Why is higher deficit not leading to higher interest rates?

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Theseus
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Why is higher deficit not leading to higher interest rates?

Post by Theseus » Sun Feb 17, 2019 6:20 pm

If a person or a business continues to spend more than their income they are in a higher risk pool. And their subsequent borrowing usually will be at a higher interest rate.

Why doesn’t that happen with US deficit? Is it due to the full faith and credit of the US government? But wouldn’t we run out of that goodwill at some point of deficit threshold ? Shouldn’t we expect higher interest rates and plan accordingly?

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Re: Why is higher deficit not leading to higher interest rates?

Post by larryswedroe » Sun Feb 17, 2019 6:24 pm

one explanation may be that people recognize that the high deficits will lead to higher taxes and they need to save more now so rates stay low
Also very low rate of global growth, and rates depend on global supply of capital
Also aging population shifting to bonds (around the globe) and that leads to lower real rates
Larry

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Re: Why is higher deficit not leading to higher interest rates?

Post by nisiprius » Sun Feb 17, 2019 6:25 pm

???? Leaving aside questions of cause and effect, aren't we, in fact, seeing higher interest rates?
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Re: Why is higher deficit not leading to higher interest rates?

Post by DB2 » Sun Feb 17, 2019 10:56 pm

larryswedroe wrote:
Sun Feb 17, 2019 6:24 pm
one explanation may be that people recognize that the high deficits will lead to higher taxes and they need to save more now so rates stay low
I don't think the average person is even thinking about this or really understands it. Maybe a small percentage of the population. Everything I've read is American's savings is very low (e.g., fed study: 40% of population cannot cover a $400 emergency, etc.).

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Re: Why is higher deficit not leading to higher interest rates?

Post by HEDGEFUNDIE » Sun Feb 17, 2019 10:59 pm

Front page WSJ article today about this topic:

https://www.wsj.com/articles/worry-abou ... _lead_pos2

Short version: as long as economic growth is higher than the interest rate, deficits don't matter.

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Re: Why is higher deficit not leading to higher interest rates?

Post by pdavi21 » Sun Feb 17, 2019 11:00 pm

Because they can print money to pay off the entire debt. Also because most of the money is owed to the US Govt and US Citizens.
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Re: Why is higher deficit not leading to higher interest rates?

Post by unclescrooge » Sun Feb 17, 2019 11:17 pm

This 5 min video on modern monetary theory will help explain why this may be happening.

https://youtu.be/TDL4c8fMODk

It's very interesting and entertaining.

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Re: Why is higher deficit not leading to higher interest rates?

Post by Day9 » Mon Feb 18, 2019 2:20 am

Could it simply mean there is high and growing investor demand for US Treasuries, perhaps because of how they were the only investment to do well in the 2008 crisis? They say generals always prepare for the last war.
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Re: Why is higher deficit not leading to higher interest rates?

Post by Starfish » Mon Feb 18, 2019 2:34 am

unclescrooge wrote:
Sun Feb 17, 2019 11:17 pm
This 5 min video on modern monetary theory will help explain why this may be happening.

https://youtu.be/TDL4c8fMODk

It's very interesting and entertaining.
Yeah... i don't know.
I lived through hyperinflation and saw the effects, I am hard to convince.

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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 2:58 am

Theseus wrote:
Sun Feb 17, 2019 6:20 pm
If a person or a business continues to spend more than their income they are in a higher risk pool. And their subsequent borrowing usually will be at a higher interest rate.

Why doesn’t that happen with US deficit? Is it due to the full faith and credit of the US government? But wouldn’t we run out of that goodwill at some point of deficit threshold ? Shouldn’t we expect higher interest rates and plan accordingly?
The answer is that the economy is very complex and things don't always work the way common sense would dictate. We had large deficits during both the Reagan and Obama Administrations and interest rates did nothing but fall. Reagan presided over a boom emerging from a Fed induced recession to tame inflation, Obama presided over a more tepid economic recovery emerging from a genuine financial crisis that nearly crashed our financial system. There was genuine worry about a second Great Depression.

In theory, large amounts of government borrowing crowd out private borrowing but in practice doesn't seem to ever happen. You would think higher demand for borrowing by government would increase competition for savings and would actually drive up interest rates. Japan has a very large government debt to GDP ratio and interest rates and inflation are both very low.

I have opined here many times that governments with debt denominated in their own currency can't default unless for some bizarre reason choose to. The problem with ballooning debt is potential inflation and not default. But with the two administrations that I cited, my opinion didn't work out too well either as inflation under both Reagan and Obama Administrations also did nothing but fall.

So the standard textbook explanations seem to fall short. Even the Modern Monetary Theory and its cousin Monetary Realism that I have often cited here don't always seem to work. They provide a different way of looking at the monetary system and help provide some answers that textbook explanations do not. But MMT and MR fall short as well.

If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.

But the theory of sectoral balances goes further: the Public Sector + Private Sector + Foreign Sector = Zero. So there is an equilibrium there. Wikipedia says that in 2017 the US trade deficit was 2.3% of GDP. That means the US is a debtor country as it consumes more than it creates. The US is a net spender. So the Foreign Sector, everyone outside of the United States, had a Surplus of that 2.3%. That means dollars are leaving the country. Thus foreign countries will be a net buyer of US Treasuries. That is why our trading partners like China and Japan that have trade surpluses with us own lots of our US Treasury debt.

The Wikipedia article on sectoral balances also said the Governmental Sector ran a deficit of 3.5% of GDP in 2017. Okay, we just said that the Foreign Sector had a 2.3% surplus, so that means the Private Sector still has a 1.2% surplus. -3.5% + 2.3% + 1.2% = Zero. So when the Foreign Sector is in surplus, that is when the US runs a trade deficit, the Government sector has to be in deficit greater than the trade deficit in order for the private sector to have savings.

Have I explained everything? Have I an airtight model here? Well, Monetary Realism says that most new monies are created by the Money Multiplier Effect. That is bank deposits can be leveraged 10:1 by bank lending. The bank makes a loan to one person and that becomes a deposit for somebody else. Some say that bank reserves have no role in banks creating loans. In effect, private banks create money out of thin air. They create money by extending credit which in turn creates a deposit. So while US Government budget deficits play a role in money creation, it would seem that most new monies are created by the private banking system.

So you can see that this gets pretty complex and yet there is more to the story than this. But this is a post and not a textbook. I will stop here. Just will repeat what I said at the beginning, that things don't always work the way common sense would dictate.
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Re: Why is higher deficit not leading to higher interest rates?

