For those interested:
There are some things I disagree with (his implication on growth and productivity statistics), but the general premise I agree with--the growth in global dollar liquidity is unsustainable compared to the US economic fundamentals:





Der Spiegel


Sorry about linking to another article Mr. Jumper....

Recap, if you don't want to read the full article:

Greed, is bad (as defined by a European). US consumption has been driving the global economy. Thus, the cure is not for the rest of the industrialized world to get its act together to grow the global economy and reduce the proportion of USA's contribution via growth, but for US to stop consuming and gently bring the world economy to a soft landing.


**********


Of course until an economic block can actually deliver the security that the US$ offers, no investor will be quick to dump the dollar.

The comparisons to the dot com collapse are assinine, because while you could try to dump your Pets.com stock while you could, you still had a chance to pick up US Steel or IBM. In the US$ case that Steingart is presenting, you'd be selling overpriced IBM to pick up Pets.com.

Boy, that's not what I got out of this... I think you might be a little bit too defensive and/or sensitive on this one...

What I took away from this is: Steingart thinks the dollar is over-valued compared to US Economy fundamentals, and a steep weakening of the dollar could be disastrous... all of which is possible.


Of course, if investors perceive that the security of the US$ drops (rather than an increase in security of another currency) this would create the same effect.


I agree with this.

I don't think you'll find too many people who aren't concerned about the long term value of the dollar relative to the underlying fundamentals. It's been a concern for a while.

So, what does Steingart do to dress up his pig to sell the book? Throw a lot of jingoisms.

Greed is driving the unsupportable dollar valuation? Doesn't he stop for a second to think that if there was even a remotely better alternative, someone would be buying up that security in droves? The reason investors are sticking with the dollar is that investing in EU or Yen is more risky at the moment. Once those zones show signs of real economic stability & growth, the prophecy may come true and the rush to sell the dollar will start. In the meantime, no one is in a rush to create a self induced market panic.

Fair enough. I don't know anything about this guy or his book other than the excerpt given here. I would certainly defer to you in that area.

Greed is driving the unsupportable dollar valuation?
I thought that this excerpt pretty much laid it out as you've described? Did I misread it?


This is the only part that I miss. I didn't get this characterization out of the excerpt, but, again, I only know the excerpt, not the man nor his book, so I'll ask: Is Steingart usually anti-American, and does he characeterize Americans as 'greedy'? Or is it the 'investors' being 'greedy' by not selling the dollar when he (Steingart) thinks they 'should'?

He's using "greed" as a proxy for investors who want a return higher than the risk-free rate of a US bond. A pretty broad brushstroke, if you ask me, since there are plenty of investments that will earn you a higher return, and wouldn't be characterized as "greedy" by most rational observers. In that short essay, greed is used four times.

Again, he's right in using an overvalued stock market analogy, but he's wrong in that the downside he's describing is a case of a bankrupt US. The truth is not near that.

I assume you agree with his assessment on the current expansion being driven by consumption, since you yourself stated in a different thread something like "the current expansion was driven by a housing bubble much like the 1990s was driven by the stock market bubble." He also rightly includes the "borrow and spend" fiscal policy of the Bush Administration. Neither of which creates a sound foundation for growth, which is one of his points.

HIs comparison of the stock market bubble is just that, it's an example of the excesses of that market, just as there is an excess now of dollars worldwide. Eventually the bubble will burst. As for your example, as he mentioned, the DOW also lost some 40% of value; so while you could dump pets.com for ibm, you still lost because the entire market was overpriced.

I agree with you on the possibility of trying to get the rest of the world to grow as a partial remedy, but that still won't solve the US CAB deficit problem--the marginal improvement in exports won't offset our addiction to imports. And there's the rub: Those CAB deficits, now approaching $900 billion annually, requires foreign investment in $ assets of an equivalent amount annually. Something has to give.

While you focus on "investors", it's the central banks of Asia that have been propping up the dollar. China now owns US assets = $1 trillion. The only thing that keeps the dollar up is the continued support for the $ by these banks. However, this also puts China's interests in league with the $, because if it falls, then the value of their $ investments fall, and it could also put the brakes on the US consumption engine which keeps their economy growing.

The point I beleive he was trying to make is that the world is awash in excess $ liquidity. It's in everyone's interest to continue the game of supporting the $, but, like all speculative bubbles, it will eventually crush under its own weight. I believe this is true as well. As he states, it may be tomorrow, it may be in a few months, or it may be in a few years, but the current situation is not sustainable. As it grows worse, it requires a smaller and smaller spark to set if off


And yes, he's a writer for a magazine, so his style is a little more flamboyant--"greed is good" yes Mr. Gecko?

And that liquidity is fueled by US expansion. The dollar strength is supported by the sheer volume of the US economy and the belief that no one is close to overtaking the US in the near future.

In effect, the currency investors are buyers of the equity in the US economy. Part of it is speculation, but a larger part of it is the underlying strength. It would be a bubble, much like Japan, when the economy wasn't strong enough to support its value or the bubble was artificially inflated by government's actions. This is not the case in the US. Whether the economy is boosted by consumer spending or excess borrowing, doesn't mean that the economy is not healthy.

As to the borrow and spend thingy - let's get the order straight. It's spend and borrow. I noticed your side has been quiet lately about the federal government receipts over the past 18 months. Based on latest estimates of final 2006 data, the budget deficit will roughly be in line with post-Vietnam war averages of between 2.5% to 3% of GDP. So much for wrecking the country with the disastrous tax cuts.

The liquidity is fueled by US deficits, and Asian CBs are holders of US debt, not equity. Asia has financed the budget deficits created by the tax cuts and increased spending.


I stand corrected....



Let's see, that puts us back to where we were before the tax cuts, in surplus, yes?

Federal Personal income tax receipts might actually reach the previous peak this year. They peaked at $1 trillion in 2000 and have yet to reach that over the past 6 years, even though nominal GDP increased by over $3 trillion over the same period. In fact, personal tax receipts fell every year from 2000 to 2003, consistent with the tax cuts.

By the way, who said the tax cuts would wreck the country? Every economists knows that personal tax cuts stimulate growth by increasing disposable income and therefore consumption, but it comes at the expense of increased budget deficits. You guys claim that tax cuts increase tax revenues to such an extent, that tax cuts don't cause deficits. Your great evidence is to suggest, now that deficits are back in line with historical ranges, it was a success. When in fact, prior to the cuts, the budget was in surplus. That's an interesting definition of success....

I guess you had a hard time with the "in effect" term. That is the most likely explanation of why the dollar has defied gravity. The confidence of continuing strength of the US economy relative to the rest of the world is giving an equity lift to a debt security. But why bother talking about capital markets' impact with you?



Yes, because as I said, a booming economy caused by overheated pets.com is much more legitimate than a booming economy caused by overheated housing prices. btw, notice the impact on the economy one year into a housing slump vs the impact on the pets.com crash (although to be fair, I should use Space.com as the real poster child. I wonder which finance guru was its chief backer?)



Uhhm.... "we" claim that tax cuts stimulate the economy in such a way as to become revenue cumulative relative to not cutting taxes. Supply side doesn't deal with runaway spending, no matter how many times you will try to turn the conversation away from revenue generation to deficits. Some potential America's Stupidest Woman contestants don't know that deficit = revenues - expenses. I do.

And thank you again for reminding us of the great Clinton accomplishment to lower capital gains taxes to aid all those capital gains receipts from 1997-2000. Because only you don't believe that the lowered rates didn't have an impact on increased capital flow to allow Space.com to raise its millions.

So are you saying that Asia's central banks are investing in dollars because they believe in US economic strength? The dollar has defied gravity because they have anti-gravity machines called a fiat currency (of their own) and they use it to buy dollars. In 2003 and 2004 half of the US current account deficit was financed by purchases of dollar assets by foreign central banks, not private investors. They do not purchase $s because they believe in US economic strength. They purchase $s to support their own economic growth.


