Tuesday Primary Twittering
links for 2010-05-18

Exorbitant Privilege Rocket Jetpack or Wile E. Coyote Moment?

What explains the continued extraordinary high prices of U.S. Treasury securities given a massively disfunctional U.S. political system and Republican Party?

Is global demand for dollar assets in a safe haven the equivalent of a rocket jetpack for the U.S. economy, or are we waiting for a Wile E. Coyote moment?


Stacy-Marie Ishmael writes:

FT Alphaville » The Treasury non-conundrum, or why yields are trading below 3.6%: SocGen economist Aneta Markowska affects bemusement at the benign bond yield environment in the US....

Sovereign debt concerns have rocked many economies in recent months. Fundamentally, countries with large twin deficits are most vulnerable because they have to rely heavily on foreign investors to finance their government budget gaps. Based on these criteria, the US is right up there with the most vulnerable economies. So why are Treasury yields trading below 3.6 per cent?... 1 – Inflation trends remain very low. Core CPI was flat in Q1 and the y/y trend now looks set to dip below 1%. 2 – Fed has been very slow to embrace the cyclical recovery and shift to a more neutral policy stance. The “extended” language is a green light for bond investors to remain in carry trades. 3 – Treasuries and the dollar have benefited from safe haven flows....

But there may be a real conondrum elsewhere, in “the fact that the unsustainable fiscal outlook is not triggering higher risk premiums.”... [T]herein lies the major difference between the peripheral European countries and the US — the US simply has more time to address its fiscal problems... "partly an outcome of greater credibility of US policy, but even more importantly it is a function of US growth dynamics. The latter is a key differentiating factor between the US and peripheral Europe.... The US is achieving some degree of fiscal consolidation via growth, rather than via painful austerity as is the case in the European periphery. While cyclical forces are likely to push bond yields higher, they will be going up for the “right reasons”, and at a pace that is unlikely to derail the recovery."

Can you say "exorbitant privilege?" I think you can.