Post by mjb » Mon Feb 18, 2019 5:49 am

So we (personal investors) use treasuries as safe short term and long term investments. However, businesses need treasuries for other purposes. Insurance companies use them for liability matching. Banks use them for liquidity and collateral for lending and derivatives. Banks use them for regulatory purposes as well. Major corporations use them for savings as they do not have access to FDIC insurance. Foreign companies use them to facilitate international trade. A lot of information on how treasuries are used can be found here httpsww.macrovoices.com/edu . The explanation they provide explains it much better than MMT. Long story short, currently there actually aren't enough treasuries to go around.

The United States is overall a well run country with a relatively fair rule of law, low corruption, an abundance of resources, and an overall strong business environment. While deficits are currently high, servicing costs are low and as the U.S. has realitively low taxes, there is capacity for the government to afford more. Treasuries are still the safest and most liquid investment around.

The lesson for us as investors is stay the course but remain observant on market conditions. If a serious alternative to treasuries arises, diversify.

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Re: Why is higher deficit not leading to higher interest rates?

Post by RedDog » Mon Feb 18, 2019 6:40 am

Theseus wrote:
Sun Feb 17, 2019 6:20 pm
If a person or a business continues to spend more than their income they are in a higher risk pool. And their subsequent borrowing usually will be at a higher interest rate.

Why doesn’t that happen with US deficit? Is it due to the full faith and credit of the US government? But wouldn’t we run out of that goodwill at some point of deficit threshold ? Shouldn’t we expect higher interest rates and plan accordingly?
Perhaps you're falsely presuming all other things are the same. What if the hypothetical person or country's net worth and income were also increasing?

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Re: Why is higher deficit not leading to higher interest rates?

Post by nisiprius » Mon Feb 18, 2019 7:28 am

(Baffled) Why is this thread looking for reasons why we are not seeing higher interest rates, when we are?

I moved some money into a local bank's 2.5% 20-month CD just last week.

Ten-year rate is pushing 3%.

Image

Total Bond SEC yield is over 3%.

Image

Fed funds rate.

Image

I have to ask this seriously: how high is up?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Why is higher deficit not leading to higher interest rates?

Post by Seasonal » Mon Feb 18, 2019 7:47 am

Theseus wrote:
Sun Feb 17, 2019 6:20 pm
If a person or a business continues to spend more than their income they are in a higher risk pool. And their subsequent borrowing usually will be at a higher interest rate.

Why doesn’t that happen with US deficit? Is it due to the full faith and credit of the US government? But wouldn’t we run out of that goodwill at some point of deficit threshold ? Shouldn’t we expect higher interest rates and plan accordingly?
A government is not a family or a company. Attempts to draw analogies to a person or business are fundamentally flawed. Among other things, few people or companies issues debt in their own currency or have taxing power over massive economies. Also, remember that US debt is mostly held by its own citizens.

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Re: Why is higher deficit not leading to higher interest rates?

Post by JBTX » Mon Feb 18, 2019 10:02 am

To the extent nominal interest rates are driven by inflation, globalization technology and automation have helped to keep a lid on inflation

While the US does not accrue a lot of personal savings, some others do, such as east Asian countries. Between the comparatively stronger US economy, the dollar being reserve currency and a "glut" of savings worldwide US treasuries have stayed in high demand keeping US interest rates low. Part of this has to do with demographics and the aging of most of the comparatively wealthier countries.

The question is going forward with continued and expanding deficit spending and an expanding debt will these forces offset any crowding out effect? That's the $30 trillion question.

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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 10:34 am

JBTX wrote:
Mon Feb 18, 2019 10:02 am
To the extent nominal interest rates are driven by inflation, globalization technology and automation have helped to keep a lid on inflation

While the US does not accrue a lot of personal savings, some others do, such as east Asian countries. Between the comparatively stronger US economy, the dollar being reserve currency and a "glut" of savings worldwide US treasuries have stayed in high demand keeping US interest rates low. Part of this has to do with demographics and the aging of most of the comparatively wealthier countries.

The question is going forward with continued and expanding deficit spending and an expanding debt will these forces offset any crowding out effect? That's the $30 trillion question.
Just because I have a more benign attitude towards budget deficits doesn't mean that I don't think they matter. My opinions is that too high of deficits can cause inflation but you have to remember there are countervailing trends. A poster above talked about globalization, technology, and automation putting a lid on inflation. Another factor is the velocity of money created by the private economy. The government can stimulate all it wants but if private banks won't lend the economy won't respond. If the government mails checks to people, and those people lack confidence in the economy, the money will go in the bank rather than being spent. Public confidence is another factor that affects all of this.

Is there a point where too much government debt will be an anchor on the economy and suppress economic growth? Some think this is happening in places like Japan and Italy. A pretty good argument is that bad demographics are to blame, too few babies. I have my ideas about all of this but we really don't know for sure.
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Re: Why is higher deficit not leading to higher interest rates?

Post by Valuethinker » Mon Feb 18, 2019 10:34 am

Theseus wrote:
Sun Feb 17, 2019 6:20 pm
If a person or a business continues to spend more than their income they are in a higher risk pool. And their subsequent borrowing usually will be at a higher interest rate.

Why doesn’t that happen with US deficit? Is it due to the full faith and credit of the US government? But wouldn’t we run out of that goodwill at some point of deficit threshold ? Shouldn’t we expect higher interest rates and plan accordingly?
US interest rates have risen.

The world is in a savings glut, as the result of demographics (populations getting older - personal saving seems to peak ages 45-60 say) and income inequality (the highly remunerated save more) & wealth inequality (wealth breeds more wealth - Picketty). In a bid to restore economic growth, monetary policy has been highly accommodating (long term low interest rates, quantitative easing etc.).

That has a couple of odd effects. One is asset price inflation - see the Vancouver Canada housing market (average price of a single family home was nearly $2m, and the local economy does not have large employers like Microsoft Boeing Starbucks Amazon etc). This is a market where international capital and runaway leverage (higher housing prices mean you can borrow more and have to to buy, thus driving housing prices up) have combined to create an essentially absurd situation. HIstory says such bubbles eventually burst, usually fairly explosively.

The other is the decreasing price of risk - whether you are a risky emerging market country, or a risky highly leveraged buyout, or a Toronto condominium development, money has been very cheap. See also peer-to-peer finance, bitcoin (as was) etc.

I am watching the US car loan default situation with some bemusement - I cannot understand fully how this is happening, but it is. Car finance looks like a mini financial crisis at work.

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Re: Why is higher deficit not leading to higher interest rates?

Post by DB2 » Mon Feb 18, 2019 10:42 am

Valuethinker wrote:
Mon Feb 18, 2019 10:34 am


I am watching the US car loan default situation with some bemusement - I cannot understand fully how this is happening, but it is. Car finance looks like a mini financial crisis at work.
I am still trying to get my head around 84-97 month auto loans.

