Jan Hatzius Connects All the Dots

Back in 2008 I started discussing the idea of the household debt crisis.  In early 2009 I read Richard Koo’s fantastic “Holygrail of macroeconomics” and ripped off the term “balance sheet recession” – the concept of weakness in the private sector due to de-leveraging which can only be offset by government budget deficits.  And then I embedded Wynne Godley’s sector balances approach into this to provide an overall view of what was occurring in the US economy and why.

In short, the US economy had suffered a massive debt bubble which resulted in ruined balance sheets and debtors turning into savers.  This lack of aggregate demand from the household sector was devastating as it caused a massive slump in private investment.  Private investment fell an unprecedented -22% year over year in 2008. The worst post-war era slump in private investment had previously been -10%.   This -22% collapse was devastating for the economy as it coincided with capitalists protecting their profit margins and bottom lines by disposing of their biggest cost – their workers.  So the unemployment rate fired higher and the economy appeared well on its way to depression.

Then the government stepped in.  In this sort of environment where the patient is having a heart attack, the government acts like an artificial heart firing blood through the system to keep it from dying.  After all, an economy is just a system of flows, incomes, revenues, profits, etc.   When the flow dies the system dies.  But the government can ALWAYS tax and spend more.  And that’s precisely what they did in 2009.  That artificial heart was turned on overdrive.  Some of the spending was good, some of it was bad.  But what it most certainly did was shower the private sector with income that helped them pay down debts, repair balance sheets and avoid a full blown depression.  In other words, the government’s deficit was the non-government’s surplus.

I’ve been describing this precise situation for years now.  So I was pleasantly surprised to see this morning’s note from Jan Hatzius in which he embedded not only the sectoral balances, but also embedded the idea of the de-leveraging.  This is the holy grail of understanding what’s happened to the US economy and why the private sector has been so weak.  More importantly, it explains why the government stopped the US economy from looking more like Spain or Greece even though we’re suffering from the exact same disease.

Hatzius writes:

The US private sector continues to run a large financial surplus of 5.5% of GDP, more than 3 percentage points above the historical average. This is the flip side of the deleveraging of private sector balance sheet. We expect a normalization in this surplus over the next few years to provide a boost to real GDP growth. This is the key reason why we see US economic growth picking up gradually in the course of 2013 and into 2014, despite the near-term downside risks from the increase in fiscal restraint.

But underneath the fiscal drag the fundamentals in the private sector of the US economy are improving. The key force behind this improvement is the gradual normalization in the private-sector financial balance, i.e., the gap between the total income and total spending–or alternatively, the total saving and the total investment–of all US households and businesses, from levels that remain very high. When the private sector balance is high, the level of spending is low relative to the level of income. A normalization then means that spending rises relative to income, providing a boost to demand, output, and ultimately employment and income. The induced improvement in income then has positive second-round effects into spending.

Continued normalization in the private sector balance is the key reason why we expect growth to improve gradually in the second half of 2013 and into 2014. While fiscal policy will likely remain a drag on growth, the extent of that drag–measured as the change in the structural budget balance–is likely to diminish from what looks like a peak in early 2013. If so, the healing in the private sector is likely to produce a gradual pickup in US GDP growth.

There’s a reason why I’ve described Hatzius as the best analyst on Wall Street.  He just gets it.  He’s one of the only people on Wall Street who I’ve ever seen connecting all these different dots from differing views of the world.

Source: Goldman Sachs

 

 

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. “Continued normalization in the private sector balance is the key reason why we expect growth to improve gradually in the second half of 2013 and into 2014. ”

    I wonder what role “Credit” or lack there of will play in all this?
    A lot of the past housing bubble was debt fuled nuklur bomb style by people using the house ATM.

    Well now that we don’t have an extra 20-30 grand in equity to exract and spend, just what will the “Normal” be?

  2. That does it, I’m adding Jan Hatzius to the list of people I think would be good as chairman of the Fed, although I imagine the pay probably isn’t as good as at GS.

