought I would see in my lifetime.
Aline van Duyn, Michael Mackenzie and Nicole Bullock:
Debt sales highlight abnormal conditions: The abnormal state of the credit markets came into focus as the US Treasury sold bonds with negative interest rates for the first time and Goldman Sachs prepared to issue its first 50-year debt deal. Both developments on Monday highlighted the difficult choices facing investors at a time when interest rates are at historical lows and the Federal Reserve is moving towards more asset purchases aimed at boosting the economy and staving off deflation. Investors who believe the Fed will succeed in its efforts – which would lead to higher inflation – accepted a yield of minus 0.55 per cent on $10bn of Treasury Inflation Protected Securities – or Tips – which compensate holders if the consumer price index rises. At the same time, retail investors looking for higher yields in the current low interest-rate environment were targeted by Goldman, which prepared to sell $250m of 50-year bonds that are expected to pay interest of up to 6.25 per cent.
“The Fed has been sending the message that its cheque book is ready and it will do what it takes to reflate the economy,” said Jan Loeys, head of global asset allocation at JPMorgan Chase. “What no one knows is whether inflation will start to show in two weeks or two years.” Mr Loeys added: “We are seeing longer-term thinking clients becoming increasingly wary of bonds and hedging against inflation. Shorter-term thinkers are still willing to still buy bonds, on the presumption that they are nimble enough to get out when inflation comes to push yields up.” Long-term institutional buyers purchased 39 per cent of the $10bn Tips sale, up from an average share of 30 per cent for the prior six Tips sales....
Expectations for inflation over the next five years – based on comparing Treasury yields and those for Tips – have risen as high as 1.75 per cent this month, up from 1.13 per cent in August...
Let Me Say That Gideon Rachman--or at Least His Headline Writer--Is Wrong
Gideon:
China can no longer plead poverty: Of course, the city has pockets of poverty. And Shanghai is not China, where 150m people (out of a total Chinese population of more than 1.3bn) still live on less than $2 a day. Even so, China’s insistence that it is a poor, developing nation is beginning to wear a little thin. This, after all, is a country that is sitting on more than $2,500bn worth of foreign reserves. In important ways, China is now a rich nation. But its insistence that it is still a “developing country” has become a shield to protect itself against vital political and economic changes that matter profoundly to the rest of the world...
China can still plead poverty. What China cannot do is ignore that it is now a great economic power, and as a great economic power it can no longer make its own internal policy decisions without any consideration of their consequences for the world at large.
Can Alan Blinder Read Ben Bernanke's Mind
Matthew Yglesis does not think so:
Yglesias » Does Ben Bernanke Secretly Want Fiscal Expansion?: Don’t get me wrong, I liked this Alan Blinder column qua economic policy commentary, but I don’t find his mind-reading speculations very plausible:
The two main thoughts that are probably going through Mr. Bernanke’s head today are, first, “I sure wish I could get some help from fiscal policy,” and second, “I probably can’t, so I’d better do whatever I can.” He’s right on both counts.
The Fed Chairman’s not locked up in the Tower of London. He’s not mute. He’s not even unwilling to comment on fiscal issues. But when he gave a big speech on fiscal policy on October 4, he focused entirely on the need for long-term deficit reductions. And I agree with him that such reductions are desirable. But I also think, just like Alan Blinder, that in the short term a bigger deficit would be helpful. If Bernanke wanted to say that, he had a great opportunity. But he didn’t. Presumably for the same reason that he’s consistently acted like a conservative Republican in other regards over the past two years—he’s a conservative Republican.
I think people tend to overestimate the number of mistakes Barack Obama has made in his presidency. But the flipside of that is that they underestimate the severity of the mistakes that are real. Giving the most important economic policy job in the country to someone who doesn’t share his values, ideology, and partisan loyalty was a big big big mistake and it’s reflected in Bernanke’s conduct around questions like this one.
As an Anxious Observer, I Recommend that Henry Farrell Stop Reading Megan McArdle...
A mind, after all, is a terrible thing to waste.
That is all.
Henry Farrell
Rhetorical violence — Crooked Timber: Megan McArdle 2010 vintage
I thought it was pretty creepy when Jon Chait described another liberal journalist, Michael Kinsley, another journalist, as “curb stomping” economist Greg Mankiw for, yes, daring to suggest that higher marginal tax rates might have incentive effects. Woo-hoo! But why stop with curb-stomping? Wouldn’t it be fun to pile ten-thousand gleaming skulls of supply-siders outside the Heritage Offices? We could mount Art Laffer’s head on a rotating musical pike that plays The Stars and Stripes Forever! Then, in the most hilarious surprise ending of all, the mob could turn on Jon Chait, douse him with gasoline and set him on fire, and then sack the offices of the New Republic!
