Interest rates spike up – How scary is it?The Wall Street Journal reports: A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher– a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market. Paul Krugman (also here) and Brad DeLong are not concerned, noting we’ve seen lots of yield changes of this size or higher in the past. Even so, whether demand will continue to be there for burgeoning U.S. debt is obviously a question of great interest. Yields are now near the highest levels we’ve seen since the Lehman failure in September 2008, and if they continue to move up at their recent pace I wouldn’t want to dismiss it as an irrelevant development.
A different perspective on interest rates – However, there is another way to think about those rates. The US government’s cost of long-term borrowing can be decomposed into a short-term rate plus a term premium which investors demand to cover the interest-rate and inflation risks of holding long-term bonds. The short-term rate is substantially a function of monetary policy: the Federal Reserve sets an overnight rate that very short-term Treasury rates must generally follow. Since the Federal Reserve has reduced its policy rate to historic lows, the short-term anchor of Treasury borrowing costs has mechanically fallen. But this drop is a function of monetary policy only. It tells us nothing about the market’s concern or lack thereof with the risks of holding Treasuries.
The source of global trade imbalances – Global imbalances are seen by some as contributing to the global crisis – but what caused the imbalances themselves? This column argues that the popular savings glut hypothesis appears to be at odds with the data. Instead a behavioural explanation based around asset-price bubbles is a much better match for the key facts.
Is the U.S. playing a risky game of politics with interest rates? – – The Obama administration just experienced its first interest rate scare. Last week’s tepid Treasury bond auctions caused long-term Treasury interest rates to jump. One speculation: America’s largest creditor, Beijing, reduced its purchases as payback for congressional criticism of China’s currency policy. Yet the surprise is not that interest rates jumped. The real question is: What took them so long? Despite today’s mind-boggling level of public debt and deficits, and extraordinary monetary expansion, interest rates have remained surprisingly low. The 10-year Treasury interest rate, yielding 4 percent before the September 2008 collapse of Lehman Brothers, still remains below that level. The five-year Treasury interest rate is yielding roughly 2.5 percent. Analyst James Capra points out that from 1980 to 2010 that rate has yielded 2.5 percent or less only 4.6 percent of the time.
All Hail CBO – It’s not at all clear whether Republicans or Democrats will end up being the political winner of health care reform, but it is absolutely certain that the Congressional Budget Office came out of the debate in a far better and more highly esteemed position than when it began. At some point during the health care debate:
- Republicans and Democrats both cited CBO’s numbers and rulings as the authoritative voice that validated what they were saying
- Debates in both houses were delayed until CBO’s could complete its estimates
- Republicans happily and repeatedly used CBO’s labeling of some of the Medicare savings as "double-counting as if the phrase was handed down from on high
- House and Senate Democrats eagerly cited CBO’s projections (here and here, for example) of lower deficits from the health care bills as if they were gospel.
Tax Loopholes, Wealth Destruction, and Health Reform – AT&T, Caterpillar, Deere, and Verizon garnered headlines last week (and an unwelcome summons to Capitol Hill) for announcing that a provision in the recent health care legislation would result in substantial accounting write downs. AT&T, for example, told the SEC that it expects to take a $1 billion charge in the first quarter because the law eliminates a tax subsidy for providing prescription drug coverage to retirees. According to the Wall Street Journal, Credit Suisse estimates that the total accounting hit for corporate America will total $4.5 billion. Citing these impacts, a Wall Street Journal editorial denounced the provision as “a wholesale destruction of wealth and capital.” White House Press Secretary Robert Gibbs, in contrast, praised it as “closing a loophole.” Who’s right?
Insurers Might Delay Covering Pre-Existing Conditions – NYTimes – Mr. Obama, speaking at a health care rally in northern Virginia on March 19, said, “Starting this year, insurance companies will be banned forever from denying coverage to children with pre-existing conditions.” The authors of the law say they meant to ban all forms of discrimination against children with pre-existing conditions like asthma, diabetes, birth defects, orthopedic problems, leukemia, cystic fibrosis and sickle cell disease. The goal, they say, was to provide those youngsters with access to insurance and to a full range of benefits once they are in a health plan. To insurance companies, the language of the law is not so clear. Insurers agree that if they provide insurance for a child, they must cover pre-existing conditions. But, they say, the law does not require them to write insurance for the child and it does not guarantee the “availability of coverage” for all until 2014.
