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Wednesday, December 21, 2011

Why Are Interest Rates So Low? (Part 6)

In this Khan Academy video, "American - Chinese Debt Loop," Sal explains the effect of China pegging the Yuan, lending the U.S. funds via the buying of Treasury securities, and thereby contributing in a major way to low U.S. interest rates.  U.S. Treasury rates affect other U.S. rates as well, along with global interest rates.  Furthermore, low interest rates push global investors out on the risk spectrum - after all, individual investors, pension funds, insurance companies, et al. aren't satisfied with miniscule rates on the least risky assets being affected by this process.

Understanding the process leads naturally to the questions of how it gets unwound and what happens if and when the Chinese get tired of holding U.S. assets.  Not long ago, Fed Chairman Greenspan wondered why long-term Treasury note yields didn't rise as the Federal Reserve raised rates from the 1% level in the latter part of 2004.  His so-called "conundrum" is partially explained by the process explained here by Sal.

Enjoy the video:

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