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Minyan Mailbag: A Painkiller, Not a Cure


The larger the debt the more debt service we owe.


Prof. Succo,

TV's talking heads are waiting for Capex to replace the consumer and drive the next leg up, as it has in previous business cycles. Not so this time 'round: 1) the outsourced manufacturing base's Capex will not contribute to the US economy and 2) domestic manufacturers may do some local hiring, but their plans often do not include expansion or modernization of domestic plants.

The Fed's medicine for the economy is a painkiller, not a cure. A shot may allow an athlete to persevere, at the cost of permanent damage to some essential body part. Pain is a trigger to stop. A shot may help win a game, but end a career. By masking the economic pain through printing money, the Fed has: 1) seeded inflation and devalued the currency (the usual anti-printing arguments) and 2) facilitated the permanent destruction of manufacturing which played a vital role in this feed back, in previous cycles.

Minyan Steven


There was an article in the FT last week theorizing that current account deficits do not matter. The article basically said that as long as the capital account balances the current account then things will continue. While this is true, it is like saying while the sun is shining it will not blow up. Actually, the sun can still be shining and it may have already blown up because it takes around 8 minutes for the light that leaves the sun to get to the earth. Ironically though, it will be about 8 minutes as well from when foreign lenders stop buying our bonds until our bond market will blow up.

We are running huge current account deficits with Asia that have now gone on longer than anytime in recent history and at magnitudes that are untenable (periodic deficits are normal; chronic ones tell of massive central bank intervention). The further issue is that it is predominately Asian central banks that are buying our debt, a debt borne from printing currency. A debt bought with printed yen and yuan.

Asia is willing to buy our debt as long as they feel that the U.S. consumer will continue to leverage themselves and buy their products. This is coming to an end. Why?

Part of the current account deficit (look at it as what we borrow to buy goods from foreign producers) is composed of the interest we pay on that debt. The larger the debt the more debt service we owe. At the point where the debt becomes so large that the debt service crowds out the part of borrowing the consumer uses to buy goods is when the Asian lenders get nervous. In other words, the U.S. consumer reaches a point where the amount of interest they are paying reaches a point where they stop buying goods.

We think that we are close to that point. That component we believe is now around $150 billion a year out of a total of $500 billion. The crowding out effect is illustrated by U.S. short rates of 5 years and under rising. It is illustrated by Chinese officials wondering out loud about their dollar exposure. It is illustrated by the price of gold breaking out.


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