Who Will Tell The President? Paul Volcker – Against all the odds, a glimmer of hope for real financial reform begins to shine through. It’s not that anything definite has happened – in fact most of the recent Senate details are not encouraging – but rather that the broader political calculus has shifted in the right direction. Instead of seeing the big banks as inviolable, top people in Obama administration are beginning to see the advantage of taking them on – at least on the issue of consumer protection. Even Tim Geithner derided the banks recently as,“those who told us all they were the masters of noble financial innovation and sophisticated risk management.”In part this is window dressing. But in part it recognizes political opportunity – the big banks are unpopular because they remain completely unreformed and unrepentant. And in part it responds to a very real danger – Senator Dodd’s bill is so obviously weak on “too big to fail” issues that it will be hard to paint its opponents as friends of big banks.
The Long View… –We sit here in the midst of 10% unemployment in the USA, of fiscal policy that is crippled in some countries by (legitimate) fears that more deficit spending will trigger government debt crises and crippled in others by confusion between short-term cyclical and long term structural deficits, of banking policy crippled by the public populist reaction against more bailouts for the bankers, and of monetary policy crippled by a strange and sinister mindset among central bankers that fears inflation even as rates of wage increase continue to drop—people who are, as R.G. Hawtrey said of their predecessors in the Great Depression, “crying ‘Fire! Fire!’ in Noah’s flood." So it is time to calm myself down. And the best way to calm myself down is by taking the long view.
Bloggers and Journalists – Economic Principals– Starting next week, I am opening the weekly to comments. They will be moderated and, in all likelihood, sparse. The idea is not to encourage readers to chat back and forth in real time, an endearing feature of many blogs, but to provide a letters page, an opportunity to share disagreements or elaborations written mainly for the benefit of other readers. This week I’ve added a j-roll – a series of links to around 60 economic journalists whom I read, whose opinions matter most to me, with whom I try to keep up. (Go to the Webpage and have a look. Next week the links will collapse beneath a button in order to preserve the simplicity of the page.) There was a time when it could be said with confidence that there existed an invisible college of reporters who read each other’s stuff, shaped each others’ reputations, and coveted each others’ jobs. With the vastly expanded world of the blogosphere, and the correspondingly diminished world of print journalism, who can be sure any longer how reputations are made and sustained?
Be careful of bilateral trade numbers – Michael Pettis -A report just came out from the US-China Business Council that seems to be getting a lot of play in the press. Among other things the report repeats a widely accepted claim that since the US no longer produces the kinds of goods that it is importing from China (the evidence for this is always anecdotal, so I have no idea if it is true), any attempt to contract the US trade deficit by getting the Chinese trade surplus to contract could not possibly succeed. Although I agree with much of what the report recommends, and some of what it asserts, I have to say I am more inclined to blame the SCBC for “flawed analysis” than the EPI. Mr. Frisbie claims that the EPI’s estimate of job losses is “built on the faulty assumption that every product imported from China would have been made in the US otherwise.”
Move Over, China. Google Has a Russia Problem, Too – Business – The Atlantic -Foreign Policy’s Evgeny Morozov has a lengthy post on today’s news that Russia may pump $100 million into launching a national search engine and what it might mean for Google. Today Google is a very distant second in the Russian search market. The largest search engine is Yandex, which controls a crushing 62.8 percent of the market. Google has a 21.9 percent share. Since September, 2007, Yandex’s market share has never dipped below 55 percent, according to statistics at liveinternet.ru. Google’s share has yet to break 25 percent. To add insult to injury, Yandex has come out with its own browser based on Chromium, the Google-sponsored, open-source project on which Google’s Chrome browser is based, according to TechCrunch. Yandex’s browser seems indistinguishable from Google’s and, apparently, it’s also called Chromium.
r.j.'s space 