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Monday, August 08, 2011

Just Because It's So Purty

Do your own over here. That's July/August 5th.

Yields are falling quite hard now, not surprisingly. On Friday the 2-year was at 28 bps. Now it's 24.

The ten year lost 19 bps and is at 2.37 now.

Despite the Fannie downgrade, real risk for the GSEs just dropped pretty hard in the last month. Their inventory is worth more and in effect bond yields got a lot of extra shielding from any possible losses with better returns in comparison to Treasuries.

So I wouldn't be crying about that.

I am watching these curves for the formation of a risk inflection point, which should set in sometime over the next year if Congress doesn't eventually get off its butt and make an attempt at imposing some fiscal constraint. My guess is that it will show up at 10 years first.

While the US has little chance of regaining its AAA rating for 2-3 decades, this downgrade is survivable. However the next likely downgrade that S&P mentions is not; at that point our interest rates would skyrocket.


The above is from your comment in the 8/5/11 thread.

It's obvious you have no idea what you are talking about. Seriously, how do you square your rising interest rate predictions and dire eCONomic forecasts regarding Gov't debt to GDP ratios with Japan's experience over the past two decades? Or do you just block out Japan's experience because it doesn't fit with your economic religion?

Has it ever occurred to you that you don't understand what your talking about? Has it ever occurred to you that there's a reason you don't understand? Is it possible that intelligent people such as yourself are spreading ignorance without knowing so?

There's a reason I spell eCONomics the way I do. You've been CONned. Wake up and smell the coffee so that you don't end up spending your life unknowingly doing the bidding of financial thieves.
Shouldn't your name be "Stupid Saver"? If you save your wealth in the form of gold or TIPS instead of dollars there really isn't much to be angry about. The "con" has been going on since 1913. Are you "angry" because you didn't know this?
Dear Angry:

Has it ever occurred to YOU that your hostility and arrogance might be off-putting?

Go take a few deep, cleansing breaths and come back when you're ready to act civilized.

Thank you.
Angry Saver.
We're not going to see higher interest rates now. That's because, sad as it sounds, we seem to be in better economic shape than too many other countries.

But if we don't stop our borrowing (the April CBO scoring of Obama's proposal had us borrowing over 2 trillion more through 2013), in the future we will.

The USA's short-term credit rating is still tops - it is our longer-term outlook which has been downgraded.

And I told you before, we're not Japan. Japan has been running a current account surplus for lo these many years. We aren't. We borrow to balance our books. Japan has financed its public debt almost entirely internally. We must borrow to do it.

You might want to watch the spread between Fannie and the 10 year.

You know, FDIC, NCUA and the FHL system just got downgraded too!

What will happen if we don't correct is that one day we'll just reach a tipping point, and all of a sudden rates will increase. On risk. And we might all want to watch longer Treasuries for signs of that happening, because Mr. Market is not such a nice friendly guy, and the way it will happen is that we'll see an inflection on longer rates.

Right now, Angry Saver, Europe is scary. Thus the run to the yen, the Swiss franc and to German bunds. And Treasuries.

It's not the ratings that move things. It's relative risk. I am unwilling to postulate a world in which most developed western countries keep growing debt/GDP infinitely. Someone's got to be the net lender!

Aren't we seeing low interest rates because we are looking the other way on bank solvency?
Follow up to my post on food stamp caseload, Ala accounted for 785K with a significant percentage due the to disaster related expenses. Here is a breakdown by states:

"increases in SNAP/Food Stamps caseloads between May 2010 and May 2011 occurred in all parts of the country. The ten states that registered the largest over-the-year percentage caseload increases were: Alabama (118%); New Jersey (20.4%); North Carolina (20.4%); Delaware (19.1%); Minnesota (19.1%); Maryland (18.6%); Nevada (18.6%); Florida (17.0%); Idaho (16.1%); and New Mexico (15.4%).."

Banks took another big hit in today's sell off, will get interesting at the Congressional level if several TBTF banks need additional funding. Can't imagine what this is doing to CR's banks in need list!!!!
So is NJ's excuse natural disasters?

I saw where MI cut off its college students. They had mostly been able to get food stamps.
Minnesota has thousands of refugees (including Somali and Hmong) and other immigrants coming in each year, and once they are here, they tend to have children. Our local school district is struggling to adjust to the shifting demographics.
Anger Saver,

If you have a justified criticism of Maxed out Mama’s comments or conclusions I for one would like to hear it, as I am attempting to learn from this and other economic blogs. If there is some error in her thought of conclusions, please present your case.

