Evaluating Causes, Cures and Global Imbalances
7. The demand for US assets INTRODUCTION After exploring the metrics of the current account deﬁcit and the US external balance sheet in the last chapter, we came to the conclusion that the most practical indicator of sustainability revolves around the demand for US assets. Issues such as the investment income riddle, the net international investment position enigma, and the dark matter debate are reﬂective of data that are either seriously ﬂawed, or at least questionable, in one way or another, rendering unhelpful the use of the standard sustainability measures. The more reliable test is foreigners’ willingness to go on holding US dollar claims. This chapter analyses a number of issues relevant to the US external deﬁcit and its sustainability from this particular perspective. The ﬁrst is the implications of a continued reduction in home bias. The second is the substantial build-up of international reserves and oﬃcial holdings of dollars by foreign government agencies. The third concerns the ﬁnancial innovations that have linked capital inﬂows into the United States with household sector ﬁnancing and the housing market. The fourth issue is to what extent the euro may oﬀer competition to the US dollar as an international currency and repository for international reserve holdings. HOME BIAS Alan Greenspan noted in late 2005 that signs of stress in the funding of the current account deﬁcit such as the inﬂation premiums embedded in longerterm interest rates seemed noticeably absent despite the continued increase in the...
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