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Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

Published by Anonymous (not verified) on Tue, 27/07/2021 - 5:56am in

Thomas Klitgaard

Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

The fiscal packages passed in 2020 and 2021 to help the economy cope with the pandemic caused a dramatic increase in federal government borrowing. One might have expected that foreign investors were important buyers of this new debt, but that was not the case. They were instead net sellers of Treasury securities. Still, the amount of money flowing into the United States increased last year, which helped fund the government’s borrowing, if only indirectly. The upturn in inflows, though, was quite modest as a surge in domestic personal saving largely covered the government’s heightened borrowing needs. How the reliance on foreign funds changes in 2021, when the government deficit will again be quite elevated, will depend on whether domestic personal saving remains high.

Foreign Purchases of U.S. Government Securities

Federal government actions during the pandemic caused a surge in the amount of federal debt outstanding. Specifically, the level of U.S. government marketable debt held by the public, pulled from the Treasury’s Statement of the Public Debt, rose by $4.3 trillion over the course of 2020, climbing from $16.7 trillion to $21.0 trillion. For comparison, this measure of debt increased by $1.1 trillion in 2019.

Balance of payments data show that foreign investors did not step in to buy this additional debt. Instead, they were net sellers of federal government securities, to the tune $75 billion. This was a change from being net buyers of $226 billion of these securities in 2019. Foreign investors were interested in other assets, with cross-border financial inflows going toward purchases of equities and investment funds ($726 billion) and corporate bonds ($194 billion).

Considering just Treasury securities in examining the role of foreign investors, though, misses the more important question of how much financial inflows rose to help fund the U.S. economy. From this perspective, increased foreign investment in U.S. assets created a pool of money that would not have been there otherwise, indirectly supporting sales of Treasury securities.

Government Saving versus Personal Saving during the Pandemic

One way to connect the change in the budget deficit with the change in borrowing from abroad is to rely on national income identities. Start with the notion that someone’s spending is another person’s income. To simplify the discussion, assume the U.S. economy is closed to the rest of the world so that domestic spending always equals domestic income. Spending can be broken down into consumption and physical investment spending and income can be broken down into consumption and saving. Consumption is the same for both identities, so you are left with the identity that investment spending must equal domestic saving.

Removing the assumption of a closed economy allows for a country to borrow from the rest of the world or lend depending on the difference between its saving and investment spending. In the case of the United States, the economy borrows from the rest of the world because domestic saving is insufficient to finance investment spending. For financial markets, this plays out as follows: the amount of cross-border financial inflows (for example, to buy Treasury securities) exceeds financial outflows from U.S. investors buying foreign assets by the amount determined by the domestic saving-investment spending gap.

To see what happened to U.S. borrowing in 2020, we break down U.S. saving into public (federal government, state and local government) and private (personal, business) components. (Note that government saving is not the same as the budget deficit because the saving calculation considers the difference between government income and consumption and does not include the government’s investment spending.)

The table below shows how all these components fit into the saving-investment spending framework. There was a $217 billion decline in saving in 2020 relative to the 2019 level, with a huge deterioration in federal government saving mostly offset by a jump in personal saving and a more modest increase in state and local government saving. Adding in a decline in investment spending ($105 billion) leaves the saving gap only $113 billion wider than it was in 2019. (The United States borrowed $503 billion in 2019.) Put another way, 90 percent of the $2.1 trillion decrease in federal government saving in 2020 was offset by increases in other sources of domestic saving and lower investment spending.


Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

From this perspective, foreigners helped offset the increase in federal government dissaving, but the scale of their contribution was modest.

What to Look For Going Forward

The fiscal support packages passed in December 2020 and March 2021 will substantially increase the amount of Treasury debt again this year. So, will the pace of net foreign investment continue to be relatively stable? Unfortunately, while the saving-investment spending framework is useful for understanding what happened, it is less useful in predicting what will happen going forward. It is just an identity, after all, and offers no insights about the interactions between the various forms of saving and the economy.

One is thus left to speculate. A retreat in state and local saving and an increase in investment spending would seem to be in the cards, judging by their levels last year relative to pre-pandemic times. Both developments would increase foreign borrowing.

