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Hanno Lustig Profile picture
Hanno Lustig
@HannoLustig
Economist at Stanford. Fascinated by exchange rates. Really wanted to be a pilot. Actually, taxes do fund spending.
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Nov 3, 2023 • 7 tweets • 2 min read
📣📣What about Japan?

Fiscal sustainability in Japan. Image 1/Whenever you bring up fiscal sustainability, you’ll get questions about Japan. Japan is not in the r<g region. Since 1997, the real return on Japanese government debt has exceeded the growth rate by 1.2%.
Sep 28, 2023 • 4 tweets • 2 min read
1/Another interesting article by @jasonfurman. A better title imho would have been "Profits and Losses don't matter at the Federal Reserve the way they matter for a regular bank, but they do matter for taxpayers." The Fed balance sheet is not a black hole for losses.
Image 2/The losses matter. If you consolidate the Fed and the Treasury, then QE has shortened the duration of the government's IOUs. The mark-to-market losses measure the cost to taxpayers of shortening duration and not locking in longer rates.
Sep 18, 2023 • 5 tweets • 2 min read
1/Bankers say they can't be profitable with higher capital requirements, but banks without deposit insurance (shadow banks) choose an average equity to asset ratio of 25%, compared to 11% for traditional banks. hmm.. Image 2/Ratio of equity capital to total assets for shadow banks and traditional banks. Density plotted below. Image
Aug 28, 2023 • 13 tweets • 4 min read
Why were monetary and fiscal policy makers caught on the wrong foot by the evolution of the yield curve over the past 18 months? What are the implications?

Some thoughts.
🧵 1/📜Traditional Macro/Finance View:

Advanced economies experiencing
1. Demographic transition
2. Secular stagnation (low g)
3. Increase in Inequality

3 slow-moving forces ➡️ lower long-run real r (which does not depend on monetary policy).

➡️Creates extra fiscal capacity (r<g)
Aug 7, 2023 • 7 tweets • 3 min read
1/In his Aug. 4 column on a potential US debt crisis, @paulkrugman cites the UK as an example of a country that managed very high debt/GDP ratios without a debt crisis, but fails to mention that the UK defaulted on all of its WW-I war debts to the US in 1934. Image 2/ The UK also converted 5% war loans from WW-I into 3.5% coupon bonds in 1932, to deal with a sovereign debt crisis. Some might call that sovereign debt restructuring. See for example https://t.co/KPiNhyxxgzft.com/content/e586cd…
Image
Jul 18, 2023 • 13 tweets • 3 min read
Recommend watching Mario Draghi's fascinating lecture to anyone interested in the Eurozone. Especially his analysis of sovereign spread dynamics in the Eurozone. 1/Draghi (correctly imo) credits the promise of implicit transfers backing all Eurozone debt before 2008 for the low spreads. All sovereign debt was pretty much priced identically in the Eurozone pre-GFC.
May 4, 2023 • 4 tweets • 2 min read
If banks are in the business of loading up on interest rate risk, they should do so with more equity capital, and not with cheap taxpayer-subsidized deposit funding. says Amit Seru in the FT today. That sounds right to me. 🧵 Image 1/ Taxpayers should not be asked to subsidize the carry trade. We already know from work by my colleague @JulianeBegenau with @piazzesi and Schneider that banks don't seem to use derivatives to hedge their interest rate risk exposure.
Mar 15, 2023 • 8 tweets • 3 min read
1/My GSB colleague @JulianeBegenau has just joined Twitter! She has been arguing in her research with Erik Stafford that banks can best be thought of as levered fixed income portfolios with slow mark-to-market, which makes it look as if they bear little interest rate risk. 2/Not a bad model for SVB, which had a $117 portfolio of Agency MBS and long-dated Treasurys with a duration of 5.6 years. But SVB was only marking-to-market $26 billion of this portfolio. The rest was designated hold-to-maturity (or close-your-eyes).
Mar 13, 2023 • 8 tweets • 2 min read
Deploying lots of leverage is more palatable when combined with with slow or no mark-to-market. Private Equity is one example. Banks are another example. SVB was running a $ 117 bn. bond portfolio, and only marking $26 bn. of it to market, with only $15 bn in capital. 1/SVB was effectively running a $117 bn. fixed income portfolio funded by mostly uninsured deposits on a tiny sliver of capital ($15 to $16 bn). And it did not have to mark-to-market $ 91 bn of this portfolio, just by declaring an intention to hold-to-maturity (HTM).
Jan 24, 2023 • 6 tweets • 2 min read
1/Krugman's NYT column today suggests we can dismiss CBO projections because they have been overly pessimistic. The colored lines are the projections up to 10 yrs out. Bold line is what actually happened to debt/GDP. These CBO projections have been optimistic since 2000 2/same pattern for projected deficits up to 10 years out. Too optimistic since 2000. Consistently.
Jan 1, 2023 • 5 tweets • 2 min read
1/In 2022 and 2021, we were surprised by high inflation and extremely low real bond returns in the US. But perhaps we should not have been. Wars are the best analogy for the pandemic if you look at the government's primary surpluses. 2/The US government has almost always resorted to some inflation during and after large wars, shifting some of the burden from taxpayers to bondholders. YoY inflation.
Dec 14, 2022 • 11 tweets • 2 min read
Important question raised by Klaus. The original rationale for QE was the zero lower bound. To lower real rates, the ECB had to buy long-term bonds.

