Friday, January 23, 2009

From "Crowding Out", to "Running Away"

While I don't agree with the entire piece, the following portion of Hoisington Investment Management Company's The Great Experiment caught my attention :

If there is a desire to increase government spending, the federal government must either increase taxes on the far larger private sector, an option that would presumably be precluded under the present circumstances, or borrow funds in the financial markets that would have gone to the private sector. At this point we have to ask which sector has the better track record of growing the economic pie—private or government expenditures? The private sector has demonstrated the greater flexibility and creativity to expand the economic pie, increasing productivity and thereby improving living standards for all. The risk is that increased federal borrowing will stunt the private sector's ability to grow.
In other words, the attractiveness of Treasuries has increased relative to U.S. equities and corporate debt. As of 2007 (the latest data available), Foreign investors owned $9.1 Trillion in Long Term (i.e. more than 1 year) U.S. Securities, split almost evenly between equities, private debt, and public (Treasury / Agency) debt. If the blue portion of the pie is growing, it is coming at the expense of the red, which explains part of the pressure on corporate spreads and equity prices.

But as Interest Rate Roundup details, there is no such thing as a "free lunch":
You can't simply bail out anyone and everyone, especially when you're a debtor nation, and expect your creditors to just grin and bear it forever.

Now investors seem to be waking up. Treasuries have been getting mauled this week, losing value every single trading day this week (Long bond futures are going for around 128 21/32 vs. 136 7/32 last Friday). Yields on 10-year Treasury Notes have shot up to 2.68% from their December 30 low of 2.06%.
The problem is that while investors are fleeing Treasuries, they aren't flying back to private securities, as both equities and corporate debt are down on the week. In other words, they may just be selling all of the above outright, but what are they buying? Mike Larson at Interest Rate Roundup seems to believe it is the old doomsday standby:
I have a thesis that might explain what's going on: Global investors are starting to sour on government debt all around the world. They can see that the cost of bailing out banks and economies here in the U.S., in Asia, and in Europe is spiraling out of control. They know that means governments are going to be issuing trillions of dollars in new debt, driving down the price of existing securities. Result: They’re flocking to alternative stores of value -- including silver and gold.
Source: InvestorsInsight


  1. Crowding out won't be a factor if the Fed is buying the Treasuries, and that is the bigger concern to me if the running away factor forces a larger and larger chunk of the issue to be absorbed by the Fed because of a lack of investors.

  2. if the fed "needs" to buy treasuries it is likely in response to a worsening of the economy. if the economy gets worse, investors probably don't want to invest in corporate debt or equities. so... i am a little confused as how that can prevent crowding out, which i'll define as treasury issuance "crowding out" private investment.

    circle alert: if this happens, the fed doesn't need to buy treasuries as rates approach zero...

  3. If investors start to choose "none of the above", by causing a capital flight to another currency, country, or gold, then all sectors would see worsening without any crowding effect between private and public investment.

    In other words, I'm more afraid of the running away than the crowding out. Arguing over marginal utility differences between private vs public investment is dangerous when you risk a flight due to too much issue.

    The only thing holding the dollar together currently as far as I can tell is a lack of alternatives.

  4. We should definitely ask which sector has the better record. Is the private sector, producing health care at twice the price of other nations, doing better? It is definitely contributing more to our monetized GDP. Since productivity is revenue divided by manpower, you'd have to say the productivity is higher.

    The public sector's infrastructure, schools, public safety, courts and organizational structure are valued at cost, not what the market will bear. Where is the great value in housing produced by the private sector? Well, it looks like the gummint is being asked to ratify it by bailing out the bad paper.

    Which is more valuable, the BMW or the road on which it runs? Perhaps the first has no value absent the second. Public goods have enormous benefit-cost ratios because they are valued at cost.

    What sort of market return could you get on a monopoly on police or national defense?

    And how valuable is the market collapse we are currently experiencing? It would be in the negative trillions.

    Crowding out? Nobody in the private sector wants to borrow! That is the problem. The banks have no value absent the gummint bailout.

    This is the Supply Side fantasy boondoggle that got us in this mess. Give it to the private sector. Humbug.

  5. You Bail Them Out, We Opt Out.We Want Some TARP

    Dear, or should I say Expensive Ben S. Bernanke,

    All of Our Economic Problems Find They Root in the Existence of Credit.

    Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

    If my bank doesn't pay back its credits, how come I still must pay mines?

    If my bank gets 0% Loans, how come I don't?

    At the same time, everyday, some of us are losing our home or even our jobs.

    Credit discriminates against people of lower economic classes, as such it is unconstitutional, isn't it? It is an supra national stealth weapon of class struggle.

    Credit is a predatory practice. When the predator finishes up the preys he starves to death. What did you expect?

    Where are you exactly in that food chain?

    Credit gets in the way of All the Principles of Equal Opportunity and Free Market.

    Credit is a Stealth Weapon of Mass Destruction.

    Credit is Mathematically Inept, Morally Unacceptable.

    You Bail Them Out, We Opt Out

    Opting Out Is Both Free and Strictly Anonymous.

    My Solution: The Credit Free, Free Market Economy.

    Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.

    I Am, Hence, Leading The Exit Out of Credit:

    Let me Outline for You my Proposed Strategy:

    My Prescription to Preserve Our Belongings.

    Our Property Title: Our Free, Strictly Anonymous Right to Opt Out of Credit.

    Our Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .

    Assets Transfer - Our Right Grant Operation - Our Wealth Multiplier.

    A Specific Application of Employment, Interest and Money.
    [A Tract Intended For my Fellows Economists].

    If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Already Worthless?

    Since credit based currencies are managed by setting short-term interest rates, on which you have lost all control, can we still say that you are still managing anything?

    We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

    In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

    The only other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

    It will be either awfully deadly or dramatically long.

    A price none of us can afford to pay.

    “The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

    - Henry A. Kissinger

    What Else?

    Until We Succeed the Economy Will Necessarily Keep Sinking Into a Deeper and Deeper Depression

    You Bail Them Out, Let's Opt Out!

    Check Out How Many of Us Are Already on Their Way to Opt Out of Credit.

    Let me provide you with a link to my press release for my open letter to you:

    Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!

    I am, Mr Chairman, Yours Sincerely [Do I really have the choice?],

    Shalom P. Hamou AKA 'MC-Shalom'
    Chief Economist - Master Conductor
    1 7 7 6 - Annuit Cœptis
    Tel: +972 54 441-7640
    Fax: +972 3 741-0824