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U.S. Foreign Money Addiction Means Trouble
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Then, there's our personal savings rate, which has been hovering near zero.
"We need the money because we're not saving any," Wyss said. "We need it from anyone who has a spare yen to lend us."
At the same time, economic growth in Europe and Japan has been weak, Wyss said. "The U.S. was the only large safe market where the yield looked reasonable."
The gush of foreign money "is critical to keeping the U.S. dollar from collapsing, because we have a large trade deficit," said Daniel Katzive, foreign exchange strategist at UBS. "If the deficit wasn't financed, the dollar would fall until it reached a level where U.S. assets were more attractive to foreign investors."
It's simple accounting, he said: Cashflow in must equal cashflow out. "If it doesn't, you have a big adjustment until you reach equilibrium."
Some argue that the waterfall of foreign money has also prettied up U.S. Treasuries. A study released as part of the
Federal Reserve Board's International Finance Working Papers Series asserts that the yield on 10-year Treasury notes would be a full percentage point less without abnormally high flows into bonds. That's because increased demand for U.S. Treasuries has pushed the yield on Treasuries lower than it would be otherwise.
Normally, Wyss said, foreign investors would be reluctant to stake so much on the Treasury market because they would be worried that a decline in the dollar would erode their returns.
But, in recent years, the Japanese and Chinese central banks have intervened to keep the dollar high.
"Central banks have trained investors that there's not much risk there," he said. "That scares me."
By ELLEN SIMON, AP Business Writer
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