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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 10:49 am

nisiprius wrote:
Mon Feb 18, 2019 7:28 am
(Baffled) Why is this thread looking for reasons why we are not seeing higher interest rates, when we are?

I moved some money into a local bank's 2.5% 20-month CD just last week.

Ten-year rate is pushing 3%.

Image

Total Bond SEC yield is over 3%.

Image

Fed funds rate.

Image

I have to ask this seriously: how high is up?
Nisiprius, I cited two examples falling inflation and interest rates despite huge amounts of deficit spending, during the 1980's and the 2010's. Two different Administrations. Two different economies, a boom vs. a more tepid recovery. Here, we are seeing a strong economy and higher deficits and we have seen both inflation and interest rates tick up a bit. But these aren't the high inflation 1970's and Paul Volcker is long retired. Inflation is still amazingly well behaved.

The thing is, interest rates have actually fallen a bit recently including mortgage rates. We saw this in December 2018, that was soooo long ago that I can barely remember it. The longer term trend has been up, indeed I think the 30 year plus bull market in bonds ended with the "taper tantrum" back in summer of 2013. Short term rates are up a lot but this was removing the artificially low interest rates imposed to fight the great recession. Long rates are up but not by as much as one would expect in a strong economic environment.

Hard to say exactly what is happening. The Fed tightened but now is signaling that the program of hiking interest rates is almost over if not already over. We would expect to see inflation and interest rates tick up with a strong economy but inflation has remained relatively well behaved. Unemployment is low, people are getting payraises, but again pay raises aren't as much as one might expect given such low unemployment. My thought is that unemployment isn't as low as we think it is though both employment numbers and labor participation rate are certainly much better.

As I said above, there are trends but there are always countervailing trends. My thoughts are that interest rates are going back to more normal levels. The Fed has decided not to hold interest rates artificially low anymore. But so many things are at work here, it is hard to say that any one thing is causing this. The economy is very complex.
Last edited by nedsaid on Mon Feb 18, 2019 10:50 am, edited 1 time in total.
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Re: Why is higher deficit not leading to higher interest rates?

Post by JBTX » Mon Feb 18, 2019 10:50 am

nedsaid wrote:
Mon Feb 18, 2019 10:34 am
JBTX wrote:
Mon Feb 18, 2019 10:02 am
To the extent nominal interest rates are driven by inflation, globalization technology and automation have helped to keep a lid on inflation

While the US does not accrue a lot of personal savings, some others do, such as east Asian countries. Between the comparatively stronger US economy, the dollar being reserve currency and a "glut" of savings worldwide US treasuries have stayed in high demand keeping US interest rates low. Part of this has to do with demographics and the aging of most of the comparatively wealthier countries.

The question is going forward with continued and expanding deficit spending and an expanding debt will these forces offset any crowding out effect? That's the $30 trillion question.
Just because I have a more benign attitude towards budget deficits doesn't mean that I don't think they matter. My opinions is that too high of deficits can cause inflation but you have to remember there are countervailing trends. A poster above talked about globalization, technology, and automation putting a lid on inflation. Another factor is the velocity of money created by the private economy. The government can stimulate all it wants but if private banks won't lend the economy won't respond. If the government mails checks to people, and those people lack confidence in the economy, the money will go in the bank rather than being spent. Public confidence is another factor that affects all of this.

Is there a point where too much government debt will be an anchor on the economy and suppress economic growth? Some think this is happening in places like Japan and Italy. A pretty good argument is that bad demographics are to blame, too few babies. I have my ideas about all of this but we really don't know for sure.
All of what your wrote makes sense. I think what you and I posted tend to be the conventional wisdom of many economists these days.

One thing I have wondered, and I don't recall explicitly hearing this, is that these days consumer good inflation is being displaced by asset inflation. Asset inflation is not traditionally considered inflation because it is investment. But when you have a greater disparity of income and wealth, coupled with the other trends above, additional money tends to chase assets vs consumer goods.

The other thing I have wondered is conventional theory says you should avoid deflation at all costs, for some pretty good reasons. However I wonder if that really holds true with technology driven modest inflation. Companies are much more adaptible at shedding work force and changing wages, so a modest deflation might not be as bad as it was 80 years ago. But all that is just conjecture.

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Re: Why is higher deficit not leading to higher interest rates?

Post by UpperNwGuy » Mon Feb 18, 2019 10:52 am

Starfish wrote:
Mon Feb 18, 2019 2:34 am
unclescrooge wrote:
Sun Feb 17, 2019 11:17 pm
This 5 min video on modern monetary theory will help explain why this may be happening.

https://youtu.be/TDL4c8fMODk

It's very interesting and entertaining.
Yeah... i don't know.
I lived through hyperinflation and saw the effects, I am hard to convince.
You must have been abroad when you lived through hyperinflation. The US has never experienced hyperinflation. The most we have seen here is low double-digit inflation.

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Re: Why is higher deficit not leading to higher interest rates?

Post by JBTX » Mon Feb 18, 2019 10:53 am

nisiprius wrote:
Mon Feb 18, 2019 7:28 am
(Baffled) Why is this thread looking for reasons why we are not seeing higher interest rates, when we are?

I moved some money into a local bank's 2.5% 20-month CD just last week.

Ten-year rate is pushing 3%.

Image

Total Bond SEC yield is over 3%.

Image

Fed funds rate.

Image

I have to ask this seriously: how high is up?
We are still nowhere near a long term average interest rates (at least I don't think)

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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 10:56 am

JBTX wrote:
Mon Feb 18, 2019 10:50 am
nedsaid wrote:
Mon Feb 18, 2019 10:34 am
JBTX wrote:
Mon Feb 18, 2019 10:02 am
To the extent nominal interest rates are driven by inflation, globalization technology and automation have helped to keep a lid on inflation

While the US does not accrue a lot of personal savings, some others do, such as east Asian countries. Between the comparatively stronger US economy, the dollar being reserve currency and a "glut" of savings worldwide US treasuries have stayed in high demand keeping US interest rates low. Part of this has to do with demographics and the aging of most of the comparatively wealthier countries.

The question is going forward with continued and expanding deficit spending and an expanding debt will these forces offset any crowding out effect? That's the $30 trillion question.
Just because I have a more benign attitude towards budget deficits doesn't mean that I don't think they matter. My opinions is that too high of deficits can cause inflation but you have to remember there are countervailing trends. A poster above talked about globalization, technology, and automation putting a lid on inflation. Another factor is the velocity of money created by the private economy. The government can stimulate all it wants but if private banks won't lend the economy won't respond. If the government mails checks to people, and those people lack confidence in the economy, the money will go in the bank rather than being spent. Public confidence is another factor that affects all of this.

