March 8, 2010
Despite a widespread outbreak of this malady here and there are signs of progress. One of them is an article in the Financial Times on the wisdom or lack thereof of shorting U.S.debt because of growing fears that the deficit is too large. The article by Dino Kos, ''Shorting U.S. treasuries could be a mistake'', appears in the F.T. today. Kos points out what I have been arguing for decades that there is no evidence of crowding out despite the higher deficits.
In fact, as deleveraging proceeds Americans are increasing their savings rates and there is plenty of domestic demand for U.S. government debt. Holdings by foreigners are significant but not overly burdensome. The Chinese for example, according to the article and the U.S.Treasury's report for February recently sold off some of their holdings but then bought back in so that they now hold 894 billion $ of the more than 11 trillion dollar debt.Previously they had held 800 billion but reduced that to 755 billion. Japan is also a major holder of U.S. debt. The last time I looked they were second only to the Chinese in terms of the amount of U.S. debt they held. Japan has used quantitative easing for years and not experienced any inflation. In fact, they have struggled to keep deflation at bay.
So Kos concludes in the medium run there is very little risk to U.S. debt holders and that the U.S. dollar will probably strengthen against the euro. It is a useful article because it helps puncture the many myths that circulate because of deficit hysteria.
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