  3. While Hatzius didn’t use the term balance sheet recession, he was the most bearish economist on the street by far in 2007/2008. His analysis centered around leverage in household balance sheets, private equity withdrawal stats and the vicious circle due to the unwinding of that leverage. I remember how he showed that banks would have to raise 100s of billions of dollars due to that effect and was dubbed extremely pessimist by the popular media.

    I think he does very good analysis of the middle ground between macro and micro, quantifying things like the impact of unwinding of leverage using hard numbers and stats. Again, this analysis is very good from the point of quantifying second round effects. This kind of analysis is pretty cool.

  4. Cullen,

    Why would this be true:

    “We expect a normalization in this surplus over the next few years”

    Does this have to happen?

    That seems like a monumentally important lynchpin premise for this whole analysis. Why is he so sure this will happen?

    I think Gary Shilling would disagree with that contention. Assuming we actually continue to deleverage for a few more years during this BSR then what happens to the economy?

    Thanks.

  5. I’m not a finance guy or an economist but I can read a graph. Somebody is going to have to explain to me why this graph is so encouraging.

    The consumer part of that mountain on the right already looks historically “normalized”. It’s the business piece that makes the private sector % so high. So you’re really depending on business spending to “normalize”? It looks like that’s already been happening as the slope is definitely downward but things aren’t feeling real perky.

    It also seems like the private sector “normalized” after 1976, but as I recall it still wasn’t a happy time and the market took several more years to recover.

  6. It’s partly automatic. As the economy recovers tax receipts increase. See this chart. Look familiar? Looks an awful lot like Jan’s chart, huh?

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=FGRECPT&scale=Left&range=Custom&cosd=1960-01-01&coed=2012-04-01&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&fq=Quarterly&fam=avg&fgst=lin&transformation=pc1&vintage_date=2012-11-13&revision_date=2012-11-13

    Tax receipts rise so the deficit falls. That means spending as a % of GDP falls at the govt level. If the pvt sector doesn’t pick up that slack then it will hurt weaken the economy. That’s why a reduction in the deficit will lead to economic weakness if the the de-leveraging is not over. By my estimates, 2014 is the end of the BSR or at least a sustainable level. But we’ll likely require big deficits until then.

    That’s why the fiscal cliff is such a huge risk. Crater the deficit now and the pvt sector can’t run with the baton. We’ll fall on our face.

  7. Gary’s “Normal”:

    “And it’s not going to end soon, he says. “My hunch is … at this rate it will take another five to seven years to complete that [deleveraging].” This is normal, as it usually takes 10 years to deleverage from a huge financial crisis, Shilling says.”

  8. I think Gary’s wrong. The household debt to income ratio will be “normalized” in the next 18 months if current trends remain in place….We’re already seeing marginal signs of improvement there. This is not an event. It’s a process and things are definitely getting better already.

  9. Do you think tax receipts will grow to keep up with entitlement spending?
    I fear the assumption that 3 percent growth pays for the coming welfare bill is a false one.

  10. We won’t see a “normalization” of spending. Demographics will prevent that. People who are ageing spend less, not more. And the US population is ageing.

  11. Is that because of the massive Govt Fiscal stimulis and mtg modifications/ refi to lower rates or could we say the FEDs QE’s that have helped nudge rates lower?
    Richard Koo talked about it taken 15 Years in Japn because of the “Intermitant” fiscal injections.

    So with out more fiscal injections (or fiscal cliff)any idea what will keep us on this path to normal?

  12. I’m confused Cullen,

    We can see from the included chart in this piece (Private Sector Financial balance % of GDP) that in the late 1990’s to 2000 the Clinton Surplus drove the private sector into spending all of its savings which led to the private sector drive towards repairing its balance sheet by lowering spending and raising savings such that savings peaked in 2010-ish.

