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c1ue
06-15-07, 02:16 AM
From ft.com:



Markets could cope with doubling of US deficit

By Krishna Guha in Washington
http://msnbcmedia2.msn.com/i/msnbc/Components/Sources/sourceFiTimes.gif

Global capital markets would be able to finance a near-doubling of the US current account deficit to $1,600bn a year by 2012, a McKinsey study published on Friday argues.
The study, by McKinsey Global Institute, breaks new ground in analysing the sources of funding for the deficit, and what a large dollar depreciation would mean for different industries and US trading partners.
McKinsey estimates that, based on trend growth rates and current exchange rates, the US deficit will reach $1,600bn (€1,200bn, £815bn), or 9 per cent of gross domestic product, in five years' time, up from 6.5 per cent of GDP last year.

But McKinsey says that on the same assumptions, countries with surpluses will generate capital outflows of $2,100bn a year by 2012.
The US would soak up 77 per cent of the total available pool of surplus capital, up from about 70 per cent between 2001 and 2006.
McKinsey admits that this would be a "historically unprecedented" share, but notes that "the US deficit has already broken all historical precedents".
It argues that over a five-year horizon, the resulting increase in US external indebtedness would be quite manageable.
The US share of total world savings would rise from 9 per cent to 12.1 per cent, while foreign ownership of US assets would increase "only slightly".
By 2012 the US would have an external debt-GDP ratio of 46 per cent – roughly similar to that of Mexico today – and net interest payments to foreign creditors would still be less than 1 per cent of GDP, McKinsey estimates.
"There really is nothing imminent about the deficit ending at all," Diana Farrell, one of the authors of the study, told the FT.
But the study assumes that foreign investors do not alter their behaviour in the light of the apparently unsustainable trajectory of the current account deficit beyond 2012 and demand greater rates of return to compensate for the risk that the dollar will depreciate.
McKinsey argues that while an expanded deficit is sustainable over five years, "eventually it needs to stabilise or even shrink relative to the size of the economy".
This would require a "major rebalancing of global savings and demand". If the change took place over a long period, the impact on exchange rates "could be minimal".
But McKinsey says it would take a 33 per cent depreciation of the dollar from its level at the end of 2005 to eliminate the deficit by 2012 (see graphic).
In the event of such a depreciation, the US would still have a large trade deficit in goods but this would be offset by a big surplus in services and a sharp increase in net foreign income, due to the increased dollar value of earnings from abroad.
McKinsey warns that the bilateral trade deficit with China "will persist in all scenarios" but that in the event of a large and broad-based depreciation, the US would move sharply into surplus against many other trading partners, including Mexico and Canada.
Copyright The Financial Times Ltd. All rights reserved.

US currency account deficit is at $765+ billion (FY 2006) or put another way at 287% of exports and over 7% of GDP.

jk
06-15-07, 05:49 AM
this study parallels gavekal's argument about the deficit: i.e. it should be compared to the value of u.s. assets, since it's a claim on those assets, and not compared to gdp. since the price of u.s. assets [i can't bring myself to say "value"] is rising strongly, the increased claim against them is well contained. of course there is a counter-argument: if prices fall, the claims don't fall with them. but prices don't ever really fall, do they?

GRG55
12-09-07, 11:35 AM
this study parallels gavekal's argument about the deficit: i.e. it should be compared to the value of u.s. assets, since it's a claim on those assets, and not compared to gdp. since the price of u.s. assets [i can't bring myself to say "value"] is rising strongly, the increased claim against them is well contained. of course there is a counter-argument: if prices fall, the claims don't fall with them. but prices don't ever really fall, do they?

This is a chart from Doug Noland's weekly commentary. Lookiing at this it just reinforces the view that America, in aggregate, is a very wealthy nation. Seems household debt could theoretically be completely repaid and hardly make a dent on the asset side of the balance sheet? Ok, let's accept that 95% of the population hold all the debt, and the other 5% have all the assets. If things get really difficult there's always government tax policy to correct that just enough to get things moving forward again. I am quite sure they will use that power it if they have to, because the 5% don't have enough votes.

