Let's consider:
- The adjective that best describes the US banking system is 'insolvent'.
- The government balance is horrible, and is about to become unspeakably horrible.
- The current account deficit is not quite as horrible as it once was, but it is still outside any normal country's comfort zone.
So why would anyone seeking a safe port in a storm be dumping other assets in order to buy US Treasuries?
The really scary answer is that investors fear everyone else is in worse shape.
Certainly the Eurozone is in worse shape because its banks are overleveraged (even by US standards), too big to be bailed out by their host national governments, and there is as of yet no prospect of a coordinated response by Eurozone governments.
Posted by: Curmudgeon | October 11, 2008 at 04:58 AM
That sounds right, but my thinking was more along the lines that up until fairly recently, our #1 fear was a catastrophic unwinding of the US current account deficit, where US Treasuries would be the very last thing you'd want to hold.
Posted by: Stephen Gordon | October 11, 2008 at 08:39 AM
There aren't enough Canadian treasuries so they just buy from the country next door. ;)
Posted by: DR | October 11, 2008 at 08:53 AM
The Gaurdian
"The one anomaly is that the dollar has strengthened in recent weeks. With the US no longer viewed as a supplier of high-quality financial assets, one would expect the dollar to have weakened. The dollar's strength reflects the knee-jerk reaction of investors rushing into US treasuries as a safe haven. It is worth remembering that the same thing happened in August 2007, when the subprime crisis erupted. But once investors realised the extent of US financial problems, the rush into treasuries subsided, and the dollar resumed its decline. Now, as investors recall the extent of US financial problems, we will again see the dollar resume its decline."
Posted by: thwap | October 11, 2008 at 07:31 PM
the dollar hasn't strengthened....the loon(ie) has weakened...
the chinese and japanese currencies continue to increase in value(vs the dollar)
everything is relative...as usual..
Posted by: em butler | October 12, 2008 at 11:17 AM
Heh. Five years of publicly-funded research to reach the same conclusions you'd reach after spending an afternoon reading Brad Setser's blog. Well played!
Any tips on how to get on that particular gravy train?
Posted by: Stephen Gordon | October 12, 2008 at 08:02 PM
The US is at least two years further into the housing crisis than any other industrialised country. I still hear and read comments like "Canada does not have a mortgage crisis", "Canada didn't go house crazy like the US" etc... Just wait until the rest of the World's real estate crashes as hard or harder than the US, then tell me where safety lies.
Posted by: Tony Danza | October 13, 2008 at 03:14 PM