Re: Re: day of reckoning for the dollar?
- Original Message - From: "Michael Perelman" <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]> Sent: Saturday, May 04, 2002 1:23 PM Subject: [PEN-L:25676] Re: day of reckoning for the dollar? > That was Jane D's argument. Michael Pollack posted the transcript of her > discussion with Doug Henwood either here or at LBO. > On Fri, 24 Aug 2001, Michael Perelman wrote: > Regarding the thread on exchange rates, yesterday Doug interviewed > Jane regarding exchange rates, posing Ellen Frank's analysis to her. http://csf.colorado.edu/pen-l/2001III/msg02118.html Doug Henwood: Welcome to WBAI, Jane D'Arista Jane D'Arista: Thank you. DH: As I said in the introduction, after many years of being the world's strongest currency, the United States, after being the target of foreign investors' capital flows, seems to be having a wobbly time of it. What's your analysis? What's going on with the dollar, and what are the underlying reasons for it? JDA: The slowdown is certainly a factor in what is going on with the dollar. But the problem is that it is the trade balance that is at the heart of this issue. The US has been not really the target of investors except as a by-product. Really what it is is the target of exporters. All the world exports except the US and we are the importer of last resort. As a result, and because of the fact that the dollar is the key reserve and transactions currency, we pay our bills in dollars, and those dollars then go out and are returned to our financial markets. So it's not so much the idea of a strong dollar policy per se, or that the US is the preferred locus of investment, so much as that those by-products are inevitable, if the dollar is going to be the key currency, and if the US is going to be the importer of last resort. Now the fact that the US economy is slowing, and those imports are dropping, is very much affecting the dollar. DH: Let's go over some basic concepts here. You mentioned the phrase "reserve currency." What does that mean? JDA: That means that countries who have to keep a reserve in order to protect their own position keep those reserves in dollars. It used to be gold, under the gold standard. Now that they hold dollar reserves, they need dollars to keep them up. They need them in order to be able to import to keep their own economies going, to repay debt, and to build additional reserves. The reserves are out there because markets for most currencies other than those of a few countries (Europe of course, Japan and the US) are very thin. So people cannot -- Mexico, for example, although it's in a very strong position at the moment, tends to use dollars as well its own currency in its export/import industries. So the dollar has become the key currency, both for holding reserves and for transactions. That has a very large implication for the United States and for US financial markets. It means that, increasingly, investment has to be in the US. Over a third of all US treasury securities are owned by foreigners, a very large share of that by foreign central banks, who hold their reserves in dollars. Now they don't hold dollar bills. They invest those reserves in a US financial asset. And they are looking for the safest asset, and that tends to be the treasury bill. They have also moved now into the Fannie Mae and Freddie Mac paper, the government-sponsored enterprises that appear to be the next-safest financial asset in the US market. DH: This is subtle point, and I guess a pretty obscure one to most Americans, namely that other countries do a lot of business, including financial business, or paying for imports, in currencies other than their own. JDA: That is correct. DH: India can't pay for oil imports in dollars, it needs dollars, and Argentina can't pay its debts in pesos, it needs dollars. JDA: That's correct. DH: But the United States is unique, in that we pay for oil imports, and pay our foreign creditors, in the currency that we print. How big a benefit is this for the United States, in your estimation? JDA: Well, certainly during the 90s it was an enormous benefit because it jump-started our economy and kept it running in 5th gear. That was a lot money pouring in. Throughout the 90s, between 10 and 20 percent of the flows into US financial markets were flows from foreign investors. So the foreign sector made a real contribution to US financial markets. This meant that the saving rates could fall and not push up interest rates and not constrain credit because credit was gushing in. But the result was . . well, when you read about a developing country, they say if the capital flow is over 10 percent of GDP, then you have a problem. Well, it's been pretty high in the US, and I think we have a problem as well. What this has done is create a debt bubble. E
Re: day of reckoning for the dollar?
That was Jane D's argument. Michael Pollack posted the transcript of her discussion with Doug Henwood either here or at LBO. "Fred B. Moseley" wrote: > below is an article in last Saturday's Financial Times, > which concludes that the "day of reckoning" for the dollar "is close at > hand". > > The article emphasizes that the key problem is that it is not necessary > for foreign investors to sell US assets for the dollar to fall. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
RE: Re: RE: day of reckoning for the dollar?
