Earlier this month, when Edward wrote
The alarm shot was given by Dalls Federal Reserve President Robert McTeer when he declared in a speech in New York last week that whilst overseas investors now ?finance? the US current account gap, ?theoretically some day that process will come to an end, the flows will turn against us and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar.? This prospect, which currently seems remote, should not be taken lightly. It is real, and it is there.
I noted that this prospect had been around for a long time (close to ten years at least) and asked what would constitute a sign that this time might be different.
This could be it:
On Sept. 9, as it must frequently do, the U.S. government turned to Wall Street to raise a little cash, and Paul Calvetti bet that demand for $9 billion worth of long-term Treasury bonds would be “huge.”
But at 1 p.m., as the auction opened and the numbers began streaming across his flat-panel screens, the head of Treasury trading at Barclays Capital Inc. slumped in his chair. Foreign investors, who had been voraciously buying Treasury bonds, failed to show up. Bond prices cascaded downward, interest rates rose, and in five minutes, Calvetti, 38, who makes money by bidding on bonds at one price and hoping market demand lets him quickly resell them at a profit, had lost $1.5 million.
“It’s amazing,” he gasped, after the Treasury Department announced that Wall Street traders, not foreigners, had been left to buy virtually the entire auction. “I don’t think I’ve ever seen this before.”
Losing the favor of the bond market can be laid squarely at the foot of the present US administration. The move from surplus to record deficits in just three years, abandonment of fiscal discipline, a view that economics don’t matter in the face of politics, policy choices that mean deficits as far as the eye can see, refusal to be honest about the cost of those policies; all purely voluntary choices, and the price may have just arrived.
One thing that has protected the US against an earlier reversal is the perception that future US growth will be stronger than future European growth. In the face of massive fiscal irresponsibility, differing growth prospects may not matter as much to international investors. Rapid flight from Treasuries is not in anyone’s interest. That doesn’t mean it won’t happen.