Those Worrisome Deficits

The global imbalance can't go on forever. People in the hot real estate markets, need to occasionally remind themselves why those rates are so low. From Brad Setser:

Make no mistake, real estate has boomed over the past few years in part because it has gotten lots of government support. From China. In order to maintain its exchange rate peg, China has to spend 10% of its GDP a year, give or take, buying dollars - dollars that it then invests in Treasuries. That helps to keep Treasury yields down. And recently, the connection has gotten more direct: the US data suggests that China has stepped up its purchases of "corporate" bonds - widely thought to be mortgage-backed securities. Put differently, in order subsidize Chinese exports, China's central bank has to subsidize American real estate.

Even Warren Buffet, devoted part of his annual letter to the challenges ahead:

The underlying factors affecting the U.S. current account deficit continue to worsen, and no letup is in sight. Not only did our trade deficit – the largest and most familiar item in the current account – hit an all-time high in 2005, but we also can expect a second item – the balance of investment income – to soon turn negative. As foreigners increase their ownership of U.S. assets (or of claims against us) relative to U.S. investments abroad, these investors will begin earning more on their holdings than we do on ours. Finally, the third component of the current account, unilateral transfers, is always negative.

The U.S., it should be emphasized, is extraordinarily rich and will get richer. As a result, the huge imbalances in its current account may continue for a long time without their having noticeable deleterious effects on the U.S. economy or on markets. I doubt, however, that the situation will forever remain benign. Either Americans address the problem soon in a way we select, or at some point the problem will likely address us in an unpleasant way of its own.