Monday, June 27, 2005

Net International Investment

Has The Fed Lost Control Over Interest Rates?
"There is a wide-spread misconception that the United States relies on the savings or other countries to finance its current account deficit. This is incorrect. During recent years, at least, the US current account deficit is financed primarily by money newly created by the central banks of other countries. Newly issued paper money is not the same thing as a county's savings. The companies that earned money by exporting to the US keep their savings. It is only that they keep them in their domestic currencies after having sold the dollars they earned from exporting to their central bank. In fact, the banking systems of the export-oriented economies all across Asia are burdened by too much savings. Excess deposits are increasing more quickly than viable lending opportunities and, consequently, interest rates have fallen to historic lows."