What is there about this picture I don't understand? :confused:


http://www.prudentbear.com/images/stories/cbb07/housebs0907.gif

jk
12-09-07, 12:08 PM
This is a chart from Doug Noland's weekly commentary. Lookiing at this it just reinforces the view that America, in aggregate, is a very wealthy nation. Seems household debt could theoretically be completely repaid and hardly make a dent on the asset side of the balance sheet? Ok, let's accept that 95% of the population hold all the debt, and the other 5% have all the assets. If things get really difficult there's always government tax policy to correct that just enough to get things moving forward again. I am quite sure they will use that power it if they have to, because the 5% don't have enough votes.

What is there about this picture I don't understand? :confused:


http://www.prudentbear.com/images/stories/cbb07/housebs0907.gif
you need to put this together with the chart ej has posted a few times, showing the distribution of wealth within the population. for simplicity let's suppose, as you suggest, that the assets are held by 5% of the population, the liabilities by the remaining 95%.

yes, the 95% have more votes, but the 5% has the money. did you notice this week the congress declined to increase taxes on private equity managers above the current 15% rate? i don't foresee the tax structure being changed in the direction of more progressivity until/unless things get much, much worse.

in the meantime, the problem is that the 95% have maxed out their credit, so consumption has to slow.

GRG55
12-09-07, 02:00 PM
you need to put this together with the chart ej has posted a few times, showing the distribution of wealth within the population. for simplicity let's suppose, as you suggest, that the assets are held by 5% of the population, the liabilities by the remaining 95%.

yes, the 95% have more votes, but the 5% has the money. did you notice this week the congress declined to increase taxes on private equity managers above the current 15% rate? i don't foresee the tax structure being changed in the direction of more progressivity until/unless things get much, much worse.

in the meantime, the problem is that the 95% have maxed out their credit, so consumption has to slow.

Have faith. Hilary is coming...


More seriously, there seems a certain tone of desperation setting in now. Paulson's body language is increasingly of a man under a lot of stress. I suspect the tax changes will be underway shortly after the next inauguration, barring a miracle recovery in the economy next year. Not that sure things really need to get that bad, just bad enough to keep threatening a deflationary outcome despite Fed policy. That'll be enough to scare 'em.

bill
12-09-07, 02:18 PM
. I suspect the tax changes will be underway shortly after the next inauguration, barring a miracle recovery in the economy next year. Not that sure things really need to get that bad, just bad enough to keep threatening a deflationary outcome despite Fed policy. That'll be enough to scare 'em.
Their trying
http://www.renewableenergyaccess.com/rea/news/story;jsessionid=4D4EDF5E398DFBE9370E38EF9EDF4A05? id=50788

“Speaker Pelosi and the House of Representatives delivered a great Bill for clean energy as we still try to broker in incentives for a few renewable technologies, and it is now up to the Senate who's future is not so sure in the face of another threatened White House veto,” said Scott Sklar of The Stella Group, Ltd.

President Bush and some leading Republican Senators have voiced strong opposition to the $21 billion in tax incentives for renewables, paid for by repealing subsidies for the fossil energy industries. There are also concerns over the RPS, which has been vigorously opposed by some powerful utilities.

jk
12-09-07, 05:11 PM
Have faith. Hilary is coming...


More seriously, there seems a certain tone of desperation setting in now. Paulson's body language is increasingly of a man under a lot of stress. I suspect the tax changes will be underway shortly after the next inauguration, barring a miracle recovery in the economy next year. Not that sure things really need to get that bad, just bad enough to keep threatening a deflationary outcome despite Fed policy. That'll be enough to scare 'em.
anyone know offhand how much of hillary's financing comes from wall street?


edit: quick google search yields oct 18, article
In the halls of high finance, Hillary Clinton’s stock seems to be rising.
In the latest quarter, Ms. Clinton tapped into a gusher of donations for her presidential campaign from employees at the major investment banks. According to an analysis by Bloomberg, she picked up $748,896 from workers at Wall Street firms from July to September, which is more than the combined amount raised by Barack Obama, Rudolph Giuliani and Mitt Romney from those sources.....
Ms. Clinton is the home senator for much of the Wall Street crowd. She has also been helped by the public backing of two of Wall Street’s most powerful chief executives, Lloyd C. Blankfein of Goldman Sachs and John J. Mack of Morgan Stanley.
Mr. Mack (who supported President Bush in the previous election) held a fund-raising event for Ms. Clinton in July, and the checkbooks must have been flying. The latest data show that Morgan Stanley was her largest source of Wall Street money, adding $210,970 to her coffers.

