The media has been progressively covering the threats in the bond markets, primarily the threat of increasing interest rates and the corresponding negative consequences on investment as a result of further deterioration of capital investments due to the increased borrowing costs. Asian and Middle Eastern countries, which are highly invested in US securities have vocally expressed concern about the value of their investments, and taken precautionary measures including: investing in equities, diversification of industrial materials, proposing an alternative world reserve currency, and holding a lot of their investments in short term holdings.
As the danger of the US economy further struggling increases, the amount of treasury investors will decrease and interest rates being a reflection of risk will increase. Acknowledgement is being given to the unprecedented increase in deficit spending and decreased revenues, however, there is limited action, and with the necessary health care reform on the agenda the prospect of further economic peril is ever increasing.
There is a theoretical silver lining to all of this, US manufacturing orders are up for the second straight month, this correlates with the continuing and prospect of further devaluation (with the threat of hyper-flation) and as long as the dollar continues to depreciate the positive trend should continue, albeit with the effect of inflation. The attraction of foreign investment will help to maintain the business investment on a global scope, but consumer credit should remain weak, countering the problematic American consumer debt culture. Additionally, if we are able to create government surpluses, we will be able to pay off our debts at a lower real value.
Though there will be ache, it’s important to understand the size of the US economy, and their obligation to provide necessary services to the poor. Moreover, the increase in foreign investments should help to keep relatively low unemployment, and help us create a stable foundation to move forward.
Next discussion will be about the technology industries which we have a head start in against developing countries like China, and the need and strategy to remain the global leaders.