Is there a point where too much government debt will be an anchor on the economy and suppress economic growth? Some think this is happening in places like Japan and Italy. A pretty good argument is that bad demographics are to blame, too few babies. I have my ideas about all of this but we really don't know for sure.
All of what your wrote makes sense. I think what you and I posted tend to be the conventional wisdom of many economists these days.

One thing I have wondered, and I don't recall explicitly hearing this, is that these days consumer good inflation is being displaced by asset inflation. Asset inflation is not traditionally considered inflation because it is investment. But when you have a greater disparity of income and wealth, coupled with the other trends above, additional money tends to chase assets vs consumer goods.

The other thing I have wondered is conventional theory says you should avoid deflation at all costs, for some pretty good reasons. However I wonder if that really holds true with technology driven modest inflation. Companies are much more adaptible at shedding work force and changing wages, so a modest deflation might not be as bad as it was 80 years ago. But all that is just conjecture.
My understanding is that the United States experience mild deflation from about 1865-1900. Going from foggy memory here and too lazy to look it up. My time period might not be exactly right but I am mostly correct here. But this was because of productivity gains, much of that from the railroads which made shipping goods a whole lot cheaper. If deflation occurs because of collapse of debt bubbles, that is a very bad thing. If mild deflation occurs because of productivity increases, that is a good thing. Another thing from my history classes recalls there was quite the debate over the strength of the money, a debate of sound money over a looser monetary policy. The Cross of Gold and all of that. Gold standard vs. silver if I recall right. Bankers vs. the farmers.
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Re: Why is higher deficit not leading to higher interest rates?

Post by carol-brennan » Mon Feb 18, 2019 11:01 am

HEDGEFUNDIE wrote:
Sun Feb 17, 2019 10:59 pm
Front page WSJ article today about this topic:

https://www.wsj.com/articles/worry-abou ... _lead_pos2

Short version: as long as economic growth is higher than the interest rate, deficits don't matter.
Won't that not be the case very soon, as in the next year?

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Re: Why is higher deficit not leading to higher interest rates?

Post by Clever_Username » Mon Feb 18, 2019 11:03 am

nedsaid wrote:
Mon Feb 18, 2019 2:58 am
If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.
I found your whole post, especially this paragraph, very interesting. Thank you for taking the time to write it out.
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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 11:07 am

Clever_Username wrote:
Mon Feb 18, 2019 11:03 am
nedsaid wrote:
Mon Feb 18, 2019 2:58 am
If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.
I found your whole post, especially this paragraph, very interesting. Thank you for taking the time to write it out.
This blew my mind too as it is counter to common sense. But when you step back and think it through, it makes sense. For example, Japan has high levels of government debt to GDP but also has low interest rates and low inflation. How can that happen? Well, Japan runs a large trade surplus particularly with the United States. The Japanese are also so incredibly productive. The foreign account + public sector account + private sector account = zero makes a lot of sense. Not a perfect model but it gives one insight into what is going on.
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Re: Why is higher deficit not leading to higher interest rates?

Post by nisiprius » Mon Feb 18, 2019 11:16 am

nedsaid wrote:
Mon Feb 18, 2019 10:49 am
... there are trends but there are always countervailing trends...
Hear, hear!

That's why Mandelbrot spoke of "financial turbulence."

And it's why novice investors constantly fool themselves by looking at charts and thinking it should be easy to see when a bear market is starting and bail, missing the fact that you never know whether you're in a big downward trend, a little downward trend within a big upward trend, or a little downward trend within a bigger upward trend within a bigger downward trend.

Anyway, I gather that the question is not "why is higher deficit not leading to higher interest rates?" It is "why are interest rates a different number from the number I think they should be?"
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StrangePenguin
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Re: Why is higher deficit not leading to higher interest rates?

Post by StrangePenguin » Mon Feb 18, 2019 11:19 am

carol-brennan wrote:
Mon Feb 18, 2019 11:01 am
HEDGEFUNDIE wrote:
Sun Feb 17, 2019 10:59 pm
Front page WSJ article today about this topic:

https://www.wsj.com/articles/worry-abou ... _lead_pos2

Short version: as long as economic growth is higher than the interest rate, deficits don't matter.
Won't that not be the case very soon, as in the next year?
I don't think it will be next year. Current US nominal interest rates are 2-3%, depending on duration. Inflation is 2% or slightly higher. So current *real* interest rates are just slightly above 0. Certainly less than 1%. The growth number that gets the headlines is always in real terms. I think growth is certainly at 2%, maybe 3% now -- again, that's in real terms. So interest rates are still ~2% less than growth. Now, that's not a huge gap, but I'd be surprised if it was closed in the next year.
(All of the numbers here are off the top of my head, so very rough.)

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bottlecap
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Re: Why is higher deficit not leading to higher interest rates?

Post by bottlecap » Mon Feb 18, 2019 11:25 am

Because the market does not "set" interest rates. The central bank does.

JT

P.S. Do you mean "deficit" or "debt"? I presumed debt.

Jags4186
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Re: Why is higher deficit not leading to higher interest rates?

Post by Jags4186 » Mon Feb 18, 2019 11:29 am

There are a million causes and effects. As others have pointed out, interest rates have increased. Also keep in mind what options there are out there for government debt. If you invest in Yen/Pound Sterling/Euro bonds you will be getting lower interest rates than you would with US Dollars. There is strong demand for US Treasuries compared to other reserve currencies debt instruments and this also keeps long term interest rates down. That’s why the Fed Funds Rate is 2.5% and the 10 yr treasury is only 2.67%.

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Re: Why is higher deficit not leading to higher interest rates?

Post by cj2018 » Mon Feb 18, 2019 11:40 am

nedsaid wrote:
Mon Feb 18, 2019 11:07 am
Clever_Username wrote:
Mon Feb 18, 2019 11:03 am
nedsaid wrote:
Mon Feb 18, 2019 2:58 am
If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.
I found your whole post, especially this paragraph, very interesting. Thank you for taking the time to write it out.
This blew my mind too as it is counter to common sense. But when you step back and think it through, it makes sense. For example, Japan has high levels of government debt to GDP but also has low interest rates and low inflation. How can that happen? Well, Japan runs a large trade surplus particularly with the United States. The Japanese are also so incredibly productive. The foreign account + public sector account + private sector account = zero makes a lot of sense. Not a perfect model but it gives one insight into what is going on.
Nedsaid is correct - US national debt literally means we’ve amassed this much wealth/fortune since the beginning of this nation.

Just remember this equation:

US government debt == US treasury == all US dollars Uncle Sam issued so far == collective wealth held by all people who are in possession of either the treasury or dollar(currency)

And also remember running a budget deficit is literally how the US grows economically - it is how the system is designed to begin with! The critical assumptions for this to work are 1) GDP growth > interest rate on the bonds 2) we can keep issuing debt in our own currency.

