On Wed, Aug 11, 2004 at 10:05:12PM -0500, Dan Minette wrote: > > On Wed, Aug 11, 2004 at 12:59:54PM -0500, Dan Minette wrote: > > > > Erik wrote: > > > > I think it is more accurate to say that certificates (bonds, stock > > certificates, IOU's, etc) flow out, not money. The trade deficit > > is financed by foreign investment in the US -- most recently by > > countries like Japan and China buying US bonds, and before that by > > foreigners buying US equities. > > I know that happens; I'm just looking at seperating the parts. > There are a lot of dollars floating around the world; dollars is > the currency of convenience. A worthwhile place to invest those > dollars is in the US national debt, or stock, as you said. But, that > investment isn't permanant; stocks and bonds are bought and sold.
Huh? Strange argument. Money even more so. Money is made for buying and selling! As for separating the parts, that is exactly what I was doing. Certainly one accounts for the dollar value of all the stocks and bonds going to finance the trade deficit, but that is just accounting, it doesn't mean that hard currency is what is actually doing the job. If the Fed were printing money as the primary way to finance the trade deficit, the dollar would be hugely devalued, much more so than it has been (if you don't believe me, check the money supply vs. the cumulative trade deficit). To see what is really happening, you need to classify that aggregate dollar number into its most important parts, as I did. Once you know what is actually financing the deficit (which is often looked at as the "twin deficits" of the budget deficit and the current account deficit), then you can see what is going on. Capital is actually flowing INTO the US to finance the deficit. The current account deficit is equal to the difference between domestic saving and domestic investment. Since Americans (including citizens, corporations, and the government) aren't saving enough to pay for our current level of investment, we run a current account deficit and a budget deficit, which is financed by investment from foreigners (who definitely do not want to hold actual dollars, since the dollar is still widely believed to be heading for more falls). The foreign investors demand some compensation for holding dollar denominated assets, and this is mostly in the form of dividends, capital gains, and interest, which you don't get by holding hard currency. (The biggest part of the current accounts is trade in goods and services, so I am using it interchangably with the trade deficit which you seem most interested in) > It seems, at some point, that the surplus of dollars might trigger a > panic. At some point, US bonds do not look like a good investment > because intrest rates are going up and stocks are not doing well. Actually, interest rates (real rates) going up will tend to strengthen the dollar. But if nominal rates go up because of inflation while real rates do not, then yes, the dollar looks much less attractive. Most people aren't worried about inflation now (although Hussman is an exception, www.hussman.net) -- the difference between 10 year TIPS and 10 year treasury yields is about 2.5%, so "the market" expects low inflation over the next 10 years. > When folks want to get out of dollars, they find there is much less > demand for dollars all of a sudden. Markets can overreact, as we all > know. Yes, but the dollar is a substitute world currency. Martin Wolf has been writing about this for a few weeks in the Financial Times (if you sign up and cancel within 14 days, you can read it for free). Basically, many countries despearately want to have dollar reserves to stabilize their economy and because the US is the only one consuming much in the world, so if the other countries with lots of unemployed (China, etc.) want to grow, they need to sell to the US and get paid in dollars. What are their alternatives? The Euro, maybe, but I can't see them wholesale switching from the dollar to the yen, franc, or pound. So it doesn't seem likely there will be a stampede for the exit door, because no one knows where the exit door is! Most likely there will be a slow devaluing of the dollar as some reserves flow into euros, but until a new big consumption country takes over from the US in pulling the world economy, then where are the reserves going to go but dollars? > I'd very much appreciate that. One thing I keep recalling from > history are those countries that obtain a massive foreign debt often > spend a lot of money paying it off. The US is nowhere near that point, > but it could definately have an effect; and I'm wondering how it would > manifest. I'll look for it tonight. > I wonder what the net assets of the US are. I've looked for that > number, but it is not as easy a number to obtain as GDP or trade > imbalance. Maybe I should look again. I've seen that number, but I can't remember where. I'll look for that when I get a chance. -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
