Tuesday, February 08, 2005

Household debt

Household debt as a fraction of disposable income is up uniformly from 10 years ago. But, I think this just reflects rational behavior - since interest rates are so low I bet debt payments as a fraction of income are actually flat or down. (Certainly the case with mortgage debt, although perhaps not with credit cards.) If you trace all the way back, the responsibility for this consumption bubble goes to Greenspan and complicit Asian central bankers (who have elbowed the bond vigilantes of the 90's off the stage).

I was amazed this week that treasuries and the dollar rallied on the basis of Greenspan's G7 comments and Bush's non-credible budget. This may be an opportune window to exchange some dollars for hard currency, before the FX traders decide there is no chance that the US current account or budget deficits will improve in the near term.


Carson C. Chow said...

I'm amazed that Japan is so high. I guess they both save and borrow.

Anonymous said...

Excellent. Japan has experienced deflation sice 1994, and interest rates range from zero to 2%. So, you have low interest rates making it attractive to borrow and deflation making it attractive to save. Which is the stronger incentive? Again, there were complaints in past years that long term loans were too difficult to come by even though the central bank was keeping rates low. Possibly the answers to the riddles are in the mortgage market. Riddle nonetheless.


Anonymous said...


Brad Setser wonders:

Why are we not issuing 30 or 50 year Treasury bonds when long term interest rates are so low? This approach to the debt seems to be in accord with the projections of Alan Greenspan that there is little reason to assume long term interest rates will rise meaningfully over time. I am completely puzzled. Paul Krugman tells us to lock in a long term mortgage, the Fed chief tells us to stay with a short term adjustable mortgage.

Of course, I say sell 30 or 50 year bonds at the current long term rates.


Anonymous said...

Britain's rise in household debt as a portion of income is definitely a result of the rise in home prices. The British and Irish mortgage markets if I properly understand deal almost exclusively in short term debt, so a rise in interest rates could be a sharp problem.

Japanese households have a more even wealth and income distribution than American households, and may be able to carry a higher debt load as a result. And yet, and yet.

Aside from Alan Greenspan's instinct, America is not shedding debt internally or externally and the dollar will fall again. Interest rates? A 4.04% long term Treasury rate is astonishing.


Anonymous said...

Be nice, be nice :)


February 07, 2005

Bush Damned Budget Lies and Voodoo Budget Magic: it will be a $600b deficit, not $233b by 2009...and over $1,100b by 2015!

The dishonesty of the administration about budget deficits has reached levels unheard of. These folks have absolutely no shame. Bush presented today a budget that claims that he will achieve his goal of reducing the deficit by half by 2008 (from a false 2004 baseline of $521 billion rather than the actual 2004 deficit of $412b) and will achieve a deficit of "only" $233b by 2009. Even better news, the administration claims today: the "halving" of the deficit will be reached by 2008, a year earlier than original 2009 target for it....


Anonymous said...


February 09, 2005

Brad Setser and I have written a new paper:
"Will the Bretton Woods 2 Regime Unravel Soon? The Risk of Hard Landing in 2005-2006".

The paper presents a number of original contributions and controversial ideas:

- We critique the view that the new US-Asian dollar-standard regime of semi-fixed rates, dubbed as the so callled "Bretton Woods 2" regime, is stable and durable.

- We argue that such regime - where large US twin deficits require persistent and massive foreign financing and forex intervention - is highly fragile and unstable because of a number of its structural vulnerabilities.

- We discuss a number of triggers that are likely to lead to the unraveling and collapse of this regime in 2005 or, at the latest, in 2006. We also discuss a number of mitigating factors that may delay, but not prevent, its early demise.

- Essentially, there is a fundamental contradiction between the large and growing US financing needs for its twin current account and fiscal deficits and the shrinking willingness over time of the rest of the world - both central banks and private investors - to provide such massive and growing financing.

- We argue that the likely collapse of this regime in the next couple of years would result in a Hard Landing scenario: the dollar would sharply fall, US long term interest rates would sharply increase, the price of most risky assets - equities, housing, high yield debt, emerging market sovereign debt - would significantly fall, and a sharp US and global economic slowdown - if not outright recession - may ensue. The probability of such hard landing is increasing.

- Chances of an orderly global rebalancing rest on three elements: 1. a significant fiscal adjustment in the US that requires - at the very least - a reversal of unsustainable tax cuts (as spending controls will not be sufficient) and giving up a budget-busting social security privatization; 2. a revaluation of the Chinese and other Asian currencies; 3. policies leading to higher growth in Europe and Japan.

- Since the current US fiscal goals - tax cuts and social security privatization - effectively clash with the attainment of meaningful fiscal deficit reduction while the US current account is still worsening given low US private and public savings and the lack of currency adjustment in large parts of Asia, the risks of a hard landing outcome are increasing.

The paper can be found online at:


Anonymous said...

Brad Setser

"Japan owes tons of debt to itself, so there is a political consensus not to erode its real return too much."

Clever and important point that I never considered.


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