In Which I Summon Ryan Avent, Bob Rubin, Carla Hills, Richard Haass, Sebastian Mallaby, and Francis Warnock to the Bar for Judgement...
Ryan Avent has, I think, done a bad thing in linking to and providing readership for the Council on Foreign Relations--in this case, Francis Warnock claiming that U.S. government debt is really risky...
Francis Warnock writing for the Council on Foreign Relations:
How Dangerous Is U.S. Government Debt?: [T]he [Triffin] dilemma.... To supply the world’s risk-free asset, the center country must run a current account deficit... until the risk-free asset that it issues ceases to be risk free.... The endgame... is a global, wholesale dumping of the center country’s securities. No one knows in advance when the tipping point will be reached, but the damage... will be readily apparent afterward. For a long time now, the United States has seemed vulnerable to the fate that Triffin predicted.... Late last year... danger came close to becoming reality... sizeable budget deficits... ever-increasing... government debt... end of the Federal Reserve’s crisis-driven program... an uptick in inflation expectations, the ten-year Treasury yield increased by fifty basis points... further increases were likely... substantially raise the cost of future government borrowing... threaten any recovery.... [F]oreigners... dollar... falling sharply. Early in 2009 it fetched almost eighty euro cents in Frankfurt or Athens; by autumn it was worth sixty-seven euro cents. Foreign investors... were getting nervous. Luo Ping... summed up the angst:
Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option . . . . We know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.
Was Triffin’s endgame—sudden reserve diversification, or the act of foreign governments abruptly shifting their funds from dollars to other currencies—about to become a reality? If so, the likeliest benefactor was the eurozone...
To this, there are only four things to say:
First, Luo Ping's declaration is mischaracterized. Warnock frames it as a declaration that the bite of the Triffin dilemma was about to manifest itself. But in fact it was the reverse. It was a declaration that the bite of the Triffin dilemma was still far off--because the only credible replacement for the U.S. dollar, the euro, was not in fact a credible replacement at all.
Second, the references to asset price movements in Warnock's piece are... let's call them unusual... Roll the tape on the exchange rate:
Warnock does not tell his readers that since the start of the recession the dollar has strengthened from 67 euro cents to 83 euro cents. He talks about the red arrow only:
Early in 2009 [the dollar] fetched almost eighty euro cents in Frankfurt or Athens; by autumn it was worth sixty-seven euro cents...
He gives his less-informed readers no clue that the movement he points to was swamped both before and after by larger movements in the opposite direction--that the sum is not the upward-pointing red but the downward-pointing blue arrow.
Now the dollar has been on a long-term weakening trend against the euro since the collapse of the dot-com bubble:
But to claim that the movement from January to October 2009 is the important move readers should pay attention to--well, that's an intellectual foul, deserving of a fifteen=yard penalty. An honorable economist would only say "[e]arly in 2009 [the dollar] fetched almost eighty euro cents in Frankfurt or Athens; by autumn it was worth sixty-seven euro cents..." if it was surrounded by clauses "between the start of the recession and early 2009 the dollar strengthened from sixty-seven to eighty euro cents" and "between late 2009 and mid-2010 the dollar strengthened from sixty-seven to eighty-three euro cents." But to add those pieces of information would undermine Warnock's alarmism. So he doesn't include them.
Third--well, Warnock's discussion of bond yields is even worse. Roll the tape again on Treasury bond yields:
Warnock does not say that since the start of the recession, in spite of the enormous expansion in federal debt held by the public, U.S. Treasury bonds have strengthened and risen in price as required yields have fallen. He talks about the red arrow only
the world’s risk-free asset, the ten-year U.S. Treasury bond, was sagging... yield increased by fifty basis points from 3.25 percent to 3.75 percent... further increases were likely...
Once again, he provides his less-informed readerswith no clue that the movement he points to was surrounded both before and after by larger movements in the opposite direction, and that the sum is not the upward-pointing red but the downward-pointing blue arrow.
It is not even true that the U.S. Treasury bond is on a long-term weakening trend:
Confidence in the safety and soundness of U.S. Treasury bonds is greater than--well, greater than it has ever been in my lifetime.
My fourth response is implicit in the first three.
We who follow the numbers know six facts:
- First, the bite of the Triffin dilemma--which will come someday--is further off now than it was in the fourth quarter of 2007, at the end of the last business cycle expansion.
- Second, international market confidence in the dollar as reserve currency and the U.S. Treasury bond as reserve asset is stronger now than it was 2 1/2 years ago. Will the period of the U.S.'s exorbitant privilege end? Someday. Could it end quickly and surprisingly? Yes.
- But, third, the chance that the period will end tomorrow is less than the chance of a sudden end was 2 1/2 years ago, as confidence in the dollar and the Treasury bond has strengthened.
- And, fourth, the period's expected lifetime is greater now than it was 2 1/2 years ago, as the U.S. has proved an island of stability in a tumultuous world.
- Thus, fifth, the someday bite of the Triffin dilemma is a less urgent and important problem than it was 2 1/2 years ago.
- And, sixth, the recession has brought us other urgent and important problems.
Anyone who is interested in informing their readers about the U.S.'s current Triffin Dilemma has to lead their discussion with those facts.
Warnock works hard to avoid bringing any of these to his readers' notice.
That's not a good thing to do.
We are talking basic canons of data presentation here. Francis Warnock should not present snippets of the data while hiding the full time series. Sebastian Mallaby should not approve documents that do not present the data as publications of the Center for Geoeconomic Studies. Richard Haass should not have a Director of his Center for Geoeconomic Studies who does not exercise quality control. Carla Hills and Bob Rubin should not chair such an institution without performing a thorough housecleaning. Ryan Avent should not link to documents that are in the data mispresentation business.
God knows the level of debate is low enough. We don't need to lower it even more. Warnock's is a genuine piss-on-your-leg-and-tell-you-it's-raining piece: He says the dollar has lost value: it has gained. He says U.S. Treasury yields have risen. They have fallen.