America's interest rates puzzle world economy

[dArKeR]

A great puzzle in today's world economy is the continued low level of long-term real interest rates in the US. Conventional macroeconomists like me look at America's current-account deficit, now running at 7 percent of GDP, and know that such vast deficits are inevitably followed by large currency depreciations. So we expect a substantial depreciation premium on US interest rates.

If the dollar falls 20 percent more against the euro sometime in the next 10 years, US long-term interest rates should be two percentage points higher than euro rates. If it falls 40 percent against the yen sometime in the next 10 years, US long-term interest rates should be four percentage points higher than Japanese rates. If it falls 60 percent against China's currency, the yuan, sometime in the next 10 years, US long-term interest rates should be six percentage points higher than Chinese rates. But we are not seeing signs of anything like this.

http://www.taipeitimes.com/News/edit/archives/2005/04/25/2003251938

[enid602]

1. interest rates

I think the administration is using dollar diplomacy to try to keep these rates down; sending Condi around the world to encourage central banks to continue investing in dollars. Persuading our trading partners that it is in their interests to keep the dollar afloat and to keep US Treasury rates down. This is just a quick fix. Look for higher rates soon, which will affect borrowing here in the States.

Traditionally, the US has enjoyed lower than normal rates on its debt because the dollar has been the de-facto exchange currency since Bretton Woods. Also, the wealthy from around the developing world have tended to invest in US securities (no matter how low the rate), as their home governments frequently printed too much money, issued currency controls and in some cases, expropriated bank accounts. 40% devaluation of the dollar (vis-a-vis most other hard currencies) over the last 20 months, combined with expected future erosion of the dollar might well reverse this trend.

Most of the central banks of developed countries have already begun diversifying out of dollar investments; the Chinese are now considering it. Many developing countries' central banks have diversified as well, as their dollar debts become much easier to pay if they keep reserves in currencies which are appreciating relative to the dollar.

The biggest problem right now is the flood of dollars on the world market formerly held by wealthy individuals and foreign central banks. We're in unchartered waters, as the world has never experienced these phenomena happening to its currency of exchange. Should be interesting to see what happens.

[fasttense]

2. After reading the reviews of the ENRON movie

I get the feeling that brush and company are playing the same kind of game with this country's economic system. They are faking the books (the economic indicators) as much as they can and using political pressure to hide their scams. The problem is it destroyed ENRON and I'm afraid it's also going to destroy the United States.

[Strelnikov_]

3. When Did Current Accounts Hit 7% Of GDP

Last time I looked it was around 6%.

At what point, thanks to the 'miracle' of compound interest, do we owe more than we produce.

[Wright Patman]

4. How much of this "offshore" money

is counterfeit. This story linked below did not get much play for some reason. This attempt at a $3 trillion counterfeit was foiled, but how many are successful and, thus, never reported? This sort of operation is bound to influence the money supply at the margin.

http://www.whatdoesitmean.com/index725.htm

Speaking of Enron, I have always sort of expected the Fed and Treasury to launch a bogus "monetization of the debt" scheme through its controlled offshore banks in the Caymans and elsewhere. If you run out of political partners with which to play the game, you just have manufacture your own.