Don't know. After the tornado takes me, I'll ask him. Maybe he was referring to a consideration inhibiting a possible decision by foreign governments. - mbs > >Bob Eisner used to point out that those holding dollar-denominated > >assets who started to bail out ran the risk of taking a bath as the > >process continued. > > How's that any different from any other speculative market? People > sell stocks in a bear market, it drives the value of their remaining > shares down, they sell more, etc., until you have a selling climax. > How could prices ever go down in Eisner's world? > > Doug >
Re: RE: day of reckoning for the dollar?
Max Sawicky wrote: >Bob Eisner used to point out that those holding dollar-denominated >assets who started to bail out ran the risk of taking a bath as the >process continued. How's that any different from any other speculative market? People sell stocks in a bear market, it drives the value of their remaining shares down, they sell more, etc., until you have a selling climax. How could prices ever go down in Eisner's world? Doug
RE: day of reckoning for the dollar?
Fred writes: > Related to the Business Week article sent to the list last > Friday by Jim D. on the danger of the US deficit on the current account and > increasing foreign debt, below is an article in last Saturday's Financial Times, > which concludes that the "day of reckoning" for the dollar > "is close at hand". > > The article emphasizes that the key problem is that it is not > necessary for foreign investors to sell US assets for the dollar to > fall. All that is necessary is that foreign investors cease to buy US > assets, or buy them at a slower rate. And it argues that there are good reasons > to believe that foreign investors may indeed purchase US assets at a > slower rate in the coming months: the day of reckoning always seems to be at hand these days, but (given the uncertainty of the future) may never happen. If we knew ahead of time when it would happen, we'd be able to get rich quick. (Of course, if we were rich now, maybe we could precipitate it if we wanted to.) The fact is that the inevitable can be postponed. But in the current political economy, postponement simply to increase the problem in the future. To be specific, let's consider the three bears (for the US). The baby bear (as I've called it) is corporate overindebtedness. This has already lead to a massive slide in business fixed investment, which chased that famous burglar Goldilocks out of the house in 2001. That depression of investment doesn't seem to be going away, while Goldie is trying to be avoid being surrounded in the woods. But the Mama Bear (I think -- I'll have to check my ursology) is excessive consumer indebtedness. As part of the Fed's and the government's 2001 bear-baiting, this critter is standing up on her hind feet, threatening to rip poor Goldilocks from limb to limb. She is being kept away by abnormally high asset prices, due to the still-overvalued stock market and the housing bubble (inflated by the Fed's rate cuts during 2001). I have a hard time believing that this bear will be kept at bay when Papa Bear comes crashing in. This is the US current account deficit, which is leading to rising external debt -- and debt service. I recently compared the US GDP to the GNP. The latter is the same as "gross national income" and does not include the production that the US does to pay foreigners for our obligations. It's just recently that the GNP went below the GDP (it used to be that the US benefited from debt service and the like) after the GNP/GDP ratio has been falling since 1979. The US is hardly in the same league as Argentina on this score, but the fabled growth spurt of the late 1990s was not as good as advertised partly because some of that growth went to pay debt service or to other flows of income outside the country. (And there are lots of other reasons, as I'm sure Doug will explain in his book. For example, as Dean Baker has emphasized, depreciation sped up.) The rising external debt encourages the dollar to fall in the near future (if not now as the FT says). It can be delayed, but that simply makes the external debt and debt service larger. This means that it's more likely that the dollar will fall _quickly_ when it falls, especially given the dynamic of speculation. (The hungry Papa Bear is more likely to leap when he's hungry.) A large fall is more of a stagflationary shock to US economy than if the authorities were able to find a way to let the air out of the foreign exchange bubble slowly. And el Maestro Greenspan will have as hard a time as Arthur Burns did if there's this kind of shock. JDevine
RE: day of reckoning for the dollar?