I laugh every time someone mentions how the souring US debt is a huge crisis lol. I’d be really worried when and if our national debt starts to shrink which literally means we are retiring all the money or credit issued against the debt circulating in the world economy and we are not experiencing economic growth - that would be terrifying as the pie stops growing and different nations start fighting other people’s share of pie.

Valuethinker
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Re: Why is higher deficit not leading to higher interest rates?

Post by Valuethinker » Mon Feb 18, 2019 11:49 am

UpperNwGuy wrote:
Mon Feb 18, 2019 10:52 am
Starfish wrote:
Mon Feb 18, 2019 2:34 am
unclescrooge wrote:
Sun Feb 17, 2019 11:17 pm
This 5 min video on modern monetary theory will help explain why this may be happening.

https://youtu.be/TDL4c8fMODk

It's very interesting and entertaining.
Yeah... i don't know.
I lived through hyperinflation and saw the effects, I am hard to convince.
You must have been abroad when you lived through hyperinflation. The US has never experienced hyperinflation. The most we have seen here is low double-digit inflation.
2 small quibbles - very small:

1. I think the USA experienced what we would now call hyperinflation during the Revolutionary War? My RW history is relatively poor so I could well be wrong about that.

2. The Confederate States of America certainly experienced hyperinflation in the last 2-3 years of the Civil War. I think inflation was just high in the Union States. So a part of the USA experienced hyperinflation.

Overall I agree with you that the USA has never experienced hyperinflation.

My mental image is that US annual CPI peaked in the 1970s around 13 per cent, but I could be wrong on that. Britain I believe it got to 27 per cent one year (in the developed countries, second only to Italy).

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Re: Why is higher deficit not leading to higher interest rates?

Post by DB2 » Mon Feb 18, 2019 12:02 pm

cj2018 wrote:
Mon Feb 18, 2019 11:40 am
nedsaid wrote:
Mon Feb 18, 2019 11:07 am
Clever_Username wrote:
Mon Feb 18, 2019 11:03 am
nedsaid wrote:
Mon Feb 18, 2019 2:58 am
If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.
I found your whole post, especially this paragraph, very interesting. Thank you for taking the time to write it out.
This blew my mind too as it is counter to common sense. But when you step back and think it through, it makes sense. For example, Japan has high levels of government debt to GDP but also has low interest rates and low inflation. How can that happen? Well, Japan runs a large trade surplus particularly with the United States. The Japanese are also so incredibly productive. The foreign account + public sector account + private sector account = zero makes a lot of sense. Not a perfect model but it gives one insight into what is going on.
Nedsaid is correct - US national debt literally means we’ve amassed this much wealth/fortune since the beginning of this nation.

Just remember this equation:

US government debt == US treasury == all US dollars Uncle Sam issued so far == collective wealth held by all people who are in possession of either the treasury or dollar(currency)

And also remember running a budget deficit is literally how the US grows economically - it is how the system is designed to begin with! The critical assumptions for this to work are 1) GDP growth > interest rate on the bonds 2) we can keep issuing debt in our own currency.

I laugh every time someone mentions how the souring US debt is a huge crisis lol. I’d be really worried when and if our national debt starts to shrink which literally means we are retiring all the money or credit issued against the debt circulating in the world economy and we are not experiencing economic growth - that would be terrifying as the pie stops growing and different nations start fighting other people’s share of pie.
Interesting stuff.

At the same time, is this affecting our GDP which has been relatively low year-to-year (compared to prior recoveries) since the 2009?

What would dictate the limit to running deficits? How high can you go? Run the deficit until money supply becomes too high (which leads to excessive inflation)?

I always thought the idea was keeping a balance to the debt-to-GDP ratio?

My concern with debt has largely been...if the debt-to-GDP ratio and deficits get too bad...and confidence drops significantly in the dollar...countries decide the U.S. is no longer the world's currency. However, I know people point to Japan which seems to be chugging along okay enough.

On the other hand, is it just going to take more time before we see dire consequences?

I don't pretend to be an expert in any of this.

Valuethinker
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Re: Why is higher deficit not leading to higher interest rates?

Post by Valuethinker » Mon Feb 18, 2019 12:11 pm

cj2018 wrote:
Mon Feb 18, 2019 11:40 am
nedsaid wrote:
Mon Feb 18, 2019 11:07 am
Clever_Username wrote:
Mon Feb 18, 2019 11:03 am
nedsaid wrote:
Mon Feb 18, 2019 2:58 am
If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.
I found your whole post, especially this paragraph, very interesting. Thank you for taking the time to write it out.
This blew my mind too as it is counter to common sense. But when you step back and think it through, it makes sense. For example, Japan has high levels of government debt to GDP but also has low interest rates and low inflation. How can that happen? Well, Japan runs a large trade surplus particularly with the United States. The Japanese are also so incredibly productive. The foreign account + public sector account + private sector account = zero makes a lot of sense. Not a perfect model but it gives one insight into what is going on.
Nedsaid is correct - US national debt literally means we’ve amassed this much wealth/fortune since the beginning of this nation.
I really don't think that is true. What you are defining is US GDP.
Just remember this equation:

US government debt == US treasury == all US dollars Uncle Sam issued so far == collective wealth held by all people who are in possession of either the treasury or dollar(currency)

And also remember running a budget deficit is literally how the US grows economically - it is how the system is designed to begin with! The critical assumptions for this to work are 1) GDP growth > interest rate on the bonds 2) we can keep issuing debt in our own currency.
For most of its history, the US government did not run a deficit. Years in deficit were balanced by years in surplus.

Your analysis above ignores the velocity of circulation of money?
I laugh every time someone mentions how the souring US debt is a huge crisis lol. I’d be really worried when and if our national debt starts to shrink which literally means we are retiring all the money or credit issued against the debt circulating in the world economy and we are not experiencing economic growth - that would be terrifying as the pie stops growing and different nations start fighting other people’s share of pie.
You can't increase your share of the pie by printing more dollars. That just devalues the dollar against other currencies - that was what the 1970s was all about for the USA.

There is the "exorbitant privilege" accorded to the USA of people in other countries being willing to hold USD, whereas if it were CAD or GBP they would simply exchange them for their own currency. Because much international trade is priced in USD it's worth holding them. Also in many countries the domestic currency is not as trusted.

Estimates of that range about $60 bn pa to the US economy - I don't think anyone thinks it is more than $100 bn. It's not enormous in the context of US GDP, but it's something.

Turbo29
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Re: Why is higher deficit not leading to higher interest rates?

Post by Turbo29 » Mon Feb 18, 2019 12:14 pm

I found this interesting when I read it a few years ago:
But the United States should, in fact, support doing away with the dollar. For all the excited talk of politicians, journalists, and generals, a world without the dollar would mean faster growth and less debt for the United States, though at the expense of slower growth for parts of the rest of the world, especially Asia.

