October 11, 2011
Crowding Out Watch, Again
I thought my March post on crowding out would be my last for a while, but the latest data are startling enough so that I wanted to post this graph of ten year real interest rates. Just for all those people who were worrying about big jumps in rates with government borrowing.
Figure 1: Ten year constant maturity TIPS yields (blue), and ten year constant maturity yield adjusted by ten year mean expected CPI inflation rate (red squares). NBER defined recession date shaded gray. Source: FREDII, Philadelphia Fed Survey of Professional Forecasters, NBER and author's calculations.
Just in case one wanted to know the exact figures, the TIPS ten year yield in September averaged 0.08% (nominal constant maturity yield at 1.98%). The TIPS ten year constant maturity on 10/6 was 0.18%, the TIPS five year was ....negative 0.57%.
Posted by Menzie Chinn at October 11, 2011 09:02 AMdigg this | reddit
Edward Harrison had some good comments on this over at Naked Capitalism.
It’s not about interest rates. If currency revulsion takes hold from negative real rates and people want to flee a country’s assets, this will be reflected in the currency. This is why the lower and lower yields in the US go against the canard about bond market vigilantes forcing rates higher.
If you believe, as I do, that the problem is excessive private sector debt and leverage due in large part to resource misallocation, you probably think growing into asset prices via increasing borrowing and lending is misguided. Debt/income and debt/GDP levels are simply too high. The government can act as a counterweight to the demand drag. But the recovery will always remain fragile until you get substantially all of the credit writedowns on unrecoverable loans. The reason financial crises are followed by slow recoveries has everything to do with this. Moreover, you want to focus on income and not GDP because the household sector is indebted and it pays for debt out of income; higher GDP doesn’t make any difference for debt service unless it is felt in household income.
Try to manufacture inflation all you want, manufacture nominal GDP all you want; until incomes rise enough to support the debt (numerator) or you get enough credit writedowns so that incomes support the debt (denominator), it’s not going to work.
Posted by: W.C. Varones at October 11, 2011 10:03 AM
Excess supply of capital caused by currency pegs (goods deficit, yen carry trade,) budget deficit, the demographic mismatch (oldster capital producers outnumber youngster capital consumers,) and a tax-code that favors capital over labor.
Posted by: Frank in midtown at October 11, 2011 12:48 PM
How can there be crowding out when governments are buying and selling to themselves. This is a market? Horse manure.
How's it feel to rob Granny and give it to banksters. Sleep good at night do ya?
Posted by: ArkansasAngie at October 11, 2011 04:08 PM
I am a High School Econ teacher and I am asking this for the benefit of my students...From what I gather (and as "Arkansas Angie" has suggested), The Fed has been the majority purchaser of US Treasuries. They have been driving up the price and lowering yields (true??). Absent of these purchases, would there not be a degree (small,medium, large?) of "crowding-out" as decisions about whether or not to buy Treasuries are made by individuals, businessess and other non-governmental institutions? If so, it seems a bit disingenuous to claim "the markets" are responding positively to US Treasuries if the markets have not been given the chance to actually respond. Since the Fed is buying a majority of the Treasuries, does that suggest "the market" does not even desire them? Constructive responses are appreciated..Respectfully submitted.
Posted by: Gene Hayward at October 11, 2011 04:56 PM
Gene Hayward: This is a good question. Obviously, most models imply that more issuance of Treasury debt would raise interest rates relative to the no-issuance counterfactual, ceteris paribus -- so interest rates clearly have risen in this sense. The Fed has purchased about $1.25 trillion in long term Treasurys ; using Jim Hamilton's estimates at the ZLB, I'd say that no more than about 40 basis points (bps) is attributable to the two rounds of quantitative easing. Add 40 bps to the 2011M09 value, and you still have a historically low real interest rate.
I will also note that a lot of the decline took place after the end of purchases under QE2 at end-2011Q2.
Posted by: Menzie Chinn at October 11, 2011 06:43 PM
If I may though ... and who else is buying when it isn't the Fed?
Let's think about this. Well ... there's PIMCO. There is Goldman. BOA. et al
What percentage is being bought by TBTF?
I posit that TBTF are central banks surrogates. How much do you have to buy and sell markets with HUGE liquidity and small actual buying and selling by INVESTORS. Nudge ... nudge ... wink, wink.
Posted by: ArkansasAngie at October 12, 2011 04:58 AM
If I may part 2 ... talking economic models ... how about including an additional variable.
Let’s call it … corruption … err… butcher’s thumb … uh … fed goodwill. Now vary that number. When does the model break?
Macroeconomic behavioralism scares the pants off me.
Posted by: ArkansasAngie at October 12, 2011 05:15 AM
It is my impression that everyone is buying treasury bonds, franks, or gold. Despite the role US government debt had in causing the financial crisis treasuries are still seen as safe. My guess is this behavior is driven by The US's historically good credit, and Bernake's refusal to create higher inflation (not hyper-inflation, but a percent or two).
America has problems, but we're still the best place to be.
Posted by: Dave at October 12, 2011 06:44 AM
The opposite of crowding out is....?
a chart you did couple years ago which i would like to find or duplicate--believe its from flow of funds-- shows that non guaranteed securitization collapsed in 2008 and is basically still frozen.
Posted by: AWH at October 12, 2011 09:06 AM
If the FED and the local/state/federal government completely exited the debt market, would more loans be made to individuals and businesses?
I would think that more private sector loans would be made because a portion of the savings that was invested in public debt would move to private debt.
Thus, the fact that rates are historically low, despite historically high levels of public borrowing, seems not tell the entire story.
Posted by: tj at October 12, 2011 11:57 AM
I doubt a complete departure of our government from the debt market would increase lending to private institutions, especially small cash strapped companies. I highly doubt lenders are happy with the yields shown above, and they have plenty of money to lend...
Banks don't believe small businesses will be able to make money, so they don't lend. Its an aggregate demand problem, not a regulatory crowding out problem
Posted by: Dave at October 13, 2011 06:46 AM
I think Dave has it right above. If one speculates about the government exiting the debt market, one has to ask, how would this be accomplished? By simply printing more money instead? Or by less spending? Or higher taxes?
The latter two would potentially cause a further decline in aggregate demand. The former would simply cause further increases in excess reserves in the banking system.
With banks already sitting on a trillion in excess reserves, corporations sitting on large amounts of cash as well, and the private sector not wanting to borrow, but rather wanting to deposit still more money in the banks than they know what to do with, there is no lack of investment funding available. What's lacking is on the demand side.
Posted by: acerimusdux at October 13, 2011 07:56 AM
It was a thought experiment. I get that we have an AD problem. I am not suggesting government exit the debt market. The point is that if you take away government, some of those funds will go to the private sector, they won't all go into excess reserves. Thus, government crowds out some private borrowers, regardless of the level of interest rates.
Posted by: tj at October 13, 2011 04:58 PM
What's interesting to me is the lack of a big swing at between the Clinton and Bush administrations. Looking at the post 2008 data, it remains plausible that crowding out is a serious problem, just not in liquidity traps.
The lack of movement after Bush's fiscal policies were put in place are much harder to explain, and suggest that crowding out isn't a real problem at all.
Posted by: A H at October 23, 2011 01:23 AM