ABA Banking Journal - April 2013 - (Page 8)

the economy BY ROBERT DYE How the fiscal chickens might come home to roost 8| ABA BANKING JOURNAL | april 2013 10 Year T-Bond Rate Federal Deficit / GDP In their recent paper, Crunch Time: Federal deficit/GDP vs. 10-year Treasury rate Fiscal Crises and the Role of Monetary Policy (U.S. Monetary Policy Forum), David Greenlaw, James 90% 9% Actual Forecast Hamilton, Peter Hooper, and Frederic Mishkin analyze the potential Right-hand scale risks facing countries with high debt loads. In a nutshell, high debt loads 60% 6% reduce the maneuvering room that countries have in implementing fiscal and monetary policy when facing severe economic conditions. The 30% 3% Left-hand scale authors conclude that countries with Mar. 15, 2013: 2.04% national debt above 80% of GDP and persistent current account deficits (primarily trade deficits) are 0% 0% “vulnerable to a rapid fiscal dete1990 1995 2000 2005 2010 2015 2020 rioration as a result of. . . . ‘tipping point dynamics.’” Source: Congressional Budget Office and Federal Reserve The tipping point works like this: High debt loads lead to a reduced demand by debt holders as they become increasingly risk averse. This leads ing, long-term inflation expectations, to higher interest rates, which lead to higher interest payments on debt, which making the Fed’s job even harder. lead to more borrowing, which feeds back into higher interest rates. The fiscal Just as there is the potential for an crunch can result in rapidly rising interest rates posing a severe headwind for adverse feedback loop in terms of a weak economy. fiscal policy, there also is a potential One implication of the adverse fiscal feedback loop is that the long-term adverse feedback loop for monetary budget projections of the Congressional Budget Office (CBO) may be optipolicy. The path to avoiding the negmistic—in at least one respect. In the CBO projections, interest rates are ative consequences of high debt levsomewhat tame. For example, the CBO assumes in its baseline projection an els, and persistent, current account average rate on 10-year Treasury bonds of 4.5% from 2015 through 2018, imbalances may be narrower than and an average rate of 5.2% from 2019 through 2023. These are reasonable we would like to believe. It requires assumptions, given normal historical relationships between interest rates and that the United States has credible economic growth, but the future may not be normal. The recent past has cerlong-term fiscal policy. We are movtainly not been normal. ing toward that, but we are not all The authors also discuss the implications of a fiscal shock on monetary the way there yet. n policy. They assume that the Federal Reserve will be in the process of exiting from its massive balance sheet expansion within the next five years. The FedRobert Dye is senior viceeral Reserve may need to sell off some of its bond holdings in order to soakpresident and chief economist at up liquidity as inflationary pressures increase. However, a fiscal shock would Comerica Bank, Dallas, Texas. increase interest rates and, possibly, lead to large losses at the Federal Reserve He is a member of the ABA Economic as it sells into a weak bond market. Higher interest rates could lead to risAdvisory Committee.

Table of Contents for the Digital Edition of ABA Banking Journal - April 2013

ABA Banking Journal - April 2013
Contents
Chairman’s View
Editor’s Column
The Economy
Bank Notes
Picture This
ABA COMMUNITY BANKING Negotiating better contracts
Pass the Aspirin
Tech Topics
COVER STORY: Focus on risk Regulators raise the bar—big time!
RAROC architect’s views on risk
Top-performing big banks
Compliance Inbox
ABA At Your Service
Legal Issues
First Person

ABA Banking Journal - April 2013

http://www.nxtbook.com/naylor/BAKS/BAKS0515
http://www.nxtbook.com/naylor/BAKS/BAKS0415
http://www.nxtbook.com/naylor/BAKS/BAKS0315
http://www.nxtbook.com/naylor/BAKS2/BAKS1014
http://www.nxtbook.com/naylor/BAKS2/BAKS0914
http://www.nxtbook.com/naylor/BAKS2/BAKS0814
http://www.nxtbook.com/naylor/BAKS2/BAKS0714
http://www.nxtbook.com/naylor/BAKS2/BAKS0614
http://www.nxtbook.com/naylor/BAKS2/BAKS0514
http://www.nxtbook.com/naylor/BAKS2/BAKS0414
http://www.nxtbook.com/naylor/BAKS2/BAKS0314
http://www.nxtbook.com/naylor/BAKS2/BAKS0214
http://www.nxtbook.com/naylor/BAKS2/BAKS0114
http://www.nxtbook.com/naylor/BAKS2/BAKS1213
http://www.nxtbook.com/naylor/BAKS2/BAKS1113
http://www.nxtbook.com/naylor/BAKS2/BAKS1013
http://www.nxtbook.com/naylor/BAKS2/BAKS0913
http://www.nxtbook.com/naylor/BAKS2/BAKS0813
http://www.nxtbook.com/naylor/BAKS2/BAKS0713
http://www.nxtbook.com/naylor/BAKS2/BAKS0613
http://www.nxtbook.com/naylor/BAKS2/BAKS0513
http://www.nxtbook.com/naylor/BAKS2/BAKS0413
http://www.nxtbook.com/naylor/BAKS2/BAKS0313
http://www.nxtbook.com/naylor/BAKS2/BAKS0213
http://www.nxtbook.com/naylor/BAKS2/BAKS0113
http://www.nxtbook.com/naylor/BAKS2/BAKS1212
http://www.nxtbook.com/naylor/BAKS2/BAKS1112
http://www.nxtbook.com/naylor/BAKS2/BAKS1012
http://www.nxtbook.com/naylor/BAKS2/BAKS0912
http://www.nxtbook.com/naylor/BAKS2/BAKS0712
http://www.nxtbook.com/naylor/BAKS2/BAKS0612
http://www.nxtbook.com/naylor/BAKS2/BAKS0512
http://www.nxtbook.com/naylor/BAKS2/BAKS0412
http://www.nxtbook.com/naylor/BAKS2/BAKS0312
http://www.nxtbook.com/naylor/BAKS2/BAKS0212
http://www.nxtbook.com/naylor/BAKS2/BAKS0112
http://www.nxtbook.com/naylor/BAKS2/BAKS1211
http://www.nxtbook.com/naylor/BAKS2/BAKS1111
http://www.nxtbook.com/naylor/BAKS2/BAKS1011
http://www.nxtbook.com/naylor/BAKS2/BAKS0911
http://www.nxtbook.com/naylor/BAKS2/BAKS0811
http://www.nxtbook.com/naylor/BAKS2/BAKS0711
http://www.nxtbook.com/naylor/BAKS2/BAKS0611
http://www.nxtbook.com/naylor/BAKS2/BAKS0511
http://www.nxtbook.com/naylor/BAKS2/BAKS0411
http://www.nxtbook.com/naylor/BAKS2/BAKS0311
http://www.nxtbook.com/naylor/BAKS2/BAKS0211
http://www.nxtbook.com/naylor/BAKS2/BAKS0111
http://www.nxtbook.com/naylor/BAKS2/BAKS1210
http://www.nxtbook.com/naylor/BAKS2/BAKS1110
http://www.nxtbook.com/naylor/BAKS2/BAKS1010
http://www.nxtbook.com/naylor/BAKS2/BAKS0910
http://www.nxtbook.com/naylor/BAKS2/BAKS0810
http://www.nxtbookMEDIA.com