The Outback Oracle
12-09-07, 05:47 PM
The problem with this whole argument about the so-called wealth is that

As pointed out by JK the "wealth" depends on the pricing level. So let's deflate housing towards the mean, say, 40% and recalculate the "assets", in conjunction with this scenario, commercial RE falls out of bed and the Stock market tanks...how much wealth is left? And again, as pointed out by JK what is now the NET WEALTH?
Now, Foreign Govts etc really are not interested in buying all your houses! Yes a frew might be interested in living in California or wherever, however what they really want are your resources and possibly (after the economy tanks and it is all cheap) your commercial RE. So the wealth to meet this debt should be discounted 40 to 50% on price and then the "wealth" in houses deducted.

We ( the US including Aus) are already in some difficulty with respect to Foreigners trying to buy resource assets. Several times already over Ports and Oil you have cried like stuck pigs when foreigners tried to spend the dollars they legitimately hold to buy assets.
So on the one side "we have all this wealth" but on the other "you are not allowed to buy anything you want"
This basically turns the currency into paper to wipe your a......well toilet paper....and i haven't tried it, but I'd presume it is not much good for that!

How much longer will the world supply Oil and Goods for stuff they cannot usefully use?
So the assumption of the "no change in behaviour" is the absolutely stupidest assumption one could make and renders the whole study totally irrelevant anyway!
The presumption on pricing makes it tecnically incorrect. So the whole thing is WRONG!...WRONG!...WRONG!

Pretty typical of a lot of studies these days. What was the cost of this damned study by a bunch of no-hopers sitting around contemplating their navels?

The Outback Oracle
12-09-07, 05:55 PM
Ahhhhhhhhhh I forgot to mention, after we have discounted all the pricing to some relevant realistic level, let's work out what the value of the dollar will be...maybe 40% below where it is now? Now let's calculate the "wealth". Of course you might be holding the value of the dollar up by high interest rates but, in that case, given that the whole pricing structure is now coming apart at the seams even with negative real interest rates, think about what the asset prices will be with say 20 or 30% interst rates? (given the already existing mountain of debt)

GRG55
12-10-07, 12:59 AM
Ahhhhhhhhhh I forgot to mention, after we have discounted all the pricing to some relevant realistic level, let's work out what the value of the dollar will be...maybe 40% below where it is now? Now let's calculate the "wealth". Of course you might be holding the value of the dollar up by high interest rates but, in that case, given that the whole pricing structure is now coming apart at the seams even with negative real interest rates, think about what the asset prices will be with say 20 or 30% interst rates? (given the already existing mountain of debt)

You've been overdosing on Nouriel Roubini (Dr. Doom) haven't you. It's okay, you can tell us... :rolleyes:

Must confess that I am not smart enough to reconcile the combination of a 30% nominal interest rate and a 40% depreciation in the US $, at the same time. Would point out however, that a 40% depreciation in the US $, were it to occur, would mean a 40% depreciation in the real value of the debt as well. There are very few things that influence one side of the balance sheet without some similar consequence on the other side of the ledger.

The Outback Oracle
12-10-07, 02:20 AM
G'day GRG

Sorry...perhaps I am not too lucid!

I was suggesting in that scenario, if you want to hold the value of the dollar near todays levels, the interest rates have to be some very high number. I haven't a clue what it is. When I look at Aus I think interest rates should now be about 20%. The reasoning is like this...if you want people to actually save thereby providing for the ageing population AND reducing the CAD...they need a real return of say 6%. Add to this about 7% inflation (real inflation). So you arrive at 13% but that is AFTER tax. So if the average marginal tax rate is say 33% (and I'm not sure that number but it would be close) you need 20% interest rates AT THE MOMENT just to keep things going. Add in liquidity crunches etc...what interest rate is necessary to stabilise things?
OK so as we raise rates we may get some deflation but I argue a lot of inflation is already built in and going to happen anyway. But that is just me! I have been known to be wrong.
As to Roubini ...he's too damn scary for me :) I got to sleep nights so I can work!
Cheers

GRG55
12-10-07, 07:44 AM
G'day GRG

Sorry...perhaps I am not too lucid!

