1)? Great minds think alike.? Fools seldom differ.? Remember my post on AIG’s subsidiaries?? Well, now in the New York Times, much of the same.
2)? Fed Independence! (spit, spit)? Come on, Bernanke, you argue against the Fed being audited because it might compromise Fed independence, and yet you regularly have lunch with leaders of the Executive branch.? You compromise the independence of the Fed more than any audit could by acting cooperatively with the Treasury.? If you were really independent, you would do what is best for your explicit mandate — fighting inflation and unemployment, rather than tinkering with non-bank credit markets, and rescuing companies.
3) Manus manum lavat. One hand washes the other.? Banks that have been bailed out are buying more Treasuries.? Some of that is lower spreads — lack of lending opportunities.? The rest is implicitly paying back the government.
4) The government may be increasing its sales of TIPS.?? I’ve been less bullish on TIPS of late, and this does not encourage me to change.? Further, farmland values may be falling.? Given growth in demand for food in the world, that should not be so, but maybe that is wrong.? Maybe depressionary conditions are that strong.? I also offer up the piece from UBS, via FT Alphaville, that suggests that deflation is more likely to minimize the total cost of debt to the US government.
All of this depends on the current length of US government debt.? If all of it were nominal (not inflation-indexed) 30-year debt, the US Government would gladly inflate.? Their financing is locked in.? But if it were all short-dated, the US government would have to manage the powder keg.? After all that was Mexico in 1994 — the government was financed in the short-term interest rate markets.
Thus, governments that have not been prudent, and have financed short-term can face a run on the currency.? The US government finances to an average of 4-5 years, so it is not apparent whether they could face a run or not.
The more TIPS that are issued as a fraction of the total debt, the less valuable the inflation guarantee becomes.? If China, or any other creditor thinks that TIPS are the solution to loss of value on US debt claims, let them realize this:
- Yes, if the US inflates its currency, there will be protection.
- No, if the US defaults on its obligations, you won’t be materially better off.
- If the US decided to selectively default on foreigners, paying them back in a different US dollar than the domestic one, TIPS won’t help you much.
5)? Bye, bye, Fannie and Freddie?? Sending them into runoff was my proposed solution when the crisis hit.? Now that the reality of the humongous losses from mortgage lending and guarantees has become apparent, the government faces reality, and may wind them down.? As it is now, we know that F&F are unlikely to pay back their aid from the government in full.? In my opinion, better that the government would have let the companies go into Chapter 11 without interference. Instead, the taxpayers bail out much of the capital structure that did not deserve a bailout.
6)? Should Ben Bernanke be reappointed as Fed Chairman?? It doesn’t matter.? There is no significant variation in ideas among likely candidates that would make a significant difference in how the Fed behaves.? I don’t think Ben should be reappointed, but I don’t see any worthy replacements.? Ron Paul is out of the question, sadly.
These articles argue that Ben Bernanke should not be reappointed, and they make some good arguments:
- Ben Bernanke Was Incredibly, Uncannily Wrong
- Reappoint Ben Bernanke? No Way
- SHOULD BERNANKE BE REAPPOINTED?
All that said, what is the option?? Is there someone stunningly good standing in the wings, with a materially different view of monetary policy from Bernanke, who would be acceptable to the activist Obama administration?? I don’t see one available, so perhaps the devil you know is better than the devil you don’t.
7)? The corporate bond market has been on fire of late, with higher prices, tightening spreads and greater issuance.? We had several episodes like that in 2002, before facing reversals.? The first time is not the charm, and I would expect more of a backup in prices because corporate loss rates have not peaked yet.
8)? Let me just point out that “cash for clunkers” is another version of the “broken window fallacy.”
9)? As for AIG, I don’t expect the government to be paid back in full.? Sales of AIG subsidiaries have gone at cheap prices, and only the simple subsidiaries have been able to be sold.? Investment banks will make money on the deal, though.
