The Global Money Market
While corn and copper are the same commodities around the world, each country or region has its own money. Market participants can choose the currency they want to hold. They will naturally want to hold the currency of a “strong” country — one that is not being devalued by inflation, and where they can use that currency to invest in important assets, such as stocks or businesses that are growing and may yield profits.
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Here’s the shocker: Despite all the money the Fed has created in recent years, the U.S. dollar is currently the strongest, most desirable currency in the world! That means the U.S. can borrow at relatively low interest rates to finance its budget deficits.
That surge of money coming into the U.S. from around the world is helping push the stock market to new highs, helping finance businesses at low interest rates, and helping to create growth here in America.
Why are America and the U.S. dollar so attractive? Well, look at the alternatives. Japan has announced it will print a lot more money to get its economy going by weakening the value of its currency (the yen), thereby making its exports “cheaper” to the rest of the world. Now Europe has climbed on the same money creation bandwagon, to get the Euroland economies (think Spain, Portugal, and Italy) growing and exporting again. China already has a policy of cheapening its currency, the Renminbi, which has fallen by about 3 percent over the past year — enough to make China’s exports more attractive to foreigners, thus stimulating production in its factories.
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How do these regions devalue their currencies, making them cheaper? The governments or central banks do it by buying U.S. dollars, and then selling their own currencies. And a lower currency value makes their exports more attractive.
And so, despite our own low rates, the dollar remains relatively attractive — enough to bring money here, and attract money to buy our Treasury notes. So the U.S. government can sell IOUs at very low rates. That huge demand for our IOUs has brought interest rates down to incredibly low levels — about 2.5 percent for a 10-year Treasury, upon which mortgage rates are based.
The supply of Treasuries is moving lower, as well. Our federal budget deficit is expected to be the lowest in 8 years this year — only about $492 billion. So despite the Fed’s plan to buy fewer bonds, foreign central banks are taking up the slack. In addition, U.S. banks are holding more Treasuries as regulators demand higher “capital” holdings in an attempt to make banks safer.
All that demand for U.S. dollars and debt, along with a slowing supply of new money, means the United States doesn’t have to offer higher interest rates to attract money. In fact, money is coming here despite falling interest rates.
How long can this situation continue? That is the quadrillion dollar question being debated in markets around the world. Most of the experts are shocked that the dollar remains strong and U.S. interest rates remain low, despite our huge budget deficits and relatively slow economic growth.
While this situation hurts American savers, who earn little interest in their bank accounts, it helps borrowers who can lock in long-term mortgage loans at low rates. Yet many potential borrowers are fearful about their jobs and business prospects — and afraid to take on even those low-rate loans. They may look back one day in the future, when rates are much higher, and kick themselves for missing out on an opportunity. And that’s The Savage Truth.
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