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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

S&P has downgraded Japan’s long-term debt from AA to AA-, indicating the U.S.’s AAA rating should be taken down several notches to less than AA-.

National economies must generate foreign currency for their governments to pay foreign creditors, and national governments must be able to tax, sell bonds or print money, without causing inflation, to cover operating expenses and pay interest.

Japan’s ability to pay is simply much stronger than the U.S.

Japan has a strong current account surplus, thanks to a powerful manufacturing export machine, and the Bank of Japan sits on $1 trillion in foreign-currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The U.S. can hardly make such a claim.

Domestically, Japan suffers from deflation, slow growth and maintains a large budget deficit to prop up domestic demand because Japanese citizens save so much. With prices falling, even in the face of global commodity inflation, the Japanese government has adequate latitude to sell bonds to its savers, and the Bank of Japan has more than enough flexibility to purchase those bonds as needed without instigating domestic inflation or creating other adverse macroeconomic consequences.

The U.S. is a different situation. The U.S. has a gaping current account deficit–on oil and with China–and policies pursued by the Bush and Obama administrations are worsening those conditions. Owing to the large current account deficit, the U.S. must run a huge budget deficit, close to 10% of gross domestic product, just to sustain growth at 3.5% and keep unemployment from flying out of control.

The large U.S. current account deficit indicates the U.S. economy as a whole isn’t generating adequate revenue to pay foreign creditors interest due on U.S. debt, and Washington must service the interest on externally held debt by printing more bonds and selling those abroad, but foreign private demand for those bonds is satiated. Consequently, the U.S. is much too dependent on the government of China to print yuan to buy dollars and, in turn, to use those dollars to buy Treasurys to finance the U.S. private economy’s current account deficit and the federal budget deficit.

Beijing plays along because the resulting weak yuan and trade surplus with the U.S. helps deal with Chinese unemployment, but printing so many yuan requires Beijing to sterilize those extra yuan by persuading Chinese investors to purchase too many yuan-denominated government bonds, bonds the private sector doesn’t want. Continue reading…

These are the views of Thomas Lam, group chief economist at OSK Group/DMG & Partners

The Jan. 25-26 Federal Open Market Committee meeting ended without any drama, though the tone of the accompanying statement might be somewhat dovish.

The upgrade to the growth description, while in line with expectations, was more modest. Moreover, the ongoing progress of the recovery was still deemed “disappointingly slow”. And the four new rotating members of the FOMC coalesced with the other seven permanent members on the January vote.

The key message of the post-meeting statement is that with a timid recovery in broad labor market conditions and underlying inflation trending lower, the FOMC has no immediate plans to deviate from the current policy stance of purchasing longer-term Treasury securities and maintaining the policy rate at current levels. This is consistent with our prevailing view that the $600 billion Treasury purchase program would be fully absorbed. Continue reading…

These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The U.S. economy grew at an annual rate of around 2% over the recent two quarters after the initial spurt in late 2009 and early 2010.

The available data suggest that real GDP growth is tracking slightly more than 3% in the fourth quarter, up from our previous forecast of less than 3%. The increase in our forecast primarily reflects the pickup in consumer spending through November on an annualized basis.

But the wild cards in our fourth-quarter forecast are net exports and the change in inventories, the two highly capricious categories of GDP. Specifically, we anticipate net trade to add around 1.5 percentage points to growth, while inventory adjustments might detract more than 1.5 percentage points. Overall, we expect real GDP growth to average 2.9% in 2010 (or 2.8% in terms of fourth-quarter 2010/fourth-quarter 2009), up from our prior forecast of 2.8%.

These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The Federal Open Market Committee’s announcement of another round of longer-term Treasury purchases and balance sheet expansion at the conclusion of the Nov. 2-3 meeting was well-anticipated.

The premeeting debate was essentially on the structure of the Treasury-purchase program (by shrinking the term premium) and potential enhancements to the forward-looking language (by lowering the path of expected future short-term rates) in the accompanying statement.

The FOMC decided to purchase $600 billion of longer-term Treasury securities by the end of second-quarter 2011, which is around $75 billion of purchases a month.

Overall, the announced Treasury purchases, according to our calculations, are equivalent to a pseudo-reduction of 50 to 100 basis points in the fed funds rate.

The announced magnitude and timing of purchases were only slightly different from expectations of up to $500 billion over six months or about $85 billion a month. Hence, the market reaction to the foregoing information should have been fairly limited.

The additional details on the breakdown across maturities, however, seemed to have surprised some market participants, as evidenced by the knee-jerk rise in the 30-year Treasury yield. When compared to the composition of the 2009 Treasury purchases (of $300 billion), this time there is greater emphasis on the four to seven-year area but less across the other parts of the curve (in particular the four-year or less, and 10- to 17-year segments).

To be sure, one key difference between the latest round of asset purchases and the 2008-09 purchase program is the keen focus on actively pursuing the dual mandate of sustainable employment and price stability this time. The postmeeting statement underscores the mandate, either directly or indirectly, at least six times. In addition, the FOMC also seeks increased flexibility in structuring the purchases this time, as emphasized by the reference that the “committee will regularly review the pace … and overall size of the asset-purchase program in light of incoming information and will adjust … as needed.” In reality, determining the scale and pace of purchases by tying them to the “statutory mandate” will be challenging simply because there is no historical precedent to this policy approach.

