Edited by pdx5, 30 December 2006 - 02:37 AM.
Fed can NOT print
Posted 30 December 2006 - 02:35 AM
Posted 30 December 2006 - 03:24 AM
A drop in interest rates paid out on Treasury obligations
would also put a crimp in foreigners buying them.
drop in interest rate means demand for money (credit) is falling. It means there are too many lenders, but too few borrowers - quite opposite of what you said. Think about it.
Central banks of foreign goverments are political elements, not businesses. They will not care much about losing/gaining money, as long as their political needs are satisfied. If you do not believe me, check when British central bank sold their gold - right at the bottom.
If this scenario became a reality, the government will be forced to curb spending
UNDER THE CURRENT LAWS. But laws can be changed <sigh>.
Government will not curb spending due to any economic limit. US government's finances are in good condition and they can borrow lot more than what they have done without major financial damage. IF you hear reports from MSM, you will tend to think completely the opposite - 'US has too much debt and dollar is about to collapse' - total nonsense.
However, government will curb spending due to political pressure, because MSM convinced everyone that our budget deficits are precarious.
The place where I see real trouble is in the budgets of states and local governments. California, for example, is on the verge of bankruptcy, but nobody knows about it. It was going bankrupt in 2003, but got rescued by the tax money from housing bubble. People in Sacramento did NOTHING to help the budget.
It's the illiquidity, stupid !
Posted 30 December 2006 - 04:15 PM
Above is true in strictly business sense, but as you already pointed out, the govt is a political
animal. It will drop rates to stimulate the economy even though the actual business conditions
do not justify it, such as existing inflation rates. And if rates are dropped on Treasury instruments
to satisfy domestic political need, then foreign countries with excess dollars could shop elsewhere
for better returns. It's not just the foreign govt's who buy treasuries. There are Billions of US treasuries
bought by foreign individuals and businesses.