Ah, we're talking economics again, are we?
Well, Prudent Bear Marshall Auerback
<http://www.prudentbear.com/Comm%20Archive/markcomm/i082900.htm> talked about
Wynn Godley's thoughts on private sector debt last August (when, to my mind,
things looked bad, but not as bad as now - Kenichi Ohmae's warnings about
Japan's new boy's idea of effectively sucking back Wall St Yen to wash away
red ink, and mebbe destroy some excess capital, come to mind):
"... A further complicating factor when examining this
credit binge and its consequences is the degree of dependence on foreigners to
sustain the boom and thereby facilitate the service of this growing private
sector debt burden. For the moment such foreign munificence seems to have a
very positive effect for all concerned. Foreigners are deriving great returns
investing in a booming US economy, which in turn reinforces the tendency to
invest more. But consider the effects of this virtuous cycle: foreign
ownership of US assets now measure over $6.4 trillion (equivalent to 66 per
cent of US GDP), according to Bridgewater Associates, compared to US holdings
of foreign assets which measure a mere $4.7 trillion (or 48 per cent of GDP).
On a net basis, the US now is a net debtor to the tune of almost 20% of GDP,
and this continues to mount with every monthly increase on the nation’s
current account deficit.
The foregoing study by Bridgewater Associates breaks
down the extent of this foreign ownership in the following manner:
- Foreigners own a record 38% of the US treasury market, and if you take out
the treasuries held by the Fed, foreigners own 44% of the liquid treasury market.
- Foreigners own a record 20% of the US corporate bond market.
- Foreigners own 8% of the US equity market. Including direct investment
foreigners own l4% of US corporations
Foreign ownership of US assets per se is not the
problem. The threat comes from the fact that this foreign ownership overlays
an economy rife with debt and, hence, highly vulnerable to financial
dislocation should this foreign capital withdraw precipitously. We have
already seen the effects of the sudden withdrawal of short-term capital in
economies prone to financial fragility during 1997/98: Thailand and Korea
immediately spring to mind. But in one respect the US is far more vulnerable
than these Asian economies, which at least had the virtue of high levels of
private household savings to fall back on. In the US, by contrast, household
savings are virtually non-existent (indeed, they are negative, as of the most
recent figures for July). Indeed, the ratio of debt relative to income for
both the household and corporate sectors is at an all-time high. By way of
comparison, these ratios are well above the levels that led to the widespread
banking and savings and loan crises a mere decade ago. The net debt issuance
of US private households and corporations taken in aggregate is now nearly 6
per cent of national income, according to a recent study by Andrew
Smithers---a historically unprecedented level. Wynn Godley of the Jerome
Levy Institute has pointed out that when a private sector deficit of this
magnitude has been attained elsewhere in the G-10, it has invariably led to
financial crisis, recession, or both. The parallels with the Asian nations
circa 1997 are both ominous and instructive. As Bridgewater notes, “If
foreign sentiment does ever turn they have a boatload of US assets that could
be sold. These holdings are so big, and so much larger than US assets abroad
that they are a long-term risk to US financial markets.” A precipitous
withdrawal of foreign capital risks setting in motion a deflationary dynamic
in which debt defaults intensify, thereby accelerating an even greater
contraction in economic activity."
And I remember Jim and Matt telling us Godley and Wray argued in a March 2001
*Business Week* that Bush's incremental tax cut won't have the clout in the
medium term to finance the private sector's debt load.
Now, if I may risk sounding my usual ignorant self in matters economical,
ain't it the truth that America's problem ain't quite the same as Japan's?
Well, not at the same stage, anyway. Sure, America has excess capacity - lots
of it - and sure, Japan has a bad debt problem - lots of it - but ain't
private debt the big cloud on the American horizon?
It occurs to me that if you give rich Yanks a big tax cut, or a 'prosperity
dividend', they're gonna do more of what they have been doing: buy foreign
made luxury consumer goods and encourage Veblenian emulation by people
emboldened to leverage their tax cuts. More money in the hand is more
creditworthiness as far as American consumers have been concerned of late.
What America actually needs is to start working on private debt, and mebbe get
somebody somewhere to buy more of the stuff its own cappos make.
What I'm trying to say is that tax cuts, in the American instance at least,
look more like solving the present by damning the future - and I reckon
Greenspan's rate drops have been doing that for a while already.
Import controls and, perhaps, a weaker greenback, are risky propositions, too,
but wouldn't they more directly address America's structural threat? Maybe
Godley and Wray's idea is more appropriate to Japan's particular balance of
problems ...
Cheers,
Rob.
