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A New Low

(Or: How I learned to stop worrying and love the deficit)

The U.S. dollar fell to a new low against the euro, finally crossing $1.50:€1.00. Gold is at $950/toz and silver is at $19/toz. The dollar stinks, and I believe it will continue to stink for a long time to come: the central bank is overstimulative, and other governments will rationally diversify reserves away from the dollar.

Against this backdrop I've become less worried about the government budget deficit. If I were cynical I might believe that the falling dollar has been a deliberate government policy. But I'm too cynical to believe that they had such planning and foresight. Why am I talking like this has benefited the government?

The U.S. Treasury publishes a quarterly bulletin with interesting data. The most recent one is for Q4 2007. If you look at table OFS-2 (p. 48) you can figure the percentage of the debt held by foreigners. At the end of Sept. 1996, $993.4 billion of U.S. treasury debt was owned by foreigners, out of $3,393.2 billion privately held. (Yes, I'm excluding intragovernmental debt.) At the end of Sept. 2007, the amount had risen to $2,248.9 billion out of $4,269.7 billion. From 29.3% to 52.7%!

Even as the dollar has fallen in value, foreigners have owned an increasing percentage of the total privately-held debt. Interest rates on treasury debt aren't high enough to offset the fall in the value of the dollar — foreigners have been losing a lot of money (well, purchasing power) on this. What an awful trade.

Who benefits from that bad trade? The U.S. government. Deficit spending financed by foreigners as the dollar falls in value is a pretty lucrative deal. Negative real interest rates… what debtor doesn't love that?


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