6 ms·

The US is running up a huge deficit and lowering rates yet the dollar is getting stronger. It is kind of strange.

joeyrideout 7y ago
The ECB is negative and preparing to cut lower. BoJ is buying 90%+ of their own bond market. Emerging markets are blowing up routinely, most recently Argentina. Australia and Canada have their own issues. The U.S. isn't perfect but it's comparatively safe with a large military and reserve currency status with positive interest rates giving them room to react short term. (Edit: To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer.)
- nostromo 7y ago
  The crazy thing is that the US is pricing its treasuries between Greece and Italy. In other words, the US could pay much less for debt if it wanted to. https://tradingeconomics.com/bonds https://tradingeconomics.com/bonds No other developed country is paying anything near that amount. That is drawing a large inflow of capital into long-term treasuries, which in my view, is the true cause for the recent inversion.
  - adventured 7y ago
    There's no question it's a bizarre choice given the epic funding requirements of the US Government now and for the foreseeable future ($12t in new debt minimum over the next ten years). The Fed should be attempting to smash the cost of US Government debt to the floor so the treasury can issue 50 year paper at 1.x% while there may be a window to do so. It would be very unpopular with the wealthy and the private US financial system. I believe it's the sole reason they're not working aggressively to minimize what the US is paying for its debt vs other more risky nations. The Fed views the private financial system as a critical partner. To an extent by intentionally leaving borrowing costs higher than they have to be, they're performing a middle ground compromise with those partners vs the government's fiscal condition.
    - amluto 7y ago
      The Fed explicitly does not involve itself in fiscal policy like this. This is a good part of the reason that people trust US currency.
    - dragonwriter 7y ago
      > The Fed should be attempting to smash the cost of US Government debt to the floor We have an “indepedent” central bank with a limited set of policy concerns which do not include this type of thing specifically so that “fiscal” concerns [0] like this are not factors in setting monetary policy. [0] MMT correctly points out that the category is based on a fiction, but even MMT advocates (while they want Congress to consider monetary impacts of what has historically been considered fiscal policy instead of the fiscal myth) don't generally want the central bank doing the kinds of things that have been considered “fiscal”.
  - ccccppppp 7y ago
    Maybe they are afraid lower rates will inflate assets even more or cause another subprime bubble?
  - Gustomaximus 7y ago
    We need to consider this 'the US could pay much less for debt' line that is recently being pushed. This is appealing to simple thinkers as it's true on the surface. America pays less ..great. It suits Trump's short term planning agenda naturally. But it fails to recognise a key point. Central banks interest rates aren't priced to coumtries 'the best rates', of borrowing. They are about controlling monetary policy. Sure every country could drop interest rates to rock bottom. But what happens if inflation drops. Or a recession is looming? At a national level you need to look at higher interest rates as 'growth in the bank' for the future. And in the same way you should keep savings on hand, a govt should keep interest rate movement available for when times are worse. Further, central bank rates effect consumer rates. Not everyone is eyeballs deep in debt looking for cheaper lending. We have to acknowledge savers too. There was a time not so long ago where people put money into banks expecting to make a reasonable profit. It feels like savers are a forgotten group. It's not suitable for everyone to load their savings into the market and hope timing suits their withdrawal needs. This post-2008 era is going to be really interesting to study in another 20 years or so when it's played out.
- TMWNN 7y ago
  >To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer. In other words, this is 1997 as opposed to 2007-2008.
mdorazio 7y ago
Cynically, this means the rest of the world is doing that much worse that the US, for all its issues, is seen as a safe haven for parking your money. Alternatively, there's more capital floating around than there are reasonably safe investment vehicles with better ROI than US treasuries.
- Taniwha 7y ago
  I think the US continues to be buoyed by it's reserve currency status, if say oil started to be priced in euros the US might find itself with a currency like everyone else's and giant debts, the dollar would crash (which would be good for US exports)
  - mdorazio 7y ago
    The US gets a lot of flak for its high debt dollar amount, but realistically the more important metric is debt to GDP ratio, which is a decent indicator of a country's ability to sustain its debt. The US is somewhere around 105% currently, right around the same level as Belgium. For comparison, Japan is almost 250% - basically leveraged to its gills - but tends not to get the same level of bad press. The US should certainly be trying to lower that ratio, but we're still pretty far from Greece-level of crisis. In actuality, if the US's reserve currency status went away it might be a good thing for our debt since the dollar value on forex would drop and exports would increase. It would also be easier for the US to inflate its way out of crisis in comparison to today.
    - Taniwha 7y ago
      While it's not Japan its debt to GDP is still really really high compared with the rest of the world https://www.theinvestorspodcast.com/blog/visualizing-the-snowball-of-government-debt/ https://www.theinvestorspodcast.com/blog/visualizing-the-sno... (as I pointed out abive I agree that it would be good for exports)
AnimalMuppet 7y ago
The dollar is, essentially, losing in an ugly contest. It has problems; everyone else seems to have worse ones.
vkou 7y ago
The US government as a whole, if you combine Local, State, and Federal spending, is not running a huge deficit. It is, in fact, paying its debts down. You can quip about how sustainable this state of affairs is, but of the three, only federal debt is growing... And, if you look at inflation-adjusted metrics, that growth is very minor.
- PKop 7y ago
  With near record low interest rates, after a decade long economic growth cycle, we are back to running $ trillion and growing deficits each year, at the peak of the cycle. In a few years, assuming current rates and no recession, interest on the debt will exceed military spending [0]. Imagine what happens when we do have a recession and much bigger deficits. Mandatory spending items will at some point soon crowd out all other spending. This comes at a time when, over the last 4 or 5 years, foreign creditors have stopped financing our deficit by buying ever growing quantities of US treasuries. So, for the first time in decades, US domestic private sector will be tasked with financing their own spending. It is about to matter very soon, as baby boomers retire en masse. The endless talk of government spending leading to inflation didn't manifest (except in asset prices) because foreigners recycled their surpluses into treasuries. That this has mostly stopped will change the dynamic. The Fed will need to monetize the debt (resume QE) because there is simply too much treasury issuance, and growing, to be funded by US domestic sector alone, either in taxes or buying bonds. If you look up last couple years US debt issuance has been bought up mostly by private sector, while central banks are buying gold. Recipe for it being the bond bull market peak and that debt being paid back in nominal but lower real terms = inflation. The only way to retire the massive and growing federal debt. Call it MMT or whatever you want, but it's coming. The loser will be the $. [0] https://nationalinterest.org/blog/buzz/2025-us-interest-payments-national-debt-will-pass-defense-budget-60987 https://nationalinterest.org/blog/buzz/2025-us-interest-paym...
  - ianai 7y ago
    MMT disagrees with the entire premise of your comment. The “why is this happening” podcast has an excellent explanation.
dthakur 7y ago
Good read https://www.cassandracapital.net/post/why-did-china-just-devalue-the-yuan https://www.cassandracapital.net/post/why-did-china-just-dev...

