Fiscal Cliff MEGATHREAD: Wile E. Economy falls off, lands in cloud at bottom

[Sheilbh]

How so?

I think there's benefits to having the global reserve currency, for example I believe it's been estimated that it knocks 50-60 base points off Treasuries because of large purchases by foreign governments and central banks.  That there's always slightly inflated demand for dollars is a helpful advantage.  I think there are other benefits which are bit chicken and egg.  So for example the US has the largest and most liquid financial market - that helps secure the dollar's position but is also an advantage in itself in the issuing of further bonds.

Those reasons were what various British governments to try and preserve Sterling as a reserve currency even though it occasionally hurt the domestic economy at the time.  They wanted the lower borrowing costs, to support London as a financial centre and, sadly, prestige.

But the US has debt for which there's still high demand, issued in its own currency, by its own sovereign central bank and it's got fiscal room for manoeuvre - it's still relatively low-tax so that should probably be on the revenue side.  The first two weren't true for any of the Eurozone crisis countries and the last problem wasn't the case in Italy, Greece or Portugal.  As Spain and Italy still have market access we're left with Portugal, Ireland, Greece and Cyprus - I don't think there's any useful comparisons to be made with countries that small, that vulnerable, in the Eurozone with the US.

Edit:  And, incidentally, the two things that have most helped Spain and Italy maintain market access are a change in policy by the ECB (which the US already has) and market faith in the ability of their governments to deliver.  This is why, as I say, the credibility of the US government's ability to function by negotiating and agreeing deals matters more than unexpectedly, unwillingly and suddenly embarking on a fiscal consolidation of 5%.

[Admiral Yi]

I think it's fairer to say that 50 to 60 basis points have been knocked off US Treasuries because China and to a lesser extent Japan have in the last few years been buying dollars to keep their currencies undervalued.  Not simply due to the dollar being a reserve currency.  With those exceptions central banks typically do not buy or sell large amounts of foreign currency.

Not any is an absolute.  Soon, on the present trend, we will have indebtedness similar to Italy.  Does that mean that investors will invariably dump Treasuries when we hit that mark?  It does not.  But it does offer some context and perspective on the US's debt sustainability.

One last point to consider is that the US, unlike the Eurozone, does not have a sugar daddy.

[The Minsky Moment]

Not any is an absolute.  Soon, on the present trend, we will have indebtedness similar to Italy.  Does that mean that investors will invariably dump Treasuries when we hit that mark?  It does not.  But it does offer some context and perspective on the US's debt sustainability.

One last point to consider is that the US, unlike the Eurozone, does not have a sugar daddy.

We have Uncle Ben.  I'll take him over the Prussians any day.

[Admiral Yi]

Uncle Ben has committed to holding inflation a fraction below 2%.

[The Minsky Moment]

Uncle Ben has committed to holding inflation a fraction below 2%.

Not exactly.
The FOMC is committed to a long-run goal of maintaining inflation under 2 percent which is not quite the same thing.
Hence the most recent announcement that the Fed will keep down rates indefinitely until unemployment goes below 6.5 or inflation goes above 2.5% (which is well above the target).

[MadImmortalMan]

I think revealing those criteria was a mistake on his part.

[Sheilbh]

Not any is an absolute.  Soon, on the present trend, we will have indebtedness similar to Italy.  Does that mean that investors will invariably dump Treasuries when we hit that mark?  It does not.  But it does offer some context and perspective on the US's debt sustainability.

But as I said earlier the present trend isn't going to happen.  In two weeks your deficit will be on trend to be reduced by around 2% of GDP or 5% of GDP, either way further steps'll be needed.

Again the UK's an instructive example. First of all the American deficit since 2009 to now has declined faster than the UK's deficit, despite the UK going for austerity and the Americans generally not.  The US deficit declined by around 5% (of GDP) while the UK deficit only declined by 2.4%, the key reason was because growth was more effective than a double-dip recession which necessitate greater consolidation.  The UK's done better on the structural budget, as you'd expect, but that is, as I say, a medium-term project.  This isn't just about austerity, there are important supply side differences too, but it's an element.

Secondly the UK government's consistently missed their own targets on deficit reduction (largely because there's been less growth than expected) which means they're extending the timeframe.  Initially the government's goal was to eliminate the deficit and be reducing the national debt by the end of this Parliament (2015 at the latest, actually 2014).  Then they moved that back to 2016 and in the latest Autumn Statement to 2018 (and beyond).  We had lower national debt and a smaller deficit to begin with but we're still projected to hit 80% of GDP in a couple of years and our deficit will still be around 2.5% by 2018.  Despite all of that there's been no massive market reaction because, in part, we've got a credible medium term plan.

There is a point when markets react and often it's sudden but none of the Eurozone countries provide a decent comparison and in those countries it's clear that market access can be retained if there's belief in government reform and consolidation plans.