Yes, growth is slowing much as it did in the post dot.com boom. Preliminary estimate of 1.6%, but that includes what appears to be a statistical error in the estimate of auto production. Without the assumption that auto production increased over 20% in the 3rd quarter, real gdp grew a paltry 0.9%.



Well...you tell me I turn the conversation away from revenue generation, but you inlcude all quotes EXCEPT the one about revenues not hitting their previous peak which occurred in 2000. Everytime we have this conversation I focus on the revenue side because that is the focus of your argument, and I have stated that the deficits are a combination of increased spending and decreased revenues. You argue it is the spending. I'd like to see you prove that the increases in government spending each year is equal to the value of its deficit.



Maybe you can also find the data that show personal tax revenues declined after Clinton raised the top rate in 1993? Personal taxes increased every year under
Clinton, both when he raised taxes and when he cut the cap gains rate.

What I believe is that the speculative bubble in the stock markets, combined with the fact that most compensation of management was through stock options in the late 1990s, helped generate the increase in capital gains revenue. It's pretty simple math.

During the bubble P-E ratios for tech stocks (at least those that generated earnings) were near 100, compared to the historical average near 20. At the previous cap gains rate of 28% and normal valued shares at $20 (I'm assuming earnings of $1 to simplify), each share sold generated $5.60 in taxes. When the rate was lowered to 20% and shares sold at $100, it generated revenues of $20.
In fact this is the same math necessary for your case on personal taxes. When you cut income tax rates, the only way you can get an increase in personal tax revenues is if income increases significantly like the stock prices did. If you cut taxes and you don't have a bubble, in income or stocks, then revenues decline.

Each year Bush cut the personal tax rates, personal tax revenues declined. Only now, six years later, have revenues recovered to equal their previous peak. That is, now that personal income has grown by $2 trillion (since 2000), the lower tax rates are generating the same tax revenues that were collected in 2000.

Gee, that's about how long it took the stock market to reach its previous peak....Those fantastic supply-side policies at work....

And just how does buying US$ support Chinese or Japanese economic growth? Or is the equation a bit more complicated than your basic premise? I didn't know that every dollar you spend on a Sony TV goes straight to the Japanese government.

I also didn't know that there was a direct relationship between a trade deficit and a budget deficit. Learn something new every day. Maybe that's why France & Germany have trade surpluses and thus are consistently running budget surpluses, right?



Oh, I forgot, the primary goal of a country's policy is to make sure that its budget is balanced, and not to provide a foundation to grow the underlying economy. Thus, by your narrow definition, of course the tax cuts led to greater short term deficits. A convenient plus for you, since we get to ignore the immediate rebound in the overall economy and pretty good earnings in the private sector over the last 5 years.

Great arguing position for you, since you agree that letting people keep more of their earnings helps the economy grow faster. Care to hypothesize where that deficit would be if there hadn't been a tax stimulus?

ps - if spending had grown closer to the 3% rate that was in effect when there was a semblance of fiscal sanity in DC, there would be no budget deficit. But you know that.



I wonder if you're getting selective amnesia on what happened to GDP in Clinton's first term and what steps he took at Dick Morris' advice to win re election in '96? Yeay, tax revenues went up, as the economy was set for a double dip recession.



The impact from stock compensation would be true if most of the stock trading volume was caused by company insiders who held those options. It doesn't take too much of an effort to see the % of company options relative to the overall float. Generally, it's less than 5%.



And gee, we are really suffering by keeping capital in the private sector.

China has pegged its currency to the $ (however, its made some recent changes--pegging to a basket of currencies and allowing very small annual changes in the Yuan/$ rate). The US runs a $200 billion plus trade deficit with China. That creates an excess supply of dollars relative to Yuan on FX markets, which would cause the dollar to fall against the yuan. However, China's CB steps in and buys the dollars (it's a little more complicated than this, but the process and effect is the same). Since they keep their currency pegged to the dollar, they offset the excess supply caused by the trade deficit by increasing demand for $s--as you know, when S=D, there's no tendency for the price to change. How do you think China's CB has accumulated $1 trillion?


