Must-Read: Ashok Rao: How Do Net International Positions Matter

Must-Read: Where the smart young whippersnapper Ashok Rao shies at the jump here is in failing to specify where he thinks the market failure is, and how to correct it. Is the demand by foreigners for safe dollar-denominated assets an improper one? And why today is it only the U.S. government–rather than, say, Apple or Wal-Mart–that can tap this funding source? Or is there a deeper problem in that Apple and Wal-Mart could tap this funding source but really do not want to–that they already have all the capital and funding that they think they can use? These are the questions that people are worrying…

Ashok Rao: How Do Net International Positions Matter?: “Capital is supposed to flow from rich countries to poor countries…

…to finance development abroad, just like water should roll down a hill. Clearly that doesn’t square with the incredible amounts of cheap cash flowing into America, and the safe-asset squeeze (whether something that’s an actual market reality, or something that is an artifact of mercantilist/crisis-weary state policy) has a lot to do with it…. Foreign investors… are largely official, and have a single-minded interest in preventing the 1999 sort of debacle where a shortage of dollars resulted in… havoc…. American investors are almost exclusively private corporations that don’t have a shortage of dollar-assets, that almost never borrow in a foreign currency, and live in a world of really, really cheap basis trades. So private, social, and market valuations diverge…. The more simple description of the entire argument is that US treasuries provide a liquidity service to foreign governments and there is an inefficient shortage thereof. Or, even simpler, the US is a classical bank earning a profit on the spread between its borrowing and lending rates. Sometimes returns paint a more useful picture than valuations.

May 12, 2015

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