Megan McArdle 2003 vintage
So I was chatting about this with a friend of mine, a propos of the fact that everyone I know in New York is a) more frightened than they’ve been since mid-September 2001 and b) madly working on keeping up the who-the-hell-caresif -Iget-hit-by-a-truck? insouciance that New Yorkers feel is their sole civic obligation. Said friend was, two short years ago, an avowed pacifist and also a little bit to the left of Ho Chi Minh. And do you know what he said? “Bring it on.”
I can’t be mad at these little dweebs. I’m too busy laughing. And I think some in New York are going to laugh even harder when they try to unleash some civil disobedience, Lenin style, and some New Yorker who understands the horrors of war all too well picks up a two-by-four and teaches them how very effective violence can be when it’s applied in a firm, pre-emptive manner.
I’m afraid I’m not quite bright enough to understand why kerb-stomping-as-a-metaphor for-argumentative-victory is creepy and unfunny, while actually beating up war-protesters with bits of lumber is hee-LAIRIUS. Perhaps someone can tease out the nuances for me in comments.
Department of "Huh?!": John Cochrane Edition
You read the start of John Cochrane's Wall Street Journal op-ed:
John Cochrane: Tim Geithner's Global Central Planning: The Chinese government's accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort...
And the only thing you can say is: "HUH?!?!?!?!?!?!?!?!?!"
Has Cochrane talked to anybody in China?
If you ask anybody--anybody--anybody at all--in China why the Chinese government has invested so much money in dollar-denominated assets, nobody will say:
"because we expect a high rate of return on those assets," or
"because we believe that they are negative-beta assets that have a use as insurance."
Instead, anybody--anybody--anybody at all--in China, when asked why the Chinese government has invested so much money in dollar denominated assets, will say something like this:
Look. China has 900 million rural dwellers who are still living at a standard of living not that far above subsistence. The pressure to migrate from the countryside to the coastal cities is enormous. China needs to grow at more than 8% per year in order to avoid mass unemployment in the coastal cities. And mass unemployment in the coastal cities is likely to be followed by political collapse and turmoil on a gigantic scale.
Part of growing at 8% per year is to continue to rapidly expand exports to the North Atlantic core of the world economy. But in order to expand exports Chinese-produced goods must look like good values. And if demand for dollar-denominated assets falls and the value of the dollar falls, Chinese-produced goods will no longer look like good values. We know very well that when we unwind these purchases of dollar-denominated assets a generation from now the financial rate of return on our investments will be lousy. But in the meantime we get something much more important to us--export growth, full employment in Shanghai, and societal stability.
So what does Cochrane think he is doing? Who does he think will believe him?
When Cochrane writes:
Economists are full of bad ideas.... Mr. Geithner starts with a dramatic proposal: "G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP [later reported to be 4%] over the next few years." Since when is every trade surplus or deficit an "external imbalance" in need of correction? It makes sense for a country that has good investment prospects to import a lot of goods, run trade deficits, and borrow money. Years later, the country puts the resulting products on boats to pay the lenders back. The U.S. borrowed abroad to finance our railroads in the 19th century and ran surpluses when Europe was rebuilding after World War II. Were these "imbalances"?
does he genuinely not understand that China's investment in the United States does not reflect a belief on the part of China's savers that the U.S. offers high rates of return? Does he genuinely not understand that this is a government-run foreign-exchange intervention program--the largest one in history?
Did nobody bother to tell him? Does he have no friends?
He denounces:
the army of economists in the basements of the International Monetary Fund (IMF) has no clue exactly how much each country should be saving, or where the best untapped global investment opportunities are around the world—including whether trade patterns are "normal" or "imbalanced."... The economists hidden away in the sub-basements of the IMF may try to decide what currencies "should be" worth across vastly different countries.... [I]t is a pipe dream that busybodies at the IMF can find "imbalances," properly diagnose "overvalued" exchange rates, then "coordinate" structural, fiscal and exchange rate policies...
But any one of the members of this army of economist, these economists hidden away in the sub-basements, the busybodies at the IMF could have told him--if he had asked--what organizations in China are responsible for asset accumulation.
But he did not ask.
Now I do not think that the United States should pressure China--much--to more rapidly appreciate the yuan. The United States ought to help China become richer as fast as possible--and allowing them to run an undervalued currency and a big export surplus for a while is a good way to do that. The United States, as the hegemon of the world economy, ought to be able to manage the level of its own and of global demand without pushing for demand-shifting policies. A little pressure on China to figure out how to shift more rapidly to internal demand-driven growth is good for them and good for us. But too much pressure--I don't think so.
Nevertheless, that an economics professor is pretending that China's dollar asset-purchase policy is "a tragic investment decision, not a currency-manipulation effort" makes me want to hide my head in shame.
Another Reason That the New York Times Should Die... (It Employs Amanda Fortini Edition)
Why oh why can't we have a better press corps?
