Foreign investors are beginning to see the U.S. as a bad place to invest their money. Their stock investments are losing money. They’re getting killed by their investments in our mortgage-backed securities. Their investments in corporate and government bonds are beginning to look risky. Now they’re looking to Asia. This is very bad news.
What this means is that interest rates are going to rise. How far and fast remains to be seen. Why? Because the dollars that we send them in payment for imported goods can only be used in one place – the United States. So their choice is either to sit on those dollars and wait for the promise of higher returns in the future in the U.S., or go ahead and just keep blindly plowing them back into U.S. stocks and bonds and securities.
At the same time, the U.S. has got to maintain a cash flow balance to finance to the budget deficit and the trade deficit. It has to issue bonds and sell them to someone. That someone isn’t Americans. There is no money left here. It has to sell them to foreigners holding those dollars. So, when the Fed holds a bond auction, if no one bids on the bonds at the rate being offered, the rate immediately and automatically is raised. This will continue until the rate looks attractive enough to offset the perceived growing risk of owning these U.S. investments. So look for bond yields to begin rising dramatically. And it’s bond yields that determine interest rates in the U.S. economy, not the Fed’s official overnight funds rate that gets all of the attention.
Won’t rising interest rates tend to slow an economy that’s already on the brink of recession? You bet! Could this turn into a downward spiral? Right again! The only way to escape such a spiral is to cut off the root cause by stopping the outward flow of dollars; that is, by eliminating the trade deficit. And if we wait for currency valuations to do the job, we’ll be waiting forever, and we have very little time to act. It’s time to walk away from the World Trade Organization and return to the trade policies of tariffs and trade surpluses that once built this nation into an economic powerhouse.