Transcript US Interest Rates

GLOBAL IMBALANCES
Notes for Discussion
Guillermo Calvo
October 20, 2005
Hard Landing Hypothesis
Major Advocates: Krugman; Obstfeld & Rogoff; Roubini & Setser; Eichengreen
“Here's what I think will happen if and when China
changes its currency policy, and those cheap loans are
no longer available. U.S. interest rates will rise; the
housing bubble will probably burst; construction
employment and consumer spending will both fall;
falling home prices may lead to a wave of bankruptcies
(...).
In other words, we've developed an addiction to
Chinese dollar purchases, and will suffer painful
withdrawal symptoms when they come to an end.”
Paul Krugman
USA External Deficit Financing
(billions of US dollars)
“Neoclassic” Period
Reflow of Private
Capital to EMs
Crisis in EMs
0
-100
-200
-300
-400
-500
-414
-600
-700
Source: WEO
679
2003
2002
2001
2000
1999
1998
1997
1996
1995
167
1994
800
700
600
500
400
300
200
100
0
-100
-14
1993
Official Financing
246
200
100
0
-100
1992
Private Financing
-666
2004
Current
Account
Who is Financing the Current Account Deficit of the US?
Prima Facie, Asian Central Banks...
International Reserves Accumulation
Reserve Accumulation
in US Dollars
(in % of the US Current Account deficit, 2004)
35%
31%
30%
2000
2001
27%
2002
71%
88%
2003
Reserves in US dollars over total reserves,
average 1992-2003: 63%
24%
25%
20%
57%
20%
15%
15%
10%
7%
5%
3%
0%
China
Japan
Rest of Asia*
Middle East**
Latin America
Others
*Includes: Korea, Hong Kong, India, Indonesia, Malaysia, Philipines, Singapore, Taiwan y Thailand.
**Includes Oil Producers: Bahrain, Iran, Kuwait, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.
How Do They Do It?
 Non-US central banks buy US
Treasury bonds by issuing their own
debt to:
 Private sector, or
 Other banks who use private
sector deposits.
 Thus, directly or indirectly, private
investors lend to US government!!
How was International Reserve
Accumulation Financed?
Senioriage Revenues in % of International Reserve Accumulation
90%
Fiscal Deficit
80%
In % of GDP
2003
2004
China
2.5%
1.5%
Japan
7.9%
6.7%
Korea
1.7%
2.0%
70%
60%
50%
40%
30%
20%
10%
0%
2003
2004
China
2003
Japan
2004
2003
2004
Korea
What If Asia Floats? (Krugman’s concern)
 If Asia floats, then Asian central banks stop buying
US public bonds,
 and, therefore, the private sector will buy US public
bonds directly, instead of indirectly (as before).
 Thus, if private sector demand for public sector
bonds remains unabated (a reasonable assumption),
Krugman need not worry. . .
 Unless, of course, political and other considerations
generate high market volatility.
Moreover
 Interest rates on long-run US public
bonds are not unprecedentedly low, and
 The US public sector is not heavily
indebted, compared with other
industrialized countries.
 The private sector savings have already
undergone a large increase.
US Interest Rates: A Long Run View
(real interest rate, 10-year US Treasury Bond, Jan-55 – Jun-05)
12,0
Average: 1.7
Average: 1.8
10,0
8,0
6,0
4,0
2.0
2,0
0,0
-2,0
-4,0
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
Jan-81
Jan-79
Jan-77
Jan-75
Jan-73
Jan-71
Jan-69
Jan-67
Jan-65
Jan-63
Jan-61
Jan-59
Jan-57
Jan-55
-6,0
US Public Debt is Still Small
Public Debt in Industrialized Countries
(Central Government, in % of GDP)
180%
162%
160%
144%
126%
101%
108%
90%
72%
53%
54%
40%
39%
37%
Germany
UK
USA
36%
18%
0%
Japan
Italy
France
US Twin Deficits: Ricardian Equivalence?
(In % of GDP)
Post US
Recession
Post EMs
Crises
1.0%
3.0%
2.0%
0.0%
1.0%
-1.0%
-1.0%
-2.0%
-3.0%
-3.0%
Fiscal Result
-4.0%
-4.0%
-5.0%
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
-6.0%
Mar-91
-5.0%
-6.0%
Fiscal Result
Current Account
-2.0%
Mar-90
Current Account
0.0%
The Changing Anatomy of the US
External Imbalance
(% of US GDP)
Private and Official Current Account
Savings & Investment
21%
0%
6%
5%
20%
4%
19%
-2%
18%
Investment
17%
-3%
16%
-4%
Current Account
3%
2%
Official
1%
0%
-1%
-2%
Total
-3%
15%
-5%
-4%
-5%
14%
2004
2002
2000
1998
1996
1994
-7%
1992
-6%
2004
2002
2000
1998
1996
1994
Private
-6%
Savings
13%
1992
Savings and Investment
-1%
Assessment
 The current imbalances are sustainable, even if
non-US central banks stop buying US public debt
obligations, if private sector propensity to buy public
sector bonds remains largely unchanged.
 Given current low interest rates, Emerging Markets
will become magnets for capital flows.
 This may give rise to higher investment and growth
in EMs but
 given their small size compared to the US, this
trend will likely have little impact on interest rates,
 unless the US fiscal deficit shows no downward
trend
GLOBAL IMBALANCES
Notes for Discussion
Guillermo Calvo
October 20, 2005