Posted on 01/24/2005 7:24:45 AM PST by 1LongTimeLurker
During the past few years the US has become dependent, not so much on millions of investors around the globe but on a few individuals in a few of the world's central banks.
In 2003, the most recent year with full international statistics, central banks financed 83 per cent of the US current account deficit, with Asian central banks accounting for 86 per cent of flows.
A similar picture is emerging for 2004. Despite a good start to the year, when the private sector was a large net purchaser of dollar assets, central banks came to the rescue again. The People's Bank of China has let it be known that China increased dollar reserves by $207bn (€159bn) in 2004, financing nearly a third of the US current account deficit, estimated at $650bn.
Self-interest has supported much of this flow of cash. The US has lapped up cheap finance to fund its unquenchable appetite to spend. Asian governments have until now been keen to oblige, in order to keep their currencies from appreciating. But all investors have their limits and they may start worrying about their degree of exposure.
If new official flows to the US were to be curtailed, the dollar would plunge, creating a huge hole in the accounts of central banks holding dollars.
"The risk exposure for Asian central banks is already great," concluded Matthew Higgins and Thomas Klitgaard of the Federal Reserve Bank of New York in a recent paper.
In November, Alan Greenspan, US Federal Reserve chairman, suggested foreign investors would reach a limit in their desire to finance the US current account deficit and diversify into other currencies or demand higher US interest rates, "elevating the cost of financing" the deficit and "rendering it increasingly less tenable".
Until recently there had been little evidence to back up these fears but this has begun to change. Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent to 61.5 per cent in the past three years.
The Bank of Thailand said this month it was considering reducing the proportion of its $50bn reserves held in dollars from 80 per cent to 50 per cent. Russian officials have made similar noises.
A detailed survey out today suggests that central banks are increasingly moving official reserves out of the dollar and into the euro.
Asian central banks are unlikely to pull the plug on dollar assets altogether. But they may be close to ending their willingness to provide cheap financing for an ever increasing US current account deficit.
I think there are offsetting factors that are typically ignored. I think the most prominent would be the profits and savings from overseas investments and trade.
This is article makes it look as if the Central Bankers buy dollars out of compassion for us.
"But they may be close to ending their willingness to provide cheap financing for an ever increasing US current account deficit"
This statement is wrong, since the defeciet can only increase if the Asians or other buy american assests.
Would anyone know how I can buy Iraq Dinars? I am not looking to buy them off ebay or some site. I would like to have bank account with Iraq Dinars. I f any of you enlightened freepers could advise that would be great.
The most important part of this article is where the Thais and the Russians are cited as "considering" reducing their stakes in U.S. debt. To me this sounds like a bunch of nations are floating the idea to see what kind of reaction it gets from us. That is, do we have the guts to protect the dollar? If even half the central banks reduced their holdings in dollars from 80 to 50 percent we are headed for an unavoidable and absolute financial disaster. Anybody know a good currency to invest in (other than Euro, of course--one can't sacrific all principles)?
The smart money is already shorting the Europe. As the fed drives the rates up the Europe will go down. The Asian banks are not doing us any favors by supporting the US government securities - they have their own reasons. Those are sold at auction anyway, no one is forcing them to buy. It they are good investments other people would step up to the plate and buy them anyway. Also, the relationship of the dollar to US Government securities is not exactly a straight orward one. These sorts of articles tend to confound central banks reserve holdings with government security holding.
If they want to do business in America they have to have dollar reserves. If their business in Europe is expanding they have to have Euro reserves.
If you think you are going to get anything positive about America out of the FT, then I have a bridge or two in New York I would like to talk to you about.
Buying Iraqi Dinars is a big scam usually. There are sites that offer investments in Dinars but they generally fudge the exchange rate by 20 percent, which basically means you are throwing away good money. The problem is that Iraq's banks are currently not capable of securely handling most wire transactions to the states. This is the reason Allawi had to fly a planeload of cash to Lebanon. Or at least I hope that is the reason.
"Dollar at mercy of central banks"
Yeah..... So is every other currency.
"the Europe" = "the Euro"
You are right on one point, obviously, namely that the dollar will continue to correct itself, especially against the Euro, but this is at least half the fault of the Europeans and their reliably crappy economy. But just because the dollar corrects against the Euro does not mean that Asian governemnts won't continue to divest dollars in favor of better investments, not just in Europe, but in Asia and even South America. The nightmare scenario is not a plummeting dollar it is rapidly rising interest rates...if you don't believe that is a real problem for our economy...
As for government debt sold at auction, it was little reported but the most recent debt auctions were troubling, sure, everthing sold, but there was the lowest demand for long-term bills that I can remember in a long-term. Central banks are still buying, but they are only buying low-risk, short-term.
Wrong !
The deficit increases every time Americans buy foreign goods over the amount foreigners buy american goods.
By the way, how would China, releasing the flood gates cause inflation? It is all supply and demand once you get beyond "monetary mercantilist" policies like the one China is pursuing. IF it makes Chinese good more expensive then local producers have an incentive to produce. There will be a supply lag but not for long. If there is a market in the UA then international producers will just move to a location outside of China. The point is to get China to float the Yuan, develop an internal market and let us in.
China releasing the flood gates on their dollar reserves would cause inflation because those dollars would increase supply of overall dollars in the market. The dollar would drop in value at a more rapid rate than it has been the past few years. The dollar has dropped 40% in value the past few years. The inflation is coming down the road from this drop in value. It does not happen overnight but look at the increase at the gas pump and the increase in insurance rates as a clue. Yes local producers would become more competitive but that is only because the prices they could charge will have risen to a level they are competitive in the marketplace.
China releasing the flood gates on their dollar reserves would cause inflation because those dollars would increase supply of overall dollars in the market. The dollar would drop in value at a more rapid rate than it has been the past few years. The dollar has dropped 40% in value the past few years. The inflation is coming down the road from this drop in value. It does not happen overnight but look at the increase at the gas pump and the increase in insurance rates as a clue. Yes local producers would become more competitive but that is only because the prices they could charge will have risen to a level they are competitive in the marketplace.
You are right again that China has no interest in seeing inflation here and a sinking dollar, this is why they peg there currency against ours. But the administration isn't making a bunch of noise about Chinese monetary policy for the simple reason that if the Chinese floated the Y this would still hardly be sufficient to make our goods competitive in China. And unfortunately there is no "us" left to let in. Once we lose our manufacturing base, as we have been doing for the past ten years at a frightening clip, we cannot simply bring it back overnight just because our goods are suddenly a bargain because of the cheap dollar. This is why even as the dollar sinks (a 1.35 againnst the Euro...I was in Europe three or four years ago and it was like 85 cents) our trade gap is actually growing!!
Can you point me to info about the treasury auctions that you are refering too.
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