The table above, though, suggests that the most important unknown is whether personal saving will again offset high federal government dissaving. Consider two extreme outcomes. In one case, consumers take the “extra” saving accumulated in 2020 as an increase in their wealth and do not let it affect their spending behavior. As a result, personal saving remains high this year, again boosted by government transfer payments, and there is little effort to spend down this accumulated savings going forward. The other extreme has consumers running down the extra savings when the pandemic eases over the course of the year and spending rises to match income. The flow of personal saving then disappears and the economy’s reliance on foreign financial inflows jumps.

A further complicating factor in anticipating how this plays out is that the amount of U.S. borrowing has to be equal to the sum of net lending by the rest of the world. Essentially, any increase in the U.S. saving shortfall has to be matched by a bigger saving surplus elsewhere and the mechanism that makes this identity hold has very unclear implications for exchange rates and global asset prices.

Thomas KlitgaardThomas Klitgaard is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:

Thomas Klitgaard, “Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?,” Federal Reserve Bank of New York Liberty Street Economics, May 21, 2021, https://libertystreeteconomics.newyorkfed.org/2021/05/is-the-united-stat...

Disclaimer

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

New PEF publication – guide to Joe Biden’s economic programme

Published by Anonymous (not verified) on Wed, 30/06/2021 - 7:54pm in

The Progressive Economy Forum is today publishing a detailed new guide to the economic programme of the Joe Biden administration.

In less than six months since his inauguration as US President, Joe Biden’s administration has staked out a new agenda for US policymaking, breaking with the previous four decades of Republican and Democratic domestic economic policy to focus deliberate government action on job creation, addressing racial equality, environmental goals, and rebuilding American manufacturing industry. A dramatic expansion in trade union rights, pushing back on four decades of draconian restrictions on workplace organising has been pledged, and over $6tr of public spending is lined up, to be funded mainly by taxes on the richest Americans and the biggest corporations.

The UK equivalent for the whole programme (using share of 2020 GDP as the baseline) would be £560bn: £170bn for immediate coronavirus relief; £240bn for investment and business support; £150bn for welfare and education.

Surprising many with the scale and scope of its ambitions, the Biden Administration’s domestic economic programme has raised the bar for progressive governments across the world. This briefing breaks down the emerging details of the programme for a UK audience and lays out the main political conclusions.

PEF Briefing – BidenomicsDownload

The post New PEF publication – guide to Joe Biden’s economic programme appeared first on The Progressive Economy Forum.

The Biden plan would be improved by federal job guarantees and compensated free trade

Published by Anonymous (not verified) on Fri, 18/06/2021 - 4:02am in

LONDON – US President Joe Biden has set out to emulate Franklin D. Roosevelt by spending huge amounts of money, something that FDR avoided doing until World War II. This threatens to trigger the sort of inflation that wrecked Keynesian economic policies in the 1970s.

Since January 2021, the Biden administration has spent or committed to spend $1.9 trillion for immediate COVID-19 relief, $2.7 trillion for investment and business support, and $1.8 trillion for welfare and education. This amounts to $6.4 trillion, or nearly 30% of US GDP. The $1.9 trillion already delivered through coronavirus spending will tail off, leaving $4.5 trillion, or about 20% of GDP, to be spent over the next ten years.

The spending will be financed largely by US Federal Reserve bond purchases, with tax hikes coming later. But will it represent the biggest mobilization of US public investment since WWII, or rather an inflationary splurge?

We don’t know yet, because we have no accurate way of measuring the output gap – the difference between actual and potential output, or, roughly, the amount of slack in the economy that can be absorbed before prices start to rise. The International Monetary Fund predicts that the US economy will be growing above potential by the end of this year, and that European economies will be close to their potential. This signals inflation ahead and the need to reverse deficit finance.

Against this static view is the belief – or hope – that government investment programs will increase the US economy’s potential output, and thus enable faster non-inflationary growth. Much of Bidenomics is about improving the workforce’s productivity through education and training. But this is a long-term program. In the short run, so-called supply-side “bottlenecks” could drive inflation. There is thus a palpable danger that an overambitious agenda gives way to abrupt policy reversals, renewed recession, and disillusion.