I was suggesting in that scenario, if you want to hold the value of the dollar near todays levels, the interest rates have to be some very high number. I haven't a clue what it is. When I look at Aus I think interest rates should now be about 20%. The reasoning is like this...if you want people to actually save thereby providing for the ageing population AND reducing the CAD...they need a real return of say 6%. Add to this about 7% inflation (real inflation). So you arrive at 13% but that is AFTER tax. So if the average marginal tax rate is say 33% (and I'm not sure that number but it would be close) you need 20% interest rates AT THE MOMENT just to keep things going. Add in liquidity crunches etc...what interest rate is necessary to stabilise things?
OK so as we raise rates we may get some deflation but I argue a lot of inflation is already built in and going to happen anyway. But that is just me! I have been known to be wrong.
As to Roubini ...he's too damn scary for me :) I got to sleep nights so I can work!
Cheers

Thanks for clarification. And I concur with your view on Roubini. I didn't start drinking really heavily until AFTER I found his web-site... :p

c1ue
12-10-07, 08:52 AM
GRG,

More specifically, about $15T of 'net worth' came from real estate in the past 10 years.

Then take the $10T or so of mortgage debt also taken on which also corresponds to net worth of someone else (note holder).

Add in the commercial real estate equivalent.

Then the LBO/PE premium in the market.

You can see how the numbers can add up.

GRG55
12-10-07, 09:43 AM
GRG,

More specifically, about $15T of 'net worth' came from real estate in the past 10 years.

Then take the $10T or so of mortgage debt also taken on which also corresponds to net worth of someone else (note holder).

Add in the commercial real estate equivalent.

Then the LBO/PE premium in the market.

You can see how the numbers can add up.

The chart that I posted from Doug Noland was for the "Household Sector".

Would Household Sector include commercial real estate (other than REITS held in 401k's and the like) or LBO/PE data?

Just seemed to me difficult to imagine some sort of US economic calamity caused by the Household Sector liabilities.
Recession; perhaps.
Deflation in certain sectors of the economy; quite possibly.
Outright economic armageddon as some are proclaiming; why wouldn't assets be gradually liquidated to bring the debt within servicing limits again? Still would appear to leave plenty of Household Sector assets left to keep the economy from collapse.

Not saying things aren't slowing, or that there aren't serious problems. There are. But those certain of a "black hole" may be disappointed, at least for a while longer...

jk
12-10-07, 10:56 AM
The chart that I posted from Doug Noland was for the "Household Sector".

Would Household Sector include commercial real estate (other than REITS held in 401k's and the like) or LBO/PE data?

Just seemed to me difficult to imagine some sort of US economic calamity caused by the Household Sector liabilities.
Recession; perhaps.
Deflation in certain sectors of the economy; quite possibly.
Outright economic armageddon as some are proclaiming; why wouldn't assets be gradually liquidated to bring the debt within servicing limits again? Still would appear to leave plenty of Household Sector assets left to keep the economy from collapse.

Not saying things aren't slowing, or that there aren't serious problems. There are. But those certain of a "black hole" may be disappointed, at least for a while longer...
the situation is somewhat worse than appears in noland's chart, however, in that the assets are in different hands than the liabilities. [see that chart on the distribution of wealth that ej has posted a few times]

GRG55
12-10-07, 06:38 PM
the situation is somewhat worse than appears in noland's chart, however, in that the assets are in different hands than the liabilities. [see that chart on the distribution of wealth that ej has posted a few times]

jk: I made that exact point with my first post on this thread with the 95/5 split (doesn't matter if the figures are as exact as EJ's chart, it's acknowledging the same point).

Essentially Household Sector assets far outstrip Liabilities in aggregate. That suggests that unless the authorities completely mishandle the situation, the ability of the economy to deal with that liability should be greater than the current popular view. To the degree that some of that asset value needs to be taxed away from the 5% (or whatever EJ's chart says it is) that holds it, it can be done. It does not appear enough of a wealth extraction to be beyond the ability of the system to accomplish while still keeping the bourbon and Bentley set with adequate stocks of holiday Dom Perignon out in the Hamptons. Nobody wins if the system goes into cardiac arrest.

Spartacus
12-10-07, 07:18 PM
the old mechanisms of rating good and bad credit are gone.

And when a liquidity crunch hits an institution, and the CEO tells everybody to SELL EVERYTHING not nailed down, no one has time to sit down with each credit risk and evaluate.

