Essentially, the U.S. is like a bank that serves as an intermediary for the world’s financial assets. It sells liquid assets to the world’s savers at the price of net foreign investment income. Foreign investors are increasingly passing on assets with higher yield in order to purchase low-yield, but highly liquid and safe U.S. assets, such as the U.S. dollar and U.S. Treasury securities. Consequently, there is a real threat that has emerged as a result of the U.S.’s position as a financial intermediary to the world: a shortage of safe assets. This shortage of safe assets matters because it suspends hope of a full economic recovery due to the reduced nominal spending caused by these holdings. This scenario can seriously endanger the value of the dollar and the safety of U.S. safe assets, which would almost certainly lead to more future economic downturns. With this paper I intend to analyze the reasons for the shortage of safe assets and the impact it has had on the global economy and the United States in its position as a banker to the world, and then use econometrics to quantify and prove its importance to the state of the global economy.
Advisor(s) or Committee Chair
Dr. David Beckworth
Carey, Kevin, "The Impact of the Shortage of Safe Assets on the Global Economy" (2014). Honors College Capstone Experience/Thesis Projects. Paper 444.