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Sorry, I accidentally deleted the part about interest rates.

Normally, a government, like any social enterprise such as a business, has to increase interest rates -- the amount it pays a borrower for use of its claims to society's resources -- when it tries to borrow huge sums.  Interest rates should have to increase when a government makes sudden, multi-trillion dollar commitments.  But the opposite has happened in the present crisis.  Interest rates have dropped to near zero for US government debt issuances instead.  This means that the security of holding an explicit  guarantee of wealth from American political authorities is so valuable today people are essentially willing to pay for that security by forgoing slightly higher interest rates in other types of non-US government securities. Why is this so? It's because the social rules of wealth in the world today make it possible for American political authorities to credibly promise to just take resources from someone else if need be, at home or abroad, and give to the bearer of its debt, while few other entities would have much credibility making such a promise.

What financiers like to call a risk premium is really just a government premium.  Government -- organized political power -- trumps markets, and bigger, stronger governments trump weaker, smaller ones when  ambiguities about wealth become manifest.

by santiago on Wed Sep 2nd, 2009 at 12:25:31 PM EST
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