There is a steadier course available, but the Biden administration has ignored two radical suggestions that might make its life a lot easier. The first is a federal job guarantee. Put simply, the government should guarantee a job to anyone who cannot find work in the private sector, at a fixed hourly rate not lower than the national minimum wage.

Such a scheme has many advantages, but two are key. First, a federal job guarantee would eliminate the need to calculate output gaps, because it would target not future demand for output but present demand for labor. This in turn underwrites an unambiguous definition of full employment: it exists where all who are ready, willing, and able to work are gainfully employed at a given base wage. On this basis, there is substantial underemployment in the United States today, including among people who have withdrawn from the labor market or are working less than they want.

Second, the job guarantee acts as a labor-market buffer that expands and contracts automatically with the business cycle. The 1978 Humphrey-Hawkins Act in the US – which was never implemented – “authorized” the federal government to create “reservoirs of public employment” to balance fluctuations in private spending.

These reservoirs would automatically deplete and fill up as the private economy waxed and waned, creating a much more powerful automatic stabilizer than unemployment insurance. As Pavlina R. Tcherneva of Bard College says, a job guarantee “continues to stabilize economic growth and prices, using a pool of employed individuals for the purpose rather than a reserve army of the unemployed.” No “management” of the business cycle, with its well-known political risks, is involved.

The second radical idea is the economist Vladimir Masch’s compensated free-trade plan. America has lost millions of manufacturing jobs so far this millennium, largely owing to offshoring of production to cheaper labor markets in Asia. The counterpart of this has been a structural US current-account deficit averaging about 5% of GDP.

One of the Biden administration’s main objectives is to rebuild US manufacturing capacity. While the COVID-19 has fostered a conventional wisdom among all deindustrializing countries that they should reserve “essential” procurement for domestic manufacturers, Biden’s “Made in America” efforts echo former US President Donald Trump’s “America First” approach. But Biden’s plan to rebalance US trade by means of tax subsidies for domestic producers, trade deals, and international agreements, rather than tariffs and insults, is vague and unconvincing.

In a world of second-best options, the Masch plan offers the quickest and most elegant way for Biden to secure the balanced trade that he wants. The basic principle is simple: any government in a position to do so should unilaterally set a ceiling on its overall trade deficit, and cap the value of permitted imports from each trading partner accordingly.

For example, China, which accounts for about $300 billion of the current US trade deficit – half of the total – might be limited to $200 billion worth of annual exports to the US. If China exported more, it could either pay a fine equal to the excess over its quota or face a ban on excess exports.

Compensated free trade, Masch argues, “would stimulate a return to the US of the off-shored enterprises and jobs.” It would also automatically prevent trade wars, because “any attempt by the surplus country to decrease the value of its imports from the US would automatically decrease the value of its allowed export.”

Policymakers seeking to stimulate the economy must pay more attention than past Keynesians did to avoiding inflation and ensuring that job creation at home is not offset by a drain of production capacity abroad. The Biden administration will have no choice but to learn these lessons. If it’s wise, it will shun austerity and unfettered trade in favor of full employment and the manufacturing capacity needed to achieve it.


Robert Skidelsky

The post The Biden plan would be improved by federal job guarantees and compensated free trade appeared first on The Progressive Economy Forum.

Up on Main Street

Published by Anonymous (not verified) on Thu, 17/06/2021 - 12:41am in

Donald P. Morgan and Steph Clampitt

LSE_2021_facility_morgan_artwork_460

The Main Street Lending Program was the last of the facilities launched by the Fed and Treasury to support the flow of credit during the COVID-19 pandemic. The others primarily targeted Wall Street borrowers; Main Street was for smaller firms that rely more on banks for credit. It was a complicated program that worked by purchasing loans and sharing risk with lenders. Despite its delayed launch, Main Street purchased more debt than any other facility and was accelerating when it closed in January 2021. This post first locates Main Street in the constellation of COVID-19 credit programs, then looks in detail at its design and usage with an eye toward any future programs.

