In a post that relates to Kash’s Monday post on the current accounts deficit, Karsten, a European blogger who follows finance, explains why massive US deficits haven’t lead to soaring interest rates:
As we all know that no saving of note takes place in the US we could assume that most of last years government deficit was financed by foreigners. This assumption is correct – those shifty little foreigners (some of whom even speak foreign languages) bought almost all of the new paper issued by the US Treasury last year. The marketable debt held by the public … increased by around 325$bn last year. Foreigners bought around 290$bn of that (and most of that was snapped up by foreign central banks)!
… A look into the future can be pretty scary: the huge current account deficit means that foreign countries are selling lots of shiny doodads to US consumers and earning dollars from those sales.
If foreigners keep financing the US deficit with those dollars, then interest rates will stay down; likewise, if foreigners buy more US goods then that will be a good thing as well. But what if they simply decide to start selling those dollars (e.g., in anticipation of inflation)? Read the rest of the story. (More generally, if you like finance and investing, you should probably be reading Karsten’s CurryBlog more often.)