Posted on 06/23/2005 5:33:24 AM PDT by OESY
The increasing attention paid to growing U.S. current account deficits has bred nightmare scenarios of a sharp decline in the foreign-exchange value of the dollar and rising U.S. interest rates. Financial markets, by contrast, appear more sanguine. Inflation-indexed bonds in the U.S. are yielding only about 1.5% in real terms, and the IMF's estimate of the long-term world real interest rate is about 2%. Capital markets rightly estimate low current real rates of interest, though the outcome affords little comfort.
Alan Greenspan has termed the fall in long-term rates in the presence of a rising federal funds rate a "conundrum." The Fed chairman intuitively and correctly identified global forces at work. Interest rates on default-risk-free debt instruments such as U.S. Treasury securities are determined in an international capital market. And the international capital market determines the world real interest rate by equilibrating global desired saving and desired investment.
At the center of the saving-investment imbalance is the large U.S. current account deficit. While the U.S. is not the only economy running a current account deficit -- among industrial economies, the U.K. and Australia are as well -- the large increase in the U.S. current account deficit in recent years has mirrored large increases in current account surpluses in the rest of the world, principally in Asia. Over the same period, world real interest rates have declined....
(Excerpt) Read more at online.wsj.com ...
Because long term rates depend on inflation expectations. Inflation is expected to be low.
And inflation is expected to be low for many reasons, including the outlook for economic growth which appears to be slow and steady.
Or, borrowers don't expect to need money in future due to recession. Flattening yield curve usually means expectation of recession, although not as reliable a predictor as an inverted yield curve.
If there were no inflation in the economy the sharp rise in oil and real estate prices would be accompanied by a fall in other prices. Except for electronics, that is not happening. The fall in electronics prices is not causing visible effects because it reflects actual decreased costs of production and is soaked up by increased purchase of electronic products.
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