tag:blogger.com,1999:blog-1331441403058020963.post7489356130344752989..comments2024-03-28T06:49:24.930-04:00Comments on International Political Economy at the University of North Carolina: (Not Snarky) Response to CommentsThomas Oatleyhttp://www.blogger.com/profile/14092437150746625670noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-1331441403058020963.post-24566311791316640492008-11-23T00:28:00.000-05:002008-11-23T00:28:00.000-05:00Thomas,Thanks for putting up with me. Not that I w...Thomas,<BR/>Thanks for putting up with me. <BR/>Not that I want the last word here but, by saying that the expected fall of the dollar's value in 2005-2006 is a reason why the Fed was able to effectively raise interest rates despite the international arbitrage effect, you validate my claim that the Fed COULD have done something (not leaving the interest rate so low)to prevent this mess. The dollar has been falling since 2002.<BR/><BR/>Fiscal policy is also to blame. But negative personal saving rate are also related to the Fed policy. If interest rates are 2%, you don't have much incentive to save, and a lot of incentive to borrow.<BR/><BR/>As for gold, yes, bubbles happen anytime. But my belief is that they are more likely to happen when the Fed messes up with the market interest rate.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-34407449288475652662008-11-21T21:19:00.000-05:002008-11-21T21:19:00.000-05:00Hi David--return to foreigners is a function of US...Hi David--return to foreigners is a function of US interest rates and change in dollar exchange rate. I would guess, therefore, that the future rate for the dollar in 2005-06 was less than the spot rate.<BR/><BR/>re your ps. This is exactly my point. Nothing the fed can do about it. It's fiscal policy (budget deficit) and negative personal savings. Gold standard is irrelevant too. We had lots of bubbles and crashes before we established the Fed and when we were on the gold standard--1894 and 1907 to name just two.Thomas Oatleyhttps://www.blogger.com/profile/14092437150746625670noreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-79901989600316143962008-11-21T12:55:00.000-05:002008-11-21T12:55:00.000-05:00I understand. But I believe you're overestimating ...I understand. But I believe you're overestimating this arbitrage effect. Otherwise how do you explain that the Fed was able to raise the interest rate to near 5% (7% at the bank) in 2006 (while interest rates were lower outside US)? <BR/><BR/>If the Fed did it in 2006, it could have done it during the 2002-2006 period. <BR/><BR/>But if your arbitrage theory is right, I strongly recommend you email Alan Greenspan about it. He could use it.<BR/><BR/>P.S. I might be wrong, but I believe that an important cause of this crisis is the imbalance between real saving and investment. So if the Fed is not to blame for keeping interest rates too low (increasing the money supply) because of arbitrage, should we blame ALL central banks? (if your answer is yes, I might become a gold standard cheerleader...)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-46978611949137041992008-11-21T11:58:00.000-05:002008-11-21T11:58:00.000-05:00Hi David,Thanks for quick reply. My argument re th...Hi David,<BR/>Thanks for quick reply. My argument re the Fed is that in an open economy, arbitrage prohibits the Fed from meaningfully raising the borrowing rate. If the Fed tries to raise rates, domestic financial institutions borrow abroad at a lower rate. Foreigners willingly lend because the rate of return in the US is higher than that which is available at home. The resulting capital inflows expand supply of loanable funds and drive down the interest rate. Interest rate arbitrage, Borrow low, lend high.<BR/><BR/>Hence, with global capital markets, the domestic borrowing rate is the world interest rate (plus expectations of future currency movements). The Fed doesn't effectively control the supply of credit.<BR/><BR/>The US has a little flexibility, because it is big enough that its demand for funds affects world interest rates. But still, there is little the Fed can do unless we are willing to impose barriers to capital inflows.<BR/><BR/>p.s., this is why the decoupling theory was never right. China thrived by lending us the money to buy their stuff. We stop buying, they stop thriving.Thomas Oatleyhttps://www.blogger.com/profile/14092437150746625670noreply@blogger.comtag:blogger.com,1999:blog-1331441403058020963.post-70735670878739819052008-11-21T11:33:00.000-05:002008-11-21T11:33:00.000-05:00As for deflation, I knew you understood, but using...As for deflation, I knew you understood, but using this definition leads many readers to make mistakes about the causes of inflation. It takes the Fed out of the equation, while only the Fed can create inflation. <BR/><BR/>As for the theoretical assumptions you make about the Fed's choice, I would say that, had the Fed raised interest rates, mortgage rates would have been much more realistic (higher). And people who couldn't afford a home (and people who bought six homes) would have behaved differently, and there would'nt be as many of them defaulting right now.<BR/><BR/>Now, if what you say is that a strong dollar would have pushed Chinese to buy houses in the US in this high mortgage interest rates environment, I think it is a bit far-fetched. Maybe I don't understand your argument.<BR/><BR/>Fiscal policy is a mess, I agree. This country has lived on credit for too long. We had a phony economy, and the day of reckoning has come. Hopefully the «decoupling» theory ended up being wrong. Because had it been right, the dollar would be in a free fall right now, and the US might be on the verge of bankruptcy.Anonymousnoreply@blogger.com