A French economist once told me that too often when policymakers think they are talking about economics they are actually talking about politics. A case in point, perhaps, is the claim first made in 1965 by Valéry Giscard d’Estaing, then France’s finance minister, that the dollar’s dominance as the global reserve currency gave the United States an "exorbitant privilege."

Giscard may have thought he was discussing economic privilege, but while during the Cold War there may well have been political advantages to the use of the dollar as the dominant reserve currency, economically it held little benefits to the United States. If anything, it forced upon the United States an exorbitant cost.

...

The world accumulates dollars, in other words, for one very simple reason. Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits. But that badge of honor comes at a real cost to the long-term growth of the domestic economy and its ability to manage debt levels.
https://foreignpolicy.com/2011/09/07/an ... nt-burden/
Last edited by Turbo29 on Mon Feb 18, 2019 12:17 pm, edited 1 time in total.

Valuethinker
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Re: Why is higher deficit not leading to higher interest rates?

Post by Valuethinker » Mon Feb 18, 2019 12:15 pm

DB2 wrote:
Mon Feb 18, 2019 12:02 pm
cj2018 wrote:
Mon Feb 18, 2019 11:40 am
nedsaid wrote:
Mon Feb 18, 2019 11:07 am
Clever_Username wrote:
Mon Feb 18, 2019 11:03 am
nedsaid wrote:
Mon Feb 18, 2019 2:58 am
If you believe in sectoral balances, public sector deficits equal private sector surpluses. We saw evidence of this as the savings rate was actually zero to negative when the US ran budget surpluses during the Clinton Administration. When the Obama Administration ran huge deficits early on to combat the Financial Crisis and the Great Recession, private sector savings rates went up and US Corporations enjoyed big profits and were flush with cash. As Gomer Pyle would say, "Shazaam." In fact, there are economists that would say that the accumulated public debt equals the national savings. So perhaps deficits have a role in creating the demand for Treasury instruments as public debt has a role in creating private sector savings.
I found your whole post, especially this paragraph, very interesting. Thank you for taking the time to write it out.
This blew my mind too as it is counter to common sense. But when you step back and think it through, it makes sense. For example, Japan has high levels of government debt to GDP but also has low interest rates and low inflation. How can that happen? Well, Japan runs a large trade surplus particularly with the United States. The Japanese are also so incredibly productive. The foreign account + public sector account + private sector account = zero makes a lot of sense. Not a perfect model but it gives one insight into what is going on.
Nedsaid is correct - US national debt literally means we’ve amassed this much wealth/fortune since the beginning of this nation.

Just remember this equation:

US government debt == US treasury == all US dollars Uncle Sam issued so far == collective wealth held by all people who are in possession of either the treasury or dollar(currency)

And also remember running a budget deficit is literally how the US grows economically - it is how the system is designed to begin with! The critical assumptions for this to work are 1) GDP growth > interest rate on the bonds 2) we can keep issuing debt in our own currency.

I laugh every time someone mentions how the souring US debt is a huge crisis lol. I’d be really worried when and if our national debt starts to shrink which literally means we are retiring all the money or credit issued against the debt circulating in the world economy and we are not experiencing economic growth - that would be terrifying as the pie stops growing and different nations start fighting other people’s share of pie.
Interesting stuff.

At the same time, is this affecting our GDP which has been relatively low year-to-year (compared to prior recoveries) since the 2009?

What would dictate the limit to running deficits? How high can you go? Run the deficit until money supply becomes too high (which leads to excessive inflation)?

I always thought the idea was keeping a balance to the debt-to-GDP ratio?

My concern with debt has largely been...if the debt-to-GDP ratio and deficits get too bad...and confidence drops significantly in the dollar...countries decide the U.S. is no longer the world's currency. However, I know people point to Japan which seems to be chugging along okay enough.

On the other hand, is it just going to take more time before we see dire consequences?

I don't pretend to be an expert in any of this.
And the experts don't know.

There's a danger point when real interest rates exceed the real growth in GDP. Then, in principle, the debt can grow without limit - just the compounding of interest.

Debt to GDP has risen to unprecedented levels across the world post 2009. *However* it is private debt to GDP (households and companies) that tends to cause recessions, when for other reasons private borrowers cut back spending & investment (in new fixed assets like factories, machinery, airplanes etc.) and the economy tanks.

Public debt to GDP the connection is much less clear. You do get countries which reach unsustainable levels - Greece in particular- and they have to restructure their debt (a polite name for default - default itself is usually legally so tortuous that borrowers and lenders try to avoid it, but not before a giant game of Chicken is held).

But then you get Japan. Where huge debt levels and awful demographics does not seem to have caused either high interest rates nor a weak currency.

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Re: Why is higher deficit not leading to higher interest rates?

Post by alex_686 » Mon Feb 18, 2019 12:15 pm

JBTX wrote:
Mon Feb 18, 2019 10:50 am
The other thing I have wondered is conventional theory says you should avoid deflation at all costs, for some pretty good reasons. However I wonder if that really holds true with technology driven modest inflation. Companies are much more adaptible at shedding work force and changing wages, so a modest deflation might not be as bad as it was 80 years ago. But all that is just conjecture.
Deflation is bad, bad, bad. It favors financial investment (cash, bonds, and in particular government bonds) over risky equity investments. Equities tend to be a good hedge again inflation, which is kind of perverse in a deflationary environment. It favors those who are wealthy (banks, the current winners) over those who hope to be wealthy (young, entrepreneurs).

Think of a very simple example of somebody wanting to buy a house, either for themselves or for rental property. You are buying a asset that will fall in nominal value thanks to deflation. Then you have to take out a mortgage on that property which does not fall due to deflation.

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nedsaid
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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 12:15 pm

The world savings glut is mentioned here and it is a chicken and egg thing. Could it be that an aging population suppresses economic growth and tax revenues but that old people cost a lot of money to take care of? Again, if you believe in the sectoral balances argument mentioned above, the deficit spending governments incur to finance taking care of the elderly might be creating the savings glut. There are relatively few of us, Bogleheads excepted, that are retirement millionaires. So I do sort of wonder who in the United States actually have these wheel barrows full of savings that are discussed here. But I digress. Hint: a lot of the savings are on the balance sheets of corporations. Point is this, is the savings glut caused by aging populations realizing they need to get serious about saving for retirement or is it caused by the deficits incurred to finance those aging populations? Just throwing it out there.
A fool and his money are good for business.

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nedsaid
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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 12:20 pm

Valuethinker wrote:
Mon Feb 18, 2019 12:15 pm

And the experts don't know.