Main Street in the Universe

Facility space is a jumble of acronyms, so it is best navigated starting with the two types of programs (see table below). Purchase facilities buy debt; loan facilities lend directly. The latter are close cousins to traditional discount window lending, so the three launched last year (or rebooted from 2008) were up and running in just a few days. Purchase programs, by contrast, are newer (and potentially riskier), and so they took longer to build. Main Street required longer than most because it bought loans, a more complex, varied type of debt than the “vanilla” bonds or securities purchased by the other facilities. “It is far and away the biggest challenge of the … facilities,” Fed Chair Powell said during build-out.

LSE_2021_facility_morgan_table1_v4

It’s Not a Race, but…

Main Street purchased more debt than the other facilities and accelerated across the finish line (see chart below). Its $17 billion in volume (as of December 31, 2020) pales compared to $525 billion in Paycheck Protection Program (PPP) loans cum grants but is close to the $18 billion by which small U.S. banks outside the largest twenty-five (as most Main Street banks were) in aggregate increased their stock of business loans every six months on average over 2010-19 (FRED).

LSE_2021_LSE_2021_facilities_morgan_ch1revise2-01

Main Street Up Close

The design and funding of Main Street was a collaborative effort. Treasury committed $75 billion and bears first losses, an important consideration in the overall risk tolerance of the program. The public also contributed over 2,200 letters that prompted several changes to the program. The Boston Fed administers the program.

The guiding concept was risk sharing without oversharing. Lenders could sell 95 percent of new loans to the facility with losses (and earnings) shared proportionately. Risk sharing was supposed to mitigate the uncertainty (COVID “fog”) constraining loan supply and release bank capital (by reducing loans on banks’ books) to support new lending. Buying the whole loan might be going too far since lenders would have little incentive to screen and monitor credits or work out problem loans.

To accommodate the diversity in bank loans, Main Street purchased three types of loans (see table below). Priority Loans and Expanded Loans could be larger and their borrowers more levered than with New Loans but were also more senior in default events. Lenders had considerable leeway within those parameters except when it came to pricing; all loans, risky or safe, had to be at 3 percent over LIBOR. Main Street targeted mid-sized firms (up to 5,000 employees) that might be too large for the PPP yet too small to benefit from the “Wall Street” facilities. Only banks (and credit unions) were eligible to sell loans to the program. Nonbank (“shadow”) lenders such as finance companies and “fin techs” (financial technology) are not supervised by the Fed and specialize in riskier lending than banks (Chernenko et al.).

LSE_2021_facility_morgan_table2_v22


Lenders and Loans

Main Street bought 1,810 loans from 312 lenders, virtually all banks. Three of the four U.S. banks with more than $1 trillion in assets participated but banks with less than $31 billion in assets accounted for 90 percent of loans sold (see chart below).

LSE_2021_LSE_2021_facilities_morgan_ch2-01

The average purchase was $9.1 million (see chart below). The average PPP loan was just $101,000 (Hubbard and Strain) so Main Street succeeded in targeting more medium-sized firms. Priority loans (which could be used for refinancing) accounted for two-thirds of loans and three-quarters of volume and New Loans most of the rest. Expanded Loans (which entailed re-writing existing loan agreements) were not much in demand.

LSE_2021_LSE_2021_facilities_morgan_ch3-02


Not a Dead End

Demand and supply help explain why Main Street did not go further. Senior loan officers reported contracting demand for business loans every quarter last year after the first quarter (recessions usually reduce loan demand). Main Street, a supply-side intervention, was pushing on a string.

While weak demand was arguably the biggest roadblock, some program features also sidetracked participants. Senior loan officers eschewing the program cited their uncertainty about how loss-sharing (the key feature) with the Fed and Treasury would play out. They reported that some borrowers were deterred (according to loan officers) by restrictions on salaries or dividends. The lack of risk-based pricing may have deterred some safer borrowers (Vardoulakis; English and Liang) though it did simplify matters. The overall risk tolerance of Main Street also mattered. A more aggressive facility would have reached more borrowers but with higher expected losses to taxpayers (Rosengren). These are considerations for any future Main Streets.

