I read several interesting posts this morning on other blogs. First, Brad Setser Brad Setser-Follow the Money discusses who bought Treasuries in 08 and who'll buy in 09. Essentially, most of the Treasury action was U.S. private investors, not China, as most people assume. Thus, he believes it will have to be U.S. investors once again in 09 leading the Treasury buying to finance the stimulus. Current economic theory as noted by John Cochrane states that investors will buy government bonds if they believe the "stimulus" money will not be withdrawn by the government, i.e., taxes will increase to pay down the debt. Thus it would make sense to me that U.S. investors will buy Treasuries to the extent need in 2009 only if they believe they will be paying significantly higher taxes in future years. I think this expectation is accurate so I wouldn't be surprised by strong Treasury market activity this year.
However, if consumers choose to save, by buying Treasuries, rather than spend, domestic demand will remain weak. That means the economy will continue to struggle despite the "stimulus". According to classic Keynesian theory as explained by Richard Posner the solution then would be to stimulate exports. "Buy American" protectionism isn't going to stimulate exports. It seems logical that export growth must be a primary objective going forward.
However, if consumers choose to save, by buying Treasuries, rather than spend, domestic demand will remain weak. That means the economy will continue to struggle despite the "stimulus". According to classic Keynesian theory as explained by Richard Posner the solution then would be to stimulate exports. "Buy American" protectionism isn't going to stimulate exports. It seems logical that export growth must be a primary objective going forward.