    And now savings are being spent (invested) as the chart line moves towards the zero % of GDP line. Is this really an indication that the economy is heading towards a gradual positive growth? Or is it a sign that the private sector spending is an attempt to hang on to assets and lifestyle rather than liquidate and move down a notch or two in the widening gap between the 2% and the 98% http://billmoyers.com/segment/jacob-hacker-paul-pierson-on-engineered-inequality/ (Jacob Hacker & Paul Pierson on Engineered Inequality)

    If politicians and economists and the media mostly don’t understand the sectoral balance of (S-I) + (T-G) + (M-X) = 0 …then it’s a pretty good bet that both sides of the aisle want to press for more cuts to federal spending (and some higher taxation) and that means that the chart line of private sector savings should continue heading back into negative territory and not because the private sector is investing in production but is spending its savings on a narrow range of survival needs.

    Yes?

  13. The Hatzius chart is just showing the private balance or the non-government balance. If the private sector is healthy, borrowing and expanding investment then there is really no need for government spending.

    Of course, our private sector isn’t healthy and we have a trade imbalance so we need a government deficit of some level to sustain some growth. The only way we can cut significantly and sustain economic growth is if the private sector borrows more or the trade deficit reverses. Otherwise, that downward sloping trend will become a problem if it continues lower.

  14. Cullen,

    Thanks for the response. It is an interesting debate regarding the timing. If the fiscal policy tightens next year won’t that put this scenario at risk?

    I also think that Gary Shilling’s scenario is predicated upon a further fall in house prices of up to 20%. I suspect neither you or Jan or expecting this to happen.

    I found a really interesting discussion and explanation of this issue on FT Blogs by Martin Wolf in July of this year:

    http://blogs.ft.com/martin-wolf-exchange/2012/07/19/the-balance-sheet-recession-in-the-us/#axzz2C8XtpWV7
    “In the recession of the early 1990s, the mild recession of the early 2000s and the “great recession” since 2007, the private sector has run either small or (in the last case) very large financial surpluses. The government’s position has been the mirror image: when the private sector has boomed, the government has been in financial surplus (as in the later 1990s). When the private sector spends more, relative to its income, the economy booms, the government’s revenue surges and its counter-cyclical spending shrinks; when the private sector spends less, the government’s revenue shrinks and its counter-cyclical spending rises. This happens without any deliberate government decisions. It is essentially automatic.”

  15. Cullen – I wouldn’t be surprised if Hatzius reads Pragcap. You’ve been so right about the macro view over the years that I can’t imagine a serious investor who doesn’t at least consider reading your content. You have more influence than you probably think!

  16. “i.e., the gap between the total income and total spending–or alternatively, the total saving and the total investment–of all US households and businesses, from levels that remain very high ”

    Wow – thumbs up to see somebody who uses sector financial balances and gets and USES the right definition of saving from the get-go – how rare!

    S = I + (S – I)

    :)

  17. Typo in 3rd para from top: “But the government can ALWAYS tax and spend more. ” –> “But the government can ALWAYS tax [less] and spend more.”

    I’m sure regular readers got it, might help the occasional ones..

  18. A little bit off topic but doesn’t Obama has just absolutely wrong economic instincts?
    In 2008 in the middle of the banking crisis he takes up healthcare reform.
    In 2012 just as economy starts to recover he decides to tax the deficit by increasing tax rates. DIdn’t he see what happened in Europe? He wants riots on the streets?

  19. As well, as reported by calculatedrisk, debt service ratio is at low recession bottom levels (and well off their record high).

  20. University of Missouri economist Stephanie Kelton might also be reading pragcap. In Business Insider, see her slide presentation on the Fiscal Cliff. http://www.businessinsider.com/stephanie-kelton-fiscal-cliff-presentation-2012-11?op=1
    Stephanie K says “The Issuer of the Currency Can Always Pay” and she quotes Greenspan saying A governmen cannot become insolvent with respect to obligations in its own currency. Argues for less austerity and more infrastructure spending to create more jobs and stimulate growth. Cullen, have you seen this? What do you think?

  21. Kelton is a leading MMTer. They say the govt issues all money. I dont agree with MMT, but its a far more accurate view of the world than neoclassical economics.