Morgan_donald
Don Morgan is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Clampitt_steph
Steph Clampitt is a senior research analyst in the Bank’s Research and Statistics Group.

How to cite this post:

Donald P. Morgan and Steph Clampitt, “Up on Main Street,” Federal Reserve Bank of New York Liberty Street Economics, February 5, 2021, https://libertystreeteconomics.newyorkfed.org/2021/02/up-on-main-street.....

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Video: The Commercial Paper Funding Facility, Explained

Disclaimer

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

What Is behind the Global Jump in Personal Saving during the Pandemic?

Published by Anonymous (not verified) on Thu, 17/06/2021 - 12:36am in

Matthew Higgins and Thomas Klitgaard

LSE_2021_personal-savings_klitgaard_460

Household saving has soared in the United States and other high-income countries during the COVID-19 pandemic, despite widespread declines in wages and other private income streams. This post highlights the role of fiscal policy in driving the saving boom, through stepped-up social benefits and other income support measures. Indeed, in the United States, Japan, and Canada, government assistance has pushed household income above its pre-pandemic trajectory. We argue that the larger scale of government assistance in these countries helps explain why saving in these countries has risen more strongly than in the euro area. Going forward, how freely households spend out of their newly accumulated savings will be a key factor determining the strength of economic recoveries.

The pandemic sent consumer spending into retreat, helping drive up saving

Consumer spending plummeted in the United States and other high-income economies with the arrival of the COVID-19 pandemic. The drop was sharpest in the second quarter of 2020, reflecting the strict lockdowns then in place. Spending picked up over the second half of the year, but the recovery was only partial. Consumption was still well below pre-pandemic levels at year-end.

A simple accounting identity can help clarify how changes in spending feed into saving. Since income is either spent or saved, changes in income must be matched by changes in spending and saving.

Change in Income = Change in Consumption + Change in Saving

If income is stagnant, a decline in consumption will result in an equal increase in saving. If income is growing, the same decline in consumption will translate into a larger increase in saving.

The chart below shows how this relationship has played out during the pandemic for the largest high-income economies: the United States, the euro area, Japan, the United Kingdom, and Canada. The triangles represent the percent change in personal disposable income—income after taxes and net transfers—comparing the first three quarters of 2020 with the first three quarters of 2019. The bars show how these changes in disposable income map into changes in consumption and saving, consistent with the identity above.


What Is behind the Global Jump in Personal Saving during the Pandemic?

While consumer spending weakened in all these economies, the magnitude of declines varied widely. U.S. spending held up best, dropping by the equivalent of 3 percent of pre-pandemic personal income. Spending in the United Kingdom fell the most, dropping by nearly 12 percent. Spending elsewhere was down 6 to 7 percent.

Household saving, in contrast, was up across the board, with increases ranging from 7 percent of pre-pandemic income in the euro area to 16½ percent in Canada. The counterparts to this increase varied widely. In the euro area and the United Kingdom, income stagnated, and higher saving came entirely from declines in consumption. In the United States and Canada, income grew strongly, and saving rose by more than twice the decline in consumption. In Japan, the increase in saving came about equally from lower consumption and new income.

Data through the end of 2020—available only for the United States and Canada—tell a similar story. Saving grew strongly, with the largest contribution from income, and a smaller but still sizeable contribution from lower consumption.

Notably, personal disposable income in the United States, Japan, and Canada grew by more than twice the average pace over the previous several years. The COVID-19 pandemic, of course, brought steep recessions to all high-income economies. This raises a natural question: Why did income growth hold up so well in the United States, Japan, and Canada?

