Treasuries Go Negative

Yesterday, 3-month T-bills traded slightly negative, while 4-week bills traded at 0.0% interest. In other words, investors were willing to accept a small negative return rather than risk larger losses elsewhere. This is good news for the government's balance sheet, but what does it mean for investors? A few things:

1. Confidence is exceptionally low.

2. Investors alluvasudden have a negative time preference for money.

3. Expectations about future inflation indicate that investors expect a dollar to be worth more in the future than it is today. In other words, bond markets expect deflation.

1 is definitely true, 2 is definitely false. i've been harping on 3 recently but even if it is true, why not just hold cash? Anybody got a better explanation? Is this being driven by large investment institutions who have to balance budget sheets and cash (for some reason) won't suffice? I'm really at a loss.

Who Adjusts, II

Update (Back date?): This post by Brad Setser nicely links the current mess to the broader current imbalance and exchange rate arrangements in Asia.

Somehow I missed Paulson's last trip to China in connection with the Strategic Economic Dialogue. While achieving little, it did reveal a bit of information about how the Chinese government is thinking about the global recession and global imbalances. When asked about the appropriate policy response, Zhou Xiaochuan, governor of China's central bank, said "The United States should speed up domestic adjustment, raise its savings rate and reduce its trade and fiscal deficits." (HT to Kaylan).

Discouraging but not surprising news, really. Discouraging because adjusting global current account imbalance is less painful if China expands than if the US contracts. Thus, the Chinese position implies a more-painful-than-necessary adjustment path. Unsurprising because China's position reflects its interests as a large creditor. As Wang Qishan, China's deputy prime minister, put it, the United States should stabilize its economy as soon as possible to "ensure the safety of China's assets and investments in the U.S." This sounds somewhat like the advice another large country often offers emerging market governments, though that country rarely is so brash as to admit that the advice is offered to safeguard American assets.

The IHT article also contains a terrific non sequitur: "During his campaign for president, Barack Obama often accused China of manipulating its currency, but ... his choice for Treasury secretary, Timothy Geithner, has lived in China and speaks Mandarin."

Revisiting Microfinance

Tim Harford has an excellent article on the subject in FT:

This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment?

There is also a discussion of the battle for the soul of microfinance, with commercial interests on one side and charitable interests on the other. Many of the results discussed in the article are similar to those found by Karol Boudreaux and Tyler Cowen earlier this year:

For better or worse, microborrowing often entails a kind of bait and switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such life saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the alternative— such as no doctor’s visit for a child or no school for a year— is much worse.

In other words, microfinance may be a force for good, but not in the ways popularly imagined.

How Iceland Imploded

Illustrated. I still haven't heard any good plan for getting Iceland back on its feet.

Europe Coordinates

The ECB, Bank of England, and Swedish Riksbank all slashed interest rates today. The Bank of England's rate is now the lowest since 1951, and matched with the lowest rate in its 314-year history. Sweden dropped its rate by a record 175 basis points. France announced a stimulus plan.

The effectiveness of these actions is still to be determined, of course. But greater coordination by central banks and governments will be necessary to get the global economy moving again. These sorts of actions are a step in the right direction.

Lagged Effects of the International Credit Crunch on Latin America

The Latin American Shadow Financial Regulatory Committee (CLAAF), a group of economists from Latin America that includes former finance ministers and central bank governors, released a statement after meeting today in Washington, estimating that Latin American governments will need roughly $250 billion just to repay maturing debt and support budgets in 2009. 

The Financial Times reports:

The statement described a marked deterioration of the region’s economic prospects in the past few months caused by a flight to high quality assets and the freezing up of international credit. The region would suffer from a sharp slowdown in the world economy and falling export prices, it said.

Unless credit found its way to the region, the economists said governments would be forced to choose between two unappetising alternatives: painful fiscal adjustment that would reinforce the downturn or distortive measures, such as import restrictions and capital controls.

“In the absence of adequate international actions, beggar-thy-neighbour policy responses may be politically inevitable, seriously undermining the basis of the global co-operative system that emerged in the aftermath of World War II [that] allowed for unprecedented rates of growth of trade and incomes and a reduction in global poverty.”

Although Latin America has not been directly affected as a result of the liquidity and credit crises that have affected the American and global economies over the past year, as detailed previously on this blog, the future may see indirect effects as Latin American nations may be "crowded out" of international credit markets as Western nations expand their borrowing and run large fiscal deficits. 

How Low Will It Go?!

The price of oil tumbled further today, settling at $43.67, it's lowest close in nearly four years.

So the question is, how much lower will it go?

Who Adjusts?

Funny how the world works. I was talking (or at least trying to) about contemporary global imbalances in class today, with a particular focus on the question of the relative merits of adjustment via contraction in the US and adjustment via expansion in the surplus countries, especially China. Reading the FT tonight I come across Martin Wolf's nice summation:

"Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy."

Of course, pointing out what ought to happen to get the world economy through this crisis in reasonable shape does not mean it will in fact happen. I am particularly skeptical about China's willingness to embrace this path. "Asked whether China might pursue economic policies aimed at saving the world, Mr. Lou said that the country’s leaders had a narrower focus. “China can only save herself..."

Happy Birthday!

The U.S. recession is one-year old today, according to the NBER.

Fixing the Food Shortage in Malawi