Fascinating interview with Carmen Reinhart

By Doug on Thu, Apr 11, 2013 - 8:38pm


I was particularly struck by these observations:


SPIEGEL: The United States is very highly indebted as well.

Reinhart: Yes, but who are the large holders of government bonds? Foreign central banks. You think the Bank of China is going to be repaid? The US doesn't have to default explicitly. If you have negative real interest rates, the effect on the creditors is the same. That is also a transfer from China, South Korea, Brazil and other creditors to the US.

SPIEGEL: And what happens if the creditors don't continue to play along and the interest rates on American government bonds climb? Do you see the danger of a debt crisis in the US?

Reinhart: Why do we have such low interest rates? The Federal Reserve Bank is prepared to continue buying record levels of debt as long as the unemployment situation isn't satisfying. And China's central bank will also continue to buy treasuries, because they don't want the renminbi to appreciate.

SPIEGEL: That sounds like a perpetual motion …

Reinhart: ... of course it is!

It seems I've heard rumblings that China has been off-loading US debt.  If they aren't, can Reinhart's observation that its a perpetual motion machine continue?  How long will China and other lenders feel the need to suppress their currencies?  Aren't interest rates inevitably going to rise?  Then what happens?  I assume the US is making interest payments on that debt.  When will the interest payments consume damaging portions of our federal budget?

In context, it is pretty well documented that the central banks of China and Russia (and other eastern countries) are buying gold while those in the west are not.  That will inevitably play a role in these currency manipulations, but I don't really know how to put that all together.

Put on your thinking caps Wonks.




KugsCheese's picture
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1469
Global Insiders

Everything has to end but end how?   I shudder to think it.

Hotrod's picture
Status: Silver Member (Offline)
Joined: Apr 20 2009
Posts: 189
Bad ending

Two possible scenarios:

International debt jubilee or war.

Grover's picture
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 896
Suppressing their own currency

China is buying our debt to keep their currency pegged. If they don't somehow recycle the dollars they get for selling their goods to us, the yuan will get stronger and their currency advantage will evaporate. I haven't wrapped my head around what would happen if they used the excess dollars to buy gold/silver instead of debt. It certainly would give the PM price a bit of encouragement, but I'm confused as to the end result to the yuan. Would it strengthen, weaken, or remain unaffected?


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments