Wednesday, May 17, 2006

CPI increases fears of inflation, rate hikes

Reader Nikki commented in an earlier thread that the latest CPI report reinforces my economic outlook. And while I'd love to be wrong and have the economy rebound, I'm definitely investing in the wrong places if it does. Also thanks to Detroit Dan for helping explain the current behavior of bonds, and for giving me insight as to why countries like China are so willing to buy our debt when they're growing so rapidly and needing to invest in infrastructure:

If the Chinese and Saudis were to stop buying our bonds, which they purchase to recycle their dollars (and keep their currencies undervalued), then long term rates would rise as there would be less demand for bonds. Less demand for bonds => higher interest rates to attract buyers => steeper yield curve. If the value of the dollar is falling, then higher interest rates will be needed to compensate for the loss in value of the dollar vis a vis other currencies...
It's just a way for them to keep their currency undervalued to strengthen their exports. Even if China stopped pegging the Yuan to a fixed fraction of the dollar, they would make sure that it "floats" in the right direction via currency manipulation such as this.

1 comment:

Federico said...

Interesting....

:-/