  22. ya, Cullen & other MR & MMTers agree on “for less austerity and more infrastructure spending to create more jobs and stimulate growth”. MMT conflates the Federal Reserve/Primary Dealers with the gov because the Federal Reserve is subservient to the federal gov (in the Federal Reserve Act of 1913 (it’s charter/law), it states that should there ever be a conflict, the Federal Reserve must defer to & obey the Secretary of the Treasury (whom is replaceable at any time by the president of the US).

    Additionally, the chairman & all board of governors on the Federal Reserve board is appointed/replaceable by the president every 4 years.

    MR describes the money supply being outsourced to private bankers(Primary Dealers/Federal Reserve system) for their profit.

    Ultimately, MMT says it doesn’t matter because at ultimately, the federal gov can always get funding from the subservient Federal Reserve system.

    Would that be an accurate summary?

  23. I would say it a bit differently. MR doesn’t necessarily support any policy ideas like infrastructure. I personally support some policies using my knowledge of MR and the monetary system, but MR is really just a description at heart. There is no policy attached to it at all. You can understand MR and apply just about any policy conclusion you’d like.

    I’d also argue that the Fed is not subservient to the US govt, but is subservient to the banks. That’s why Fed policy doesn’t really serve public purpose, but serves private purpose by serving the interest of private profit seeking banks (with the hope that healthy banks = healthy economy).

    Yes, the govt could in theory, just get funding, but that’s not really the way our system is designed. The system is designed so the govt has to be able to procure funds from the private sector. Saying this doesn’t matter is like saying that international law imposes laws on nations restricting the use of nuclear bombs, but saying it doesn’t matter because the rule is “self imposed”. No, the rule is there by design for a specific purpose. In the USA, we outsource the money supply because we created checks within our money system specifically so the govt didn’t have all the power. You might not like it and you might even think it doesn’t make sense, but it’s perfectly in keeping with the ideals of a capitalist market based economy….The old MMT saying about “self imposed” could be used as justification for doing just about anything. “Oh, I killed my neighbor, but humans self impose that whole no murdering rule so it doesn’t really matter”. That’s just silly thinking. Most of the self imposed rules in our society serve a specific purpose. Outsourcing the money supply and self imposing a rule on the US govt serves a specific purpose….

  24. Nice response Cullen.

    You are right that the “old MMT saying about “self imposed” could be used as justification for doing just about anything. “Oh, I killed my neighbor, but humans self impose that whole no murdering rule so it doesn’t really matter”

    Operative word being *could*……. its not used that way however by anyone that Ive read. This is a little bit like the people yelling Zimbabwe every time we discuss adding a couple hundred billion of federal spending….. it could lead to that if we increased the scale of it *a bit*.

    But you also must admit that

    “The system is designed so the govt has to be able to procure funds from the private sector. Saying this doesn’t matter is like saying that international law imposes laws on nations restricting the use of nuclear bombs, but saying it doesn’t matter because the rule is “self imposed”. No, the rule is there by design for a specific purpose. In the USA, we outsource the money supply because we created checks within our money system specifically so the govt didn’t have all the power.”

    its equally bad if the *design* gives ANY entity all the power! Including the banks! Additionally how its designed determines which entity might get all the power and how. Poll American people and ask them if they want the banks to have complete control of their lives? Many think they already do. Its all about balance. And as you’ve stated before our American experiment has succeeded thus far because weve been pragmatic and willing to do what works without letting any one group hold sway over policy for real long periods of time. Our monetarist experiment has failed, as I think you, Mike, Beowulf, JKH as well as Warren, Randy, Mr Mitchell and Ms Kelton have aptly demonstrated over the last few years. Pragmatism says we should do something else and that something else requires the banks to be more subservient it seems to me. Is there any way a private banking system can be run on other than monetarist models? It seems to me that monetarism is short hand for “How Banks think”. America…. the world really, is in need of some new ideas (and really I think the re adoption of some old ones we developed in our more pragmatic times) Id like to see you “MR guys” be a little more emphatic with calls for things to happen. You dont have to say “I know this will work because my *model* says so” and act like you’ve got the whole thing figured out, leave that posturing to the other idiots, but use your voices to make bold calls that can start the process of pragmatic examination of outcomes.

