Benn Steil


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Beware the “Reverse Conundrum”

June 22, 2010

Foreign ownership of U.S. assets, particularly Treasury bonds, has increased significantly over the last two decades. Foreigners now own 57% of outstanding U.S. Treasurys, up from 37% in 1997. The chart above shows that this growth has been driven entirely by government purchases, notably China’s. In the two years ending in March 2005, official sector purchases accounted for 60% of new issuance, compared to about 40% historically back to 1960. The increasing significance of government participants, whose motivations are not always profit-driven, may help to explain Alan Greenspan’s famous “conundrum” — the question of why long-term interest rates declined in the face of strong economic conditions and rising short-term rates in late 2004 and early 2005. This disruption to the mechanism through which monetary policy normally affects the broader economy may one day work in reverse if governments choose to reduce their exposure to Treasurys back to 1960s levels. The resulting “reverse conundrum” — rising long-term interest rates in the face of weak economic conditions and falling short rates — would be far more unpleasant than the Greenspan version.

Warnock: How Dangerous Is U.S. Government Debt?
CGS Chart Book: Foreign Ownership of U.S. Assets
Steil, Swartz: Dangers of U.S. Debt in Foreign Hands
Greenspan: FRB’s Monetary Policy Report

Post a Comment 2 Comments

  • Posted by Mark Hitti

    There is no surprise.
    The FED can’t back the american economy by itself.
    Every body knows that US households have been consuming above their means for more than 30 years. They save no money in american banks.
    Thus where do you want american companies and the US treasury to find money? Abroad of course!
    You have japanese and chinese seeking US bonds and Gulf countries investing in US companies.

  • Posted by empty stomach

    A little stone overturns a great cart. – Italian Proverb

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