Great article! Thank you. If the excess this time is in the public debt market, as I believe you stated, then the private credit markets could be in danger. In other words how much will interest rates (10yearTreasury) have to rise to balance a large incoming deficit with a declining demand from big buyers(Japan,China Fed) which would contract private sector credit demand? Do you feel this will be the trigger that contracts credit throughout the system? It seems like it’s the public debt markets that are the threat? Your very helpful thoughts? Thank you:)
This deserves its own newsletter, but in short foreigners can't reduce demand for treasuries if they choose to run a current account surplus against a US deficit.
If central banks reduce buying, it must be taken up elsewhere.
This is because a US current account deficit must be met with a capital account surplus i.e. inward investment into the US.
Rates won't have to move with foreign decision making (as evidenced by the extremely inverted curve at the moment)
It is counterintuitive, however it's exactly that reason for why it's more troublesome.
The expected loss on secured is very very low. It is this expectation which tailors the entire banking system around making more of these loans in large sizes because of this. When this expectation is broken, it is extremely damaging.
It's all about the forecast and expectation of losses being so wrong that creates such a difficult problem for the system to deal with.
Great article! Thank you. If the excess this time is in the public debt market, as I believe you stated, then the private credit markets could be in danger. In other words how much will interest rates (10yearTreasury) have to rise to balance a large incoming deficit with a declining demand from big buyers(Japan,China Fed) which would contract private sector credit demand? Do you feel this will be the trigger that contracts credit throughout the system? It seems like it’s the public debt markets that are the threat? Your very helpful thoughts? Thank you:)
This deserves its own newsletter, but in short foreigners can't reduce demand for treasuries if they choose to run a current account surplus against a US deficit.
If central banks reduce buying, it must be taken up elsewhere.
This is because a US current account deficit must be met with a capital account surplus i.e. inward investment into the US.
Rates won't have to move with foreign decision making (as evidenced by the extremely inverted curve at the moment)
Great article. A little unclear as to why secured lending is more troublesome than unsecured.. very counterintuitive.
It is counterintuitive, however it's exactly that reason for why it's more troublesome.
The expected loss on secured is very very low. It is this expectation which tailors the entire banking system around making more of these loans in large sizes because of this. When this expectation is broken, it is extremely damaging.
It's all about the forecast and expectation of losses being so wrong that creates such a difficult problem for the system to deal with.