    The only thing that matters is the quality of the outcomes of the policies, its not whether the policies adhere to some model.

    Prag Cap is still the most comprehensive econ/business site on the web for my money (especially since its free!!). Thanks

  25. I’m always curious when I see that said. Probably I just haven’t seen some more sophisticated population models but…

    Looking at http://www.bls.gov/cex/2011/Standard/age.pdf I see that as a % of after-tax income, total spending levels out during the 35-64 age range and then actually increases at 65 and beyond (dramatically increasing at 75+). Of course with lower income in retirement and higher income in the middle years the opposite happens if we care about spending in $ instead of as that ratio.

    Just as an exercise, though, if we advance each segment of the population in this chart to the next segment’s income and spending, eliminating those currently 75+ and adding nobody to the under 25 segment, the new average spending would increase from $49,705 to $50,350 and the spending as a % of after-tax income would increase from 80.6% to 82.1%.

    That’s a woefully incomplete way to look at it of course, and I don’t know what kind of survey bias we might see with BLS methods. But as a very quick analysis of the extreme scenario where we assume no deaths except for those over 75 and no entrance into the economy of new young participants, it seems to suggest that an aging population may not actually spend less overall.

    Of course WHERE they spend changes dramatically, and that itself has potentially huge consequences.

  26. When people retire, they have less income. So what Bond Vigilante says makes sense.
    Now if you count the health care procedures that Medicare provides, it may be that ‘spending’ increases. However, that ‘spending’ on seniors takes spending away from younger people.

  27. CR: “After all, an economy is just a system of flows, incomes, revenues, profits, etc. When the flow dies the system dies.”

    I think this is a fallacy. It is like saying that if you switch off your car it can never drive again (or it will only drive again if the government goes in front and uses its crank as a true Keynsian). This view of the economy does not consider at all if the flow is adding or destroying value.

    CR: “But the government can ALWAYS tax and spend more.”

    I posted this objection before, but cannot find which blog post was it (is there a way to find my comments in various posts on the site?): It is not only inflation that is a restraint, but government’s share of GDP growing constantly, which over the long term reduces potential GDP (remember the latter is driven over the long term by productivity increases and population growth). Cullen, have you posted a reply to this one?

  28. Isn’t this simply an expansion of a tautology (S=S)? What information do you gain?

  29. IMHO, the forecast on private sector reactivation is a fairly reasonable one but we need to be aware there is significant undertainty attached to it. The Hatzius/CR argument relies on equilibrium, things having to go back to normal at some point; i.e., businesses investing/hiring. But such actions depend on demand. If the demand is not there, (and for many reasons like demographics, etc., it may not be) businesses won’t invest/hire. Bottom line, I guess what I am trying to say is that in his forecast, Cullen is sponsoring an implicit degree of certainty which I believe is simply not there. The optimistic scenario may be the most likely one but more pessimistic scenarios have a probability significantly different from zero.

  30. IX,

    You’ve made this criticism a number of times now and I’ve responded to all your comments. OF COURSE THE HEALTH OF THE FLOW MATTERS! The analogy I use is the human body. A flow filled with toxins will kill you. A healthy flow with nutrients and real productive output at the end will thrive. You should know from Monetary Realism that we are overly concerned with real output and the importance of Investment (hence our equation S=I+(S-I).

  31. We have also outsourced the ability to remove USD from circulation to the top 1% and the biggest corporations.

  32. Thanks Greg. Fair comment, as always. I have to say that you’ve consistently been one of the more understanding voices on the MMT side. I think you really understand that what we’re trying to get at is a truly realistic description of the system.

    The way I view this is that we need to establish MR as an accepted view of the world. I want people coming to Pragcap telling ME how MR works. I want to see people on CNBC describing how the US govt can’t run out of money. We’re very far from that point. So, in my opinion, it’s a mistake to use MR as a political tool. I think that distracts. I am trying to adhere to my “Da Vinici approach” where I tell people how it works and let everyone else solve the big problems.

