Confidence in the safety and soundness of U.S. Treasury bonds is greater than--well, greater than it has ever been in my lifetime...
We who follow the numbers know six facts:
- First, the bite of the Triffin dilemma*--which will come someday--is further off now than it was in the fourth quarter of 2007, at the end of the last business cycle expansion.
- Second, international market confidence in the dollar as reserve currency and the U.S. Treasury bond as reserve asset is stronger now than it was 2 1/2 years ago. Will the period of the U.S.'s exorbitant privilege end? Someday. Could it end quickly and surprisingly? Yes.
- But, third, the chance that the period will end tomorrow is less than the chance of a sudden end was 2 1/2 years ago, as confidence in the dollar and the Treasury bond has strengthened.
- And, fourth, the period's expected lifetime is greater now than it was 2 1/2 years ago, as the U.S. has proved an island of stability in a tumultuous world.
- Thus, fifth, the someday bite of the Triffin dilemma is a less urgent and important problem than it was 2 1/2 years ago.
- And, sixth, the recession has brought us other urgent and important problems.
*[T]he [Triffin] dilemma.... To supply the world’s risk-free asset, the center country must run a current account deficit... until the risk-free asset that it issues ceases to be risk free.... The endgame... is a global, wholesale dumping of the center country’s securities. No one knows in advance when the tipping point will be reached, but the damage... will be readily apparent afterward.
---Brad DeLong, 6/25
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