1. soolebop says

    This is a great piece!

    I would only say that the savings rate should have an effect on bond yields. he say’s it would have no effect, but more saving should denote lower interest rates. I think that’s one of the things supporting the JGB’s low interest rates and keeping Bond Vigilantes at bay… I could be wrong, I’m wrong a lot. Anyway, I’m happy he even mentioned the savings rate, many don’t even speak of it. Thanks for sharing this!

  2. Kassidy Lane says

    How do you figure that the Yen will be the weakest link, when you yourself put forth that Japan has the second largest foreign exchange reserves in the world… The dollar is gonna crash and all you experts will have had your heads in the sand.

  3. mwyand says

    Apologies if elementary – but trying to grasp this part:

    Since domestic investors’ asset preferences are unchanged, the moment they observe falling bond prices and rising equity prices, they will take advantage of those price moves and reinstate what they consider to be the equilibrium between bond prices and equity prices. As a result, under the circumstances described above, the currency bears the brunt of any adjustment necessary to appease foreign investors.

    If we assume the foreign investor must stayed invested in UK assets, how does one’s sale of gilts in exchange for UK equities change fx rates?

    1. Edward Harrison says

      The point there is that shifting private portfolio preferences do not affect net capital/current account flows. They just affect which types of assets are accumulated via those net flows. What that means is that any adjustment that gets made because of so-called “currency revulsion” by foreigners falls squarely on the currency – if domestic portfolio preferences are unchanged. As I always put it, the release valve is the currency not bond yields.

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