    Who knows, maybe when I am older I’ll have more appreciation for being involved in social change more directly…

  33. Random observation:

    Prior to the 90s, business and household balances were often each other’s (scaled) opposites.

    After that point, they follow each other.

    I can’t say I understand what that means.

  34. The way I see it, govt share of GDP only reduces potential GDP if we are near full employment. We are not.

  35. 16 trillion in federal debt reaches the everyday economy through worker wages and transfers.

    Well, most of it anyway. A sizable chunk ends up in the coffers of companies producing weapons.

  36. To say that the system is ‘designed’ to support the outsourcing of the money supply (with the Fed ‘designed’ to support the private banks) suffers from the same logical flaw: designed by whom? for whom?

    My suspicion that the current system may be fundamentally flawed arises in no small part from the fact that the system was designed; in an era when the largest businesses (eg railroads), the federal government, and many state governments were dominated by a few large financial interests (eg JP Morgan: ‘the money trust’); by individuals with very close ties to those institutions.

    Looking backwards, the practices that exercised this influence, have long been acknowledged as ‘corrupt’ by mainstream historical accounts. Over time, this influence has largely been transformed to operate within a legal framework, but, if anything, its role in both government and the economy has increased.

    The same sector clearly bore major responsibility for the ongoing global financial crisis, yet even many conservatives are outraged that far from being punished or even reformed significantly (with at best, the jury still out on ‘Dodd-Frank’), it was ‘rescued’ by the same system ‘designed’ originally to serve its interests.

  37. I’m guessing you were thinking of the QEs. You are 100% right that these did not reach the households.

  38. Is the federal government really procuring $1.5 trillion a year from the private sector?
    Put another way, if we weren’t borrowing $1.5 trillion a year, what would the private sector be doing with that money?
    Is federal borrowing taking money from other useful purposes?
    Or are the primary dealers themselves borrowing money from each other to make these purchases?
    Another question: If China is buying T-bonds, wouldn’t it be better for them to buy our actual goods or services, as those would stimulate our economy and not lead to an obligation on our part to pay them back.
    When the feds need to borrow $3 trillion in 5 years, does the private sector have available?
    Am I even thinking about this the right way?

  39. Colin,

    The USA has always been based on a free market capitalist design structure. So who better to control the money supply than the people themselves? We control the issuance of money via our demand for debt. The banks can’t just force money into the economy. It is a demand based system. And it is regulated in large part by the ability of the banks to manage their risks. I personally believe the govt should play a more involved role in forcing them to manage risks better. But I do not believe the government should take over the money supply via a nationalized banking system or some sort of MMT type structure that would create the equivalent of a fully state money system.

    This doesn’t mean the private sector is perfect by any means. But I have significant trouble imagining that a govt controlling the loan issuance process would be superior to the system we have today. Take out the private competition based on profit and the likelihood for loose or politicized lending would destabilize the system substantially. One could argue that the loose lending regs that were implemented and then taken advantage of by the banks were a small example of how dangerous such a monetary design could be.

    The solution is better regulation. Not state money.

  40. Cullen,

    Thanks for your response. However, I am not arguing for a nationalized banking system. I am as leery of centralized concentration of power in government, as I am in a private ‘oligopoly’. I am wanting to know whether there may be alternatives to either extreme.

    I do think that a society’s money supply is a fundamentally public matter. It is not clear to me that ‘the people’ do in fact control the money supply under the current system. Tim Geithner strikes me as very much a ‘government’ type, but one much more closely aligned to ‘Wall Street’ interests than to those of ordinary Americans, while Bernanke’s academic roots may make him equally remote to those interests (and in saying this, I do not mean to personally malign either man).

    It makes intuitive sense to me that private banks should provide access to capital for private businesses – and to meet the needs of large corporations, some large banks are probably required.
    However, for people to depend on money, created in the form of debt by private banks, that must be paid back with interest to meet the basic necessities of life, is counter-intuitive.