There's a danger point when real interest rates exceed the real growth in GDP. Then, in principle, the debt can grow without limit - just the compounding of interest.

Debt to GDP has risen to unprecedented levels across the world post 2009. *However* it is private debt to GDP (households and companies) that tends to cause recessions, when for other reasons private borrowers cut back spending & investment (in new fixed assets like factories, machinery, airplanes etc.) and the economy tanks.

Public debt to GDP the connection is much less clear. You do get countries which reach unsustainable levels - Greece in particular- and they have to restructure their debt (a polite name for default - default itself is usually legally so tortuous that borrowers and lenders try to avoid it, but not before a giant game of Chicken is held).

But then you get Japan. Where huge debt levels and awful demographics does not seem to have caused either high interest rates nor a weak currency.
Hint: Greece is a member of the European Union and its debts are denominated in Euros. Japan has its own currency and its debts are thus denominated in its own currency. Japan can create more Yen to service its debt, Greece is restrained by its revenue and ability to borrow but cannot create more currency. In other words, Japan has a printing press and Greece does not.
A fool and his money are good for business.

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Re: Why is higher deficit not leading to higher interest rates?

Post by alex_686 » Mon Feb 18, 2019 12:22 pm

nedsaid wrote:
Mon Feb 18, 2019 10:56 am
My understanding is that the United States experience mild deflation from about 1865-1900. Going from foggy memory here and too lazy to look it up. My time period might not be exactly right but I am mostly correct here. But this was because of productivity gains, much of that from the railroads which made shipping goods a whole lot cheaper. If deflation occurs because of collapse of debt bubbles, that is a very bad thing. If mild deflation occurs because of productivity increases, that is a good thing. Another thing from my history classes recalls there was quite the debate over the strength of the money, a debate of sound money over a looser monetary policy. The Cross of Gold and all of that. Gold standard vs. silver if I recall right. Bankers vs. the farmers.
During this period, deflation / inflation pretty much tracked gold production. When there were gold rushes in California, South Africa, Australia and Alaska inflation spiked. When there were not gold strikes, deflation. Which makes some sense. If the money supply was fixed by the amount of gold, and money demand is tied to economic output, hold gold fixed and expand the economy and you get deflation.

On the Gold Standard vs. Silver, it is easier to look at it from the hard money people to the easy money people. If you have money (cash or bonds) you get the interest rate and the deflation as part of your return. High return for low risk. It helps entrenches the wealthy where they don't have to work or risk much. Easy money gets you inflation.

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Re: Why is higher deficit not leading to higher interest rates?

Post by JBTX » Mon Feb 18, 2019 12:25 pm

nedsaid wrote:
Mon Feb 18, 2019 12:15 pm
The world savings glut is mentioned here and it is a chicken and egg thing. Could it be that an aging population suppresses economic growth and tax revenues but that old people cost a lot of money to take care of? Again, if you believe in the sectoral balances argument mentioned above, the deficit spending governments incur to finance taking care of the elderly might be creating the savings glut. There are relatively few of us, Bogleheads excepted, that are retirement millionaires. So I do sort of wonder who in the United States actually have these wheel barrows full of savings that are discussed here. But I digress. Hint: a lot of the savings are on the balance sheets of corporations. Point is this, is the savings glut caused by aging populations realizing they need to get serious about saving for retirement or is it caused by the deficits incurred to finance those aging populations? Just throwing it out there.
The US is kind of the exception in terms of savings rates. It is higher in pretty much all other developed countries (and developing countries). One of the reasons Japan can maintain a 200+% of GDP govt debt is due to its ridiculously high personal savings rates.

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Re: Why is higher deficit not leading to higher interest rates?

Post by Grt2bOutdoors » Mon Feb 18, 2019 12:26 pm

DB2 wrote:
Mon Feb 18, 2019 10:42 am
Valuethinker wrote:
Mon Feb 18, 2019 10:34 am


I am watching the US car loan default situation with some bemusement - I cannot understand fully how this is happening, but it is. Car finance looks like a mini financial crisis at work.
I am still trying to get my head around 84-97 month auto loans.
It’s all about the monthly payment? Consumers are conditioned to think in terms of monthly cost. If they knew the true total cost, they would say 1 or more things to seller; 1) I don’t gave the money and 2) the price is too high. The seller defuses these potential responses by 1) working with buyer to a monthly payment that will fit into buyer’s monthly budget and 2) obscures the true cost by saying it’s only $X dollars per month, you can afford it!

If it takes more than 4 years to pay off a vehicle, you can not afford it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Why is higher deficit not leading to higher interest rates?

Post by alex_686 » Mon Feb 18, 2019 12:38 pm

Grt2bOutdoors wrote:
Mon Feb 18, 2019 12:26 pm
I am still trying to get my head around 84-97 month auto loans.
It’s all about the monthly payment? Consumers are conditioned to think in terms of monthly cost. If they knew the true total cost, they would say 1 or more things to seller; 1) I don’t gave the money and 2) the price is too high. The seller defuses these potential responses by 1) working with buyer to a monthly payment that will fit into buyer’s monthly budget and 2) obscures the true cost by saying it’s only $X dollars per month, you can afford it!

If it takes more than 4 years to pay off a vehicle, you can not afford it.
[/quote]

Let me make a modest counterargument. Why 4 years? Is that because it was standard when you were growing up or do you have a rational reason for picking that number?

One should match assets with liabilities. That is, if a productive piece of equipment has a useful lifespan of X years, then the loan to finance it should also be X years. Yes, cars have gotten more expensive. Not just in nominal terms, but also in real terms. Part of this increase in cost can be traced back to a increase in lifespan, dependability, and reliability. 30 years ago cars were more or less done by 10 years / 100k miles. Not anymore. Now it is more like 10 years / 200k. In this context a longer loan makes more sense.

As a side note, I do prefer smaller cheaper cars over larger expensive cars because I don't like spending money in that direction.

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Re: Why is higher deficit not leading to higher interest rates?

Post by MarkBarb » Mon Feb 18, 2019 12:45 pm

Seasonal wrote:
Mon Feb 18, 2019 7:47 am
A government is not a family or a company. Attempts to draw analogies to a person or business are fundamentally flawed. Among other things, few people or companies issues debt in their own currency or have taxing power over massive economies. Also, remember that US debt is mostly held by its own citizens.
Mostly. At the end of 2018, debt held by the public (as opposed to debt being held by other parts of the government) stood at $16.1 trillion. Of that, $6.3 trillion was owned by foreign entities. That's about 39% foreign owned vs 61% domestic owned.

In a country of 328 million people, that works out to a total debt per person of $49 thousand of which $19 thousand is owed to people outside of the US. That's supported by a national income (GNP) per person of about $60,000.

