A Way to Keep People Buying Treasuries

There is a race to the bottom on currency values. The lower your currency goes in relation to other currencies, the better off you are exporting as your goods are cheaper. Yet, here is a reason why the U.S. may not be in a position to devalue and may, instead, have an incentive to go the opposite direction slowly but surely. This seems the wrong thing to do, right? Well, if we want anyone to buy Treasuries, probably not. Eventually fear will not cause a flight to Treasuries. Indeed, fear may at some point drive a flight in the opposite direction.

So you need something to keep people buying Treasuries. Well, the rates certainly are not going to do it at the moment. Recently some people were essentially paying the U.S. government to hold their money for them and that is not going to last for long. When people start deciding there are better places for their money - which they are already in the process of doing - then they will need an incentive for buying Treasuries.

Foreigners, especially, are not going to buy Treasuries at very low rates when the dollar is devaluing, as that is a losing proposition. But if the dollar is rising gradually in value against their currency, then a Treasury investment, even at low interest rates, is providing growth through currency exchange rates. And since the U.S. desperately needs to sell Treasuries for years to come, this might be the tool of the day for them to do it, and perhaps the only way.

Comments

[Kunst:]

A rising dollar makes our out-of-control debt that much harder to service, let alone pay back.

Foreigners can't force up interest rates because the Fed can buy treasuries instead. Maybe we'll just buy out China, Japan, and the rest with nice new electronic dollars.

Jan 10 11:20 PM

[John Lounsbury:]

Craig - - -

How do you propose the U.S. (Treasury or Fed) can force the value of the dollar to go anywhere? It is great to say that a gradually rising dollar would be a good thing, but I don't know what policy can assure that, particularly when the big battle of the moment is to stop deflation. Yes, the value of the dollar can rise in systemic deflation, but is that where you think we are going?

Some times when I can't figure something out it's because I'm just ignorant about something. Other times it is a case of no one (or maybe just a few very bright ones) figuring it out. Which is the case here?

Jan 10 11:23 PM

[Steven Hansen:]

We are all talking here like the fed has some control. Hello.... is anyone noticing anything which is working? Yes, we are in a ship in the middle of an ocean without a map or any known coordinates. Whatever happens happens.

Jan 10 11:39 PM

[MarvinMBA:]

Actually, a deflationary US will give dollar holders more for their US dollars and dollars become desirable to own because of their buying power so you could have a strong dollar. Purchasing Power Parity is what its all about in the long run. Of course traders and central banks try to influence what the buck is all about as well as political/world events. What does this all mean to the average guy on the street that lost his job...a big fat zero...keep your bucks close and wait for interest rates to rise is my considered opinion...MarvinMBA

Jan 11 12:56 AM

[igggy:]

You are suggesting that the government will prop up the dollar to make foreigners buy US treasuries. Why would they do that since the US economy benefits from a weak dollar! Besides, they can't really move the dollar higher without increasing interest rates.

I do suddenly wonder though. When yields start going up, would that also make the dollar more attractive?

Jan 11 01:20 AM

[Balderdash:]

Hiking interest rates to support the currency will kill treasuries but may incentivise people to purchase them in the future. But it would simultaneously stop the federal government from digging our hole deeper because borrowing would be so costly in terms of real purchasing power. Of course, without forcing our currency value to zero there is no way to pay of the trillions we owe without an outright default. What should be clear right now is that the government is out of options and it can't have its cake and eat it too.

The only way out of this mess is to stop selling treasuries alltogether, slash government spending by 70-80% and start servicing our debt.

Jan 11 08:31 AM

[EUARTE:]

We can not pay our debt off now much less if we have to pay it in a more valued currency. Currency/Debt 101.
But you could give local buyers a break. Make the treasuries, of all kinds, tax free to all American citizens.

Jan 11 12:52 PM

[afortini@ao...:]

The feds have been buying 10yrs since september and they can easily
bust the dollar shorts using dollar futures.
Bill Kear

Jan 11 01:52 PM

[jepittman:]

Mark Chandler has a piece out today in which he makes a case for a stronger dollar going forward. Essentially his point is that the US will likely be the first developed economy to exit the recession and thus attract enough investment dollars to be keep our currency generally stronger relative to the euro and yen. I have my doubts but it is a plausible position.

Jan 11 02:04 PM

[iyamwutiam:]

Essentially the point is a stronger dollar makes it easier to support debt. No argument there. Kunst- the Fed has for years being buying up productive assets of other nations through their various branches (IMF/World Bank/Investment banks/Leveraged Corporations) -so this is nothing new in my opinion.

Also the world in general has been swindled. No nation on earth has the courage to walk away from the tremendous surpluses (China/Japan/Germany/G... of trillions of dollars). They are almost bound to recognize value of the dollar -otherwise their surplus is basically worthless. Finally- the US Armed Forces is the only armed forces that has been used principally to defend the currency of the nation (ask Iraq/Iran/Venezuela and Russia).

So basically where do we go from here? Either status quo (and thats the safer bet-since the corrupt don't like change) or a dramatic and catalytmic event (a la Russian/Franch revolution)- and according to Blakc Swan theory -may be more probable than our models indicate.

In short- we gain a reprieve through mass consent agrees to perpetuate inequality, growing disparity, continual states of war and duplicity. In short -an Orwellian future where the minds of the world will slowly be turned into a mass pyschosis re-enforced by fear/retribution etc- the dark future we see in Robocop and other Sci-Fi movies.

The short term -outcome for americans will be the end of this country as the premier destination of millions who seek a better life. Because even its own citizens will find it hard to continually fund mandated debt required to feed the monsters of debt creator (banks/education/taxes... insurance etc). The days where 45 percent of people who came here to have a better life can actually do so is over because I can guarantee you that over 60 percent of this countries citizens will not be able to do so. Debt financing has reached its apogee in terms of sustaining the burden and it has reached a critical point -in terms of public perception of advisability.

Being long in treasuries is a short term play - but in the long run -being long in commodities is the safer bet.

Jan 11 07:00 PM

[jackooo:]

I cannot understand why people are buying treasuries for 1% interest and then paying federal taxes on it. Duhhh. I would put my money under the matress before I did that!
There are great preferred stocks with dividends in the 8% area.

Jan 12 11:11 AM