Russell, can you clarify? How can deficits not matter, but spending does? I'm confused because I see them as highly correlated (unless you are raising taxes).
Typically governments are the largest single employer - so if government policy is to keep wage growth low and cut taxes - you are going to see deficits, but not much inflation. On the other hand, if govermnets are increasing wages by 10% a year, and raising taxes as well, you will likely see limited deficits buy high inflation. US government debt to GDP was only 20% in the 1970s....
Thanks for the reply, Russell. I'm not sure it see your logic yet, probably because of my priors. First, I tend to think of the inflation of the 1970s as a demographic driven phenomenon -- we had a huge swath of Boomers coming of age, globally. Supply chains couldn't meet the demand. Second, I believe the change in debt to GDP is, at least, as important as the static number *at low debt-to-GDP values.
I think we're seeing that today. Debt-to-GDP is high, interest rates are, relative to history, high and, therefore, debt servicing costs are high *while* we continue to run war-time level annual fiscal deficits >5% of GDP. All of this is conspiring to expand the money supply (aka inflation) regardless of monetary policy -- The federal government doesn't care about interest rates and debt servicing costs (for now, anyway).
Last point... I read your employment comment *as if* the government attempted to set wages, like it was an input. It seems to me that employment and wage level is result of the large fiscal deficits. Again, I'm jaded by my prior conclusions on the topic.
Big picture... I agree with all of your conclusions. I can't wrap my head around owning duration at such low risk premiums in the face of enormous, and rapidly growing, federal fiscal deficits.
A theory... I think the low term premium on long bonds *may* be a result of entities that need to ALM, like pensions and insurance companies. I could see them making large, levered bets on long duration assets because they must. We know pensions are woefully underfunded, but everyone needs to pretend that 7% returns are achievable - which requires leverage. Someone has to buyer of the long bonds here... I can't think of anyone else. Can you?
Pensions and life insurers will be forced buyers of duration - all the way down. Fortunately for accounting purposes they can hide the losses... unlike regional banks!
Japanese government did not raise spending... its not the deficits that matter. It whether spending is rising or not
Russell, can you clarify? How can deficits not matter, but spending does? I'm confused because I see them as highly correlated (unless you are raising taxes).
Typically governments are the largest single employer - so if government policy is to keep wage growth low and cut taxes - you are going to see deficits, but not much inflation. On the other hand, if govermnets are increasing wages by 10% a year, and raising taxes as well, you will likely see limited deficits buy high inflation. US government debt to GDP was only 20% in the 1970s....
Thanks for the reply, Russell. I'm not sure it see your logic yet, probably because of my priors. First, I tend to think of the inflation of the 1970s as a demographic driven phenomenon -- we had a huge swath of Boomers coming of age, globally. Supply chains couldn't meet the demand. Second, I believe the change in debt to GDP is, at least, as important as the static number *at low debt-to-GDP values.
I think we're seeing that today. Debt-to-GDP is high, interest rates are, relative to history, high and, therefore, debt servicing costs are high *while* we continue to run war-time level annual fiscal deficits >5% of GDP. All of this is conspiring to expand the money supply (aka inflation) regardless of monetary policy -- The federal government doesn't care about interest rates and debt servicing costs (for now, anyway).
Last point... I read your employment comment *as if* the government attempted to set wages, like it was an input. It seems to me that employment and wage level is result of the large fiscal deficits. Again, I'm jaded by my prior conclusions on the topic.
Big picture... I agree with all of your conclusions. I can't wrap my head around owning duration at such low risk premiums in the face of enormous, and rapidly growing, federal fiscal deficits.
A theory... I think the low term premium on long bonds *may* be a result of entities that need to ALM, like pensions and insurance companies. I could see them making large, levered bets on long duration assets because they must. We know pensions are woefully underfunded, but everyone needs to pretend that 7% returns are achievable - which requires leverage. Someone has to buyer of the long bonds here... I can't think of anyone else. Can you?
Pensions and life insurers will be forced buyers of duration - all the way down. Fortunately for accounting purposes they can hide the losses... unlike regional banks!