10)? Even if GDP shrinkage is slowing due to government spending, that still means that the private sector is weak.? GDP ex-government growth will be a statistic to watch in the future.
David,
regarding point 8) [ Let me just point out that ?cash for clunkers? is another version of the ?broken window fallacy.? ]
While I understand the concept of broken window fallacy, I think that the analogy would only be correct if your opinion of usable life and that of the policy makers happen to be the same.
In my mind, I frame this question as a case of my wardrobe: If I have clothing that is a couple of years old, and I measure usable life as wearable without making me look like an idiot on the street, then by that account even my clothing of almost a decade old would not be replaced. Up to this point it is still a bit similar to cars. While I don’t have a problem with my clothing, my family/partner (government) might think otherwise, because they bear other costs like being constantly in the company of an unfashionable person (or other social costs that are hard to measure, like increased probability of killing others in car accidents, which might be relatively hard and costly to complement the existing “window” versus just substituting it.
This is by no means a negatively toned comment on your opinion. It’s just that I have some trouble to absorb the entire subject matter and what I wrote is what came to mind while reading your post.
Eric
Fed buys Treasuries, or Fed provides banks with excess reserves to buy Treasuries–what’s the difference, it is still monetization of the debt. The Fed keeps overnight rates at quasi-zero so that the banks can buy bills and notes and make the spread–they’ve been doing this in Japan for years. The question is, what makes the game come to an end?
…”the piece from UBS, via FT Alphaville, that suggests that deflation is more likely to minimize the total cost of debt to the US government.”
**Deflation** is going to make things better for a large net debtor?!?!?!
No wonder UBS is insolvent
David — I have to take you to task over equating “inflation” with “CPI” (the index behind TIPs)
According to the BLS website, CPI is ***NOT*** and never was an inflation index. It doesn’t matter how many people misuse CPI, or how many people believe the Earth is flat. CPI is not the same thing as inflation and never was
It is not hard to redefine CPI to produce a lower reported PRICE INDEX — while still running rampant inflation. The Boskin Commission is the oft cited example of how this already happened, but the process is on going.
While there is not widespread agreement on how to control healthcare costs, there is agreement that healthcare spending is about 16% of US GDP… But CPI weights healthcare only 6%. Since healthcare costs are exploding 8-10% per year, under-weighting them makes CPI report lower than reality. That is just one example that is in the news.
The government minimizes its cost by having the Fed set short term interest rates at negative real rates — and by allowing the myth of CPI = inflation to go unchecked
You lost the argument along with Hoover.
It could be argued that farmland was overpriced as the Harvard/Yale investment model drove a lot of the price increase, with the end result of too much capital chasing an asset class.
The top of the farmland market was the day that CNBC did a special on the Iowa farmer in Brazil, with his mega farm.
It seems the run-ability on the treasury’s debt is determined by the median duration, not the average. I would say a run is not unthinkable if it were another country, but as we are talking about the US, who has the critical mass to start the run?
Your Point 4 is a complete mess, which leads me to doubt your overall grasp of economic fundamentals…either you’ve deliberately misread the FT Alphaville post & are scare-mongering (because of ideology or whatever reason) or you need to re-read a basic economics textbook.
JS — care to elucidate?
The FT Alphaville post talked about how UBS economists, after an empirical research study, found that most countries have not resorted to inflation to tide over huge/stubborn deficits, except in hyperinflationary instances. The main reason for that, according to them, is that most countries have relatively short-term maturities on their debt which would be difficult to roll over if creditors see inflation in these countries’ economies.
How do you, then, arrive at “…that suggests that deflation is more likely to minimize the total cost of debt to the US government”??
Your logic for not buying TIPS also seemed bizzare…you think the US will default “selectively” on its debt?? By printing & paying back in alternative currencies??! If one is worried about inflation, TIPS is the best alternative around (except for gold and some other commodities, but they have their own issues). And in any case, if the US does default on its debt no asset class, including gold, is safe.