by Euric » Sun 30 Jul 2006, 00:43:18
$this->bbcode_second_pass_quote('DesertBear2', '')$this->bbcode_second_pass_quote('Euric', '
')In reality, Americans shouldn't be paying one penny in taxes. All of their government's operating expenditures should come strictly from petrodollar recycling.
And our petrodollar creditors will continue to cooperate with all this for how much longer?
Hard to say. It may be at the point where it isn't a matter of willing but a matter of being able.
I personally believe that this year 2006 is the watershed year for the US, meaning the turning point. We may not feel it or sense it now, but I believe when the big boom happens and the future world historians (if there are any) look back at the crisis, they will mark 2006 as the year the US began its descent.
I personally believe also the US can prevent its own demise simply by working out a plan with the world to have a basket of currencies to allow the world's economy to function in, as well as for a means to turn the US from a debtor nation to a nation with a balanced economy.
The problem with this fantasy is it would require the US to not only admit it is sick and need of help, but to relinquish control and be a team player, not s dictator. The US will never do this, thus the only result will be its destruction, of its own making.
by MrBill » Mon 31 Jul 2006, 03:48:11
$this->bbcode_second_pass_quote('DesertBear2', '')$this->bbcode_second_pass_quote('Euric', '
')I personally believe also the US can prevent its own demise simply by working out a plan with the world to have a basket of currencies to allow the world's economy to function in, as well as for a means to turn the US from a debtor nation to a nation with a balanced economy.
That is interesting....
But I don't understand how rearranging the international currencies will solve the hollowing out of the US manufacturing sector, implosion of the housing bubble, massive over dependence on imported energy, outsourcing of high value jobs, the health care crisis, the federal deficit, a trillion dollar/year current account deficit, and the coming boomer aging bubble?
International currency units are representations of wealth but are not wealth in and of themselves.
Not trying to be argumentative.
That is the point, and that is the problem with linking everything back to petrodollar recycling, which is very specific, and then ignoring that some of the problems you mentioned (I may not agree with your list) of hollowing out the manufacturing sector (largest manufacturer in the world), implosion of the housing bubble (or simply stagnation in a country who's population is still growing through birth and immigration), reliance on imported energy (China, Germany and Japan as well by the way), outsourcing of high value jobs (as well as creating new ones in the USA) that have nothing to do with petrodollar recycling per se.
$this->bbcode_second_pass_quote('', 'O')il-producing nations are challenging
Asian central banks as the biggest source of cash in world
financial markets. One result may be higher U.S. borrowing costs.
The current account surplus of countries such as Kuwait and
Norway is projected to widen to $311 billion this year from $242
billion in 2005, according to an International Monetary Fund
report in April. Asia's surplus will be $253 billion, down from
$263 billion, the IMF said.
Asian central banks tend to invest their surpluses in U.S.
Treasury securities, helping to finance the U.S. current account
deficit. The world's new heavy hitters, on the other hand, also
buy real estate and stakes in corporations, allocate cash to
private-equity funds, place money with hedge funds and invest in
emerging markets, according to George Magnus, senior economic
adviser to UBS AG.
Source: Bloomberg, July 31, 2006
And where I do agree with you about "the health care crisis, the federal deficit, a trillion dollar/year current account deficit, and the coming boomer aging bubble?" which are all captured under the headline of
future unfunded liabilities again it has been Asian central banks, not necessarily OPEC and non-OPEC oil exporters, that have been funding those liabilities (in the past). Nor is it clear to me that they would choose to continue to fund them in the future?
$this->bbcode_second_pass_quote('', 'M')otivated by a desire to keep their currencies weak and
exports competitive, Asian central banks generally use the
revenue received from selling goods to the U.S. to buy low-
yielding, dollar-denominated Treasuries, he said.
By selling their own currencies to buy dollars, Asian
central banks keep the U.S. currency stronger than it would be
otherwise, fueling more purchases of Asian goods. The purchases
of Treasuries help keep U.S. interest rates low.
``Profit motives take a back seat to exchange-rate policy,''
Sargen said. ``The U.S., in effect, obtains automatic financing
of its external deficit.''
Assessing where oil exporters stash their cash isn't easy.
For instance, the Bank for International Settlements is unable to
identify where 70 percent of oil-exporting nations' combined
revenue surpluses have been invested since 1999. Oil-exporting
nations made net purchases and deposits of roughly $270 billion
of U.S. securities between June 2003 and the end of 2005,
according to U.S. Treasury data.
Magnus said the $270 billion accounts for just a quarter to
a third of oil exporters' total financial investments. U.S. data
doesn't identify the owners of assets purchased indirectly
through third parties such as brokers.
Source: Bloomberg, July 31, 2006 The organized state is a wonderful invention whereby everyone can live at someone else's expense.
by MrBill » Mon 31 Jul 2006, 10:51:58
$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('Scactha', 'W')hat would happen if it ended is one thing but I see no political 'camp' deny the fact that it contributes quite significally.
In fact, Mr Bill does not agree with the petrodollar view.
Not quite. Petrodollars are an observed phenomenon. However, they are only part of the story. Not to rehash all the ink that has already been spilled over this subject, but no one is forced to buy US treasuries regardless of what currency oil is priced in. Oil is produced around the globe in a variety of local currencies. Some oil producers have pegged their own currency to the value of the dollar. Some have independent currency policies.
The most recent and most accurate research and data supports the view that Asian central banks have been mainly financing the US current account deficit, but going forward there is no denying the size of reserves being generated by OPEC and non-OPEC producers. But again the data supports the fact that they are not buying low yielding government bonds with those dollars. The attached Bloomberg article from this morning outlines someplaces where they have been investing.