We're definitely no longer at the ZLB. So what is the rationale against QT?

Some thoughts 🧵 1/The ECB is now in the business of using its balance sheet as a warehouse for risks that private investors do not want to hold at current prices. ECB has completely crowded out private investors in some markets.
Nov 17, 2022 • 10 tweets • 3 min read
The crypto bubble (BTC per USD in chart) was fueled by declining real interest rates (10 YR real yield) in 2019/2020 and would be inevitably be popped when rates climbed back up.

Uncovered Interest Rate Parity. Useful benchmark. 1/if you create a currency that is not a hedge against risk and it does not provide meaningful liquidity/safety services, then investors will simply equate the long-run return on your currency with that of other currencies
Oct 13, 2022 • 28 tweets • 4 min read
is it "bollocks" to connect the U.K. pension fund crisis to BoE policies? 1/defined benefit pension funds in the UK (PFs) are forced to mark their liabilities to market using the gilt yield curve. when the BoE buys gilts on Tuesday and the 30-year yield declines, the PDV of the PF's future payouts increases
Oct 7, 2022 • 7 tweets • 2 min read
1/bond markets did not do a great job of forecasting the recent inflation spike and also did not signal that governments were running out of fiscal space. 2/central bankers ought to at least consider the possibility that their interventions may not improve the functioning of bond markets, a claim they often make, but in fact may actively hamper price discovery.
Sep 28, 2022 • 12 tweets • 4 min read
From global safe asset supplier to an emerging market country ? 1/The UK's debt/GDP ratio has exceeded current levels in the past. After the Napoleonic wars, WWI and WWII, the debt/GDP ratio exceeded 150%.
Sep 27, 2022 • 4 tweets • 1 min read
Governments in mature economies have made lots of promises to transfer recipients and bondholders. They probably can't keep all of them. These promises are now being marked to market by investors. Sorting out which promises will be kept and which ones won't. That process of marking-to-market had already started in the Eurozone after the GFC with the sovereign debt crisis. The ECB then used its balance sheet to warehouse sovereign credit risk, which slowed this mark-to-market process down.
Sep 13, 2022 • 23 tweets • 7 min read
📣The secular decline in rates may not have boosted U.S. fiscal capacity as much as you think, but it definitely has exposed the U.S. Treasury to more interest rate risk. 🧵

based on #BPEA piece brookings.edu/bpea-articles/…
@SVNieuwerburgh @ProfJiang @MindyXiaolan 1/in standard models, government debt is fully backed by the collateral, future primary surpluses (S). So, a natural way to assess fiscal capacity is to measure the dollar value today of this stream of future surpluses
Jul 20, 2022 • 10 tweets • 3 min read
1/Macro-economics is still quite US-centric, and so, many of us implicitly use the US as **the benchmark**. But the US is quite different from most countries. Especially when it comes to fiscal capacity. 2/ Just to name one big difference, the US is the world's safe asset supplier and the dollar is world's reserve currency. This allows the US to implement policies that other countries probably can't implement. that's exorbitant privilege.
Jun 5, 2022 • 9 tweets • 2 min read
Does it matter if Europe keeps pumping Euros into 🇷🇺? Economists who claim it does not believe Putin has given Europe a huge free lunch. An explainer. 👇 1/ #1 claim📣 `We can keep injecting dollars and euros into 🇷🇺 without any real impact because Russians have absolutely no use for dollars/euros now or ever.' Underlying assumption: Permanent autarchy. The 🇷🇺 economy will be even more isolated than 🇰🇵 for the next century.
Jun 4, 2022 • 4 tweets • 1 min read
1/additional export sanctions against 🇷🇺 have no effect, if (i) Russian imports are zero now, and (ii) zero in the future, and (iii) Russians have no other motive for holding dollars/euros (for example, no demand for dollar safety). dollars have to be completely useless in 🇷🇺. 2/each one of these assumptions is unrealistic. (i) is clearly not true: Russian are importing stuff. (ii) Russians will definitely import stuff in the future, (iii) Lots of demand for the safety of dollars in all countries, including 🇷🇺