Unholy Trinity: also called the impossible trinity: the Impossible Trinity are three choices that a

government cannot choose all at once. It can only pick two out of these three: fixed interest rates, free
capital movements and the ability to set its own interest rate.

For example, Singapore has chosen to have free capital movement and fixed interest rates. It must
necessarily give up the ability to set its own interest rates, hence monetary policy.
The state chooses free capital movement and the ability to set its own interest rate and hence its
exchange rate must be free floating.

The reason we cannot all three at once is because when a government is trying to lower interest rate to
reviving the economy in recession. In order to do that, it must increase the supply of money in its
economy. However, when the interest rate is lower than that of its trading partners (for example US), the
investors will want to move their funds to that country, this will increase the supply of the country A in the
forex market and depreciate its value. But if the government of country A wants to maintain a fixed
exchange rate, then it will have buy back the excess currency and the demand for it, but it cannot do this
for on continual basis as it will eventually run out of foreign reserves.

 Free capital flows

 Independent monetary policy ( setting interest rates)
 Fixed Exchange rate

Q4. What is the underlying reason US issue TREASURIES?

 Since the U.S. government almost always spends more than it takes in, the
national debt continues to rise. The U.S. debt surpassed $27 trillion. The
government owes this to buyers of U.S. Treasury notes including individuals,
companies, and foreign governments.  
Demand will rise when there is an economic crisis. This is because investors
consider U.S. Treasury’s to be an ultra-safe form of investment.
To remain competitive, interest rates on other bonds and loans increase as
Treasury yields rise
Thus, the US government issues treasury stocks, bonds, notes, and inflation
protected securities to makes up for the budget deficit.
 The yields on such treasury securities are used as benchmark i.e. risk free rate, and they are
used in the pricing of other debt securities.
 The treasuries might reveal about the market participant expectation about the future path of
country’s monetary and fiscal policy
 Also, market participants can use treasuries to hedge positions in other fixed income securities
and to speculate on the course of interest and exchange rates because they can buy and sell
treasuries quickly and with low transaction costs

“General foreign buying of Treasuries reflects the global low interest

environment,”