How far can interest rates fall before foreign investors abandon a countrys debt?
Question: How far can rates fall before foreigners abandon our debt and how will we maintain the value of the dollar? Interest rates cannot be as arbitrary as we would like. Interest rates have approached zero in Japan. Where has that gotten them? Answer: Remember that the interest rate includes two factors. First, it includes the market rate of time preference between now and the future: other things being equal, people prefer to have money now, and they discount the value of future money by their rate of time preference. Second, interest includes a risk premium based on the chance that if people invest money now, they might not get the expected future return on their investment, or might even lose their money altogether. Depending on the market rate of time preference and especially on investors’ perception of risk, a low or even zero nominal interest rate might not be sufficient to attract their money. I believe that was part of the problem in Japan. Foreign investors buy US stocks
