I’ve been on the road, and not as close to things as usual, so from what I’ve seen and heard:

Looking at the market prices I’d guess yesterday’s sell off was a euro zone credit response.

The euro dropped a quick 3% and gold went up enough to be up even in dollars.

When Europeans get scared they often run to gold and dollars.

The ECB reportedly bought some Irish paper, indicating concern and also showing they will continue to support national govt funding.

Liquidity is not what it used to be. Sudden violent moves can just as easily be due to relatively small buyers and sellers and not any kind of fundamental shift. It can all reverse just as quickly as it sold off.

I’d key off the euro. It was up a tad last I checked, and stocks were stabilizing.

The fact that q2 earnings were very strong even as Q2 GDP was not so strong is a good sign for stocks.

Congress has extended unemployment benefits, approved 26 billion for the states, and is toying with extending the tax cuts set to expire, all indicating there will not be any serious deficit reduction interference for at least the rest of the year.

Last I checked Federal revenues had bottomed and were starting to rise indicating an underlying positive tone to the economy.

8%+ continuing Federal deficits are a very large tailwind that I expect to keep GDP in positive territory.

Weekly claims are on the high side, but not at double dip levels and continuing claims continue to fall. And the combo of hours worked and new jobs shows ongoing improvement.

Lack of consumer credit expansion (borrow to buy) keeps it all moderate, though poised for expansion as debt to income ratios have continued to fall due to the federal deficits.

Federal deficits have added to net financial assets and incomes of households, allowing them to spend from income and also add to savings, as indicated by firm final demand in the Q2 GDP revisions.

Lastly, Q3 has shown declines in a variety of markets over the last few years making rear view mirror traders more than cautious.

8 Responses

  1. What is the basis for characterizing a non-growing government deficit (around 8%+) as a “tailwind”, given that if it stay the same size it will not contribute directly to future increases in GDP? Is your underlying assumption that the deficit has been large enough long enough to induce households to soon start reducing their savings rate?

    Also while I agree it’s a positive that policy this year doesn’t seem destined to actively reduce government deficit, I wonder if growth in net exports, investment, and productivity will be enough to counter the automatic reductions in the deficit, such as ARRA spending rate having already peaked in Q2, and the potential for many people to fall off unemployment payrolls after 99 weeks, especially in Q4 2010 and Q1 2011. Maybe the standard tax stabilizer effect is a big enough counterbalancing force to those reductions, I’m not sure…

    1. Mike,
      Kltikoff has what he calls his “fiscal gap” at 4T per year, without picking apart his assumptions to get the 4T, perhaps he could look at it this way:

      You (in your service as of today) have YoY increase in Treasury interest at an addl $6.94B with about two months to go here in the FY, so this looks like it will finish out at an addl $8B or so YoY, and you also know that weve issued about $1T of addl Treasuries this FY with 2 months to go.

      So the rate looks to be about an addl 7.5B of interest per Trillion of Treasuries issued throughout the FY. Assuming the same Monetary Policy as current.

      His $4T gap then equates to an addl $30B per year in interest once/as the Treasuries are issued. Very ‘do-able’ in what would then be an $18T+ economy.

      Good luck on the RT, they seem to be more open to facts than domestic US cable networks.


  2. Even $7.5 billion per trillion, equivalent to an average .075% interest rate, is too much in debt service (morally at least, economically its fine). If we stopped selling any bonds longer than 3 months and set up a tap market like we had in World War II (capping interest rates at the current FFR with the Fed buying any unsold Treasuries at that rate), the average debt service would then be 0.025%, $2.5 billion per trillion.

  3. Been away with little computer time, just back.

    It’s just a guess that 8%+ deficits will keep things muddling through with very modest top line growth until the ‘savings deficiency’ is filled and eventually starts over flowing. Before the surplus years of the late 90’s seems deficits averaged maybe 4% over 10 year periods (?) and unemployment was often 5% or less. So maybe the underlying need for deficits to offset the demand leakages and support the resulting credit structure that keeps unemployment at 5% or less is 4%? That means 8%+ deficits have been sustaining some growth and also been filling the savings hole as both savings have been high and increasing, and unemployment at least stabilizing. When the savings deficiency gets neutralized the next step should be expanding consumer credit for the likes of cars and houses.

    1. Thanks for responding in more detail! Your “guess” seems plausible, though I think I put a lower probability on this outcome than you do, for a variety of reasons (some I’ve mentioned in previous comments, some I haven’t). But I hope you’re right!

  4. >> Before the surplus years of the late 90’s seems deficits averaged maybe 4%
    >> … & unemployment was often 5% or less

    that was before current income & wealth disparities; much higher deficits may be needed if we’re going to keep the electorate alive AND support this much disparity?
    how much higher?

    might be useful to model deficits before/after, say, 1907 as a precedent?

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