Showing posts with label us debt. Show all posts
Showing posts with label us debt. Show all posts

Monday, December 31, 2012

The fiscal cliff of 1937

With all the current noise regarding the 'fiscal cliff' I thought a look back at when we had a real fiscal cliff would be interesting.

Steve Keen, an Australian economist I've mentioned before recently gave a presentation to members of Congress regarding the Fiscal Cliff of 1937.


Source: http://www.debtdeflation.com/blogs/2012/12/06/briefing-for-congress-on-the-fiscal-cliff-lessons-from-the-1930s/

In his presentation Mr. Keen describes the mechanism through which a dramatic tax increase coupled with an absolute cut in spending threw the US economy into a recession.  From 1937 to '38 tax receipts when up ~25% and spending was cut ~8%  While in the 1937 spending and taxes were a much smaller percentage of GDP, the large swings in their absolute numbers were enough to decrease the deficit from -2.5% to -0.1% or a change of 2.4% (source: White House)

Additionally the Federal Reserve shrank their balance sheet at the same time:

The wrong time to anti-QE
Source: Federal Reserve

The combination of Fiscal and Monetary tightening pushed the economy back into recession. (Vertical gray lines on above graph.)

Right now we are experiencing a similar situation: The US economy is working off the excesses of a burst credit bubble and federal spending and deficits are at an all time high.   


Spending and Taxes from 1930 on
Source: White House
As you can see above, spending is at at a peacetime high and taxes are near a post WWII low. (Both relative to GDP.) Combine the two and you have the largest peacetime deficit from 1900 onward. (The data from the White House doesn't go back any further than 1900, so there may be another time period before then however I doubt we have experienced peacetime 10+% budget deficits before.)


Today we can see the credit bubble bursting in a chronically high unemployment rate and sluggish GDP growth.  Unlike other downturns, our GDP did not rebound much. 


Real US GDP
Source: Federal Reserve

A ~2.5% GDP growth rate after coming out of a recession is quite low as compared to historical norms.

Raising taxes too quickly combined with actual spending cuts on an already slowly growing economy could send us immediately into a recession.  This is what has Wall Street in a current tizzy and is already hitting consumer confidence.

Predictions about the future are tricky, especially when politicians are involved.

How much taxes go up, and if there are any actual spending cuts will determine how much of a fiscal drag hits the economy in 2013.  Right now it's all speculation and I'm not going to try to predict what Congress and the President will eventually agree to, before or after January 1, but there are a few items which appear certain:

  • Taxes will go up, but not as much as 1937 on a percentage basis
  • Spending will most likely not decline on an absolute basis
  • Federal spending is a much larger percentage of the economy than in 1937
  • The Federal Reserve will NOT shrink its balance sheet in 2013

How much taxes will go up and on whom is the unknown and that is what is creating uncertainty in the mind of corporations and individuals.  Until we have clarity both the markets and consumer actions may be volatile.

Additional reading:

http://www.ritholtz.com/blog/2012/12/what-is-the-fiscal-cliff/

http://www.cringely.com/2012/12/16/dr-al-explains-the-so-called-so-called-fiscal-cliff/

http://soberlook.com/2012/11/putting-fiscal-cliff-in-perspective.html

I actually wrote about this 2+ years ago as I was studying the history of the Great Depression.
http://merrillovermatter.blogspot.com/2010/06/is-steep-yield-curve-leading-us-astray.html

Thanks to
 @mbusigin 1937 fed data
 @AlephBlog When is a 'cut' really a 'cut' in Washington speak (hint, not very often)    


Wednesday, April 27, 2011

Bank lending update

It's been a few months since I last highlighted total bank lending but not much has changed since late October. Just to make sure you don't think I forgot here's an update.

Total bank loans and leases as per the Fed continues its steady decline economic recovery notwithstanding.  As you can see there was a large recent spike but this was due to an accounting change in bank's loans and not a sudden increase in lending.  This lack of new lending may be one reason broad money supply is so sluggish of late.

Like last update the banks are buying US Treasuries instead of lending. If you wondering who is buying those hated T bonds look to your corner mega-huge bank.   Considering their funding costs and capital requirements are pretty much zero you could say banks would rather just play golf and clip Treasury coupons.

Tuesday, October 26, 2010

Bank lending update

The data initially looks good but a change in accounting rules is the reason and not more lending by the banks.


In Chart #1 you can see the recent large spike in total loans and leases at commercial banks.  New accounting rules forced the banks to place off balance sheet items back on their books.  (I thought the Enron scandal fixed all that? Guess not)


This really throws off the year over year data so don't get excited if you hear bank lending has recently surged.


Just to show you how this decline in lending is unusual Chart #2 shows the series longer term on a year over year change.  As you can see until recently serious declines in lending never happened.


In case you are wondering what the banks are buying instead of lending... they are buying US government securities.
In my opinion this lack of lending by the banks is just one reason the Fed is freaked out and is prepping the markets for QE 2.0.  They are going to flood the market with money to try to get more people to borrow money and buy stuff.  Unfortunately I don't think it will work and I'll be writing about that soon(tm)









Wednesday, July 14, 2010

Late Night Linkage

Postings have been light due to some business related demands.  Here's some links to my recent reads from the last few days.

Humor
Vuvuzela -- Will it blend? Youtube

Gold
Telegraph - did BIS gold swap spook the markets?

China
From Chinadaily - Property restrictions continue.
Chinadaily - Home price appreciation slows.
Chinadaily - Rate of lending slows in China.

Residential
From CalculatedRisk - A Chapter 13 bankruptcy can wipe away a 2nd lien.

