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Why would rates go higher? The Eurozone has lower rates than the US. Heck, Australia and New Zealand (not exactly global reserve currencies) have the same rates

Why would rates go higher? The Eurozone has lower rates than the US. Heck, Australia and New Zealand (not exactly global reserve currencies) have the same rates as the US. The only way that the dollars international status would meaningfully affect USG’s ability to borrow is if it was relegated to emerging markets status. All developed market currencies can borrow at sub-2% rates. That doesn’t require you to have reserve currency status.

twelve40 6y ago
Great question, I'm just reading the article and noticed he's so convinced that the rates will go up in this case, that he used the words "almost certainly". Maybe a deeper look at his works can explain his conviction.
fennecfoxen 6y ago
Borrowing is subject to supply and demand. If people are buying substitutes for dollar-denominated debt, they're not buying dollar-denominated debt, or they're buying less of it. The price paid for the bond goes down, so the rate goes up. Yes, there's a Federal Reserve too, and they can bid up the price of bonds and buy as many as they want, but it's functionally equivalent to printing money, so it becomes a question of how badly they overshoot their inflation target, and that influences demand as well.
- dcolkitt 6y ago
  Central banks FX reserves make up only a sliver of the demand for long bonds (5+ years of maturity). Long bonds are generally not considered money substitutes, so FX reserves have no interest in holding them. Foreign central banks may hold a sizable proportion of short bonds, particularly 3-month T-Bills. But there’s essentially an infinite wall of demand for short bonds at the near zero bound. So maybe loss of reserve status increases borrowing costs from 0.02% to 0.15%. Not exactly a catastrophe for the budget deficit. This is why reserve status is essentially irrelevant to borrowing costs. All developed market governments, regardless of their currency’s reserve status, can borrow cheap in today’s regime.
  - fennecfoxen 6y ago
    > Central banks FX reserves make up only a sliver of the demand for long bonds (5+ years of maturity). The average Treasury bond duration is about 60 months, and falling, so that's still half the bonds we're talking about (and rising).
- dkjaudyeqooe 6y ago
  If demand for USD denominated debt drops that puts downward pressure on the USD. That can be good and bad for the economy, but it can cause all imports to go up, essentially importing inflation into the US economy. If that's a problem then the Fed can raise interest rates (or just stand by while they go up), but it can also make the USD it has on its balance sheet disappear, which is deflationary. Quantitative tightening is also a thing. You've got to keep in mind that the people who are buying or holding these bonds are the ones who will get burned, so they're not going to suddenly dump their USD holdings at great expense. The Chinese I'm sure would love to strike at the USD but they're holding trillions of it, so they would mostly be hurting themselves. So if it happens it will be relatively gradual and the Fed and the market will do its thing.
  - fennecfoxen 6y ago
    > If that's a problem then the Fed can raise interest rates (or just stand by while they go up), but it can also make the USD it has on its balance sheet disappear Those are the same thing. The Fed shrinks the money supply by inducing someone to surrender dollars in exchange for debt. This means there is increased supply, and the price of the debt goes down (i.e. the rate goes up).

twelve40 6y ago

Great question, I'm just reading the article and noticed he's so convinced that the rates will go up in this case, that he used the words "almost certainly". Maybe a deeper look at his works can explain his conviction.

fennecfoxen 6y ago

Borrowing is subject to supply and demand. If people are buying substitutes for dollar-denominated debt, they're not buying dollar-denominated debt, or they're buying less of it. The price paid for the bond goes down, so the rate goes up. Yes, there's a Federal Reserve too, and they can bid up the price of bonds and buy as many as they want, but it's functionally equivalent to printing money, so it becomes a question of how badly they overshoot their inflation target, and that influences demand as well.

dcolkitt 6y ago
Central banks FX reserves make up only a sliver of the demand for long bonds (5+ years of maturity). Long bonds are generally not considered money substitutes, so FX reserves have no interest in holding them. Foreign central banks may hold a sizable proportion of short bonds, particularly 3-month T-Bills. But there’s essentially an infinite wall of demand for short bonds at the near zero bound. So maybe loss of reserve status increases borrowing costs from 0.02% to 0.15%. Not exactly a catastrophe for the budget deficit. This is why reserve status is essentially irrelevant to borrowing costs. All developed market governments, regardless of their currency’s reserve status, can borrow cheap in today’s regime.
- fennecfoxen 6y ago
  > Central banks FX reserves make up only a sliver of the demand for long bonds (5+ years of maturity). The average Treasury bond duration is about 60 months, and falling, so that's still half the bonds we're talking about (and rising).
dkjaudyeqooe 6y ago
If demand for USD denominated debt drops that puts downward pressure on the USD. That can be good and bad for the economy, but it can cause all imports to go up, essentially importing inflation into the US economy. If that's a problem then the Fed can raise interest rates (or just stand by while they go up), but it can also make the USD it has on its balance sheet disappear, which is deflationary. Quantitative tightening is also a thing. You've got to keep in mind that the people who are buying or holding these bonds are the ones who will get burned, so they're not going to suddenly dump their USD holdings at great expense. The Chinese I'm sure would love to strike at the USD but they're holding trillions of it, so they would mostly be hurting themselves. So if it happens it will be relatively gradual and the Fed and the market will do its thing.
- fennecfoxen 6y ago
  > If that's a problem then the Fed can raise interest rates (or just stand by while they go up), but it can also make the USD it has on its balance sheet disappear Those are the same thing. The Fed shrinks the money supply by inducing someone to surrender dollars in exchange for debt. This means there is increased supply, and the price of the debt goes down (i.e. the rate goes up).