Today the Federal Reserve held a two-day meeting and released a statement. They didn’t change their rates but the marketplace changed the rates dramatically downward. The ten year Treasury bond yield dropped from 2.61% to 2.525%, a drop of 8.5 basis points, several times a typical day’s movement. The technical traders who follow chart patterns have felt the rate might never go below 2.62% and would instead go above 3% and stay above that, thus the decline significantly below 2.62% is a shocking technical indicator matter, implying the “Invisible Hand” of the market “knows” that a recession will soon come. The futures market estimates a 50% probability of an eventual Fed easing of the Fed’s official rate. The drop
The annual federal deficit budget is 5% of GDP, or 7% if count some one-time excluded items. The percentage has been growing. The government has relied upon foreign investors and central banks to buy U.S. Treasury’s. The Treasury Bills have been used as the world’s money, thus absorbing the funding needs of the U.S. If foreigners decide to stop this then the dollar would drop in value and the Federal Reserve would have to monetize the deficit, creating inflation. As long as the other major economies have so many significant contingent financial problems (the negative interest rates in the EU and Japan, the huge debts in China and Japan) then the world economy will continue operating the same way.
People worry the rising deficit will make the dollar drop in value. The annual federal deficit is 5% of GDP, about $1Trillion a year. The long run average federal tax revenue is 18% of GDP. Assuming a 2% CPI adjustment is applied to the deficit then the deficit is growing by 3% of GDP a year in real terms. For example, a debt of $21Trillion if it increases by 2% a year when inflation is also 2% is basically not an increase in real terms. Eliminating the Federal Budget Deficit Could Help Raising taxes by 3% from 18% of GDP to 21% would be enough to fix the problem. A compromise is to raise taxes by 1.5% of GDP
The US dollar is best, cleanest dirty shirt in the world’s dirty clothes hamper. Our capitalism makes the tax base stronger than that of other countries and this taxable income can be used to service government debt. If domestic debt increases too much, possibly the outcome of excessive debt will be a situation where the government gets all of its needs met first, crowding out most of the private sector, so excess debt might not be a problem for government which pays interest-only. The risk is that private sector would undergo a wave of bankruptcies that would clear out debt and ironically induce more desire to own safe government debt, resulting in a further increase in spread between government
A popular myth is that the US deficits and recent tax cuts are so huge and out of control that the global investment community will dislike the US economy and sell off their dollar-based assets, making the dollar collapse. Assuming the recent tax cuts aren’t as effective as thought and start to reduce the cuts due to pre-set changes in the law (the whole thing reverts back in less than a decade due to Byrd amendment) then deficits may not get that much bigger. The tax law of December, 2017 actually raised taxes on corporations with offshore operations and closed loopholes such as large personal state income tax deductions, causing some personal form 1040 taxpayers to pay more. The
Many articles have been written by other people forecasting that the dollar will decline, but I disagree. The huge and growing federal deficit is a concern, but it can be handled and reduced by switching to a European system of government controlled health care. Much of the deficit can be attributed to health care costs. A popular myth is that Americans don’t pay as much in tax as people in other Developed countries. But some articles written about this topic seem to only focus on federal income tax and not on payroll tax, state income tax, etc. Also, most countries, except the U.S., don’t tax their individual citizens on offshore earnings held in corporations located offshore. Many wealthy
Today Japan’s central bank refused to issue “helicopter money” saying it was unconstitutional. They refused to do anything today saying they needed time to study it. The Nikkei stock index fell 3.6% today (it was down 5% at the low of the day) when the news was announced. The Yen went up 3% which is bad for Japan’s exports. The worse their economy gets the stronger their currency becomes since it appears to somehow magically resist inflation, so foreigners want to hold the Yen. The central bank had recently experimented with negative interest rates but they are not producing results. Global central banks are finding that the zero bound problem is a real barrier to further rate cuts. It is
China has been selling $250Billion of U.S. Treasuries, about 12% of what the central bank owns, but this is only 2% of all of our Treasury issues and this will be offset by growing demand for Treasuries in EM countries, including the private sector in China, to own G7 sovereign bonds. China’s sale is roughly the same as three or four months of the volume of Quantitative Easing that recently ended so it is not that much. As the U.S. economy gets better then the federal deficit gets smaller and thus less Treasuries are issued. This can create a recession in EM countries who view Treasuries as a type of global “money”. There have been suggestions by some economists that