Re: the Fed: comment from weblog

"sinister" <sinister@xxxxxxxxxxxxxx> wrote in message ...

> Kash: "By how much will China be able to ease off on its purchases of US
> securities? What will happen to US interest rates as a result?"
>
> Answer: NOTHING is going to happen to US interest rates if the Fed doesn't
> want any change to occur.

Perhaps it would have been better to ask: what will happen to US interest
rates, assuming the Fed wants to keep inflation low and constant?

We currently have a nice semi-equilibrium. Americans spend more than they
earn, with much of that spending going to Chinese goods. We can do that
because foreigners (esp. China) lend us money to buy their goods.

If the yuan appreciates significantly, then equilibrium can be maintained as
1)China lends less to the US, and 2)Americans buy less from China. The
question is: do we need higher interest rates to keep things balanced.
Perhpas so: if Americans continue their big spending habits while China no
longer lends to us, then the $ will depreciate and maybe raise inflation.

Dan in Philly


.

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