Monday, January 18, 2010

He almost has it!

The first article I have read in the MSM that sort of "glances" the fact that current account deficits are less about goods changing hands than the net desires of foreigners to hold U.S. dollar denominated financial assets.

And, dear reader, has the world gotten any safer? Has uncertainty regarding both short term and long term outcomes disappeared? In China? In the Euro area?

And yet we continue to hear about the "inevitable" demise of the dollar and the coming storm of inflation, in the face for strong U.S. Treasury demand, even for the long bond.

"There is no doubt that the pressure on the U.S. financial system [that led to the financial crisis] came from abroad," says Caballero, who is the head of MIT's economics department. "Foreign investors created a demand for assets that was difficult for the U.S. financial sector to produce. All they wanted were safe assets, and [their ensuing purchases] made the U.S. unsafe."

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