“Give me your tired, your poor, your huddled masses,” runs the poem on the Statue of Liberty. It should read, “Give us your money too.” So far, foreign investors have done just that. In October they bought $286bn of US Treasury bills and cash. Their flight to safety after Lehman Brothers’ collapse is largely why the trade-weighted dollar has risen so far, so fast: by 15 per cent since mid-July. But, as US interest rates drop to a target range of 0 to 0.25 per cent, and inflation risk increases, it is also why the dip in the dollar that began last week could accelerate.
The US is moving from a liquidity trap to a liquidity flood. Monetary policy is almost as loose as it can be. Fiscal spending is on the rise; next year, net US Treasury issuance is expected to rise by $2,000bn. Investors seem unconcerned, so far. Their need for a “risk free” investment has trumped other concerns, such as returns. Ten-year bond yields have plummeted below 2.4 per cent. Last week, Treasury bill yields even turned negative. The only reason anyone would chose to lose money is because they have to – due to index rules, fiduciary obligations, or to keep their jobs. But such forced buying is also a sign of a bubble.
