Welcome to my weekly recap of articles I’ve read on topics of finance, markets, and investing. All are on open questions I’m interested in.
Debt servicing costs to rise from 1.4%-5.8% of GDP if interest rates normalize LINK
The Federal Reserve’s unconventional monetary policy has driven down the cost of the net interest on the federal debt to just 1.4% of GDP, despite the increase in the volume of the debt. But as interest rates normalize and the volume of debt grows, the cost of servicing the interest on the national debt is projected to increase to 5.8% of GDP.
Shiller on uncertainty as a leading indicator of consumer confidence LINK
In a 2015 working paper, the economists Scott R. Baker, Nicholas Bloom, and Steven J. Davis constructed Economic Policy Uncertainty (EPU) indices for a dozen countries using digital news archives. The indices (covering Canada, China, France, Germany, India, Italy, Japan, Russia, South Korea, Spain, the United Kingdom, and the United States) were created by counting the number of newspaper articles in each country and each month that had the trifecta of terms “economy” (E), policy” (P) and “uncertainty” (U).
Chinese liquidity and assessing how to measure money LINK
Welcome to the liquidity trap. While markets are all-too aware of Beijing’s challenge to pump up the money supply to spur private investment, the scale of the mission is put into stark distinction by Michelle Lam, analyst at Lombard.
In a research note published on Monday, she writes: “Over the past two quarters, the PBOC has injected liquidity in excess of capital outflows. But our measure of broad money, which is the best indicator of overall monetary conditions, has deteriorated on a year-on-year basis, and fell below its level in 2013-14 and the government’s target.”
Lombard’s ‘M3’ calculation uses the official, so-called ‘M2′ measure, which is a broader measure of money than what’s known as M1, since it includes time deposits as well as cash and current deposits. In order to calculate M3, Lam adds in deposits that are excluded from mere M2, in addition to banks’ stock of bonds, and foreign liabilities.
Still assessing this retrospective on Helicopter Money LINK
In essence, the U.S. version of QE was the most profitable carry trade in the world where the Fed paid 0.25% (the interest rate on excess reserves for most of QE’s tenure, rising to 0.50% on Dec. 17, 2015) to buy assets that had yields of 2% or higher, in effect remitting the difference to the Treasury.
Still weighing this Zerohedge repost with an eye to verify this key chart LINK
#longread: To Be Clear, the ‘Helicopter’ Is Not Stimulus LINK
There is, however, an inherent flaw where economic theory is perhaps most important in practical usage. This is something that Milton Friedman himself very briefly mentioned in passing in A Monetary History; a small little nothing that may have seemed unimportant or innocuous in the context of 1963, but in 2016 it seems as if it was written as if it was describing Ben Bernanke’s turbulent tenure, including QE at the Fed, ECB, or Bank of Japan.
“In years of prosperity, monetary policy is said to be a potent instrument, the skillful handling of which deserves credit for the favorable course of events; in years of adversity, monetary policy is said to have little leeway but is largely the consequence of other forces, and it was only the skillful handling of the exceedingly limited powers available that prevented conditions from being worse.”