Re: drop in demand for US bonds

From: polar bear (bear_at_pole.com)
Date: 09/13/04 

Date: Mon, 13 Sep 2004 04:11:06 -0700

In article <4144A70F.688A@mindspring.com>, Ron Hardin
<rhhardin@mindspring.com> wrote:

> polar bear wrote:
> > They can use the dollars to buy oil, iron ore, aluminum, nickel,
> > copper, manganese, soybeans, jelly beans, whatever seems most important
> > to them at the time.
>
> They can buy from the US, and get out of dollars. But if it's not from the
> US, they just shift the problem to the guy they gave the dollars to. The number
> of dollars _somebody_ has to ``get out of'' does not decline until they're used
> for a purchase from the US.

True enough, but if foreign buyers shift their preference from US paper
assets towards commodities, they are now competing with US
producers/consumers for those commodities. The effect is a rise in
producer prices, which gets passed along as higher consumer prices or
lower corporate profits (mutual funds, pension funds etc), concurrent
with a rise in interest rates caused by the drop in demand for paper
assets. And that's bad. M'kay?

> Only then does it compete with the domestic money supply, which is what
> constrains
> the Fed from printing more to replace it. The Fed targets the proper domestic
> money supply, not any particular number of dollars existing.

I'm not sure this has any bearing on the effects of a drop in demand
for US bonds. Frankly, I'm not even sure the fed CAN control money
supply at this late stage of the game. There's a lot of entities
issuing credit outside the banking system these days.

pb

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