The daily newspapers display events as string of beads. Discrete, unrelated. That masks the key to understanding what is happening: the systemic drivers at work. This is in my opinion not a series of isolated events or even a cyclical downturn. We are experiencing a change in the fundamental structure of the global economic regime.
You might find this series of articles of value to properly “frame” these events, listed from old to recent. Please share your comments (brief and relevant, please), or email me at (spam-protected spelling) fabmaximus at hotmail dot com.
A brief note on the US Dollar. Is this like August 1914? — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, Chapter II — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Power shifts from West to East: the end of the post-WWII regime in the news — We are seeing another western industry ceding dominance to eastern competitors, one more step in a larger process.
Death of the post-WWII geopolitical regime, III — death by debt — Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
A recommendation to read these bulletins from the front! — A brief note on today’s articles in the NY Times and Financial Times, with Brad Setser’s explanation of why they are important.
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It’s interesting that with the US fed rate continuing to drop, and drop some more, that the US is still able to attract without much apparent diffculty forgien investment to carry this debt. Lower rates means a low rate of return for forgien investors, and yet although the US currency value has dropped reletive to others, it still remains apparently an attractive and stable enough investment.
How much lower ? And how much longer ? Is the trillion dollar question,,? How long before the Fed runs out of capacity in dropping rates as a stimulus to the laging economy, how long before foreign investors look at the rate of return, and wiegh the risk, then deciede to go elsewhere ?
Bad news, Max. Despite what we read in the newspapers, it has been several years since the US attracted sufficient foreign investment in the sense you describe. We borrow to a large extent from foreign central banks, most of which are of Asian and oil-exporting nations. They are not buying t-bills at 2% for the wonderful return. Nor are they buying it for the safe return of principal, as they know they will eventually suffer large foreign exchange losses.
They buy for merchantilist reasons. They are, in effect, financing our purchase of their exports and obtaining political leverage. Current leverage, as with the oil exporters. Future leverage, as with China. As we all know, in general creditors rule debtors. Eventually.
So we can restate Max’s question — which is one of the major ones in today’s geopolitical world. When will private investors bail (aka “currency flight”)? Or, when will the political leadership in Asian and oil exporters begin “de-pegging” their currencies from the US Dollar — which will reduce their buying of US dollar assets? Nobody knows.
Currency flight by private (as opposed to State) investors is a “herd” event, and hence can start quickly and accellerate rapidly. Central banks are the opposite hind of animal. They are reactive, incrementalist, slow to decide, and slower to act. The common doomster analysis of some official in China deciding to hit the “red button” on his desk that sells all their US bonds — destroying the world financial system — is unlikely.