The ECB is negative and preparing to cut lower. BoJ is buying 90%+ of their own bond market. Emerging markets are blowing up routinely, most recently Argentina. Australia and Canada have their own issues. The U.S. isn't perfect but it's comparatively safe with a large military and reserve currency status with positive interest rates giving them room to react short term. (Edit: To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer.)

nostromo 7y ago
The crazy thing is that the US is pricing its treasuries between Greece and Italy. In other words, the US could pay much less for debt if it wanted to. https://tradingeconomics.com/bonds https://tradingeconomics.com/bonds No other developed country is paying anything near that amount. That is drawing a large inflow of capital into long-term treasuries, which in my view, is the true cause for the recent inversion.
- adventured 7y ago
  There's no question it's a bizarre choice given the epic funding requirements of the US Government now and for the foreseeable future ($12t in new debt minimum over the next ten years). The Fed should be attempting to smash the cost of US Government debt to the floor so the treasury can issue 50 year paper at 1.x% while there may be a window to do so. It would be very unpopular with the wealthy and the private US financial system. I believe it's the sole reason they're not working aggressively to minimize what the US is paying for its debt vs other more risky nations. The Fed views the private financial system as a critical partner. To an extent by intentionally leaving borrowing costs higher than they have to be, they're performing a middle ground compromise with those partners vs the government's fiscal condition.
  - amluto 7y ago
    The Fed explicitly does not involve itself in fiscal policy like this. This is a good part of the reason that people trust US currency.
  - dragonwriter 7y ago
    > The Fed should be attempting to smash the cost of US Government debt to the floor We have an “indepedent” central bank with a limited set of policy concerns which do not include this type of thing specifically so that “fiscal” concerns [0] like this are not factors in setting monetary policy. [0] MMT correctly points out that the category is based on a fiction, but even MMT advocates (while they want Congress to consider monetary impacts of what has historically been considered fiscal policy instead of the fiscal myth) don't generally want the central bank doing the kinds of things that have been considered “fiscal”.
- ccccppppp 7y ago
  Maybe they are afraid lower rates will inflate assets even more or cause another subprime bubble?
- Gustomaximus 7y ago
  We need to consider this 'the US could pay much less for debt' line that is recently being pushed. This is appealing to simple thinkers as it's true on the surface. America pays less ..great. It suits Trump's short term planning agenda naturally. But it fails to recognise a key point. Central banks interest rates aren't priced to coumtries 'the best rates', of borrowing. They are about controlling monetary policy. Sure every country could drop interest rates to rock bottom. But what happens if inflation drops. Or a recession is looming? At a national level you need to look at higher interest rates as 'growth in the bank' for the future. And in the same way you should keep savings on hand, a govt should keep interest rate movement available for when times are worse. Further, central bank rates effect consumer rates. Not everyone is eyeballs deep in debt looking for cheaper lending. We have to acknowledge savers too. There was a time not so long ago where people put money into banks expecting to make a reasonable profit. It feels like savers are a forgotten group. It's not suitable for everyone to load their savings into the market and hope timing suits their withdrawal needs. This post-2008 era is going to be really interesting to study in another 20 years or so when it's played out.
TMWNN 7y ago
>To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer. In other words, this is 1997 as opposed to 2007-2008.