It doesn't go straight to the Japanese government. However, the same thing occurs with Japan: We run an $80 billion deficit with Japan. Japan's CB has intervened to prop up the $ by buying $s with yen, especially in 2004 when the $ almost fell below 100 yen.

The reason Japan and China (and other countries) do this is because they pursue "export-led" growth strategies. by keeping the $ relatively strong, it makes imported goods cheaper. A fall in the dollar against the yen and yuan would make their goods more expensive. I'm surprised you don't know this.



I'm starting to find out how little you do know...
It's called the "Twin deficits." The relationship is:
NX = (S -I) + (T - G)
The current account deficit = the value of the net surplus/deficit in domestic private savings + Public savings (total government deficit/surplus). When the right hand side is negative, then the left hand side is negative. If there's insufficient savings domestically to fund domestic investment and government spending, then we borrow from the international sector. The current account deficit's mirrow is the capital account surplus--an $800 billion deficit on goods and services is offset by an $800 billion inflow of foreign savings.

So, yes, there is a relationship between trade deficits and budget deficits; however, it's not always direct because of the third variable net domestic saving surplus/deficit.

Here's a nice little primer for you:
Twin deficits




As you rightly point out, the deficit is the difference between revenues and expenditures. From the BEA web site (billions of $s--note also, that the difference between expenditures and total revenues = change in the deficit):

From 2001 to 2002: G increased by $150, revenues fell by - $166 (personal taxes fell by $-160); change in deficit= -$316.
From 2002 to 2003: G increased by $170, revenues increased by $24 (personal tax revenues fell by - $56); change in deficit = - $146.
From 2003 to 2004: G increased by $133, revenues increased by $125 (personal taxes up by +$26); change in deficit = - $8.

So you are wrong again. Even if expenditures had grown by 3%, there still would be deficits because of the drop (or slow growth) in revenues from 2001 to 2003. Certainly when the economy finally turned around revenues picked up again in 2004 and 2005.



Real GDP growth for the 8 years under clinton (BEA):
2.7 4.0 2.5 3.7 4.5 4.2 4.5 3.7

As for the last point, that's why I said it was a combination of the options and bubble in prices.

So, it is a bit more complicated than simply saying that the Chinese and Japanese are financing our "budget deficit" since their bigger concern is to artificially keep their currencies down. The fact that they would rather hold T-bills than US dollars in a vault is a side effect to the trade imbalance. If the US government runs a suprlus next year (which is possible) China & Japan will continue to buy T-bills. Will they be funding our budget deficit, then?



And I'm starting to find, in a rush to show you bias, how little you try to read what I asked.




Is there any particular reason to stop your analysis in FY 2004? Especially since we're if fiscal 2007 now, and I was speaking from the standpoint of today? Did you even sensitize the expenditures to assume a 3% growth rate?



I didn't know that Clinton's first term lasted 8 years. I'm guessing you're referring to the pending Clinton dynasty - Bill I, Hill II.



Yes, I know that's what you said, and you're wrong. Stock option comp was the result, not the driver of the bubble. Hard to drive the liquidity in a market when most of those stock options vest over a 3 year period. But you know that.

Pot calling kettle black. Are you reading what I wrote without bias?
Your first sentence is almost exactly what I said earlier. Their primary goal is to keep their currencies low relative to the dollar; they do that by purchasing dollar assets; a lot of which are treasuries, but not all.
The People's Bank of China (PBC) does not hold dollars in a vault--only despots do. They have billions of dollars held in various other types of deposits, including US bank deposits.

First, I'd be willing to bet you dinner at my/your favorite restaurant if the US government runs a surplus next year. Second, you are conflating two issues: 1) the US trade deficit with China; and 2) the twin deficit relationship.
1. As long as the US runs a CAB deficit with China, AND China continues to maintain its peg to the $, then the PBC will accumulate dollar assets to offset the pressures on the yuan/$ exchange. Those assets could be treasuries, other bonds (public/private), or dollar deposits held at US banks (or even the generic "euro $" market).
2. As long as the US government runs a deficit AND there is insufficient domestic savings (S - I), then the savings has to be supplied by the foreign sector. It could be in the form of foreign private investors purchasing US assets or foreign CBs purchasing US assets. Given that US private savings has been in deficit, any change in the US government's budget will require more or less foreign savings. As the US budget deficit has come down, that reduces the need for foreign savings.

