December 15, 2004
WHO'S GOING TO TRUST CHINESE BONDS? (via Robert Duquette):
Benign Neglect of a Dying Dollar (Pat Buchanan, December 20, 2004, The American Conservative)
On Nov. 19, Alan Greenspan informed the world’s central bankers that the U.S. dollar will continue its fall indefinitely.What an admission. We cannot defend our currency. We cannot protect the value of the savings and income of the American people. We cannot, in the near term, cease becoming a poorer nation. [...]
America’s dollar crisis reflects a failure of political will and imagination. What are its causes?
There is, first, the U.S. budget deficit that in the fiscal year ended Sept. 30 came in at $413 billion. That deficit has been largely financed by foreigners, especially Chinese and Japanese, who buy U.S. bonds and T-bills and collect scores of billions of dollars in annual interest payments from American taxpayers.
There is, second, the trade deficit, which should come in this year at $600 billion, with the merchandise trade deficit closer to $700 billion. As we Americans save so little, we borrow abroad to finance our rapacious consumption of foreign goods. And with U.S. companies closing factories here and shedding American workers to re-site their plants in Asia, exports cannot rise fast enough to cover the surging increase in imports.
Debt moves up at fast clip, but household assets also rise (VINCENT DEL GIUDICE, 12/14/04, Bloomberg News)
Household net worth, a category that also tracks nonprofit organizations, advanced to a record $46.7 trillion in the third quarter from $46.2 trillion as real estate values accelerated, the Fed said.
It's largely forgotten now, and was barely noticed even at the time, but a crisis loomed when the surplus started to swell at the turn of the century: would any safe harbor remain for risk-averse investment if American had no debt? Given the fact that the Baby Boomers will begin retiring soon and will need to transfer their holdings from stocks to bonds and that the concurrent rapid increase in the homeowning American population will require a huge number of bonds for escrow accounts, one wonders whether it's either possible or desirable for America to reduce its debt level? Posted by Orrin Judd at December 15, 2004 3:28 PM
And yet more reports are coming out about the Euro slowly displacing the greenback as the world's reserve currenecy. If this happens, the US will lose many advantages.
OJ, can dismiss the Euro all he wants because of what he sees as Europe's interminable decline, yet we should remember that the US had bouts where it looked like we would never recover. If your strategy is based solely on your competitor always being a screw up, it's quite easy for you to lose if that changes.
None of Europe's problems are unsolvable, and crises or even the appearances of crisis does wonderful things to focus the mind. A European recovery could easily be accomplished.
Yet if the Euro becomes even a partial reserve currency, the damage to the greenback will not be able to recover for a long time if ever.
The risks are frankly far too great to chance especially considering the low cost to eliminate, yet the Republicans seem willing to take them.
Posted by: Chris Durnell at December 15, 2004 4:15 PMOJ - you're correct. I remember Greenspan making some comments about how entities would have to begin purchasing corporate bonds as the supply of U.S. Treasuries decreased and the potential negative impact that would have.
As for Pat Buchanan (well known economist of course) he seems to be upset that foreigners own US assets and therefore receive payments on those assets. He probably thinks the Chinese owning US TBills means they control the country.
Posted by: AWW at December 15, 2004 4:18 PMChris - what reports about the euro replacing the US Dollar?
Except for the depression and maybe the 72-74 oil induced recession when was there doubt that the US would recover? Europe's problems as OJ notes (declining population, growing govt control over economy, out of control social programs, etc) are structural problems that Europe cannot easily reverse. Europe has been stagnating since the 90s and has shown little interest in fixing itself.
Finally, there are continued reports that the EU countries, especially France and Germany, can't meet the economic requirements of the EU. The draft EU constitution is in shambles. Countries are now questioning their involvement (didn't Italy say just recently they would probably pull out in 2012?). The future of the EU is too shaky to be predicting that the euro will replace the greenback.
Spending should be cut to reduce the budget but the growing economy and less $ for Iraq will also decrease the deficit. The trade deficit reflects that the US is the only country growing and buying things while the rest of the world (Europe, Japan) is stagnant.
Posted by: AWW at December 15, 2004 4:31 PMIf national debt is an issue, the Euro weenies are in a much deeper hole than we are.
I'll bet the trade deficit does a lousy job of measuring services, which the US excels at. So the actual trade imbalance may be nowhere near the headline value.
Posted by: Jeff Guinn at December 15, 2004 10:20 PMOJ, I don't think you have to worry about the debt. As long as there are productive enterprises in the world there will be a need for the savings of retired folks.
I think that, rather than the Euro replacing the Dollar as the world's reserve currency, the Euro will compete with the dollar for that role, along with gold. Not all central banks have sold off their gold reserves, and with the price rising as it is, many will shelve their plans for further sales. There is talk of the SE Asian economies forming a similar economic union to the EC and creating their own regional currency. The future of the dollar as the world's reserve currency, and our ability to borrow at will are not assured. I see a multi-polar economic world in the future revolving around 2 or 3 strong currencies, with gold as the backup. The US will have to compete with the EU and the Asian bloc for currency supremacy.
Americans consumers as well as corporate and government entities are playing the "carry game". That is, borrowing short term to invest long term, and benefitting from the spread. They are putting all their eggs in 2 baskets, real estate and equities. The money that could, and should be going into savings is being spent on real estate, home equity is tapped to buy more real estate or to speculate in the stock market. Corporations are doing the same via hedge funds. The problem with the carry trade is when the source of cheap funds dries up, you have to unwind your positions, but everyone is trying to do the same thing at the same time. The asset markets that everyone and his brother are in up to their earlobes become tied to interest rates, and when they rise, the value of the assets drop, because everyone can't get out fast enough.
This 46 trillion net worth that OJ trumpets as a sign of our "savings" is highly dependent on rates staying low. Rates staying low is dependent on foreigners continuing to buy our debt. They won't keep buying it at such low rates, especially as they are losing money in their own currencies as the dollar falls. Rates will head higher.
Posted by: Robert Duquette at December 16, 2004 4:53 AMNot at these interest rates they won't. Why do you think there is such a boom in hedge funds? Why are people putting money in equities and real estate instead of money market CDs and bonds? Yield.
Posted by: Robert Duquette at December 16, 2004 2:14 PMYes, retirees have to eschew yield for security. Nothing is safe except for U.S. debt.
Posted by: oj at December 16, 2004 2:21 PMWhen the first medium to large hedge fund goes BOOM, people will rush (back) to CDs and money markets.
It may take awhile, but it will happen. One almost ruined 1998.
Posted by: jim hamlen at December 16, 2004 4:54 PMFor an anti-statist, you sure do worship state idols, don't you?
Posted by: Robert Duquette at December 17, 2004 6:07 AMI'm not anti-statist but an anti-Statist.
Posted by: oj at December 17, 2004 7:36 AM