Thank the US Congress? No thank Bernanke.
Demand for US treasury bonds abroad has been falling and sales of those bonds has been increasing.
This isn’t a new phenomenon. We have argued in this space for some time that The Fed’s unprecedented printing of new money to buy US bonds may have a secret motivation. It is very likely that since the Crash the Fed has been worried about foreign demand for US bonds. Indeed it may well fear a collapse. It is convenient for the Fed to prop up the market under cover of supposedly trying to increase US employment. One of the oddities of the Fed’s policy is that there is no economic theory or history to show that printing new money to buy bonds will help employment. Either Fed chairman Bernanke has marched to his own drummer (still a possibility) or he has had undisclosed motives.
Now with foreign demand for US bonds more visibly weakening, the media will blame Republicans in Congress for not capitulating on the debt limit more promptly. But the real source of trouble is the bind that Bernanke has created for us. In the short run, if Bernanke stops creating so much money, that will spike interest rates, which will spook foreign buyers. But in the long run, all the money creation means that the dollars we will eventually pay back to the foreigners will be worth less and less, will be more and more “watered” as the old saying went. If you were a foreigner, would you want to buy bonds in a currency that is being debased so rapidly?
As Bernanke set out on his latest round of money creation (“quantitative easing”), he said that one of his objectives was to keep interest rates low. But they have actually risen. What if his missteps cause interest rates to rise further? Higher interest rates could help attract foreign buyers, but not if they are expected to keep rising. If this is the expectation, it could also lead to massive selling of the dollar. As the dollar fell in value, the costs of our exports could soar. And that could lead to fear of runaway consumer price inflation.