Originally posted by: dirtboy
Originally posted by: Jhhnn
Govt bonds are paying low rates precisely because they're in demand- it's an auction of sorts.
Amazing how in one sentance you have provided complete proof that you have no clue what you are talking about.
There isn't a demand for buying government bonds right now. Why do you think the dollar is sliding? For two big reasons: the first is that people are putting their money back into the stock market and getting out of bonds because you don't want to get stuck holding a bond when rates rise; and second there are other stable governments in other countries right now that have higher rates so people who invest in safe government bonds are choosing ones that pay higher that ours.
Want to see a demand in government bonds? Raise interest rates to 12% and watch the money pour in.
Japan and China have been buying US treasury bonds to the tune of
hundreds of billions of dollars to prop up the dollar to support their own currencies.
Rest of the world get's sick of propping up Bush's deficit
"If, or when, the rest of the world decides to stop funnelling the $US2 billion per working day that the US needs to pay for its spending, Henry says we're all in for "an economic adjustment of major proportions".
American interest rates would skyrocket and the greenback would drop like a stone, for starters, which is why Henry argued so hard for the Reserve Bank board to drop interest rates pre-emptively this year.
One of Henry's colleagues on the Reserve Bank board, Warwick McKibbin, is not concerned about the quantum of America's record 5 per cent, $US500 billion current account deficit, but he is very worried about its composition.
An ANU economist and professorial fellow at the Lowy Institute, Professor McKibbin is doing the sums on the incomprehensibly large $US7000 billion in tax cuts and security spending - 10 times Australia's annual economic output - that has been lumped on to America's 10-year deficit projection since Bush's election three years ago.
His modelling concludes that the deficit "explosion" would leave the US economy "unambiguously worse off in the medium and long term".
"I think that the story for the next couple of years will be how the world economy will adjust to that sort of expansion in the US," says McKibbin.
He is now modelling the consequences of such a move and thinks they could be dramatic.
McKibbin says the record US current account deficit will lower world growth by diverting investment spending to the US - until the massive fiscal component scares investors away.
A financial system shake-out in the US could wound the American economy but may not be all detrimental to the rest of the world.
American consumers will be forced to finance their own public and private debts, causing US interest rates to rise and investment to fall.
"Rather than financing the fiscal deficits from willing foreigners, the funds are now drawn from within the US economy through higher interest rates, reducing private investment," says McKibbin.
He estimates that the US fiscal deficit will depress American equity markets and lop 6 per cent from GDP within 10 years.
On the plus side, his modelling shows investor "flight" will boost growth in the rest of the world because their money would be redirected.
Australia's fund managers would redirect the disproportionately large investments they send to US markets and Australia would benefit as other countries redirected their investments here.
Seven months on, it seems Ken Henry's major adjustment has begun in earnest. There are early signs that the rest of the world is no longer happy to fund American spending.
State Street's portfolio flow indicators suggests the quality of capital inflows into the US is rapidly declining. Equity inflows have increased into most world markets in the past two months, except for the US.
Total investment flows to the US are declining, compounding the US dollar's two year fall, which McKibbin attributes to investor concerns about country risk.
"That happens in some smaller countries but is quite unusual in the US - at least since the second world war," says McKibbin.
There has been dissension on the Bank of Japan board about whether to extend its US dollar-buying program.
And if Chinese inflation accelerates too far, the People's Bank of China could choose to loosen its currency peg and slow its purchases of US dollars.
Only faith from the East Asian central banks - or perhaps a continuation of the American economy's phenomenal productivity rates - may stand between the US and a currency fall, interest rate spike, investment slump, equity market fall and sub-standard economic growth.
Meanwhile, the Bush Administration continues to lobby China to appreciate its currency.
"The US better be careful about getting what it wished for," says Kalirai. Economic officials in Australia and across the world are practising their crash positions. "
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