The new global balance

Abstract

Few months after the crisis began, the global flight to safe assets benefited US Treasury papers, and financial deleveraging favored the dollar. Once economic and market conditions normalize, we will see a reversal of these trends (that is, a weakening of the dollar and an increase in North American rates). Added to the return of risk appetite will be a financial scenario with greater regulation and lower leverage that will result in a more persistent shortage of international capital, an increase in private savings due to the wealth effect of the crisis, expansive fiscal policies and a reduction in the external income of economies with trade surpluses that could lead to a “drain of savings” by global lenders. Despite the fall in the North American current account deficit, the US will probably face more rigid financing conditions in the coming years. In this context, we expect that the Federal Reserve will choose to keep interest rates depressed, at least until there are clear signs of recovery in real growth in the North American economy, at the cost of further depreciation of the dollar.

JEL classification: F42 ; F44 ; G01