Working Papers

Valuing US Financial Markets

RBA Deputy Governor Ric Battellino made the following observation in testimony before the House Economics Committee yesterday:

The popular perception is that, somehow or other, the US is out there spending a lot of money and has to go around the world borrowing to fund that expenditure. I am not sure that is the correct interpretation of what is happening. I think that what is really happening is that the investors of the world want to invest in the US financial markets. They are inundating the US with money, and the US economy and US households are responding to those financial pressures.

I am not sure that there is a huge problem of US indebtedness. I think this is really a sign that world investors actually very much value the characteristics of the US financial markets. There is no doubt that they have the deepest, most liquid and most credit-worthy financial markets in the world. People who have excess savings want to put a lot of their money in the US.

Regular readers will not be surprised to learn that I agree with this proposition.  What surprises me is that there seems to be so little appreciation of these institutional strengths of the US economy and financial markets within the US itself.  The mistaken notion that ‘global imbalances’ are somehow a problem stems from the failure to recognise this fundamental institutional reality.

posted on 22 February 2007 by skirchner in Economics, Financial Markets

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Stephen, what about the notion that the reason foreigners have these excess savings is because they are buying USDs to keep their currencies from rising (and hence their levels of consumption artifically low)? If that is the case, doesn’t it lead to higher US consumption than would be the case in a world with fully floating exchange rates? And would that make the USD (and potentially the US economy) vulnerable to a change in exchange rate policy elsewhere? Mind you, I’m not saying there’s anything the US authorities could or should do about this. I’m just raising the possibility that perhaps it is a desire to limit exchange rate appreciation (and the USD is still the world’s reserve currency) rather than a desire to invest in US financial assets per se, that is driving this behaviour.

Posted by .(JavaScript must be enabled to view this email address)  on  02/22  at  08:38 PM

Yes, there is an element of forced saving that arises from managed exchange rate regimes in East Asia.  But this is very much tied to financial and capital market repression in countries like China.  China is more wary of capital account liberalisation than of exchange rate appreciation per se.  This is a problem for them, not the US.

Posted by skirchner  on  02/23  at  09:38 AM

I saw a graph yesterday showing the current account balances of Asia, with China broken out separately.  The other Asian countries balances were growing fast, even faster than China’s it looked like.  Since their currencies are floating (I think), that would support your thesis.

Posted by cb  on  03/01  at  04:05 AM

I would characterise most East Asian currency regimes as ‘managed floats’ because there are still episodes of heavy intervention designed to influence the level of the exchange rate from time to time.

Posted by skirchner  on  03/01  at  10:02 AM

International Institute of Management (IIM) released a new report warning about the U.S. economic risks. The report:
1. Uncovers the forces behind Feb 27th stock market meltdown and the Chinese reaction to the outlook of U.S. Economy.
2. Forecasts the future behavior of U.S. and global markets.

Med Yones, the author of the white paper, warns against costly policy mistakes and provides a detailed analysis of the economic, social and geopolitical risks facing the United States

The complete text of the report is available at:


Posted by .(JavaScript must be enabled to view this email address)  on  03/02  at  01:11 AM

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