akuma587 said:
Maybe demand for bonds is low because the stock market has been on a three month rally and the rate of return putting your money there is much higher than putting it in treasury bonds, which even during a recession don't give that great of a return. They are simply like a mattress where people stick there money to keep it safe. When the stock market does better, they take it out of the mattress because there isn't much incentive to leave it in the mattress. Furthermore, the people "demanding less debt" usually aren't in the securities market in the first place. It will be great if China removes the peg to the U.S. dollar currently on the yuan. That is one of the primary causes of the humongous trade deficit we have. It gives China an unfair advantage on the world market and has hurt our economy in several different ways, including speeding up outsourcing. And you are making a very simplistic argument that China unpegging its currency would hurt the U.S. dollar. It is just as likely that it would benefit the U.S. dollar as it would change a lot of dynamics in the U.S.-China trade situation. There is a complex connection between the value of your currency, inflation, and interest rates. There aren't any set rules as to what will happen when one changes. It depends on a lot of factors what will actually end up happening. I don't think you are recognizing this fact. Plus at the same time you are saying we will see both higher interest rates and higher inflation, when normally those two forces are diametrically opposed except in rare instances of stagflation (which we have only seen once this century). |
Higher interest rates are always a direct consequence of higher inflation ...
If the yields available in the bond market do not keep pace with inflation investors pull their money out of the bond market and put it into other investments (stocks, commodities, and real-estate) that have an intrinsic value and therefore increase in value along with inflation. After this money leaves the market the prices of bonds fall, which results in a higher yield and (therefore) higher interest rates.
The growth of China's economy along with the Chineese peg on the American dollar has allowed the Federal reserve to keep interest rates artificially low and the American government to have very large deficits for decades without facing the consequences related to these actions. If the peg is moved or removed the American dollar will fall to a level which could cause other countries to dump some or all of their foreign holdings of American dollars; and this would probably result in the American dollar falling further and more countries dumping their reserves of American dollars. Overnight the American people could be facing hyper inflation