Commodities
From FT -- The financialization of commodities.

LNG
From Hellenicshipping - A lot of spare LNG ships standing idle.

Lumber
Globe and Mail - Canada exporting lumber to China.

Sovereign debt
CalculatedRisk - How much debt is there and what is the probability of default?  It's a multi part series. Good stuff.
GMO - White paper on defaults in history. Very good. Intend to write longer blog post about this.

BP / Oill spill
WSJ - BP has replaced old cap, trying new one in an attempt to stop leak.  (This is at least 24 hours old.)

Euro
Telegraph - Legal challenges to bailout of Greece.
WSJ - Moody's downgrades Portugal.

Debt
Annaly - The debt deleveraging continues.

Wednesday, June 30, 2010

No one is talking much about deflation . . . yet.

US Treasury rates have dropped recently and it appears to me they may continue declining.   How low can they go?  I have no idea but I thought it would be interesting to look at when 'deflation' was a popular search term on Google.  Click on the screen capture at the right and you'll see searches spiked around the same time long term US Treasury bond yields dropped very quickly.

I wonder if we'll get another spike in search traffic for deflation if bond yields fall again . . .

Monday, May 24, 2010

Bank lending update

It has been a while since I last discussed the decline in bank lending.  Total loans and leases continues to decline while bank's holdings of US Treasury securities continues to climb (Source: Federal Reserve, 2010-05-24)

You may notice the spike in loans and leases but don't get excited, this is due to FASB 166 & 167 requiring banks to bring off balance sheet items back into the sunlight.  This will screw up the year over year data for a while but even after this 'increase', lending is down year over year.  Annaly's blog has the details

Wednesday, February 17, 2010

Bank lending continues falling -- Are buying US Treasuries instead

Bank lending continues to fall on a year over year basis.  Compared to the previous two recessions in which bank lending stabilized and then renewed growing this time overall bank lending is down and is continuing to decline.

As you can see from the first graph they are instead following the pattern from the last two recessions and are increasing the US Government securities portfolios while cutting lending to the private sector.   Unlike private bank loans Treasuries are very liquid and can be sold immediately if cash is needed.   Capital requirements for Treasuries are also much lower compared to a private bank loan.  Considering the capital positions of most banks in America (I'll have a post on this soon)  are tenuous they need the liquidity and 'safety' of Treasuries.

The year over year change in bank's holdings of US Government securities does not show the full extent of the bank Treasury purchases. As you can see from the second graph the banks continue to load up and the slope is definately upwards.

Thursday, December 3, 2009

Bank lending continues cliff diving


Here's the update on total bank lending and it is not good.  Total loans and leases at US banks continue to drop and is picking up speed.

I went back and looked throughout the entire data set available (back to 1973) for bank loans and loan growth has never been this negative, ever.  

If you notice on the graph, bank lending levelled off and slowly resumed growing after each of the two previous recession.    So far bank lending continues to fall and shows no sign of even levelling off. 

The year over year deceleration in US government securities owned by banks is curious considering loans dropped as well.  Are banks deleveraging their balance sheets or is it just seasonal noise?

Until bank lending stabilizes and starts growing again we will not have any meaninful recovery.

Thursday, November 12, 2009

Inflation expectations in the bond market

While gold continues powering upwards the US Treasury market is not confirming similiar concerns about inflation.  (If gold is climbing due to uncertainty regarding the entire paper fractional banking monetary system is another matter)  Looking at the comparative yields of nominal versus inflation protected bonds (called TIPS) issued by the US treasury is illuminating. 

As you can see inflation expectations in this market are actually lower now than before this crisis erupted in 2008.  If the bond market was truely concerned with inflation you would see the implied breakeven inflation rate go up, not down. 

Monday, October 19, 2009

Who is buying all the Treasury debt? a.k.a how bankers are bad traders


Like a worldwide version of Where's Waldo,  a lot of people want to know who is buying all the US Treasury debt being produced by a yawning budget deficit and when they will conversly dump them on the open market.  The Chinese and the Federal Reserve are the first people on everyone's list, but here's another. 

Presented is US Government Securities at all commerical banks.  The first graph shows the absolute change year over years, in billions of dollars.  As you can see US banks have added nearly 240 billion dollars to their portfolios in the last 12 months.   Unfortunately this has not absorbed the entire supply of new issuance in the last 12 months, but it takes a serious chunk of the notes out of circulation.  As this data series is released weekly, I'll be watching it closely to see if the bankers are buying more US debt in the near future. 

Here is the data in a slightly different format so recent events do not dominate the picture, it shows government debt holdings on a year over year percentage basis.  What struck me about this graph is how the banks seem to be adept at raising their treasury holdings as the recessions appear to be ending as shown by the gray vertical shaded areas. 

The bankers appear to consistently purchase US debt just as the recession is finally ending (remember the recession 'end' is backwards looking and it can take several months before a recession is declared as over) and from a trading perspective at exactly the antipodal time to reduce credit risk. 

Also, a bank loading up on US debt is less likely to be making conventional loans to consumers and corporations.  They only have so much room on their balance sheet to hold securities and with all things being equal (yes, I know they aren't)  US Government debt purchases crowd out the possibility of making conventional loans.


Hey, look at that.... Inverse correlation between (US debt) and (loans and leases) on banks books!  It appears the bankers are still running scared and loading up on US treasuries.  Also, look at how loans are declining on a year over year basis, something that has not happened over the entire time period in this graph.  Corporations can access credit via other means (commercial paper, debt markets, etc) but the decline in bank lending  is troublesome.