Interest rate conundrum

[__earth]

Windy_city is right, this sig has been inactive way too long.

Anyway, if you are an economics junky like me, you probably have heard about Greenspan's interest conundrum.

The conundrum comes from the fact that yield on US treasury and long term interest rate are going down despite the fact that the fed is committing to short term interest rate hike.

Possible explanation so far is increasing foreign demand on US Treasury.

This (http://www.frbsf.org/publications/economics/letter/2005/el2005-08.html) is an explanation by SF Fed.

Whatever the reason is, the big conundrum is why are people financing the US government debt at a fixed rate of 4% for 10 years. The deficits are huge with no solution in near sight (besides raising taxes, which wouldn't happen in the next 3 years since Bush is in office).

Actually, why are we still keeping US dollars? Unless Uncle Sam can balance its budget, more dollars will be printed to finance the debt. But then again, what better alternative to US dollar do we have?

[el_empty]

Does anybody have any statistics on countries that finance the most US debt? I have a feeling it's china... and if we think conspiracy theory, this hoarding of dollars will soon become a major liability for the US Treasury. In other words, China holds US as an economic hostage and this allows Uncle Mao to make his socio-political demands on Uncle Sam.