Heck, they didn't do it when writing the mortgages, when they had thousands of sales staff (now all gone) and thousands of underwriters (now all gone) and all the time in the world (now in short supply)

why would they ever do it now?


why wouldn't assets be gradually liquidated to bring the debt within servicing limits again?

Not saying things aren't slowing, or that there aren't serious problems. There are. But those certain of a "black hole" may be disappointed, at least for a while longer...

I'm not convinced of the extreme doomsday scenarios either, but time will tell

c1ue
12-10-07, 09:11 PM
Would Household Sector include commercial real estate (other than REITS held in 401k's and the like) or LBO/PE data?

Not all of the commercial and LBO/PE wealth is held by corporations; or to be more precise there are plenty of family businesses and trusts which hold commercial and LBO/PE types of wealth.

While it is easy to focus on Wal-Mart and the other big chains, nonetheless from the overall commercial real estate market standpoint, there are tens of thousands of smaller operators with 1, 2, or 10 commercial buildings as a substantial portion of their income and wealth.

Similarly on the LBO/PE side, while the money may be managed by a GS or Merrill, the majority of it is coming from individual wealth holders. There is no point playing OPM if there aren't OP!.

Does this mean doomsday is coming? Well, depends on your point of view.

A 2 decade long credit fueled asset inflation trend ending in financial disaster for the largest economy in the world.

Great Depression II - tens of thousands of jobs already lost, perhaps hundreds of thousands to come as the cash basis behind commercial credit is sucked into the subprime/MBS/CDO/SIV black hole, in turn causing multitudes of businesses large and small to fail due to lack of financing (and poor management in general).

Lack of jobs combined with falling home equity leads to even further home price drops, in turn impacting federal, state, and local government revenues. This in turn leads short term to more deficit spending, but long term to loss of government jobs - probably faster than previous as deficits are already massive.

Inflation via dollar depreciation rearing its ugly head - and further stirring the toxic brew.

All through this the politicians and their sheeple will continuously look for an easy way out, but instead contribute to further losses and longer recovery time frames.

United States turning into a 3rd world nation?

No, but the United States being forced into a multi-decade societal and economic restructuring to reverse bad habits?

Very possible.

GD I did it for the 'greatest generation'; perhaps GDII will create another one.

The Outback Oracle
12-11-07, 06:05 PM
Sorry if I am really thick!!!

Isn't the question about your CAD? Can you handle double the current CAD for the next eternity????
So who owns what debt and who owns what assets internally in the USA is irrelevant?

The point being, like us here in Aus, you owe everyone else (external to teh USA )money! So there is no point in including your inflated houses in the wealth available to service the debt.
I am not hearing much from the "deficits don't matter" brigade these days as the USD plunges.

Again, sorry if I am a bit thick. Maybe someone can set me straight.

Mind you I think it is a great stunt the US has pulled. The dollar is now just an IOU and you are basically refusing to redeem them while still holding the biggest six gun (economically and well as militarily) in town! The problem will be when others have all your bullets!

GRG55
12-11-07, 10:24 PM
Sorry if I am really thick!!!

Isn't the question about your CAD? Can you handle double the current CAD for the next eternity????
So who owns what debt and who owns what assets internally in the USA is irrelevant?

The point being, like us here in Aus, you owe everyone else (external to teh USA )money! So there is no point in including your inflated houses in the wealth available to service the debt.
I am not hearing much from the "deficits don't matter" brigade these days as the USD plunges.

Again, sorry if I am a bit thick. Maybe someone can set me straight.

Mind you I think it is a great stunt the US has pulled. The dollar is now just an IOU and you are basically refusing to redeem them while still holding the biggest six gun (economically and well as militarily) in town! The problem will be when others have all your bullets!

For many years economists like Morgan Stanley's Stephen Roach kept pointing out that a US $ decline was a necessary condition (but not by itself a sufficient condition) for any correction in the unsustainable US CAD.

I am sure that someone out there has a chart or graph with up to date information to verify this, but I believe that the CAD topped out around 7% of GDP, and is no longer rising (the trade deficit is started to reverse if I recall recent reports correctly?).

c1ue
12-12-07, 03:29 PM
CAD is supposedly around 4.5% deficit now, but that still is not good.

The other thing to keep in mind is that the financial exports are not well accounted for in trade figures; I suspect that CAD previously was not as bad as it appeared due to exported MBS/CDO crap, but is now much worse due to that 'business' evaporating.