quarta-feira, junho 22, 2005
Why bother?
There is a wide-spread misconception that the United States relies on the savings of other countries to finance its current account deficit. This is incorrect.
During recent years, at least, the US current account deficit is financed primarily by money newly created by the central banks of other countries: the companies that earned money by exporting to the US keep their savings - after having sold the dollars they earned to their central bank.
In fact, central banks accumulate large stockpiles of dollars as they print their own currency to buy dollars (resulting from their countries' trade surpluses with the United States) and thus prevent their currencies from appreciating.
The central banks then seek to invest those dollars into US dollar-denominated debt instruments, preferably US treasury bonds or agency debt, in order to earn a return.
If the dollars accumulated by foreign central banks exceed the amount of new debt being issued by the US government and the US agencies during any particular period, then the central banks will buy existing debt instead of newly issued one. By thus acquiring existing debt, they push up the price and push down the yield. That seems to explain why long bond yields have been falling since mid-2004 even though the Fed has been increasing interest rates at the short end of the yield curve.
If this reasoning is correct and if the US current account deficit continues to expand (as seems likely so long as the dollar remains at existing exchange rates), then the amount of paper dollars that foreign central banks wish to invest in US government debt will continue to expand as well.
Meanwhile, the US budget deficit is widely expected to be lower in 2005 and that means that the government will issue less new debt.
Under such circumstances, there will not be enough new government and agency debt issued to satisfy the demand of foreign central banks. Consequently, they are likely to buy existing debt instead, pushing up the price of those bonds and driving their yields down even further...regardless of what the Fed does to the Federal Funds rate.
Regardless, then, of whether the US government reduces its budget deficit or not, it would appear that the rapidly expanding US current account deficit has begun to undermine the ability of the Fed to determine the level, or even the direction, of interest rates in the United States.
John Mauldin (edited)
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During recent years, at least, the US current account deficit is financed primarily by money newly created by the central banks of other countries: the companies that earned money by exporting to the US keep their savings - after having sold the dollars they earned to their central bank.
In fact, central banks accumulate large stockpiles of dollars as they print their own currency to buy dollars (resulting from their countries' trade surpluses with the United States) and thus prevent their currencies from appreciating.
The central banks then seek to invest those dollars into US dollar-denominated debt instruments, preferably US treasury bonds or agency debt, in order to earn a return.
If the dollars accumulated by foreign central banks exceed the amount of new debt being issued by the US government and the US agencies during any particular period, then the central banks will buy existing debt instead of newly issued one. By thus acquiring existing debt, they push up the price and push down the yield. That seems to explain why long bond yields have been falling since mid-2004 even though the Fed has been increasing interest rates at the short end of the yield curve.
If this reasoning is correct and if the US current account deficit continues to expand (as seems likely so long as the dollar remains at existing exchange rates), then the amount of paper dollars that foreign central banks wish to invest in US government debt will continue to expand as well.
Meanwhile, the US budget deficit is widely expected to be lower in 2005 and that means that the government will issue less new debt.
Under such circumstances, there will not be enough new government and agency debt issued to satisfy the demand of foreign central banks. Consequently, they are likely to buy existing debt instead, pushing up the price of those bonds and driving their yields down even further...regardless of what the Fed does to the Federal Funds rate.
Regardless, then, of whether the US government reduces its budget deficit or not, it would appear that the rapidly expanding US current account deficit has begun to undermine the ability of the Fed to determine the level, or even the direction, of interest rates in the United States.
John Mauldin (edited)