    I appreciate the role MR is taking on of describing how the current system actually works, but at some point, I am also looking for exploration of alternatives that might be viable based on what is known about the workings of monetary systems in general.

  41. You are doing the classic mistake of thinking of the economy in only two sectors: private and public.

    A more relevant division in THIS discussion is “financial sector vs everything else”.

    The money is coming from the financial sector. And the govt circulates it into the everyday economy via wages and other spending.

  42. And no the money isn’t coming from other useful purposes. The financial sector is SWIMMING in excess cash chasing assets to be “invested” in.

  43. Regarding the T-bonds: why would China want to buy US goods? That’s bad for their economy and they know it. They want to produce produce produce. Importing hurts domestic production.

  44. I should add that I am also not averse to a role for private banks (ideally, community based) in enabling people, in aggregate, to save, and to utilize these savings to meet those basic needs; and to charge reasonable fees for providing this service.

  45. Thanks Cullen

    I simply look to places that give me good information and I get that here and at MR.

    I sense that there really is a method to your madness. Simply repeating certain facts over and over again has a way of swaying people. Not to mention that many of the people who need to be swayed have verrrrrry large egos and dont like to be *told*, they want it to be their idea. Those of us with smaller (yet present and sometimes longing to be stroked) egos sometimes have to just quietly nudge and let the bosses be the ones to figure it out.

    One of my early mentors used to say that when we call a cardiologist to the recovery room to evaluate a patient, we never say ” We think they are having an MI” because thats their job to say that. Even if we know they are we simply tell the cardiologist all the symptoms and let THEM make the diagnosis. Its just a way its done. Otherwise you will lose time while the cardiologist goes back and does all the assessment again since he’s sure you are wrong (why else would you call him otherwise)

    I certainly do appreciate the realistic description of how the banks work with the govt to provide funding, I guess I see it a little like the guys working on certain diseases though. It took many years before viruses were found to be the culprits for some of our most dreaded ailments. The guys who actually understood things well enough to describe the process were also the ones best equipped to suggest how to stop the process too. Yes it took others who worked with those who were the breakthrough guys, but those who had the original model right could best suggest areas to attack. When you understand how things work you also understand where they are breaking down when they do.

    The only thing holding us back is ourselves

  46. I suspect that they buy treasuries largely because they can’t sell the dollars they receive and convert them into yuan because it would move the exchange rate. Therefore they are forced dollar holders. A number of the dollars can be used to buy, say, oil from KSA or wherever but they are left with a balance. At that point they have a choice: Keep the dollars in Citi/Chase and accept the credit risk that comes along with that or buy treasuries. And the latter appears to be their choice…
    Rgds

  47. “Regarding the T-bonds: why would China want to buy US goods? That’s bad for their economy and they know it. They want to produce produce produce. Importing hurts domestic production.”

    MR Olsson, are you sure about that?
    Heck Buffett is not:

    Buffett’s Berkshire Disclosed Deere Stake:
    Berkshire held 3.98 million shares of the agricultural equipment maker on Sept. 30, Buffett’s Omaha, Nebraska-based firm said today in a filing disclosing U.S. stockholdings at the end of the third quarter. Deere advanced 0.7 percent to $85.35 in extended trading at 5:40 p.m. in New York.

    I think the Chinese know what’s in their best interest
    I.E. Stealing US Patent secretes, buying stock In john Deere, Trying to Buy US assets Like Unocal Corp.

    ta heck with China.. Or should I say CAUTION with regard?
    Hell I dunno because I have a vested interest in thier cheap labor but do have to monitor things.. Just sayin…

  48. I’ve been holding off responding to this because I’ve been trying to understand what you’re trying to say. But now I give up. I don’t get it.

  49. You can have both..ie, North Dakota has a successful state gov bank.

    China’s 7 largest & most profitable banks in the world are gov owned/operated yet it also has private banks too

    ie, you can have both systems side by side (ie, post office, UPS, FedEX… or Germany’s private/public health insurance system, etc)