One surprise from the accompanying statement, however, is that the FOMC left the forward-looking language, or the “extended period” reference, on the fed funds rate unchanged. Perhaps, the committee decided that there could be a more opportune time, if needed, to come out with all guns blazing. While it is often recognized that the communication strategy associated with this approach might be reasonably challenging, there is room to lower the path of expected future short-term rates.

Finally, Kansas City Federal Reserve Bank President Thomas Hoenig unsurprisingly dissented on the action. Well, he has one more meeting on Dec. 14 to cast his final dissent. Next year, however, the FOMC lineup is unlikely to produce fewer dissents.

(The author can be reached at thomas.lam@dmgaps.com.sg.)

These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The conclusion of the September 21 Federal Open Market Committee (FOMC) meeting, albeit with less drama than the August 10 outcome, was generally in-line with expectations.  The Committee’s decision to maintain the ongoing reinvestment policy on its securities holdings (announced at the August meeting), retain the “extended period” phraseology on the target fed funds rate and emphasize that it is “prepared to provide additional accommodation if needed” was consistent with our call.  The gist is that while the inclination to ease remains on the table (since the August meeting and Bernanke’s Jackson Hole speech), the timing and extent of additional accommodation are still moot.

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These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

Incoming economic data recently suggest that U.S. real GDP growth for the third quarter, while still positive, remains in a soft patch.

As best we can judge, the high-frequency jobless claims data through August might be consistent with real GDP growth in the vicinity of 1% to 2%. Also, an early read from monthly indicators, mostly July data, suggests that consumer spending is tracking roughly 2%, growth in capital expenditures probably moderated to around 7% to 9%, and residential investment seems poised to contract at around 10%, all measured on an annual-rate basis.

In addition, the guidance from forward-looking indicators implies that inventory change is likely to detract slightly from overall GDP growth, but net exports should reverse some hefty subtraction in the prior quarter and add modestly to third-quarter growth. As a group, inventory change, net exports and government spending could generate a net contribution of less than half a percentage point to overall growth.

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These are the personal views of Lena Komileva, group chief economist overseeing market economic research at Tullett Prebon:

In the end it was the disappointing Federal Reserve Bank of Philadelphia survey and U.S. Dept. of Labor’s jobless claims figures that provided the trigger for a fresh downgrade in investor risk sentiment and appetite for yield in an otherwise peaceful holiday week.

The Philadelphia Fed survey is the most volatile of regional surveys and carries the weakest correlation with the nationwide trend, so the fundamental implications should not be overstated.

Still, the July decline sends an important signal for the health of the economy as it reflects a universal picture of deteriorating corporate sentiment that is driven not by ultra-low Fed funds rates and the strong earnings-driven liquidity reserve accumulated through the past two years’ deleveraging, but by companies’ desire to protect capital and cash-flows in an environment of restrictive credit, local government austerity and future economic uncertainty.

In the survey detail, the Philadelphia Fed purchasing managers’ index manufacturing fell into contraction territory, at -7.7 in August, down from +5.1 in July, for the first time since July 2009 (-8.9). Core growth components sent out universally bearish signals as new business flows, shipments and backlogs all fell and firms slashed inventories and employment.

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These are the personal views of Thomas Lam Tai Loong, group chief economist at OSK Group/DMG & Partners:

The August 10 post-meeting Federal Open Market Committee (FOMC) statement has instigated debates and speculations on the need for additional policy actions and the efficacy of these actions. The Committee’s decision to change the reinvestment policy on agency securities, which more-or-less maintains the size of the Fed’s overall holdings of securities by purchasing Treasuries while allowing agency debt and MBS to run-off, did lower longer-term Treasury yields, however.

The 10-year Treasury yield fell by around 15bps over two sessions in total on August 10 (post-meeting FOMC statement) and August 11 (released a tentative schedule of Treasury purchases). Our estimation suggests that the foregoing result was primarily due to a lower term premium, which probably declined by roughly 10bps or more in aggregate during those two days. Indeed, the term premium response was in-line with current research. (Theoretically, longer-term interest rates can be decomposed into an average of current and expected future short-term rates plus a term premium. The term premium is simply additional compensation required for the risk of holding onto longer-term assets.)

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By Min Zeng

    A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)–Thursday’s sale of $16 billion in 30-year Treasury bonds faces a challenge after the Federal Reserve signaled that the longest maturity in the bond market isn’t on its priority list of purchases.

In the absence of Fed support, and given the very low yields on offer, market participants are concerned that demand at the 1 p.m. EDT sale could waver.

The so-called long bond has a much narrower investor base than other maturities: its buyers are mainly domestic, rather than foreign, and are typically pension funds, insurance companies and asset managers that need to match long-dated liabilities.

Soft demand would be bad news for the U.S. government as it would have to pay up to get the sale done. The higher costs would come just at a time when the government is looking to lengthen the maturity of its outstanding debt.

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These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

It is widely acknowledged that the Federal Reserve still has policy ammunition–such as reintroducing large-scale asset purchases, lowering the interest-on-excess-reserves rate, adjusting its reinvestment policy on agency securities and enhancing its communication strategy–to mitigate the downside risks to the outlook.

But the final decision on which tool(s) to employ remains highly challenging, partly because of the vague distribution of marginal costs and benefits associated with the available policy options.

Nonetheless, over the past week or so, there has been increasing chatter that the tone of Tuesday’s Fed meeting could potentially deviate from the seemingly unexciting postmeeting announcements lately. On balance, the soggier data releases recently weighed on Treasury yields and extended expectations on the timing of Fed policy normalization.

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