It’s hardly new or a surprise to hear Jim Rogers go on about the virtues of commodities and banging on about inflation - Julian Robertson has now (probably some time ago) joined the bandwagon, but announced it in an interview given to CNBC’s Erin Burnett yesterday.
These gentlemen (and others) are very focused on the public sector debt increase and the potential problems associated herewith. Aren’t they forgetting that public sector debt is just one component of a country’s total debt - and shouldn’t this worry have been expressed years ago as the US carried on with ever rising budget and current account deficits not least as the domestic household savings rate was negative? In effect it was the ‘over-consumption’ of the US consumer that led the country down this path. China supplied the goods (or many of them) and took the dollars from the system as not to re-value the yuan and re-cycled the reserves into treasuries, which in turn kept interest rates lower than they otherwise would have been, which caused mortgage rates to be lower, which pushed up house prices, which made consumers feel richer, which made them spend more......and round and round it went.
Now things have changed......US consumers are now saving at a rate of 6-8% (of disposable income) and while it may increase further it’s not all bad news: this newfound prudent attitude can help the government with its budget deficit as these savings are finding their way into fixed income and money market funds rather than more speculative stock funds. The slack potentially left by the reduced need for ‘re-cycling’ of dollars could be taken up domestically - let’s also not forget that having a steep yield curve is one of the ways of funding a large budget deficit - you get paid to go further out the curve and even if you do not want to have the currency risk the very low short term rates makes it perfectly natural and inexpensive to hedge that risk.
While I don’t disagree completely with Mr Robertson (he mentions that a lot of pain will be necessary, while the imbalances are corrected) and I completely agree that some measures of austerity are necessary to correct primarily the budget deficit e.g. a gas tax, but I completely disagree that interest rates will shoot to 15-20% if the Japanese and the Chinese stop buying (more) treasuries. Their need to buy treasuries (apart from re-investment of coupons payments and redemptions) are predicated on a running trade surpluses with the US. If these surpluses are reduced their will be less buying, but at the same token the savings rate (and the banks) can pick up the slack.
There is a lot of focus on the public sector deficits - and with good reason - but little attention is paid to the total debt issuance, as many securitization markets remain closed and the only real mortgage lender in the US, is the government, total net debt issuance (if the QE measures are factored in) is actually lower now than it was before the crisis hit. Credit spreads have collapsed i.e. other forms of credit have vastly outperformed treasuries to a level where it is probably worth having treasuries over spread product.....!
I am a big believer in looking at the ‘black swan’ scenarios which may have low probability but high impact, but this one I think is much less likely than the world experiencing a true double-dip when the fiscal stimulus is withdrawn and the lows in equity markets are re-tested and perhaps broken. 20% inflation and 20% interest rates would be a breeze compared to that!
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