Government support bolstered household incomes

Wages and other labor compensation account for the largest part of household income—more than 60 percent of income before taxes for the economies discussed here. The rest of income comes largely from private sources such as proprietors’ earnings, rents, and investment returns. (The line between labor compensation and proprietors’ income varies across countries, depending on differences in accounting practices and in how businesses are organized.) Net social benefits represent a final key category. This includes government-provided retirement benefits, unemployment insurance, income assistance, and similar programs, net of the taxes going to fund them. For some countries, net social benefits are typically a negative item for aggregate household income, with benefit-related taxes exceeding benefit payouts. What matters for our purposes, though, is how income streams changed over the course of the pandemic to yield the total change in household income.

The chart below provides a breakdown of disposable income growth, comparing the first three quarters of 2020 with the same period a year earlier. (As with our earlier chart, data through the end of 2020 are available only for the United States and Canada, and tell a similar story.) Again, the bars show contributions to this income growth. The gold bar labeled Earnings combines labor compensation, proprietors’ earnings, rents, and investment returns. The blue bar shows the net contribution from social benefits. The small green bar labeled Net other largely consists of changes in income taxes and in private transfers such as workers’ remittances.


What Is behind the Global Jump in Personal Saving during the Pandemic?

Nominal earnings growth was negligible in the United States and negative for all other economies—hardly a surprising development given steep recessions and the resulting sharp rise in unemployment and falloff in proprietors’ income. The positive outturn in the United States seems surprising, and can be traced at least in part to a less severe downturn: Real GDP for the Q1-Q3 period was down about 4 percent in the United States, compared to a decline of more than 6 percent elsewhere.

Higher net benefits made a meaningful contribution to income growth in all economies. But the magnitude of the contribution varied widely, ranging from just under 2 percentage points in the United Kingdom to more than 8 percentage points in the United States and roughly 10 percentage points in Canada. Absent the increase in benefits, disposable income growth would have been barely positive in the United States and Canada and negative elsewhere.

What would saving have been if there had not been these higher net benefits? It is impossible to say for sure. As an accounting matter, households could have maintained the same level of saving by making even sharper cutbacks in consumption spending. But consumption declines were already large and painful. More likely, the buildups in saving would have been substantially scaled back. Moreover, an attempt to maintain saving would be at least partly self-defeating. Deeper consumption cutbacks would have translated into steeper recessions, reducing incomes across the economy—and forcing further cutbacks in consumption or saving. The perverse feedback mechanism, whereby a general increase in saving makes everyone worse off, is known as the Paradox of Thrift.

Government support went beyond social benefits

Government pandemic assistance has gone beyond higher direct transfer payments. The United Kingdom, Japan, and some euro area countries have channeled wage subsidy payments to businesses rather than workers, which means these funds show up in household incomes as wages rather than social benefits. This arrangement helps explain why earnings declines have been small given the depth of recessions. Similarly, in the United States, Paycheck Protection Program funding shows up as proprietors’ income or indirectly as wages, not as social benefits.

A look at the government accounts serves as a check on the scale of support for household incomes. Countries’ integrated macroeconomic accounts show government outlays on subsidies to the business sector. These outlays have risen substantially—by roughly half as much as the increase in social benefit payouts in the United States, the euro area, and Canada, and by four times the increase in benefit payouts in the United Kingdom. No data are yet available for Japan, but indirect evidence indicates that the bulk of pandemic assistance there is captured in the household statistics.

Unfortunately, the data do not allow us to specify what fraction of these funds were eventually paid out to households. But the upshot is clear enough. Government support for household incomes and saving was larger than suggested by the increase in social benefits—dramatically so in the United Kingdom. The euro area continues to stand out for support that is large relative to history, but small relative to what has been enacted elsewhere.

Will households spend down “excess” saving?

How freely households spend out of their newly accumulated savings will be a key factor determining the strength of economic recoveries. Consumer spending would soar if households run down these funds aggressively when economies reopen. The potential upside is underscored by the fact that much of the buildup in savings is being held in easily spendable form. As the chart below shows, household deposit holdings for the five economies discussed here have risen by an amount equivalent to between 6.5 and 13.0 percent of annual disposable income.


What Is behind the Global Jump in Personal Saving during the Pandemic?

