Capital Flight is now being discussed

My statement in the previous article that "the only reasonable conclusion is deflation" is taking a hammering now that I'm looking at other blogs.

Krugman quotes from another blogger:
"Is this the beginning of the end for the dollar and the Treasury market? Is this the first sign of the bursting of the bubble in Treasury securities? That market, in a sense, represents the ultimate bubble as it exists at the whim and caprice of foreign investors, who have as participants in a Faustian bargain, financed our war(s) and our lifestyle so generously over the last decade. Maybe even that bizarre construct is crashing about us as we speak."
And responds:
Maybe I should be drinking something a bit more … calming .. than coffee right now.
This afternoon I co-led a forum on the financial crisis with my Evergreen colleague Peter Bohmer. I had a flash as I was preparing: at some future point we could be in for a reverse tsunami.

Here’s the idea: A real tsunami begins with an outward flow of water. If you’re standing on the beach and suddenly the water line retreats 10 or 20 meters, it’s time to race for higher ground. Now consider the opposite phenomenon. The massive Fed/Treasury spending spree to hold the crisis at bay, thus far unsuccessful, is being financed by a massive capital inflow. Some of this comes from foreign CB’s eager to do their part, but a big part is the result of global capital flight to the supposedly least risky currency. Suppose we get out of this alive and calm returns to the markets. Most of those people are going to want to bring their money back—that’s the reverse tsunami. How do we finance that? The Fed’s balance sheet will be wall-to-wall junk.

Housing Doom also points out
that foreign central have swapped agencies into treasuries. Apart from abandoning things like Freddie and Fannie bonds (which deserved to be abandoned), the stage is now set for any foreign central bank to pull out of America. All they need to do is sell the bonds and buy Yen or Euro or whatever.

If Krugman's worried - so should we be. Maybe now is a good time to panic.

1 comment:

John M said...

Thanks for the mention :-)

It's nice to have an incoming that doesn't relate to an anti-Obama spam mail, and now we know there's at least one other person in the world who sees that last week's H.4.1 was a significant move.

Please see our previous week's post on foreign central bank agencies / treasuries holdings trends Foreign Central Banks Smash Weekly Treasuries Buy Record (Oct 3, 2008). That amazing weekly buy of $43.93 billion of treasuries would seem to nicely correlate with your "Econospeak" quote above.