That said, you comments were not particularly helpful. If you are going to criticize you must make a coherent case for why the other person’s point of view is in error. Telling them they are wrong and asking open ended questions without making your case does nothing to make your case. If you have a better explanation or have spotted a error in Maxed out Mamas though, please take the time to write a few coherent paragraphs, with references if it will help your case and then post it. Otherwise you will convince no one.

I mention this as when I got down reading your posting and Maxed out Mamas, I had no idea what you objection to her line of reasoning was, exactly.


Mr. Sensitive
Mr. Sensitive,

Here's just one example of M.O.M.'s flawed logic.

Her comment:

Thus the run to the yen, the Swiss franc and to German bunds. And Treasuries.

M.O.M. claims S&P's ratings matter (Gov't debt to GDP and all that non-sense). Yet she also claims that money is fleeing to the safety of the Yen and the Dollar - two countries that have already been downgraded. Apparently, markets believe that there is safety in downgraded countries, lol!

Note that Japan has been downgraded numerous times by the rating agencies (starting in 1998 if memory serves). Why? Because their Gov't debt to GDP ratio has been rising for two decades and is now ~ 200%. Despite these downgrades, Japan has uber low short and long term interest rates and an appreciating currency. M.O.M. would have you believe that internal funding is the key. Bunk! By that line of thinking, Japanese savers enjoy low yielding bonds. Or maybe they don't know of alternatives.

I could go on and on but I'll close by saying that M.O.M. is an ideologue that ignores the operational realities of the system.

p.s. In case your wondering, the reason the U.S. is like Japan and not Greece is because both the U.S. and Japan manage/issue their OWN CURRENCIES. The PIIGS gave up their monetary sovereignty and are now subject to the bond markets for funding.

For the U.S. and Japan, it's about willingness to pay, not ability to pay. Fundamental difference although with our idiotic CONgress one can't be sure.
Angry Saver - You do know that S&P only cut our long-term rating, right? They reaffirmed our short-term rating at absolutely tops. So there is absolutely no contradiction here.

I don't think the ratings matter except as they address a fundamental potential inability to pay, and unfortunately, the US does have a long term issue. Over the next couple of years the US is planning to spend more than 7 trillion dollars. We are going to borrow over 2 trillion of that. This cannot continue for too many more years after that without very real repercussions.

If you look at the public finances of all the countries from which people are fleeing to the franc, the yen and yes, Treasuries, their short-term outlook is a lot worse.

So there is no contradiction here.

In fact, Japan's deflation means that savers do accept those very low rates. Why else would they buy them? Especially banks. What matters is the spread.

A country that does not have a positive trade balance (which is the most crucial difference between the US and Japan) must compensate by inflows of money. We get those mostly in the form of Treasury buys right now, although in the past some creditors have bought US real estate and so forth.

In many ways the US is following the same course as Japan, with the same outcome. In the short term. But over the longer run, if we keep borrowing we will have a very different result, because the market will reject our debt or charge us very high rates.

Willingness to pay is not the issue here; capacity to pay is.

Some background on balance of trade.
If you look at the public finances of all the countries from which people are fleeing to the franc, the yen and yes, Treasuries, their short-term outlook is a lot worse.


Their short term outlooks aren't worse by your key metric - Gov't debt to GDP ratio. Their short term outlooks are worse because of their lack of monetary and fiscal sovereignty. The Euro rules just don't square with all the ponzi private debt in the system.

Again, Japan has a debt to gdp ratio of ~ 200%, far above the ratios of the countries people are fleeing. Using your gov't debt to gdp logic, investors should be fleeing from Japan to the PIIGS countries, yet the reverse is occurring.

And Japan's debt to GDP ratio isn't a one off or short term event either. It's been rising for decades. Further, Japan was first downgraded 13 years ago, not exactly short term.

Also, Japan's recent earthquake, tsunami and nuclear meltdown don't exactly lend themselves to a rosier short term outlook.

Lastly, the U.S.'s collapsing long term interest rates run completely counter to your claims of short vs. long term. Good grief, the 30 year is nearing historic lows!

p.s., Thanks for the wikilink. I never would have thought of looking there to gain a deeper understanding of trade.
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