A recent Liberty Street Economics post, however, provides reasons for thinking that spending out of recent savings will be relatively modest based on how spending typically responds to an increase in the nation’s wealth. As noted in that post, goods consumption in the United States is already above its pre-pandemic trend. The same is true in other advanced economies. In addition, most consumer spending on services goes to essentials such as housing, utilities, education, and healthcare. There is only so much pop that pent-up demand for services such as travel, restaurant meals, and entertainment can deliver.

This isn’t to discount the upside potential for growth this year and next, particularly for the United States. Data in 2020 already place the scale of U.S. government support for households toward the upper end of the advanced economy range. The additional U.S. fiscal package passed in December boosted household incomes and savings starting in January, and the much larger package passed in March will add even more.

Matthew HigginsMatthew Higgins is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Thomas KlitgaardThomas Klitgaard is a vice president in the Bank’s Research and Statistics Group.

How to cite this post:

Matthew Higgins and Thomas Klitgaard, “What Is behind the Global Jump in Personal Saving during the Pandemic?,” Federal Reserve Bank of New York Liberty Street Economics, April 14, 2021, https://libertystreeteconomics.newyorkfed.org/2021/04/what-is-behind-the...

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Reinstating fiscal policy for normal times

Published by Anonymous (not verified) on Thu, 10/06/2021 - 2:16am in

This paper, just published in the PSL Quarterly Review by PEF Council member Robert Skidelsky and Simone Gasperin of UCL Institute for Innovation and Public Purpose, upholds the classical Keynesian position that a laissez-faire market economy lacks a spontaneous tendency to full employment. Focusing on the UK case, it argues that monetary policy could not prevent the economic collapse of 2008-9 or achieve full recovery from the Great Recession that followed. The paper outlines the case for fiscal policy to regain a permanent status of primacy in modern macroeconomic management, beyond the pandemic emergency. It distinguishes between public investment and automatic stabilisers, reducing discretionary actions to a minimum. It presents the case for re-empowering the State’s public investment function and for reforming the system of automatic counter-cyclical stabilisers by means of public jobs programmes.

Skidelsky-Gasperin-2021-Reinstating-fiscal-policy-for-normal-times_Public-investment-and-Public-Job-Programmes-1Download

The post Reinstating fiscal policy for normal times appeared first on The Progressive Economy Forum.

The Return of the State – authors introduce their chapters

Published by Anonymous (not verified) on Wed, 09/06/2021 - 5:59am in

Jan Toporowski

TO PURCHASE THIS BOOK click here and use AGENDA25 to obtain a 25% discount

The post The Return of the State – authors introduce their chapters appeared first on The Progressive Economy Forum.

Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

Published by Anonymous (not verified) on Fri, 21/05/2021 - 9:00pm in

Tags 

fiscal policy

Thomas Klitgaard

Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

The fiscal packages passed in 2020 and 2021 to help the economy cope with the pandemic caused a dramatic increase in federal government borrowing. One might have expected that foreign investors were important buyers of this new debt, but that was not the case. They were instead net sellers of Treasury securities. Still, the amount of money flowing into the United States increased last year, which helped fund the government’s borrowing, if only indirectly. The upturn in inflows, though, was quite modest as a surge in domestic personal saving largely covered the government’s heightened borrowing needs. How the reliance on foreign funds changes in 2021, when the government deficit will again be quite elevated, will depend on whether domestic personal saving remains high.

Foreign Purchases of U.S. Government Securities

Federal government actions during the pandemic caused a surge in the amount of federal debt outstanding. Specifically, the level of U.S. government marketable debt held by the public, pulled from the Treasury’s Statement of the Public Debt, rose by $4.3 trillion over the course of 2020, climbing from $16.7 trillion to $21.0 trillion. For comparison, this measure of debt increased by $1.1 trillion in 2019.

Balance of payments data show that foreign investors did not step in to buy this additional debt. Instead, they were net sellers of federal government securities, to the tune $75 billion. This was a change from being net buyers of $226 billion of these securities in 2019. Foreign investors were interested in other assets, with cross-border financial inflows going toward purchases of equities and investment funds ($726 billion) and corporate bonds ($194 billion).