If the budget is in surplus next year, C&J could certainly continue to buy treasuries, since we still have to fund the $8 + trillion in government debt that rolls over. Was there a point to that question?


You say that the deficits were caused by excessive spending. I gave you the spending changes--which were indeed excessive (greater than the 3%, so those numbers would be even more supportive of your argument), but the deficits were larger than the change in spending. The only explanation is that revenues also fell. I focused on the years the tax cuts were made.

Is your claim that tax cuts from 2001/02 caused increase revenues in 2006 and 2007? That's the problem with S-Side theory, always changing the theory to fit the facts. And if the theory is that changes today have an impact 5-10 years from now, that theory is essentially unverifiable, which is why it's more like a religion...



Sorry, was it too difficult to figure out that the first 4 numbers were gdp growth in his first term?



Well, there you go again....did I say it was the driver of the bubble? Read what I wrote! I said a bubble in prices AND the movement toward stock options replacing income as compensation was the cause of the increased capital gains tax revenue---NOT THE CAUSE OF THE BUBBLE.

Right, and that's why you threw in the innocuous reference to C&J supporting our budget deficit, when in reality that has little to do with what I was talking about, and more importantly Steingart's point about the dollar's eventual collapse.



You're on.



Yes the point to the question was the potential impact on the US$ by the trade deficit. No one was talking about the budget deficit (other than you), and even you agree that C&J would continue buying treasuries if the budget was in a surplus.



Which did not answer my specific point of the deficit not being there, had spending been kept at the constant 3% growth rate.



Uhhm, how is revenue growth from a sustained economic recovery caused by tax cuts in prior years, a change in theory? In my view, the theory works as advertised. Cut taxes now, take a short term hit to revenues which will lead to a quicker and sustainable economic recovery. If the theory didn't work, wouldn't we be facing a fiscal disaster 5 years after the first tax cuts went into effect, since we would be drowning in the ballooning budget deficits?



Well, considering the question was about Clinton's first TWO years, and the changes he put in place to reverse the slide, I don't know what your point was to show the last SIX years, other than to illustrate that by adopting more supply side policies (cutting capital gains taxes) and Al Gore's invention brought a nice boost to the economy.



Yeah, and in order for the capital gains taxes to be collected, the capital gains have to be realized. So if stock option compensation is roughly 5% of the total float, how does the exercise of those options lead to a large enough volume to be a "cause" of increased capital gains receipts?

It's not innocuous. Asia certainly financed a large part of the US budget deficit. I hope you're not confusing the deficit with the debt?
IN an era when private domestic savings is inadequate, a budget deficit must be funded from external savings. That's what the twin deficit explains. Yes, you weren't talking about the official flows, which, as I pointed out have been the most important in supporting the $ over the past 3-4 years. By not focusing on it, you miss the most important part of the story.

Only if you provide your definition of a "surplus" before hand....


Let me simplify the Twin deficit relationship for you: assume domestic savings = domestic investment (S-I=0), then NX = (T - G)
This relationship implies that any budget deficit has to be financed by the foreign sector. When the government budget deficit went from surplus to deficit, it required an increase in foreign savings. In the worst years, 2003 and 2004, private foreign investments were insufficient to supply the gap. The CBs of Asia supplied the additional funds, buying US assets.
In 2003, the budget deficit was -$415b and foreign CBs bought $225b in treasuries.
In 2004, the budget deficit was -$428b and foreign CBs bought $305b in t-bills.
In 2005, the budget deficit was -$360b and for CBs bought $156b in t-bills.

