It is these subpar returns that I think will eventually reach a tipping point where once foreigners factor in a decline in the dollar that they are actually receiving a negative return. The foreign savers have to contend with the currency exchange rate. If a European investor had converted his Euros into dollars and bought treasury paper, he would have an outright loss of capital over the last eight years. This is why I believe we are only seeing FCBs purchasing dollars in order to stabilize the exchange rate. As a result of these purchases by FCBs in order to achieve full employment, many nations are sharing in the inflation that the FED/Treasury is flooding the world with. If our trading nations seek to limit inflation in their own countries and reduce treasury purchases, our dollar will continue to fall and at some point this will either result in a drop in the American standard of living, and eventually a substantial rise in interest rates. This seems to me to clearly be the path that we traveled in the late 70’s/early 80’s.

The Feds need to scare the market into treasuries tomorrow, once more.