Considering just Treasury securities in examining the role of foreign investors, though, misses the more important question of how much financial inflows rose to help fund the U.S. economy. From this perspective, increased foreign investment in U.S. assets created a pool of money that would not have been there otherwise, indirectly supporting sales of Treasury securities.

Government Saving versus Personal Saving during the Pandemic

One way to connect the change in the budget deficit with the change in borrowing from abroad is to rely on national income identities. Start with the notion that someone’s spending is another person’s income. To simplify the discussion, assume the U.S. economy is closed to the rest of the world so that domestic spending always equals domestic income. Spending can be broken down into consumption and physical investment spending and income can be broken down into consumption and saving. Consumption is the same for both identities, so you are left with the identity that investment spending must equal domestic saving.

Removing the assumption of a closed economy allows for a country to borrow from the rest of the world or lend depending on the difference between its saving and investment spending. In the case of the United States, the economy borrows from the rest of the world because domestic saving is insufficient to finance investment spending. For financial markets, this plays out as follows: the amount of cross-border financial inflows (for example, to buy Treasury securities) exceeds financial outflows from U.S. investors buying foreign assets by the amount determined by the domestic saving-investment spending gap.

To see what happened to U.S. borrowing in 2020, we break down U.S. saving into public (federal government, state and local government) and private (personal, business) components. (Note that government saving is not the same as the budget deficit because the saving calculation considers the difference between government income and consumption and does not include the government’s investment spending.)

The table below shows how all these components fit into the saving-investment spending framework. There was a $217 billion decline in saving in 2020 relative to the 2019 level, with a huge deterioration in federal government saving mostly offset by a jump in personal saving and a more modest increase in state and local government saving. Adding in a decline in investment spending ($105 billion) leaves the saving gap only $113 billion wider than it was in 2019. (The United States borrowed $503 billion in 2019.) Put another way, 90 percent of the $2.1 trillion decrease in federal government saving in 2020 was offset by increases in other sources of domestic saving and lower investment spending.

Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

From this perspective, foreigners helped offset the increase in federal government dissaving, but the scale of their contribution was modest.

What to Look For Going Forward

The fiscal support packages passed in December 2020 and March 2021 will substantially increase the amount of Treasury debt again this year. So, will the pace of net foreign investment continue to be relatively stable? Unfortunately, while the saving-investment spending framework is useful for understanding what happened, it is less useful in predicting what will happen going forward. It is just an identity, after all, and offers no insights about the interactions between the various forms of saving and the economy.

One is thus left to speculate. A retreat in state and local saving and an increase in investment spending would seem to be in the cards, judging by their levels last year relative to pre-pandemic times. Both developments would increase foreign borrowing.

The table above, though, suggests that the most important unknown is whether personal saving will again offset high federal government dissaving. Consider two extreme outcomes. In one case, consumers take the “extra” saving accumulated in 2020 as an increase in their wealth and do not let it affect their spending behavior. As a result, personal saving remains high this year, again boosted by government transfer payments, and there is little effort to spend down this accumulated savings going forward. The other extreme has consumers running down the extra savings when the pandemic eases over the course of the year and spending rises to match income. The flow of personal saving then disappears and the economy’s reliance on foreign financial inflows jumps.

A further complicating factor in anticipating how this plays out is that the amount of U.S. borrowing has to be equal to the sum of net lending by the rest of the world. Essentially, any increase in the U.S. saving shortfall has to be matched by a bigger saving surplus elsewhere and the mechanism that makes this identity hold has very unclear implications for exchange rates and global asset prices.

Thomas KlitgaardThomas Klitgaard is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:

Thomas Klitgaard, “Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?,” Federal Reserve Bank of New York Liberty Street Economics, May 21, 2021, https://libertystreeteconomics.newyorkfed.org/2021/05/is-the-united-stat...





Disclaimer

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

The 2021 federal budget

Published by Anonymous (not verified) on Tue, 04/05/2021 - 1:04pm in

I’ve written a ‘top 10’ overview of the recent federal budget. The link to the post is available here: https://nickfalvo.ca/ten-things-to-know-about-canadas-2021-federal-budget/

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