Following the deficit debate, I've been hearing about this day of reckoning for 12 years. It must be getting really close! I'd say the key issue in all this is the Bubble. U.S. assets still seem to be over-valued. As for the accounting scandal, it may be that the ingenuity of Euro and japanese accounting just hasn't seen the light of day yet. We can't doubt an equal capacity for chicanery by our capitalist brethren. Perhaps it is greater, if we grant that U.S. capital markets are more honest, relatively speaking, then the rest. Bob Eisner used to point out that those holding dollar-denominated assets who started to bail out ran the risk of taking a bath as the process continued. Paul Davidson would reply that on the micro level, with atomized decision-making, anyone in the midst of such a wave has a rational reason to try and dump before the next fool, leading to the big communal bath. Given the age structure of the U.S. population, with aging Boomers trying to save after leading our dissolute lives, this ought to prop up asset values for another ten years or so. At that point who knows what shape the world will be in. mbs FM: > Related to the Business Week article sent to the list last Friday by Jim > D. on the danger of the US deficit on the current account and increasing > foreign debt, below is an article in last Saturday's Financial Times, > which concludes that the "day of reckoning" for the dollar "is close at > hand". . .
day of reckoning for the dollar?
Related to the Business Week article sent to the list last Friday by Jim D. on the danger of the US deficit on the current account and increasing foreign debt, below is an article in last Saturday's Financial Times, which concludes that the "day of reckoning" for the dollar "is close at hand". The article emphasizes that the key problem is that it is not necessary for foreign investors to sell US assets for the dollar to fall. All that is necessary is that foreign investors cease to buy US assets, or buy them at a slower rate. And it argues that there are good reasons to believe that foreign investors may indeed purchase US assets at a slower rate in the coming months: US asset markets are no longer outpacing the rest of the world; the price-earnings ratio on US stocks is almost twice as high as on European stocks (the print version of the article has an impressive graph of this differential in price-earnings ratios, which has increased in recent months); and US bonds have become less attractive. One could add that the Enron scandal and the more general accounting crisis in the US have led many to have doubts about the value of US assets. If the day of reckoning is at hand for the dollar, then so it is for the US economy, which has become increasing dependent on foreign capital in recent years, and which would suffer negative consequences if this inflow of foreign capital were to slow down (rising interest rates, slower investment and growth, higher unemployment, etc.), and especially if it were to turn into capital outflows. Fred Analysts sense day of reckoning for dollar: A fall in capital inflows to the US has alarm bells ringing Financial Times; Apr 27, 2002 By CHRISTOPHER SWANN After a frustrating couple of years, dollar bears in the foreign exchange market are scenting blood. With the US economy supposedly leading the world out of recession, one might have expected the greenback to spring higher. In fact it has fallen by almost 3 per cent over the past month in trade-weighted terms. Currency strategists are asking whether this sign of vulnerability presages the long-awaited fall in the dollar or whether it is yet another false alarm. Defenders of the dollar are quick to point out that the recent weakness of the currency is largely the result of bets by speculative traders. Speculators have taken these positions several times over the past few years, only to be forced to withdraw their bets because fund managers continued to invest heavily in US assets. This argument would suggest that the recent weakness of the dollar could be relatively short-lived. But a rising number of analysts are unpersuaded by this sanguine analysis. "This is not just a fire drill for the dollar, it is a real alarm," says David Bloom, currency strategist at HSBC in London. The key problem for the US currency is that investors do not need to sell US assets for the dollar to fall. All that is necessary is that they fail to buy. The bloated US current account deficit, running at about 4 per cent of gross domestic product, means that the US needs to attract a net inflow of around Dollars 1.5bn (Pounds 1.04bn) every day in order to stop the dollar falling. The latest figures from the US Treasury provide strong indications that capital inflows are finally drying up. In January the net inflow into US equities and fixed income was just Dollars 9.5bn. This is weak even compared with the Dollars 17.8bn the US attracted in September. Analysts say the US is struggling to attract funds because its asset markets are no longer outpacing the rest of the world. "Over the past few years, just when one source of inflows for the dollar ran dry another would take over," said Ray Attrill, director of research at 4Cast, the economic consultancy. "Now it is becoming harder to see how the US can attract enough funds to prevent the dollar from falling." Inflows into US corporate bonds, which funded the lion's share of the current account last year after mergers and acquisitions inflows dried up, are thought unlikely to be as important in 2002. Economists are concerned that recovery has been based on companies rebuilding their stocks after the slowdown and government spending rather than on a pick-up in investment spending. "This is low-quality economic growth of the kind that does not boost corporate profits," said Paul Meggyesi, senior economist at Deutsche Bank. "It is looking increasingly like the day of reckoning for the dollar is close at hand." Copyright: The Financial Times Limited 1995-2002
