speaking of the FOMC, which announced it would keep the size of its balance sheet static by reinvesting principal pre-payments and maturities of its existing assets into Treasuries, Paul Krugman asks:
"Presumably there’s some optimal size of the Fed’s balance sheet, given the state and prospects of the economy. What are the odds that the optimal size of that balance sheet is precisely the size it’s currently at?"
in any case, what, if any impact, should this QE-lite or QE-neutrality (or whatever we should refer to it as) have on interest rates?
In a research paper earlier this year, Joseph Gagnon and other Fed staffers at the FRBNY estimated that a purchase of long-term assets in an amount equivalent to 1% of GDP would lower the yield on 10-year Treasuries by 4.4 basis points (see Table 5a on page 35) (hat tip James Hamilton).
So for each $150 billion (about 1% of GDP) in assets that the Fed has rolling off its balance sheet over the next year, the yield on 10-years might be expected to rise about 4.4bps; and by rolling the proceeds of those maturies into Treasuries, the Fed might be expected to prevent that 4.4bp rise in yields from happening. So, say, rather than the 10-year going from 2.70 to 2.75, ceteris paribus, it will now stay at 2.70. WOW, thats some stimulus!
by the by, is Hoenig being instructed to dissent, for some obscure political or P.R. purpose, as MK thinks, or is he simply smoking something?
he claims he dissented because he "judges that the economy is recovering modestly, as projected"
REALLY? as projected? as of April, the Fed was projecting 2010 growth of 3.2% to 3.7%; but Q2 GDP growth was estimated at 2.4% (and is likely to be revised down), while the median forecast of economists for Q3 & Q4 are 2.5% and 2.6% respectively
so, this is the same guy who dissented in April when he opined that the fed funds rate should be hiked to 1% this summer --- and who dissented in October 2007, on the eve of the recession, preferring to leave the fed funds rate unchanged at 4.75%, with no need for monetary stimulus (hat tip, Barry Ritholtz)
so, frankly, I think Hoenig's on drugs; whatever he says, go the other way
China Seen Robbing Consumers With Low Interest Rates. Bloomberg.
discusses reasons to be very skeptical of a consumer boom in China
consumption as a share of GDP has plummeted from 46% in 2000, already a very low share relative to most economies, to just 35%
though the economy has grown remarkably over the last decade, only a small proportion of this has flowed through to consumers in the form of income growth
MIT professor Huang Yasheng:
Vice Premier Li Keqiang, widely believed to be the anointed premier when leadership changes in 2012:“Even in the best-case scenario I do not see household consumption replacing investment as a driver of growth in the foreseeable future.”
“I never believed the hype that China was turning the corner on rebalancing growth toward consumption. The main political agenda is not to let GDP growth slip and that means continued investment growth.”
China’s past development has created an “irrational economic structure” and "uncoordinated and unsustainable development is increasingly apparent.” Long-term dependence on investment and exports for growth “will grow the instability of the economy,” he said.Glen Maguire, economist at SocGen:
“Until consumption grows faster than fixed-asset investment for a sustained period, the economy will remain unbalanced.”Chinese consumption and the Japanese "sorpasso". Michael Pettis.
most analysts viewed the surge in auto sales and in durable goods-driven retail sales was immensely good news and they argued that this increased demand signaled a major shift in the consuming and saving behavior of Chinese households
some observers are getting excited about the fact that China's GDP will soon overtake that of Japan, thus becoming the 2nd-largest economy in the world; Pettis has reservations:[but skeptics like me] claimed that the surge in demand for automobiles was caused mainly by government subsidies, and that these were not sustainable. The same thing happened, by the way, to durable goods, which were also subsidized and which also saw a surge in retail sales. More importantly, we argued, any current increase in automobiles sales and durable goods would be reversed in the future as households absorbed the cost of the subsidies.
Remember that subsidies are not manna from heaven. They must be paid for, and ultimately it is the household sector that pays for them, usually in the form of higher taxes but sometimes, and certainly in the case of China, in the form of financial repression. The government, in other words, borrows from the household sector (via the banks) at artificially low interest rates, which implies continual government debt forgiveness paid for by the household sector. Either way, whether it is through taxes or debt forgiveness, as households pay for today’s subsidies out of tomorrow’s income, consumption will rise today and decline tomorrow....
Contrary to conventional thinking, the Chinese have no aversion to consuming. They are eager consumers, as even the most cursory visit to a Chinese shopping mall will indicate.
So why do they consume such a low share of national GDP – perhaps the lowest share ever recorded? The answer has to do with the level of household income as a share of GDP, also one of the lowest ever recorded.
Chinese households are happy to consume, but they own such a small share of total national income that their consumption is necessarily also a small share of national income. And just as the household share of national income has declined dramatically in the past decade, so has household consumption. This isn’t to say households are getting poorer. On the contrary, they are getting richer, but they are getting richer at a much slower speed than the country overall, which means their share of total income is declining.
before we get too excited about China’s overtaking Japan, we should remember that this has as much to do with Japan’s astonishing decline as with China’s astonishing rise, and that there is at least some small chance that the policies responsible both for Japan’s breakneck rise and equally breakneck decline may be being replicated in China
other fare:
Frozen jet stream links Pakistan floods, Russian fires. Michael Marshall, New Scientist.
First They Came For The Climate Scientists. Paul Krugman, NYT.
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