Matthew Yglesias:
Yglesias » Bloggers Are People Too!: Writing about Bravo’s Millionaire Matchmaker, Amanda Fortini and the NYT manage to pull the classic MSM stunt of quoting a blogger without naming her:
Last April’s finale garnered a series high of almost 1.6 million viewers. Even those who generally consider themselves too refined for reality TV — the microwave dinner of the entertainment world — are closet fans. “Watching Patti rather savagely describe what’s wrong with these guys and why they have trouble getting/keeping themselves in real relationships is strangely invigorating,” wrote a blogger for the feminist magazine Bitch before fretting: “Can I continue to watch this show and write for Bitch in good conscience?”
I put the quote into Google, and swiftly unearthed the post in question by Anna Breshears. Would it be so hard to use her name? To include a link to her post in the online version of the article?
Liveblogging World War II: October 25, 1940
United Mine Workers and Congress of Industrial Organizations President John L. Lewis endorses Wendell Willkie for President as the not-Roosevelt:
Through the years of struggle you have been content that I should be in the forefront of your battles I am still the same man. Sustain me now, or repudiate me.... You who may be about to die in a foreign war, created at the whim of an international meddler, should you salute your Caesar?... [Mothers,] may I hope that on election day... with the sacred ballot, [you] lead the revolt against the candidate who plays at the game that may make cannon fodder of your sons.
Melvyn Dubofsky reports that Herbert Hoover telegraphed Lewis that "that speech will resound over years to come," and that Willkie wrote that it was "the most eloquent address I have ever heard."
Department of "Huh?!": Where Is Joe Stiglitz Coming From? Edition
Joe Stiglitz joins... the Austrians, I think:
Joseph Stiglitz: Why Easier Money Won't Work: The Federal Reserve, having done so much to create the problems in which the economy is now mired... now wants to make a contribution to preventing the economy from sinking into a Japanese-style malaise... through large-scale purchases of U.S. Treasurys—called quantitative easing, or QE....
The problem is that, with interest rates already near zero, there is little the Fed can do to restart the economy—and doing the wrong thing can do considerable damage. In 2001, (then) record-low interest rates didn't reignite investment in plant and equipment. They did, however, replace the tech bubble with an even more dangerous housing bubble....
Large businesses are flush with cash, and small changes in interest rates—short-term or long—will affect them little. A banker rightly asks if such a business comes asking for money, "What's wrong with it?" But it is SMEs that are the source of job creation in most economies, including the U.S. Many of these enterprises are starved for cash.... They borrow from banks, and many of the smaller local and community banks on which they depend are in dire straits.... Yet even if the banks were willing and able to lend, lending to SMEs is typically collateral-based, and the value of the most common form of collateral, real estate, has fallen 30% to 40%. No wonder then that credit availability is so constrained. But QE in the form of buying U.S. Treasurys is not likely to affect this much....
QE may not even succeed in lowering interest rates, or lowering them very much. Given the magnitude of excess capacity, there is little risk of inflation today. But if the inflation hawks come to believe that the risk of future inflation is real, then... long-term interest rates, even now, may actually rise....
QE poses a third risk: The bursting of the bond market bubble that the Fed is seeking to develop—the sequel to the tech and housing bubbles—will clearly have adverse effects on the economy....
The advocates of QE point to another channel through which it will strengthen the economy: Lower interest rates may also lead to a weaker dollar, and the weaker dollar to more exports.... But this policy only works if other countries don't respond. They will and have, through every instrument at their disposal.... [A]s the U.S. lets forth a flood of liquidity... money is supposed to reignite the American economy... instead goes around the world looking for economies that actually seem to be functioning well and wreaking havoc there.
The upside of QE is limited. The money simply won't go to where it's needed, and the wealth effects are too small. The downside is a risk of global volatility, a currency war, and a global financial market that is increasingly fragmented and distorted. If the U.S. wins the battle of competitive devaluation, it may prove to be a pyrrhic victory, as our gains come at the expense of others—including those to whom we hope to export.
As I understand it, Joe Stiglitz adopts his standard segmented-capital-markets view and makes three claims:
The problem is one of impaired capital on the part of small banks and impaired collateral on the part os small enterprises--a credit channel problem--and quantitative easing in Treasuries will not help that problem.
Quantitative easing will raise expectations of inflation on the part of financiers--and so will raise long-term nominal interest rates--without raising expectations of inflation on the part of industrialists, and so it will raise the perceived cost of capital to businesses and so diminish investment.
Quantitative easing will unleash a process of combined and uneven quantitative easing across the globe that will create dangerous exchange rate and trade volatility.
Therefore we should not do it.
I, by contrast, would say that to the extent that quantitative easing raises expected price levels ten years hence, it will raise the value of collateral. I would say that quantitative easing gives small banks a chance to sell assets to the Federal Reserve and so improve their capital. I would say that even a bond bubble--a topic I have a very hard time wrapping my mind around--is dangerous only if leverage means that the losses from its end are concentrated in key financial institutions. I would agree that quantitative easing is like the scene from Monty Python where they are trying to catch fish in the river by hitting them with a log.
But when you need fish, and when all you have is a log, you try to catch the fish by hitting it with a log.
Don't you?
J. Bradford DeLong's Blog
- J. Bradford DeLong's profile
- 90 followers