So, yes, a decrease in the budget deficit reduces the need for foreign savings, just as an increase in deficits increases the need. The argument most experts have made about the possible collapse of the dollar is that we need to reduce the need to borrow from the foreign sector, which can be done by either increasing private savings or reducing the budget deficit. There is also the additional worry that foreign CBs will diversify their holdings and sell off $ assets. You won't believe me, so read some WSJ articles on this.

Last, the CBs of China and Japan purchase US Assets if foreign private investors aren't purchasing enough to keep their exchange rates up. The CBs pick up the slack when private funds to the US slow, as they did from 2003-2005.


Got me here; I did misinterpret this one.
Based on expenditures growing by 3% using 2001 as base: insufficient revenues were responsible for 2/3 of the deficit in 2002, half of the deficit in 2003, and about 44% in 2004. And that is the point--the deficits were a consequence of an increase in spending and a cut in revenues.



Congratulations! You are now officially Keynesian!
This is the first time you've ever mentioned "the short term hit in revenues" which creates a ______?
Keynesian theory states that if you cut personal taxes without cutting govt spending, it stimulates economic growth in the short run by increasing disposable income and consumption. The impact is increased deficits in the short run. You pursue this policy whenever the economy is in need of a stimulus. As the economy grows, and tax rates aren't changed, revenues of course increase. Assuming no change in taxes or other government policies, deficts always decline during growth (more people working and paying taxes) and increase in recessions (fewer people working and paying taxes). So, yes, we are now in complete agreement!!!



Very easy when you include the other part of what happened--a bubble in stock prices. Did investors not sell stocks during the bubble? The options are just an additional influence, especially when you consider a nice little chunk of income has now been transferred to capital gains--less income taxes paid; more capital gains paid.

But, even as you agreed later on, C&J would still be buying treasuries because their goal is to prop us the US$, not to invest. Therefore, as long as there are treasuries, they would be buyers. Whether the US runs a budget deficit or a surplus, is irrelevant to the main point of propping up the US$ (Although the budget deficit does give them more options on which treasuries to buy)



Total Receipts less Total Outlays for the fiscal year, as defined by OMB.



Not the first time, and probably not the last.



Selective memory? I don't believe that I've ever said that supply side doesn't cause a short term revenue drop. I still believe in math. What I said, and will repeat, again, one more time - By keeping more capital with the private sector, supply side policies will lead to a faster GDP growth, which will become revenue accreting. I don't think that there's been a deviation from this definition. But it could be just me.

And again, your analysis stopped in 2004.



So a 5% contribution from stock options (likely divided by 3) is enough for you to list them as a contributory factor to capital gains receipts?

Or is it the rehash of the "stock options, bad" mantra by people who think that stock options are bad, because they are stock options.

Again, there are two different issues: 1) their primary goal is to prop up the $; however, 2) increased government deficits means it takes more foreign investment to keep the $'s value up--again, depending upon what happens with the domestic savings and investment surplus/deficit.

They are buyers of $ assets as long as three things happen: 1) the US has a trade deficit with them; 2) there is insufficient private foreign investment (from their country to the US); and three, they want to prevent their currency from depreciating against the $.


How about as measured by CBO?


Whatever. I don't have a problem admitting when i make a mistake. Unfortunately most people here are too egotistical to do that.


Please point me to a post when you might have said that. That is revolutionary to me.
Selective memory? NO. Age? yes.
Now, to be clear, I have focused on personal tax cuts and personal tax revenues. I believe there are "marginal" effects from tax cuts directed at capital, but cuts in the personal income tax rates are not (explicitly) directed at capital.


It doesn't matter now that we're both Keynesians....


A marginal factor, but a factor. Also, as I said, you get a twofold impact--lower taxable income, larger taxable cap gains .



Nope. I agree with the agency theory crowd here.

I don't see anything in there about a budget deficit



Sure, it's the same number.



Just returning capital to people who are more likely to create more capital.



A convenient economic theory that absolves people from reading 10Ks

Paraphrased:




It looks like you are doomed! Doomed I say! Hahahahahaha.......

First month of fiscal year 2007

Those spendthrift rebulicans will do you in....