I think foreign capital flows are not predominate in the Fed's mind.>
If that is the case, and I don't think it is, would be a huge mistake, as they have these balls to juggle, and will take more than world class call girls to pull more hat tricks. There is no way increasing coupon passes from currently $38 billion YOY (a 4.8% increase rate)to say $75 billion, can cure this. Their only option is to try and sneak a little extra in once in awhile.
Brad Setser: To sustain [a] soft landing equilibrium, a few things have to happen.
* First, those foreign investors who now hold the $13.9 trillion in claims on the US have to be willing to hold onto those claims. That includes central banks and oil investment funds that now presumably hold well over $3 trillion in claims on the US – personally, I think the actual number might be closer to $3.5 trillion, counting all the Gulf investment funds.
* Second, American investors have to be willing to continue to keep the vast majority of their wealth in the US, and in dollars. That cannot increase their $10.7 trillion or so of (estimated) external assets. If Americans want to add to its investments abroad, the financing the US needs from the rest of the world goes up.
* Third, a combination of foreign central banks and private investors abroad has to be willing to add $1 trillion a year, give or take, to their holdings of US assets. And they need to be willing to do so for nominal rates of around 5%, no matter what happens to the dollar. |
