Sabtu, September 23, 2023

A New Concern: Falling US Treasury Demand

price levels upon consumers and producers, but there are clearly effects beyond those. As monetary authorities initiate policies intending to stem the upward trend of prices, financial markets may become more volatile than normal. Should inflation prove stubborn, or particularly unpredictable and thus difficult for contractionary monetary policy to counteract, financial markets may become excessively volatile. High levels of volatility dissuade investment, and at very high levels, careening markets may pose a threat to financial stability. In either case, the prices that guide economic calculation become less reliable. Supply- and demand-driven changes in relative prices, which provide information to entrepreneurs and seasoned managers alike, can be completely masked by broad moves in the ulasan film general price level.

Early in the pandemic, the Federal Reserve undertook one of the fastest quantitative easing campaigns in its then-107 year history, under conditions ostensibly necessitating such actions. But like all major government programs, unintended consequences are likely; we may be experiencing some early effects at present.

For both the US and the UK, inflation is taking a toll on sovereign (government-issued) bond markets. For several reasons, the typical purchasers of US Treasury bonds have been stepping away from the market. Treasury bond yields are used as the global proxy for the “risk free rate,” a variable that impacts countless financial and economic calculations all over the world. If the market for US government bonds were to soften materially, the pricing of countless other instruments could be impacted. A loss of confidence in the reliability of bond prices could have massive ripple effects with negative implications for the entire world’s financial system. There have already been warnings that this risk “poses one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.”

In the quest to determine causes, the most fundamental consideration is the prevailing forces of supply and demand. The massively expansionary fiscal programs of the past few years show clearly that the supply of US Treasury bonds has been torrential. As has been pointed out elsewhere, it may well be that the global appetite for US government securities has been sated, at least for the moment. Whether we are discussing ice cream cones or US Treasury bills, demand curves (almost) universally slope downward. As the cost of a good increases, the quantity demanded decreases. Moreover, there are potential buyers all along the curve. Those beneath the equilibrium price would be willing to consume should the price fall to lower levels, while those above would continue to purchase the good even if the price were to increase.

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