Will the World Still Buy US Debt?
Is the PBoC going to stop buying US treasuries? The debt ceiling debate and a potential default have brought this question back into the spotlight. The theoretical and the real world answer to concerns about China and US debt is the same: China will not dump Treasuries. China’s purchase of US treasuries is simply a function of its trade policy.
And as we see today, with Treasury yields even lower, at 2.74% on the 10-year, it’s really all about interest rate expectations. John Brynjolfsson is right. “ A shutdown would signal greater weakness in the economy and cause Treasury yields to fall even more” – since we all know bond holders will eventually get their money.
The right question to ask is “How fast will the Chinese revalue to dump dollars?” “if China wants to dump dollars, it should stop the chatter and put its money where its mouth is: Revalue faster or float; everything else is just hot air.”
Expect more from Michael Pettis on this question in his next weekly column.
Below I answer questions about Chinese demand for US debt in the context of the debt ceiling debate on a Friday appearance on Russia Today.
Note, my next media appearance will be tomorrow on the BBC World News at 12 to1230ish ET to talk about the debt ceiling (again!). Tune in.
Edward, I read more of your material yesterday and today (as I said I would), and despite the fact that I agree with the way that you conceptualize the business cycle and the role of excessive credit creation in the misallocation of resources (which is ultimately to blame for the bust), I don’t see how you can call for the government to “focus on jobs,” as the solution to our current crisis just because the rise in unemployment has exposed a giant hole in the annual budget deficit.
If the government were spending money on a project-by-project basis, then I feel like this argument would have more merit, but an outright focus on job creation or aggregate demand stimulation only exacerbates the factors that caused the bust in the first place, misallocating more capital, and leading to more cancerous forms of growth.
I believe that we are headed into a time of greater, not less, resource scarcity. The current growth model for the global economy subsists on wasteful production and trinket consumption. Misallocation of resources abounds, and this is not just a result of chronically low, and artificially set interest rates or deficit spending, but also a corporatacratic imperial model that subsidizes the price of energy through military spending and war. All of these malefactors, and more, originate in the west, and they are enabled through big government.
Lastly, I have a question for you regarding your apparent support of the central banking model. You clearly understand the boom bust cycle, so why would you not want to restrain excessive credit growth by allowing the market to set the price of money organically? We had a money trust pre-1913, and it clearly exerted some monopoly powers, but having a federal reserve is even worse. I feel that if any factor is most to blame for our current crisis, it is the manipulation of interest rates (this, coupled with the fact that most of the malinvestment in infrastructure and productive capacity happening outside of the US, with nothing but house, storage facilities and retail stores being built here)
Focusing on jobs i.e. a jobs program run by the private sector but financed by government does not create a resource MISallocation. It allows the economy to use the government’s fiscal space to REallocate resources. This is not a focus on ‘aggregate’ demand, it is a focus on jobs.
Also, see here:
https://pro.creditwritedowns.com/2011/03/should-central-banks-focus-on-core-inflation.html
“The Fed and other central banks must take asset bubbles into account. That must be made explicit as a policy goal of the Fed if it is to be effective. This is Stephen Roach’s view. I would prefer the Fed be stripped of its existing mandates, allowing fiscal policy through automatic stabilizers to deal with full employment and the market to set interest rates. The Fed could then concentrate on its role as lender of last resort. “
But how is that any different than paying military contractors to do the jobs that were once done by GIs? It will be done more efficiently, but if your focus is on jobs and not profits, then all this means is that the resources will be misallocated more efficiently. It would still result in misallocation, because the private sector would be responding to demand signals that are artificial, and that, once the stimulus is pulled away, can find no self-sustaining growth dynamic to lean on.
There are scenarios under which I can imagine government spending programs to promote economic growth once the training wheels are taken off (maybe DARPA and the national highway system could stand as examples, although the assistance given to the railways during the boom in the second half of the 19th century could still have resulted in some type of misallocation, dispute the fact that it came with clear economic benefits), but in such cases, the focus would not be on jobs but rather on a need to speed up economic externalities that could benefit the private sector.
If we did engage in such deficit spending programs, then the programs would need to be though out with incredible care and maturity, and this government doesn’t have very high marks on either of those trust variables.
In response to your last point, I don’t see why the benefits of having a “lender of last resort” outweigh the costs of not having one. There is simply no way to control “the animal spirits” as you refer to them, and so any monopoly over the issuance of currency and credit will inevitably lead to abuse. Therefore, in my view, a central bank would only be a positive force if the constants of human nature were not part of the operational equation. Since we cannot automate the central bank to function outside of the vagaries of human intrigue, I would strike down the notion of a lender of last resort for the same reason that I would strike down the notion of a benign despot.
By the way, when I talk about jobs programs I mean replacing unemployment insurance in part with this program. And I am not talking about make work but private sector jobs financed in part by the program. This is very different from some of the other jobs programs being discussed.
A jobs program does not necessarily need to be an alternative to unemployment insurance. A well designed infrastructure program could suck up all the unemployed dealing with badly maintained roads and tracks. The benefits will be reduced overheads for businesses as vehicle damage from roads will fall and there will be fewer traffic jams.
Demetri
Excellent points and well said.
Somehow over the past few decades, our actions (or non-actions) have come to support a larger government with more controls over money supply (through deficit spending). There’s no question that allowing the government to juice liquidity can lead to a missallocation of captial and unintended consequences – we’ve been watching unfold live for 4 years.
Charles Hugh Smith aptly describes this as the saviour state. the majority want hand-outs, entitlements and favors from the government. Unfortunately our large financial enterprises have control of Washington and hence the answers for real leadership are scewed.
Edward has tirelessly tried to educate everyone about MMT. Anyone listening has learned alot. Despite the education, MMT is complicit in creating – and furthering – the problem of missallocation – that being the debasing of our soveriegn currency. The ability to fund government without bongs and the ability to not default (by choice) shows that while MMT is how our soveriegn fiat works – it also shows that without controls, MMT is taking us down a destructive path. If our leaders weren’t driven by relection and the power they seek, they’d have self imposed controls for the good of the people and economy.
Simply put – MMT is descriptive of where we are – but not an answer for how to operate unless strict controls are in place.
The world will continue to invest in the US regardless because the US is still viewed as a free capitalist economy with a rule of law that is well respected and envied around the world. Countries feel safer investing here than in let’s say, Greece or Somalia, as examples to make the point.
i gather blaming government is the key here, since apparently government is so screwed from the get go. obviously from now on we have to then rely on private interests to lead, which isn’t happening as far as the entire economy goes.
that leads to an endless circle of no one trusting government and private interest only concerned with themselves. Private business only uses Government to advance its’ interests, which is what any other special interest would? what’s to change the dynamic to get the “entire American economy going, not just the Wall St. sector? not going to happen the way things stand, hasn’t since the crash either.
so how is this to be solved. also Government isn’t going away. i only see diversions to different sectors of Government, like Defense,Finances, and Security sectors of Government. right now Government is co-opted by the Private interests and as we can easily see, there is no interest in focusing on jobs or any method to increase our economy other than just the casino route. Profit comes first, whatever the means. Business can make more money outsourcing than creating jobs here in America. plain as day.
we probably will have Government stay diverted by Private Business and direct all the public assets to Private business’s “way” which has so far only led to even more and Bigger Government entities. at least those parts of Government that Business desires.
Government capture doesn’t diminish the size of Government only changes the parts of Government that grows, while the unwanted parts of Government withers on the vine if so desired.
which is only natural in this scenario.
the real fallacy here is the idea that we can get rid of “Government” by having Private Business take it over. Government is still there, regardless of what you choose to call it or how you describe it. just now we have a bigger Government/Business duopoly. Godzilla plus Mithra together. try killing that!! the Business sector will defend that part of Government it wants.
seems like making Government work better and more efficiently would be a better and more profitable route. that would at least simplify Government and do away with “duplicity” and cut costs that get in the way of everyone. and it could help Business. though i wonder if Business doesn’t automatically see Government as inherently EVIL.
unless of course, you can completely takeover Government, and hope it disappears by clicking your shoes three times and say, “there’s no place like home. That only changes the appearance of Government/ now under the guise of Private Sector monopolies.
frankly the thinking is too “orthodox” to come up with a solution. the either or way of thinking doesn’t lead to a solution.
Rule of law in America? respected and envied around the world? lol, quite a dated insular view of America, i.e. this is primarily an American view. nowadays at least. our meddling in other countries affairs has caused inflation via commodities and our unwillingness to get off of Oil has destroyed the Dollar and hit the poor extremely hard, witness the Egyptian insurrection, or the Goldman Sachs manipulations of foreign Governments/Greece/Ireland, where Timmy is loved beyond words.
and blowback from the Infidels has limited our freedoms left and right.
being the international currency does have its’ benefits, though. America is ruled by the Wall St. Banksters. Banksters write the laws, if that is what you mean. everybody knows what the set up here is as far as “safety” is concerned. lol
investing is only as safe as long as the Banksters can keep control of the casino. they have done very well for a long time. so, yes it is safer here, for now. Nothing lasts forever, however. not even the Banksters.