Date: September 28, 2018
Trillion-Dollar Deficit? Whatever, Says New Washington Consensus
With its plaintive call for balanced budgets, the fiscal hawk once pervaded Washington. But it’s getting harder to spot one. That’s because of President Donald Trump, and the equal-and-opposite reaction he’s provoked on the U.S. left. Trump is proving as indifferent to fiscal orthodoxy as to any other kind. The spending measure on his desk for signing, along with the one approved in March and December’s tax bill, amount to the biggest stimulus outside recessions since the 1960s. They sailed through a House led by the supposedly hawkish Paul Ryan, who’s due to step down in January without much progress on his goal of reining in so-called entitlements like social security — an illustration of how Republican deficit scolds are in retreat. On the Democratic side, the reaction that’s firing up the grassroots isn’t “How could you do that?’’ It’s: “Why can’t we do that?’’ Democrats opposed the tax bill, and party leaders have deplored Trump’s fiscal recklessness. But some Democrats are spinning it differently. There’s always room to boost spending at the Pentagon or finance tax cuts for the rich, goes their argument — so why not for social programs? “Ever notice how the ‘how do you pay for it’ argument is selectively employed against working class benefits?’’ Alexandria Ocasio-Cortez, a House candidate in New York, tweeted in July. In both parties, deficit spenders are gaining ground. That makes Year Two of the Trump administration look increasingly like end-times if you are, for example, the Committee for a Responsible Federal Budget. “The tax cuts really set off a spiral of irresponsible justifications for not caring about fiscal responsibility,’’ says Maya MacGuineas, president of the CRFB. The group gets funding from the Peter G. Peterson Foundation, a project of the late Wall Street billionaire, who advocated slashing social programs to balance the budget. Deficits are supposed to trigger inflation and scare off bond investors. The latter don’t seem too alarmed. Ten-year Treasury yields have edged back above 3 percent, but by historical standards it remains very cheap for the U.S. government to borrow money.
U.K. Current-Account Deficit Widens Ahead of Brexit
The U.K. current-account deficit widened more than economists forecast in the second quarter, raising fresh questions about the sustainability of the shortfall as Britain prepares for Brexit. The gap between money leaving the U.K. and money coming in stood at 20.3 billion pounds ($26.5 billion) between April and June, the equivalent of 3.9 percent of gross domestic product. A shortfall of 19.4 billion pounds was forecast by economists in a Bloomberg survey. The Office for National Statistics left its estimate of GDP growth in the period at 0.4 percent, but business investment fell for a second straight quarter and inflation-pressured households once again spent more than they earned. Growth in the first quarter was revised back down to 0.1 percent, the weakest since the end of 2012. The pound weakened following the figures and was at $1.3059 as of 9:43 a.m. London time, down 0.2 percent on the day. Brexit has put the current account back in the spotlight, with economists questioning the willingness of foreign investors to keep financing the deficit by buying British assets after Britain exits the European Union. Britain has the highest deficit among Group of Seven countries and officials see it narrowing only slightly in coming years, despite the fall in sterling since the 2016 Brexit referendum. Fears were reignited by figures last month showing overseas investors reduced their holdings of U.K. government bonds by a record 17.2 billion pounds in July. Britain saw a deterioration in both its trade balance, driven by higher imports, and in the gap between what investors earn on their foreign investments and what foreigners earn on their investments in Britain. The overall deficit was up sharply from 15.7 billion pounds, or 3 percent of GDP, in the first quarter.
Japan Paves Way to Reduce Purchases of Super-Long Bonds in October
The Bank of Japan paved the way to buy fewer super-long bonds in October, amid calls from insurance companies to taper so as to let yields climb in the world’s second-largest debt market. The central bank lowered its purchase range for securities due in more than 25 years to between 10 billion yen ($88.2 million) and 100 billion yen for each operation in October, according to a statement Friday. That compares with a band of 50 billion yen to 150 billion yen for September. It kept the indicative buying ranges for other categories unchanged. “The BOJ is not seen wanting to proactively control the yield curve, even if it probably sees it desirable that super-long yields steepen naturally on their own,” said Eiichiro Miura, general manager of the fixed-income investment department at Nissay Asset Management Corp. in Tokyo. The BOJ in July indicated that it will be more flexible with bond purchases amid criticism that the size of its holdings is distorting trading in the world’s second-largest debt market. Global markets have been riveted by how high yields may climb on the so-called super-long Japanese bonds, as it may determine whether insurers and pension funds bring back some of the money parked overseas. The 30-year yield has climbed 16 basis points to 0.905 percent since the BOJ’s policy tweaks on July 31. Nippon Life Insurance Co., Japan’s largest private life insurer, said in April it needs the yield to rise to more than 1 percent for it to consider buying. The tenor is important for insurers given how it could match their long-term liabilities. The BOJ surprised investors last Friday when it cut purchases of super-long maturity bonds at its regular operation, sending yields higher. Analysts then predicted that it could follow up with a range reduction for the October buying plan.