The interrelated issues of interest rates, the US Dollar, and US Government debt, and what the future might hold for them, seems to have gone mainstream. Thanks to all who have been submitting links. With the increase in coverage, it is probably no so relevant for it to be covered in as much depth here since there are people coming into the fray who are much more knowledgeable than I.
One of whom is William Buiter, Professor of European Political Economy at the LSE, who penned an interesting and comprehensive editorial at the Financial Times yesterday, Can the US economy afford a Keynesian stimulus?
There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place. The notion that the US Federal government will be able to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of “dark matter” or “American alpha” is not credible.
Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama’s advisers appear to realize [sic]. Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets. Keynesian cyclical policy options that would be open to more structurally sound economies should therefore not be tried on anything like the same scale by the US authorities.
There is some good analysis at Naked Capitalism.
While this blog will continue to track developments, it will also hopefully be delving into some new topics.