The Davos meetings have to some degree become irrelevant during this current crisis. The titans of global banking no longer exist and policy-makers have to focus at home on trying to solve economic problems. There is no money for big think projects and no one has been able to cut-through the crisis to provide a useful solution. There is a call for regulation but there does n0t seem to be good solutions from the internationalists. There was not even a good defense of globalization and trade.
What was noticeable was the focus on what the impact of budget deficits will have the global financial markets. While there is no concerns about whether deficits matter in the US Congress, some emerging market leaders are asking whether there will be crowding out from the US deficit. Fro example, former Mexican president Ernesto Zedillo is asking the question of how the US will pay for the stimulus. He states, "People are not stupid. They see the huge deficit, the huge spending, and wonder what cones next."
The argument is a corollary of the global imbalance story. Because the US has such a well developed capital market, it has been a safe haven for foreign investors. US has been able to continue current account deficits with the savings from the rest of the word because of this strong financial system. Now this same system is in overdrive and is asking the rest of the world to finance what may be close to $2 trillion in 2009. Developed countries that do not have as well established bond markets will not be able to compete against the US for their funding needs to there will be crowding out of deficit financing by other countries.
W will not go into the arguments on the instability of this process, but suggest that the crowding out story is real in the short-run. The natural question from the creditor's point of view is whether they are getting a good investment. The savings countries which include many in the developing works are now asking the question of whether the stimulus is prudent given that they will have to pay for the projects.
What happens if the world balks at buying the debt?
What was noticeable was the focus on what the impact of budget deficits will have the global financial markets. While there is no concerns about whether deficits matter in the US Congress, some emerging market leaders are asking whether there will be crowding out from the US deficit. Fro example, former Mexican president Ernesto Zedillo is asking the question of how the US will pay for the stimulus. He states, "People are not stupid. They see the huge deficit, the huge spending, and wonder what cones next."
The argument is a corollary of the global imbalance story. Because the US has such a well developed capital market, it has been a safe haven for foreign investors. US has been able to continue current account deficits with the savings from the rest of the word because of this strong financial system. Now this same system is in overdrive and is asking the rest of the world to finance what may be close to $2 trillion in 2009. Developed countries that do not have as well established bond markets will not be able to compete against the US for their funding needs to there will be crowding out of deficit financing by other countries.
W will not go into the arguments on the instability of this process, but suggest that the crowding out story is real in the short-run. The natural question from the creditor's point of view is whether they are getting a good investment. The savings countries which include many in the developing works are now asking the question of whether the stimulus is prudent given that they will have to pay for the projects.
What happens if the world balks at buying the debt?
2 comments:
China is going to chip in for sure ...
We have seen a decline in Chinese purchase of agency securities and a focus on just Treasuries. We are also seeing a decline in exports which affects the cash flow that they will potentially have to buy Treasuries.
We have also accused the Chinese of being currency manipulators which only decreases their desire to hold Treasuries.
They will be the top buyer, but the supply will be so large that we will need them to increase their purchases not just be the top buyer.
The key for funding may be the increase in US savings that can be funneled back to the Treasury. But I thought we wanted people to consume?
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