The impact on markets of the government’s expanded financing need is largely still ahead of us. Over the past year, the government has funded essentially all of the increase in its deficit by issuing T-bills and spending down its cash reserves rather than significantly ramping up the issuance of duration to the market. As a result, Treasury issuance hasn’t needed to entice money out of other cash and asset markets, and thus the impact of the expanded deficit on liquidity has been minimal thus far. We think this pressure is delayed rather than eliminated: looking forward, we expect that the Treasury will shift its mix of issuance toward more duration, as the budget deficit remains elevated and the share of bills outstanding rises through the range that the Treasury generally prefers to target (though there is plenty of flexibility around the precise proportion).
- Date Posted:
- September 13, 2023
The positive-sum vision of global economic integration is that rising production in one place does not need to displace existing production elsewhere because demand and living standards will rise commensurately. Novo Nordisk’s scientists invented something new and valuable, simultaneously creating both supply and demand. They did not pivot from selling to Danes to selling to Americans. The negative-sum vision is the one of businesses burdened by persistent “overcapacity” (really, underconsumption) are forced to fight for market share in a world without growth. The U.S. effectively preempted the influx of Chinese-made electric vehicles with the Inflation Reduction Act, which boosts total demand while reserving a share for local producers. Europe is far more exposed and has yet to formulate a response. The common belief in certain circles that Europeans are more “open to trade” than Americans may not survive this experience.