The Bernanke Files has written extensively about where money comes from. Today the Federal Reserve released the monthly Credit-Demand report. Demand for credit has dropped significantly. This means that, because credit is the opposite of savings, savings in the US has increased. When there is more demand for savings, bond yields go down; thus making investment easier.
In other words, from 1997-2007, the USA went into debt with China to the tune of a trillion dollars. But, savings in the USA is now UP, so we will not go as heavily into debt to China as we will to American savers!! At the same time, economic growth will slow in the USA because we SAVE money instead of borrow money that we can SPEND. Of course when Americans buy less, China makes less money. To avoid this problem, the government will SPEND more and they will SAVE less. Chinese demand for US-TBonds is being replaced by AMerican demand for T-BOnds, and everything is coming into equilibrium.
Subscribe to:
Post Comments (Atom)
Does this effect how the US government's debt will change? The economy will contract some, as there is less spending going on, correct? But then if bond yields go down as you say the government should be able to borrow money cheaper, so perhaps they can afford to go deeper into debt?
ReplyDelete