Re: drop in demand for US bonds

From: Ron Hardin (rhhardin_at_mindspring.com)
Date: 09/13/04 

Date: Mon, 13 Sep 2004 14:13:18 GMT

polar bear wrote:
> > 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?

The foreign buyers aren't buying anything. They have a dollar problem.
If they want something, they can spend dollars in the US, or they can
shift the problem to another foreigner.

A sudden hoarding of gold is fairly uneconomical for anybody, and as a hedge
against what? Money is not wealth, especially if you're a government.
The country's wealth is in its productivity, and the money supply is a way
of making people take turns in saying what the economy should do next. A hoard
of gold is no good at all. The economy does not become capable of producing more.

Interest rates don't particularly matter so much as that they don't change.
Changing rates picks random winners and losers, which is not good for the
economy, and in fact the winners don't particularly want to be winners. They're
in some other business entirely and would prefer the terms of contracts stayed
where they negotiated them.

About 2 year term interest rates will match inflation on the average - too long to
control, but too short to get out of line very far. They're neither high nor
low, but about real zero. 

-- 
Ron Hardin
rhhardin@mindspring.com
On the internet, nobody knows you're a jerk.