Ben Stein at the NY Times had a good peice on Sunday in his "Everybody's Business" column titled, Mr. Chairman, You Can't Control China, So Relax (free subscription required for a while -- then payment required for back-dated articles).
Here's a quote:
May I suggest a reason for the low long-term rates? It has to do with a certain circularity in world flows of capital. American consumers and businesses buy far more from the Japanese and Chinese than the United States sells to them. The difference is in the hundreds of billions of dollars annually. The Asians do not respend this money in America by buying Big Macs. Instead, they use a large chunk of it -- again, hundreds of billions -- to buy Treasury bonds.
That creates a floor under the dollar, keeps their own currencies low and makes their products very competitive. But this voracious buying of Treasury bonds -- at varying lengths of maturity -- keeps a high floor under bond prices as well. That, in turn, keeps the interest rate low, because interest rates move inversely to bond prices.
In other words, interest rates are supressed at very low levels by the recycling of the trade deficit into Treasure bonds. It may just be that simple.
In turn, this keeps mortgage rates low, props up the amazing housing boom and starts to affect commercial real estate in a big way, too."
It gets better - worth the time to read. The idea is that the attempts by the Fed to control inflation by raising rates is doomed to failure while Asians are holding LT rates down through their buying of T-bonds.
