下任美国总统将面临难得一见的经济弱势

Let's take stock. To start with, the Federal Reserve has embarked on a daring, never-before-tried strategy to recharge the COVID-stricken economy and support prices of everything from stocks to houses. The Fed's plan centers on holding short-term interest rates, and possibly a long stretch of the yield curve, below the level of inflation. Supercheap borrowing, the Fed reckons, will entice companies to invest in new plants and fabs, spurring productivity and growth, and supporting assets that may not yield much, but they'd beat Treasurys by such a wide margin that they sustain their lofty valuations.

Interest rates

The Fed's stance is winning widespread praise from Wall Street and corporate America. But it also raises a nagging issue: Interest rates, left to the market, typically give investors a return that exceeds the trend in overall prices, often by a lot. That makes sense. Big lenders such as banks and hedge funds, and folks who buy corporate bonds, want interest payments that are well above today’s pace of inflation even on the safest credits, as payment—an extra cushion—for tying up their money for years and shouldering the risk that unforeseen future spikes in consumer and producer prices could wipe out their gains.

For decades, companies have willingly paid several points over inflation because they can make much more using that money to build or retool factories or launch winning new products.

Now the Fed is buying such a gigantic portion of all newly issued government and private bonds that it’s relentlessly pushing up their prices. Those super-high prices have shrunk the cents in interest that investors collect for every dollar they're paying for the bonds to lows never before witnessed in modern U.S. history. Hence, the consumer price index is now rising faster than what Treasurys are yielding, and top-rated corporate bonds are offering 2.3%, beating inflation by less than a point.

So it's logical to worry that by creating a huge distortion in the credit markets, the Fed could trigger a backlash from another bulwark of the economy that's damaged by artificially low rates. By pulling hard on the stimulus lever, will the Fed push another set of macro forces in motion that go in the wrong direction, undermining growth and hammering asset prices?

The dollar

The factor most likely to blunt the Fed's offensive is a steep fall in the dollar. That's the view of Ashwin Alankar, head of Global Asset Allocation at Janus Henderson Investors, a firm with over $300 billion under management, and a Ph.D. in finance from Berkeley. "Policymakers and investors are mostly overlooking the risk of a downward spiral in the dollar at their own peril," says Alankar. (Alankar makes his case in this excellent piece on Janus Henderson's website.)

Alankar notes that the dollar is already declining, albeit from high levels, and cautions the Fed's policies lift the probability that drop will accelerate. The problem posed by a weak greenback, he argues, is that the foreign investors who've been essential to funding our big deficits and debt, and whom we need more than ever now that shortfalls are exploding, will soon have far fewer dollars to buy our Treasurys. Alankar thinks the endgame could be the return of stagflation.

A second risk that Alankar also fears, and this writer deems more probable: The pullback in overseas buyers of Treasuries is so violent that the Fed loses its grip, ditching its easy money stance and allowing a jump in rates to lure back foreign investors. In the process, the U.S. endures a new, post-pandemic recession as rising borrowing costs curb business investment, and the need to tame inflation forces the Fed to keep rates high.

As Alankar points out, it's the Fed's reliance on "negative real rates" that poses the threat. In recent years, the dollar's been extremely strong. According to the Bloomberg Index that measures its value versus a basket of major currencies, the dollar in the past two years has hovered roughly 25% above its level from 2012 to 2015. Its recent buoyancy arises from relatively robust GDP growth through early this year and its status as the world's reserve currency. That confluence has made the greenback especially attractive as a safe haven in the turbulence caused by shocks such as Brexit, the collapse in oil prices, and turmoil in emerging markets.

Until late 2018, the Fed was "normalizing," meaning that it was gradually raising its benchmark rate to exceed the pace of inflation, hence orchestrating a return to positive "real rates" that have been the norm for decades. In late October 2018, the 10-year Treasury yield rose to over 3%, meaning that the inflation-adjusted number reached a positive 1%. Then, the worsening trade war and a selloff in stocks—unleashed by investor panic over those rising rates—prompted the Fed to reverse course. The pandemic propelled Chairman Jerome Powell to double down, pledging to hold the Fed funds rate at zero through at least 2022.

That cheap-credit policy has dropped the yield on 10-year Treasurys to 0.66%, the lowest reading in 60 years. Inflation was running at 2.4% in January and February and, after collapsing in the darkest days of the pandemic, is on the rise, hitting 1.3% in August. So the real rate, the 10-year yield minus inflation, is in negative territory by at least 0.6% and likely even more.