Total Debt: https://www.treasurydirect.gov/govt/rep ... 122018.pdf
Foreign Owned: http://ticdata.treasury.gov/Publish/mfh.txt
Population: https://www.census.gov/
GNP Per Capita: https://fred.stlouisfed.org/graph/?id=A791RC0A052NBEA,

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nedsaid
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Re: Why is higher deficit not leading to higher interest rates?

Post by nedsaid » Mon Feb 18, 2019 12:51 pm

I want to make it clear that national wealth isn't created just by running up Government debt. Money is backed up in large part by the productivity of the economy. The strong currencies are those of the most productive economies in the world.
A fool and his money are good for business.

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Re: Why is higher deficit not leading to higher interest rates?

Post by garlandwhizzer » Mon Feb 18, 2019 12:52 pm

This is a very interesting discussion about deficit/debt and how it differs dramatically between households and governments. Households have to at some point balance their budgets and pay their debts off, otherwise they go bankrupt and lose access to credit. Governments don't have to do that and all goes well as long as inflation remains under control and the economy/employment is growing well. The ability of governments to do this is based on only one thing: faith and belief in the soundness of their currency. In the case of the US, the dollar is the world's reserve currency, meaning the world's faith in it is supreme relative to other options. A major risk to this privileged situation for the US is something that would question that faith and belief. For example, ever increasing inflation in the US would tend to discount the real value of the future dollars held by anyone which might chip away at this faith. Basically a $100 bill is just a piece of paper. There is nothing backing it except faith and belief that it will remain a safe storehouse of wealth in the future. There is current weakness in the Pound Sterling, the Yuan, and the EURO relative to the US for political/economic reasons. Political/economic issues in the US could possibly at some point diminish the universal faith in our currency to the point that other nations would lose confidence in the dollar as the world's reserve currency. That would mean they will no longer buy Treasuries among other things. Based on how things look now, that seems highly unlikely in the foreseeable future.

There is some historical data suggesting that when governmental debt exceeds 100% of GDP, the rate of future economic growth slows. Japan is a case in point, but as nedsaid points out that may be due more to demography than to debt itself. I suspect that at some point excess governmental debt relative to GDP does produce a negative economic feedback loop, although it is very hard to say where that point is. Certainly if faith in the soundness of currency is lost the game is over. Japan has had 200%+ governmental debt for a long time but has still remained a prosperous society with a very high standard of living. Of course, unlike the US, household debt and corporate debt in Japan is low, so it's hard to compare the two.

Garland Whizzer

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Re: Why is higher deficit not leading to higher interest rates?

Post by JBTX » Mon Feb 18, 2019 12:55 pm

bottlecap wrote:
Mon Feb 18, 2019 11:25 am
Because the market does not "set" interest rates. The central bank does.

JT

P.S. Do you mean "deficit" or "debt"? I presumed debt.
I would argue the market does set long term interest rates, mostly, although QE does affect it. Not so much short term interest rates.

cadreamer2015
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Re: Why is higher deficit not leading to higher interest rates?

Post by cadreamer2015 » Mon Feb 18, 2019 12:59 pm

Like much in economic theory, this might be true if all else were equal. But all else is almost never equal (unchanging).

Remind me how this is actionable? Or is it an attempt at market timing of the bond market?
De gustibus non est disputandum

JBTX
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Re: Why is higher deficit not leading to higher interest rates?

Post by JBTX » Mon Feb 18, 2019 1:06 pm

alex_686 wrote:
Mon Feb 18, 2019 12:15 pm
JBTX wrote:
Mon Feb 18, 2019 10:50 am
The other thing I have wondered is conventional theory says you should avoid deflation at all costs, for some pretty good reasons. However I wonder if that really holds true with technology driven modest inflation. Companies are much more adaptible at shedding work force and changing wages, so a modest deflation might not be as bad as it was 80 years ago. But all that is just conjecture.
Deflation is bad, bad, bad. It favors financial investment (cash, bonds, and in particular government bonds) over risky equity investments. Equities tend to be a good hedge again inflation, which is kind of perverse in a deflationary environment. It favors those who are wealthy (banks, the current winners) over those who hope to be wealthy (young, entrepreneurs).

Think of a very simple example of somebody wanting to buy a house, either for themselves or for rental property. You are buying a asset that will fall in nominal value thanks to deflation. Then you have to take out a mortgage on that property which does not fall due to deflation.
But houses are not included in inflation. They are considered investment. And that kind of gets to my point.

Deflation is considered bad because
- there is less incentive to spend, because you can buy in the future cheaper
- sticky wages - people tend not to accept flat or lowering nominal wages.
- the impacts of zero or negative interest rates

I am not really arguing those, just wondering if it comes down to the way we measure inflation. For CPI, there are reasonable adjustments for substitution (if apples go up, and pears go down, people buy more pears and less apples), and also impact of technology. A Toyota camry price may go up 5% from year to year. But CPI inflation will be somewhat less because the new model has some bells and whistles that the prior year model didn't.

As to substitution, as you spending tends to become concentrated more with higher income, I really wonder if those people care so much in the difference in apples and pears.

More importantly, the reason deflation is bad is because of the negative behavioral impacts listed above. If prices go down, people wait to buy. But that doesn't take into account that instead of people waiting for the price to fall, they just buy the newer model with more bells and whistles.

To your point about houses, they have been a major driver of the economy, and housing prices are not part of inflation (rents are). If housing prices go up, there is no direct inflationary impact. But once people buy houses, they tend to fill it up with consumer goods - furniture, appliances bedding, TVs, decor, etc. Do people sit around and wait for prices to go down due to deflation? No, they buy what they can afford right away.

Bottom line, does the CPI inflation rate correctly measure the behavioral aspects that tend to lead to deflation?

MarkBarb
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Re: Why is higher deficit not leading to higher interest rates?

Post by MarkBarb » Mon Feb 18, 2019 1:17 pm

https://fred.stlouisfed.org/graph/?g=n0Va

That's a chart showing the 10 year treasury rate, the fed funds rate, and the debt/GDP ratio (scaled down by 10 to make the graph easier to read). I don't see any relationship between the debt and the interest rates.

When you say "higher interest rates", you need to be more clear on what you mean. The Fed Funds Rate is the overnight rate charged by banks when they lend to each other. When we talk about the Fed setting the interest rate, this is the rate that they try to control. In theory, they can set it at whatever rate they want, but they are constrained by market forces. If they push it too high above demand, the economy slows. If they push it too low below demand, inflation rises.

The 10 year treasury rate is set by the market based on demand from buys and supply from sellers. It isn't controlled by the Fed, but it is influenced both by the same forces the Fed considers when setting the Fed Funds Rate and by perception of the impact in changes to the Fed Funds Rate.

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