Economist's View: International Capital Flows and U.S. Interest Rates

リンク: Economist's View: International Capital Flows and U.S. Interest Rates.

What affect, if any, do international capital flows have on long-term interest rates within the U.S.?:

International Capital Flows Alter U.S. Interest Rates, by Les Picker, NBER Digest: There is a burgeoning literature on the impact of international capital flows on emerging market economies. ... In contrast, much less is known about the impact of capital flows on the larger economies of the world. ...[U]ntil recently, many market participants held the view that capital flows could not possibly affect interest rates in the United States.

In International Capital Flows and U.S. Interest Rates (NBER Working Paper No. 12560), authors Francis Warnock and Veronica Warnock ... ascertain the extent to which foreign flows into U.S. government bond markets can help to explain movements in long-term Treasury yields.

The authors address this issue at an important time. ... Over the course of 2004, the Federal Reserve began a well advertised tightening that raised short rates while economic growth strengthened and inflation picked up. Many market observers predicted an increase in long-term U.S. interest rates that would result in substantial losses on bond positions. However, long-term interest rates remained quite low, puzzling market participants, financial economists, and policymakers.

The authors find that foreign flows have an economically large and statistically significant impact on long-term U.S. interest rates. Their work also suggests that large foreign purchases of U.S. government bonds have contributed importantly to the low levels of U.S. interest rates observed over the past few years. In the hypothetical case of zero foreign accumulation of U.S. government bonds over the course of an entire year, long rates would be almost 100 basis points higher. Were foreigners to reverse their flows and sell U.S. bonds in similar magnitudes, the estimated impact would be doubled. Further analysis indicates that roughly two-thirds of the impact comes directly from East Asian sources. In addition, some of the foreign flows owe to the recycling of petrodollars, suggesting a mitigating factor that might be reducing some of the bite of higher oil prices. ...

Posted by Mark Thoma on October 27, 2006 at 12:09 AM in Economics, International Finance | Permalink

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Comments

EV: "In contrast, much less is known about the impact of capital flows on the larger economies of the world. ..."

Not really. All you have to understand is that the dollar is a reserve currency and that trading nations are willing to keep the dollars that they earn. For as long as they keep dollars, and re-lend them, interest rates are lower (than otherwise).

The day that they decide that the dollar is no longer worth keeping, they will dump them. They will sell it to whomever is willing to buy them, meaning that the dollar will depreciate. This simply provokes even further dollar dumping. As you increase the aggregate supply of money, which is losing value, then banks must also increase its yield in order to compensate.

In the wake of this dollar tsunami, interest rates could very well skyrocket.

Note also that, in order to spread the risk, more and more countries are dispersing their reserve currencies by adding Euros and ... the Chinese Yuan. The US has had a "reserve currency" advantage since WW2, which is constantly being eroded.

Is the moment arriving when the piper must be paid? Or, will Americans continue to believe the idiocy uttered by thier VP, that "Deficits don't matter. Nixon proved that."

Posted by: Lafayette | Oct 27, 2006 2:22:48 AM

Foreign capital flows are important.

What about the impact of the intragovernment debt, about 43% of the total US federal debt?

If the US government were not collecting far more in fees and Social Security employment taxes than was going out what would interests rates be?

What would aggregate demand be? I the the working guy kept a third of what is now taxed in SS?

The touted $315B deficit in 2005 was merely the need for more privately held debt and does not reflect the increase in intragovernment debt which financed about $216B of the cash shortfall from the receipt of income taxes.

Posted by: ilsm | Oct 27, 2006 3:44:45 AM