Why Are Interest Rates So Low? (Part 8)

In this final, 4-minute Khan Academy video on currencies, "China Keeps Peg But Diversifies Holdings," Sal notes that China's holdings of U.S. Treasuries are decreasing as they diversify their holdings but other countries holdings of Treasuries are increasing.  In fact, globally the rest of the world has to do something with the excess of the amount we buy from them versus what they buy from us, i.e. our trade deficit.  They buy Treasury issues because they are liquid and safe and can be bought in very large amounts.

So, the end result is that China buys Treasuries to peg their currency below the market rate which results in a humongous demand for Treasuries, driving Treasury prices higher and rates lower.  This is a major factor holding U.S. rates low and expanding the U.S. trade deficit.  It holds Treasury rates lower than they would be otherwise as well as the rates on other issues. B y doing this, China is able to build their manufacturing base.  Eventually they should reach the point where they create a middle class to buy the goods they produce.

To me, the Khan Academy videos are a treasure.  For those interested in understanding how the economy works and financial markets, I suggest visiting the site on a regular basis and viewing the videos systematically.  To keep up-to-date on events, check out the new videos he is constantly producing.  Eventually your understanding of markets will become much more sophisticated.  I actually believe that many big-time money managers didn't fully appreciate the impact on rates described by Sal in the videos we have viewed this week.

Why Are Interest Rates So Low? (Part 7)

In today's Khan Academy video, "Debt Loops Rationale and Effects," Sal looks at the positives and negatives--for both China and the U.S.--of the on-going pegging of the Yuan on global markets.  He discusses the likely outcome once the process is halted and the result when it is reversed.  Very simply, it has held interest rates low and enabled the U.S. to finance its massive debt at historically low interest rates.  Understanding this whole dynamic is crucial, IMHO, for the DIY investor going forward because it will be a driving force.  In fact, it could be the driving force of the next big crisis - banks hold Treasuries!  Central banks around the world hold the dollar as a reserve currency in the form of Treasuries.

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:

Why Are Interest Rates So Low? (Part 5)

In this 16-minute video, Sal of Khan Academy takes us real close to understanding an important dynamic taking place in the global capital market that has held interest rates down and has been a bit underappreciated.  Here he shows how the Chinese Central Bank needs to constantly print Yuan and use that Yuan to buy U.S. dollars to maintain the peg between the Yuan and the U.S. dollar.  They do this to produce an ongoing trade surplus with the U.S. - i.e., to sell more goods to the U.S. than it buys from us to support its industries.

The key is what they do with the dollars bought with the Yuan they print.  As Sal points out, they need to put this massive accumulation in something that is safe and liquid, i.e. U.S. Treasuries.

Just this morning there is a report that Japan wants to increase the amount it can intervene with in currency markets to prevent the Yen from rising further.  So this whole process is not just unique to China.  Countries have an incentive to keep their currencies from appreciating versus the world's reserve currency!

Enjoy the video:

Why Are Interest Rates So Low? (Part 4)

The previous 3 posts presented short videos from the Khan Academy that covered some basics of international trade.  They showed a simple example of how a trade imbalance is resolved in a market of freely floating exchange rates.  They showed how currencies and prices adjusted.

Today's 7-minute video presentation, "Pegging the Yuan," takes us closer to the real world.  It begins to look at what happens if China wants to keep the currency at a level where demand for its goods stays high.  How does it do this?  What is the effect on U.S. interest rates?

This is especially interesting today because, as most market observers know, investment professionals expected Treasury yields to rise this year; and they actually fell.  It seems that, while everyone was focused on a Fed that was undertaking unprecedented monetary stimulus, less attention was directed to what the Chinese were doing in the currency markets.

Why Are Interest Rates So Low? (Part 3)

The last two posts have looked at how a trade imbalance gets worked out in a freely floating exchange rate environment as explained by Sal Khan.  Today's 10-minute video,  "Currency Effect on Trade Review" brings it all together and shows how the quantity demanded for dolls and cola adjust, along with prices, to result in balanced trade.

This sets the stage for what is happening in the real world with China controlling its currency and the role of U.S. Treasuries, which will be taken up next.

Why Are Interest Rates So Low (Part 2)

Yesterday we looked at the first short video of 7 that explains why interest rates are so low.  The effect comes from the global currency markets and, in my vie,  is an effect that hasn't been fully appreciated by investors - even very sophisticated investors.

Today's Khan Academy 14-minute video shows, in very basic terms, how freely varying exchange rates eliminate trade imbalances.  Notice especially, at the end, how prices in the countries change.

Again, this is leading to a fairly sophisticated understanding of the impact of controlling exchange rates and demonstrates that the economics investors need to understand can be presented without esoteric mathematics.

Why Are Interest Rates So Low?

I have previously touted the Khan Academy videos produced by Sal Khan. They are a revolution in education produced by a gifted teacher.  Bill Gates, in fact, has called Sal Khan his favorite teacher.
This is the first of 7 videos that takes the viewer into the world of currency exchange and shows how China's controlling its currency has an important influence on U.S. interest rates.  The videos are approximately 12 minutes in length.  Although most readers won't appreciate it, the typical way this information is presented is by using esoteric mind-numbing mathematics which, in the end, detracts from the fundamental principles presented.  Watching the 7 videos over the next several days will contribute to making DIY investors considerably more sophisticated.

In this first video, Sal takes us through the dynamics of an imbalance in the demand for U.S. $s versus the Chinese Yuan.

Rent or Buy?

 Khan Academy ( Bill Gates said the Salman Khan was his "Favorite teacher") YouTube video that does the math on buying a house versus renting:

What I like about this video is it lays out the analysis in a straightforward way and gets us to question conventional thought. Most people believe that buying is always better than renting and don't bother to do the math.

Friday's Employment Report

Graph by Haver Analytics (Click to enlarge). Friday's employment report is expected to show an increase of between 75,000 and 300,000 non-farm jobs (Bloomberg estimates). The upper end of this range would be good to see since job creation has been the bugaboo of this recovery. Some attention will be paid to the government sector where,on net,jobs have been lost despite hiring tens of thousands of census workers.
One concern do-it-yourself investors sometimes express to me is their weakness in understanding the macroeconomy. With that in mind I present an explanation of the unemployment rate calculation by Salman Khan. If you are not familar with his work you are in for a treat. You can practically get a college education viewing his youtube videos.