Tito's Blog

Economist and FT on Private Deleverage vs Public Borrowing

Martin Wolf explains why extra government borrowing will be met by increased private (mostly corporate) savings, à-la Japanese lost decade. In general it makes a lot of sense, even though it makes two strong assumptions:

1. the somewhat paradoxical net flow of capital from developing to mature countries via reserve accumulation and currency manipulation will continue indefinitely
2. dollars and pounds will still be considered a safe heaven

On private corporation deleverage, The Economist has a good article on this week print edition (“Show us the money”) on increased cash generation by US and UK companies, due to lower investments.

Social Security Tipping Point

After the Japanese Government Pension Investment Funds announced in 2009 that it would be forced to sell JGBs to meet cash requirements, it turns out that US Social Security started unloading US Government Treasuries in 2010, 6 years earlier than expected.

Of course it will take years to deplete Japanese or American pension funds, but the switch from being net buyers of government debt to net sellers makes a hell of a difference. First, it finally makes it clear beyond any doubt that the entitlement system is not sustainable and will get worse over time. Second it will push upward pressure on government debt yields, as major buyers of debt not only stop buying, but start selling.

US Yields Are Not Turning Japanese

With Quantitative Easing coming to an end, even a deleveraging private sector cannot absorb a wall of supply. From WSJ - Debt Fears Send Rates Up:

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year note sale Thursday.

Maybe we are not in Japan 2.0 after all.