Reverse Re-construction or vendor financing
What happens when a nation's trade deficit runs at levels upward of 6% of GDP: investor confidence ebbs, capital investments are scarce, credit markets plummet, and the central bank is forced to counterbalance deflation by raising interest rates, all this while the currency is weaker then a sand castle - deep recession.
When that nation is the USA, these things don't happen, or at least they haven't yet; but how much longer will Asia keep up this predatory lending practice? As of June 30, 2007 the Japanese government owned just over $800b, and China owned around 680b worth of US government backed securities or Treasury bonds. Basically the US Treasury sends over IOUs and they send us money.
This affects us all: since mid 2004 the Federal Reserve has raised the federal funds rate from 1% to 5.25% and, in-theory, this should have caused a sell-off of long dated Treasury’s. However thanks to central banks around the world this didn't happen.
In short, why would a poorer nation lend to richer one? Simple: send cheap money to the richer nation and they will send it right back in the form of Lexus’, Samsung flat screen TVs, LG washing machines, and any number of [defective?] Chinese products
Tomorrow we will discuss how US borrowing affect mortgage prices. For now buy Doral Financial
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