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Wednesday, March 30, 2005

Maybe the Best Econoblog Yet (From Vox Baby)

Andrew Samwick at Vox Baby, discusses the latest Wall Street Journal Econoblog, a discussion between Nouriel Roubini and David Altig, titled " Does Overseas Appetite for Bonds Put the U.S. Economy at Risk?". He begins:

It's a funny question as a lead-in. Generally, when some other country has an "appetite" for something (like U.S. government bonds) that we make, we are not at risk but richer for it. There are some relative price shifts that have distributional consequences (like making U.S. exports relatively more expensive compared to foreign imports), but on the whole, the country is richer. For a variety of reasons, Asian central banks have been willing to not only hold U.S. debt but (via undervalued exchange rates) pay too much for it. At least initially, it's their problem, not ours.

So the real question, and the one that Nouriel and David seek to answer, is whether a potential loss in overseas appetites for U.S. government bonds will put the U.S. economy at risk.
Click here for the whole article.

Overall, the arguments in the WSJ article are exceptional. They (and Andrew's discussion) center around the question of how hard a shift in overseas investor appetites for U.S. bonds would affect interest rates (i.e. whether there would be a "hard" or "soft" landing). WhileI haven't looked extensively at the issue, I'm in the "soft landing" camp - it would be difficult for overseas investors to unwind large portfolio positions rapidly.

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