LEX Policymakers in Washington may be missing the forest for the trees as they debate a record stimulus package. How the trillions of dollars are spent in coming years is no trivial point, but they are blithely extrapolating the past at a time of wrenching change if they fail to consider what price America’s creditors will charge for their precious capital. Unlike the days of Alan Greenspan’s “conundrum”, the once seemingly bottomless well of global savings could run dry for the world’s largest debtor as flows of funds reverse.
The flight to safety that recently sent US Treasury note yields to a 55-year low gives a false impression that there is perpetually excess demand for such “risk-free” bonds, assuaging concerns about a projected record $1,300bn budget deficit. Unlike Japan’s slump in the 1990s when it could count on domestic savers, America is over-reliant on the kindness of strangers. Asian exporters that hold the lion’s share of Treasury and agency debt suddenly have fewer dollars to recycle and face slumping economies of their own. Ditto for oil exporters who have far fewer petrodollars at $40 a barrel and unexpected budget gaps to fill.
