It Should Actually Be: “The Campaign To Weaken The Dollar”

Some interesting data out this week from the Fed’s flow-of-funds survey.

First, there was a huge reversal in households’ purchases of US Treasuries in the third quarter, with the sector moving from a large net-buying position to a modest net-selling position. The last time the household sector was a net seller of Treasuries was in Q2 2011, just before the Fed ended its second round of quantitative easing.

Treasury yields rose a bit during the third quarter, but other sectors did step up to offset the selling that occurred in the household sector. Specifically, foreign buying of Treasuries increased noticeably, with the foreign sector purchasing more than $600 billion worth, totaling roughly 4 percent of GDP.

Which brings me to an important point: If you’re a fiscal hawk who gets infuriated every time the government runs a deficit, then you should be equally infuriated whenever the Treasury finances the deficit by selling massive amounts of bonds to foreigners.

The two outcomes, after all, are closely related:

What I never hear the fiscal hawks also complain about, however, is the fact that the US runs a large trade deficit. This is strange because the reason why the Treasury often finances the federal deficit by selling bonds to foreigners is because of the trade deficit. It is, after all, an accounting identity that links the two deficits together.

If the fiscal hawks were consistent, then they would actually be rooting for a weaker dollar, which is the primary mechanism through which trade deficits are supposed to normalize. In fact, according to most of the literature on intertemporal current-account smoothing, the large trade deficits of the past decade or so actually imply future exchange-rate depreciations. And so the sooner we get those depreciations, the sooner we get back to a sustainable growth trajectory; that is, if you believe (as you should) that high net-external debt flows contribute to asset bubbles and financial crises.

It is for all of these reasons that private-equity billionaire Peter Peterson’s recent pet project, “The Campaign To Fix The Debt,” is a serious misnomer. If the Campaign’s funders knew anything about economics, then the initative would actually be called: “The Campaign To Weaken The Dollar.”

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