Arnold Kling hits the macroeconomic nail on the head with a very heavy rhetorical hammer:
…it would appear to be quite likely that the United States will
experience a debt crisis within the next two decades, unless the path for fiscal policy changes from what is projected by the Congressional Budget Office. However, international capital markets continue to treat U.S. Treasury debt as a fairly safe asset. One way to interpret this phenomenon is that investors expect the United States to take steps to get its fiscal house in order.
The assumption that the United States will have the political will to stabilize its fiscal position is based more on hope than on recent experience. If the political process continues to enlarge the government’s commitments to spend in the future, investor expectations will change at some point. That change in market perception is likely to be swift and severe.
WILL THERE BE A QE2? WILL IT MATTER?
Fed Chairman Ben Bernanke is scheduled to speak today at the Kansas City Fed’s annual Jackson Hole conference in Wyoming. Will he outline a new plan for monetary stimulus? If so, will the second wave of quantitative easing (QE2) be bold–bold enough to work? Or maybe he’ll just offer the same chit-chat that we’ve been hearing for months by telling us that the recovery is slowing and that nominal rates will stay low for an extended period.
JOBLESS CLAIMS: BETTER BUT STILL HIGH
Today’s update on new filings for unemployment benefits brings a reprieve from last week’s disturbing surge in new claims. For the moment, we can breathe a sigh of relief. But while the trend has improved, it’s still not healthy.
RATE DEBATE
Minneapolis Fed president Narayana Kocherlakota’s recent speech has unleashed a storm of criticism. The offending remark: “To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.”
WAITING FOR GODOT…OR BERNANKE
The yield on the 10-year Treasury Note was under 2.5% this morning at one point—the lowest since early 2009 and down sharply from this past April’s 4% range. Not surprisingly, inflation expectations are falling too. The market’s outlook for inflation slipped below 1.5% yesterday for the decade ahead, based on the yield spread between the nominal and inflation-indexed 10-year Notes. The last time this inflation forecast was so low was July 2009.
EXISTING HOME SALES TAKE A DIVE
As widely expected, existing home sales fell sharply last month. The expiration of the federal government’s home buyer tax credit was probably a factor. Whatever the reason, the news is unmistakably bearish for the housing market, with repercussions for the broader economy as well. As the National Association of Realtors (NAR) advised in a press release accompanying today’s update: “Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.”
HOW THE OTHER HALF THINKS ABOUT DEFLATION/INFLATION
The case for worrying about deflation, or at least continued disinflation, is fairly compelling, as we noted yesterday. But is deflation fate? No, at least not yet. Much depends on the Federal Reserve’s actions in the weeks ahead. There’s also the question of how the economy fares. Was the recent slowdown in economic momentum temporary–or the sign of something more ominious for the business cycle?
INFLATION EXPECTATIONS STILL FALLING
The summer is winding down and so too is the market’s outlook for inflation. The 10-year forecast for inflation, based on the yield spread between nominal and inflation-indexed Treasuries, dipped under 1.6% last week—the lowest level in about a year.
A SHORT HOLIDAY…
The Capital Spectator will be MIA for a few days. Back on Monday, August 23.
READING ROUNDUP FOR WEDNESDAY: 8.18.2010
►The Great American Bond Bubble
Jeremy Siegel and Jeremy Schwartz/Wall Street Journal
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago. A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds.
► China Reduces Holdings of Treasury Debt in June
Martin Crutsinger/AP
China reduced its holdings of U.S. Treasury debt for a second straight month in June while the holdings of Japan and Britain rose…The debt figures are being closely watched at a time when the U.S. government is running up record annual deficits. A drop in foreign demand would lead to higher interest rates in the United States.
►China Hiding Treasury Purchases
Derek Scissors/Heritage Foundation
China’s reported holdings of U.S. Treasury bonds fell sharply again in June and are now almost $100 billion lower than they were in July 2009. The press reports this as meaningful and important. It isn’t. You may have noticed that American interest rates are not soaring; in fact, they’re at historic lows. One reason they’re not soaring is because, contrary to widespread assertions, American interest rates don’t depend on the PRC. The other reason is, over the same period, reported British holdings of U.S. Treasuries rose $265 billion. Why would the UK increase its holdings 273% in 11 months, when the yield on Treasuries is close to zero? The answer: China’s State Administration for Foreign Exchange (SAFE) has an office in London. When purchases are made through that office, they are initially counted as purchases from Britain, not China. SAFE’s goal is to reduce China’s visible dependence on the United States.