mdorazio 7y ago

Cynically, this means the rest of the world is doing that much worse that the US, for all its issues, is seen as a safe haven for parking your money. Alternatively, there's more capital floating around than there are reasonably safe investment vehicles with better ROI than US treasuries.

Taniwha 7y ago
I think the US continues to be buoyed by it's reserve currency status, if say oil started to be priced in euros the US might find itself with a currency like everyone else's and giant debts, the dollar would crash (which would be good for US exports)
- mdorazio 7y ago
  The US gets a lot of flak for its high debt dollar amount, but realistically the more important metric is debt to GDP ratio, which is a decent indicator of a country's ability to sustain its debt. The US is somewhere around 105% currently, right around the same level as Belgium. For comparison, Japan is almost 250% - basically leveraged to its gills - but tends not to get the same level of bad press. The US should certainly be trying to lower that ratio, but we're still pretty far from Greece-level of crisis. In actuality, if the US's reserve currency status went away it might be a good thing for our debt since the dollar value on forex would drop and exports would increase. It would also be easier for the US to inflate its way out of crisis in comparison to today.
  - Taniwha 7y ago
    While it's not Japan its debt to GDP is still really really high compared with the rest of the world https://www.theinvestorspodcast.com/blog/visualizing-the-snowball-of-government-debt/ https://www.theinvestorspodcast.com/blog/visualizing-the-sno... (as I pointed out abive I agree that it would be good for exports)

AnimalMuppet 7y ago

The dollar is, essentially, losing in an ugly contest. It has problems; everyone else seems to have worse ones.

vkou 7y ago

The US government as a whole, if you combine Local, State, and Federal spending, is not running a huge deficit. It is, in fact, paying its debts down. You can quip about how sustainable this state of affairs is, but of the three, only federal debt is growing... And, if you look at inflation-adjusted metrics, that growth is very minor.

PKop 7y ago
With near record low interest rates, after a decade long economic growth cycle, we are back to running $ trillion and growing deficits each year, at the peak of the cycle. In a few years, assuming current rates and no recession, interest on the debt will exceed military spending [0]. Imagine what happens when we do have a recession and much bigger deficits. Mandatory spending items will at some point soon crowd out all other spending. This comes at a time when, over the last 4 or 5 years, foreign creditors have stopped financing our deficit by buying ever growing quantities of US treasuries. So, for the first time in decades, US domestic private sector will be tasked with financing their own spending. It is about to matter very soon, as baby boomers retire en masse. The endless talk of government spending leading to inflation didn't manifest (except in asset prices) because foreigners recycled their surpluses into treasuries. That this has mostly stopped will change the dynamic. The Fed will need to monetize the debt (resume QE) because there is simply too much treasury issuance, and growing, to be funded by US domestic sector alone, either in taxes or buying bonds. If you look up last couple years US debt issuance has been bought up mostly by private sector, while central banks are buying gold. Recipe for it being the bond bull market peak and that debt being paid back in nominal but lower real terms = inflation. The only way to retire the massive and growing federal debt. Call it MMT or whatever you want, but it's coming. The loser will be the $. [0] https://nationalinterest.org/blog/buzz/2025-us-interest-payments-national-debt-will-pass-defense-budget-60987 https://nationalinterest.org/blog/buzz/2025-us-interest-paym...
- ianai 7y ago
  MMT disagrees with the entire premise of your comment. The “why is this happening” podcast has an excellent explanation.

dthakur 7y ago

Good read https://www.cassandracapital.net/post/why-did-china-just-devalue-the-yuan https://www.cassandracapital.net/post/why-did-china-just-dev...