Many people have a misunderstanding about what the overnight lending rate really is. It has little to do with the U.S. domestic economy. Any nation’s interest rate is nothing more than an advertisement. Just like any mutual or hedge fund advertises its rate of return, so too do Countries via their overnight lending rate.
Since the USA is now a debtor nation they need foreigners to buy their bonds to keep the economy afloat. If the Fed. simply ignores the rest of the world and starts to lower rates then our advertised rate of return will to go lower. This would make U.S. bonds less competitive then bonds from say Australia or England or any other first world nation for that matter.
Think about it, if you were a Chinese banker that had 100 billion to invest in bonds why would you put them in US bonds paying 5% when you can put them in Australian bonds and get 7% with an equal amount of safety? Trust me folks we need the Chinese far more than they need us and this fact will become more evident as time passes. The recent announcement by both China and Nigeria that they are moving away from dollar denominated assets only exacerbates an already growing problem and the recent weakness in the Dollar is proof of this paradigm shift.
I am not trying to be a pessimist but rather a realist. The charts don’t lie but central bankers do so listen to the charts not the talking heads.
Photo credit: stevendepolo via VisualHunt.com / CC BY
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