It's a falling dollar that's delivering the counterpunch. Since May, its value has dropped against that of major currencies, declining over 6% from its pre-pandemic high and settling 5.4% below its average for 2019. It's impossible to identify all the factors responsible for the pullback: The deep recession and foreign investors' wariness over the gigantic increases in U.S. federal debt doubtless are contributing. But for Alankar, the downward pull comes principally from those subzero real rates.

"What's happening is that the dollar's weakness is making foreign imports more expensive in dollars, so that American consumers and companies can afford fewer German cars and French wines and perfume," says Alankar. Hence, overseas companies that sell those products stateside are collecting fewer dollars. Alankar adds that most of the cash gets recycled into super-safe Treasurys. Now foreigners are amassing fewer dollars at the same time our deficit, in a single year, has exploded from just under $1 trillion to a projected $3.4 trillion in 2020, with $4.4 trillion in shortfalls to come from 2021 to 2023.

Imports and exports

The exploding gap between the dollars foreigners are reaping and the dollars the U.S. government needs to borrow is illustrated by the shift in the shares of national income going to imports versus deficits. In 2018 and 2019, the imports averaged roughly 2.5 points of GDP, trailing our 4.5% deficits by two points. In 2020, the share of imports is stable, while the budget shortfall has swelled to 17% of GDP, dwarfing the imports share by over 14 points.

Negative real rates also make dollars less attractive to funds and folks with savings abroad, so they will increasingly invest in their home countries, or invest elsewhere in euro or yen securities, because our returns don't even match inflation. The upshot is lower demand for U.S. Treasurys. Also curbing demand for our debt: Foreign investors can get much higher yields on dollar-denominated debt issued by Mexico, Brazil, or Indonesia. Their bonds are all yielding from 2.2% to 3.8%.

If the dollar keeps falling, products from abroad will get more and more expensive, and foreigners will have fewer and fewer dollars to buy the fresh trillions in Treasurys flooding the market. As of June, foreigners held $6.2 trillion in U.S. federal debt, almost one-third of the total and 90% of the amount owned by U.S. citizens. (As part of its stimulus plan, the Fed itself has accumulated 17% of all outstanding Treasuries.)

Inflation

A falling dollar, dragged down by ultralow rates, will stoke what Alankar calls "imported inflation."

"The big danger that stance creates is that higher import prices will lead to higher inflation, yet rates don't rise to stabilize the dollar. Instead, real rates stay negative," says Alankar. Indeed, the Fed has declared that it will allow inflation, if it picks up, to run hot without raising rates. So U.S. consumer and producer prices are destined to rise faster than the yield on Treasurys, making our bonds increasingly less enticing to foreign investors. That could create a vicious cycle: As the dollar keeps falling, Americans buy fewer and fewer foreign goods. Alankar foresees the possibility of a downward spiral in the dollar that would severely curtail the foreign purchases of Treasurys sorely needed to sustain our gigantic borrowing without causing a crisis.

What would that crisis look like? It's important not to overstate the potential perils. "I would not extrapolate from short-term movements in the dollar," says Matteo Maggiori of Stanford University, a top international economist. "For example, a lot of dollar alarmism for a few percentage movement in the short run seems to me overstated. However, there are some important long-term questions about the dollar's role in the international monetary system. The rapid increase in U.S. federal debt is one risk factor. The large foreign holdings of this debt is another." Maggiori views these factors not as an immediate threat but as long-term risks.

The market or the Fed?

Alankar believes a haymaker is bunching its fist and could strike at any time. As foreigners pull back, he says, Americans will be forced to fill the breach by plowing trillions more of their savings into Treasuries. The pool of those savings available to businesses would shrink. It's unclear what effect that shortage would have on future rates, because the Fed might take more extraordinary measures to hold its benchmark artificially low, a posture that could depress yields on all bonds. In any case, government borrowing would "crowd out" much of the private capital needed to fund new growth, at the same time the falling dollar feeds inflation. Result: stagflation reminiscent of the U.S. in the 1970s, and Japan for more than two decades.

But another outcome is also possible. The dollar's fall could become so severe that the Fed throws up its hands and hikes rates to wrestle down inflation and boost the dollar. Of course, the stock market freaks out at the very hint of higher rates, and the tightening would throw the U.S. into another recession. But the market, not the Fed, would be back in charge. And the foreign investors we need so desperately would return en masse to the U.S. haven that's not only the safest in the world but also one that is free to offer a decent return once again.