Subject: Re: Spy down another 4 percent,
The US deficit is NOT caused by the behaviour of non-US trade partners, whether "fair" behaviour or "unfair". It is caused because the US consumes more than it produces.
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Really? Running the deficits we have run, we still have reasonably low interest rates. We still have a rush in of foreign money to fund American debt at what are not outrageously attractive interest rates.
It seems to me that if the US was to somehow mandate that it consume no more than it produced, that there would be no "demand" for foreign money for either capital investment (foreigners buying stock, real estate, etc) or debt financing (foreigners buying T-bills, bonds private debt etc.). Since even with our deficit spending and a significant demand for foreign investment and debt financing, interest rates are not at all particularly high, it seems to me if we stopped consuming more than we produced, the demand of foreigners for US equity and debt would drive our interest rates NEGATIVE. How else would the demand of foreigners for equity and debt investments be brought down to zero, which is where it would need to be in order for the US to consume no more than it produced?
Am I understanding this correctly? That as long as we have open markets in debt and equity and foreigners still "demand" a constant flow of debt and equity to buy that we can never, algebraically, consume only as much as we produce?

Your summary is sound. If the US balanced its budget (or close enough for rock and roll purposes), and the US dollar remained the primary reserve currency, then yes, US bond rates would certainly fall. Negative is pretty unlikely, but definitely lower. Some people demand high interest rates to get them to lend you money, others don't. If you borrow less, you can satisfy your needs with just the second group. The benefit to the US budget is therefore compound: the size of the borrowing is smaller, and the interest rate is lower. The interest rates the US pays are lower than what they would be if the US dollar were not such a popular reserve currency (lower than what another country in the same situation would pay), but the general rules still apply: if you borrow less, you don't have to pay as high a rate.

The last part is a bit off. Non-US persons don't have a huge "demand" for US equity and debt that has to be satisfied by the US running deficits and so forth. It's (almost entirely) the other way around. The high demand of non-US entities for US equity and debt is the capital account surplus, the flip side of, and primarily the result of, the high current account deficit. The two quantities always match (once you remember the weird stuff like central bank actions, which doesn't change the result). If the US current account deficit were to fall a lot, the weirdly high rate of purchases of US assets would also fall.

Jim