The US budget deficit
Brad Setser wrote a piece yesterday on the funding of the US budget deficit in which he points out that central banks are not responsible for most of the recent growth in the holdings of US Treasuries—the US private sector is. Meanwhile, Constantin Gurdgiev thinks that Treasuries are likely to go belly up later this year, when the risk of deflation subsides.
So, the forces that have been keeping the US dollar buoyant and interest rates low in the last year—central bank purchases, fears of deflation and a flight to safety—are receding. In their place, we are eventually likely to see a falling dollar, rising inflation, rising interest rates and a fall in the US trade deficit.
The good news is that this might eventually lead to a reduction in the enormous trade imbalances of recent times. The bad news is that debtors and exporters everywhere (not just in the US and China, respectively) are likely to be squeezed, putting the solvency of us all yet further into question.
And if money has nowhere else to go, then international lending really could come to a standstill. Then it really will be 1930 (or more precisely, 1931) all over again.