I'd add two other points.  One is that at the minute interest rates don't seem to me to be very attached to debt risks.  It looks more like markets are looking for safe assets in a time of low and skittish growth.  That's why France is borrowing at record lows and why the yield on gilts and treasuries declines in response to underwhelming growth numbers - which makes that debt more difficult to pay.  This is, in some ways, more worrying than their response to the fiscal situation because my understanding is that that was the situation in Japan for many years.

Secondly Italian debt isn't wildly unsustainable. When taken in the round they did quite well in EU debt sustainability analysis, better than some Northern saints like the Netherlands. This is good on the subject:
http://cib.bnpparibas.com/01/MyDocuments/C1201_A1.pdf

I think revealing those criteria was a mistake on his part.

Isn't it what Carney, our future BofE Governor, is most prominent for from the Canadian Central Bank?

[Admiral Yi]

But as I said earlier the present trend isn't going to happen.  In two weeks your deficit will be on trend to be reduced by around 2% of GDP or 5% of GDP, either way further steps'll be needed.

Where'd do you get those numbers from?

Again the UK's an instructive example. First of all the American deficit since 2009 to now has declined faster than the UK's deficit, despite the UK going for austerity and the Americans generally not.  The US deficit declined by around 5% (of GDP) while the UK deficit only declined by 2.4%, the key reason was because growth was more effective than a double-dip recession which necessitate greater consolidation.

I would think the key reason is because we only had one trillion dollar stimulus.

[Razgovory]

I think that was dps Raz.

Yes, it was me, and yes, I'll still defend the statement.

Do I have a link?  No, it was based on newspaper accounts I read at the time--I didn't even have internet access until just before the 2000 election, or even a computer until almost the end of Clinton's 1st term.

That's convincing.

Nobody's provided any evidence to the contrary.

Nobody has provided any evidence in support.

[The Minsky Moment]

Re surpluses:

Look at historical table 1.2 in the Federal Budget.
It shows a surplus for the years 1998-2001, including all off-budget items.
If you just look on-budget (exclude social security), there is a slight deficit in 98 and 01, a balanced budget (rounded off) in 99  and a surplus in 2000.
Then if you look at the exact number for 1999, table 3.1 reveals 1,381,064,000 in on budget spending, and table 2.1 shows 1,382,984,000 in on budget receipts.  So without the rounding, there was a surplus.

Bottom line is that the feds ran a surplus in 1999 and 2000 no matter how you slice it.

[PJL]

The Bank of England has been unofficially targeting nominal GDP ever since it was made independent in 1997. What Mark Carney is saying is that the BoE should also be targeting the historical nominal GDP growth line. Given 1997 as a base line, we're about 10% off that at the moment.

Incidentally, George Osbourne hasn't ruled out a GDP target either. So it's possible the UK could adopt the target in the near future.

[Sheilbh]

Where'd do you get those numbers from?

IMF had US deficit at 13% in 2009 and 8.1% in 2012, they had the UK at 10.4% in 2009 and 8 in 2012.

I would think the key reason is because we only had one trillion dollar stimulus.

I'm not sure what you mean here.  Seems a bit of a non-sequitur

[Admiral Yi]

IMF had US deficit at 13% in 2009 and 8.1% in 2012, they had the UK at 10.4% in 2009 and 8 in 2012.

I was asking where you got the 2% and 5% deficits we will have one of after January 1.

I'm not sure what you mean here.  Seems a bit of a non-sequitur

It's an explanation of why the US deficit has dropped.  We had an enormous stimulus package in 2009.  In the years since, we have not.

[Sheilbh]

I was asking where you got the 2% and 5% deficits we will have one of after January 1.

Sorry, the Economist had the total fiscal cliff as 5% of GDP and the most likely to expire or come into effect (eg. Obamacare taxes, things no-one's trying to defend) come up to 2% of GDP.

It's an explanation of why the US deficit has dropped.  We had an enormous stimulus package in 2009.  In the years since, we have not.

Not enormous enough and too many tax cuts.  But that isn't a difference with the UK comparison.  We also had large stimulus though, at around 2% of GDP (excluding automatic stabilisers like unemployment payments which aren't renewed here), I think slightly smaller than in the US, but maybe more if you included respective benefits spends.

[Admiral Yi]

Sorry, the Economist had the total fiscal cliff as 5% of GDP and the most likely to expire or come into effect (eg. Obamacare taxes, things no-one's trying to defend) come up to 2% of GDP.[/quotes]

Thanks.

That 5% cliff sounds real good to me. 

Not enormous enough and too many tax cuts.  But that isn't a difference with the UK comparison.  We also had large stimulus though, at around 2% of GDP (excluding automatic stabilisers like unemployment payments which aren't renewed here), I think slightly smaller than in the US, but maybe more if you included respective benefits spends.

That does seem to explain it Shelf.  You had a one time 2% stimulus.  We had a one time 7% stimulus.  When they were done our deficit shrank more than yours.