The View From 1776

The Treasury Can Keep Its Hat On

Until Europe and Japan get their economic houses in order, the United States Treasury doesn’t need to bow and scrape, hat-in-hand, to sell its notes and bonds.

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In New York Times Editorialists Wrong As Usual, the argument was made that:

“SECOND, let?s examine the editorial?s assertion, ?Each day, the United States must borrow billions of dollars from abroad to finance its enormous budget and trade deficits. Without a steady stream of huge loans, the country would face rising interest rates, higher inflation, a dropping dollar and slower economic growth.?

“As noted above, there is no correlation between interest rates and inflation, on the one hand, and budget and trade deficits.

“More importantly, the United States does not each day ?borrow billions of dollars from abroad to finance its enormous budget and trade deficits.?  Nobody compels foreign central banks to hold dollars as their main reserve currency.? Why do they hold dollars?? First, because no other currency, including the Euro, is strong enough and available in large enough amounts to handle the volume of dollars flowing each day in international money markets.? Second, the United States has the highest credit rating and the lowest political risks in the world.? Third, our economy is, with the exception of China?s, the strongest in the world.? Our economic growth rate is almost twice that of Europe or Japan.? Other nations, not being able to grow at home, have to export to the United States to avoid economic recession.

“The total of budget and trade deficits is slightly over a trillion dollars.? Of that, more than 60 percent, $618 billion, is the trade deficit.? The Times leads you to believe that the Treasury sends somebody overseas, hat in hand, to borrow money.? What actually happens is that foreign countries export goods and services to the United States and are paid $618 billion.? If they decide not to accept payment in dollars, they can?t export to the United States.? Even France and Germany aren?t stupid enough to stop exporting to the U.S.? They aren?t lending money to the United States, they are financing their own exports.”

Today’s Wall Street Journal in Long-Term Rates Have a Logic, Even if Fed Appears Confused notes the following:

“But for many investors, the historically low level of long-term interest rates around the world stems from a host of real factors supporting prices, even with six Fed rate increases since last June.

“Chief among them is the desire for yield in what remains an environment of low global returns, a search that is being juiced by pension reforms. Against a backdrop of quiescent global inflation, owning a 10-year Treasury note yielding 4.18% or a 3.56% German bund let alone a 1.41% Japanese government bond isn’t perilous.

“Only when inflation is back on the radar screens will long-term fixed-rate bonds become a poor investment as investors inject a greater risk premium into their yields. Such is the demand for long-dated debt, even at current low yield levels, that France is expected to announce today whether it will issue a 50-year bond.

“From a fundamental perspective, long-dated global bond yields also seem close to fair value. Japan is revisiting recession status, and the euro zone is limping along, with a strong currency relative to the dollar, effectively amounting to tighter monetary policy. The recent performance of the U.S. economy has delivered reasonable growth marked by tepid job creation, which in turn has reinforced low inflation expectations.”

Posted by .(JavaScript must be enabled to view this email address) on 02/18 at 10:18 PM
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