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Implications of the Falling Supply of Safe Assets


When the world is short of safe assets--and investors are desperate to hold them--to complain about budget deficits in rock-solid reserve-currency countries and thus about safe asset issuance is profoundly stupid.

Cardiff Garcia:

FT Alphaville » The decline of “safe” assets: Presenting the unwanted mutant offspring of the most important chart in the world…

You’ll find the above on page 143 of the Credit Suisse 2012 Global Outlook, which we’ve stuck in the usual place.

It shows how the world’s outstanding stock of safe haven assets denominated in either dollars or euros has evolved, adjusted to account for the Fed’s purchases of US Treasuries and other assets in recent years as part of quantitative easing.

You can see just how impressive the decline has been since the end of the crisis, and we’d also note that if Credit Suisse had been feeling uncharitable, they would have been justified in excluding French sovereigns.

The chart helps explain much of what’s happening in global financial markets now, especially in Europe (not on its own, mind you — we said “helps” explain)….

Issuance in recent years hasn’t been nearly big enough to make up for the decline in other kinds of safe assets or, certainly, to correct the imbalance between investor demand for safe assets and outstanding supply. We’re not saying it should have been — only that this further confirms how absurd it is that the US government has spent so much time this year bickering over deficits rather than economic growth, and that the US economy confronts a fiscal drag beginning next year.