But at the end of the day, the US has large and liquid capital markets. As the US consumes 70% of the world's savings there are bound to be some oil revenues that end up as foreign investment in the USA that plugs the US' large current account deficit.
However, this problem is not caused by petrodollar recycling. It is also about Asian central banks recycling their export revenues into US dollars. And if I may point out, yields in the USA are higher than in the euro and yen as well as elsewhere, so there is a yield pick-up to invest in dollars even if you may feel the dollar is overvalued and likely to fall in value.
And in addition to stating that it does not matter in which currency oil is priced, what matters is in which currency oil exporters invest their savings, I also feel that as the dollar, euro, yen and other currencies are freely convertible that it would not matter if you priced oil in euros and dollars as the price would be the same. Otherwise there would be an arbitrage opportunity.
Much like trading shares in local currency and global deposit receipts (ADR/GDRs) in dollars. The price of shares and ADRs will always trade in parallel with one another taking into account the exchange rate or someone will buy shares and sell ADRs or vice versa and make an arbitrage profit through the exchange rates.
So if oil is expensive in dollars, buyers will prefer to buy it in euros. If oil is expensive in euros, buyers will prefer to buy it in dollars. If no one sells oil in dollars, than buyers will have to buy in euros. However, even if exporters sell in dollars, they are free to sell dollars and buy either local currency or euros for re-investment.
At the moment (as per the article) oil producers seem to want to invest elsewhere - as in property, shares, local projects - rather than in US treasuries. So the difference has to be made up by Asian central banks and private investors who demand higher yields than those central banks who have other investment objectives like keeping their own currencies competitive vis a vie the dollar.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
by MrBill » Tue 01 Aug 2006, 05:35:10
$this->bbcode_second_pass_quote('Scactha', 'E')xhaustive and interesting. Thanks for the writeup
$this->bbcode_second_pass_quote('', 't')he difference has to be made up by Asian central banks and private investors who demand higher yields than those central banks who have other investment objectives like
keeping their own currencies competitive vis a vie the dollar.
Here you seem to endorse the recycle theory or am I just misunderstanding?
If you keep an eye on this webpage you'll learn more about central banks and reserves than I can tell you.
$this->bbcode_second_pass_quote('', 'E')ither sum dwarfs China’s reserve growth. Though the fact that China is adding $20b to its reserves a month and running a $15b a month current account surplus even as its oil import bill soars is a big part of the global story. But that is a topic for another post.
Right now, the flow of savings from oil states to the world (and one assumes, from oil states to the US via various intermediaries) dominates the global flow of capital.
I suspect Martin Wolf is right: the size of the oil surplus has (temporarily) increased the size of the sustainable US current account deficit.
And I suspect these oil-state flows also have something to do with London’s emergence as the global financial center par excellence. London is physically a lot closer to the big oil exporters than New York. It doesn’t have all of the United States political baggage. And the UK never has worried very much about taxing oil money moving through London …
And the money keeps rolling in …But yes, just like where SUPPLY = DEMAND at every price one man's current account SURPLUS = DEFICT of another regardless of the rate of interest. It is an immutable fact and one that needs to be understood at its most basic level or nothing makes sense.
The USA consumes 70% of the world's current account surplus with their current account deficit. Does the world save too much or does the USA consume too much? They are two sides of the same coin.
If Asian countries save their excess returns from exporting versus reinvesting that money domestically or consuming it then it goes into external savings. External savings have to flow somewhere? If they do not want their own currencies to appreciate and undermine their own export competitiveness they need to sell their local currency and buy dollars or re-invest their dollar surplus into US treasuries and other US denomimated investments like shares, bonds, real-estate, etc.
If oil producers save their excess returns from exporting versus reinvesting that money domestically or consuming then it goes into external savings. External savings have to flow somewhere? Does that sound familar?
But unlike Asian central banks, oil producers are not concerned about keeping their own currencies weak for competitive reasons and some even peg their own currency to the dollar to avoid asset & liability mismatches (
that were part of the cause behind the Tequila, Asian and Russian currency crises and Argentine defaults by the way). Therefore, they are free to invest in shares, bonds, real-estate, etc., but they are not restricted to dollars, they can also invest in euros or other currencies.
However, per the data, at least 25% of those savings seem to be finding their way back into the USA, some of which end up in US treasuries. That is because the USA has large, liquid capital markets, is transparent, have legal protections and currently pays an interest rate yield pick-up via the euro and the yen.
Is that yield pick-up enough? Likely not, so the dollar may also have to weaken in order to attract 'selective' capital, that is capital that is sensitive to a risk weighted return (as opposed to central bank capital that is 'blind' and less sensitive to risk returns).
Private investors whether they are mutual or hedge funds, banks or investment agencies like the Kuwait Investment Agency are obviously interested in earning those risk adjusted returns for their stakeholders/shareholders. If there is not enough central bank investment to cover the US current account deficit, then yields will have to increase and the dollar will have to decrease until those more selective investors are tempted back into the game. That means higher real interest rates which will act as a drag on US growth or even a recession.
But obviously, Asian central banks would lose from a US recession in the form of lower exports, and if there is a global slowdown because of that, we can expect oil prices to also moderate or decline which would also impact oil exporting countries. No country is an island, we all draw from the same pool of global liquidity! ; - )
UPDATE: although this post is older you may want to also give it a read with regards to central bank versus petrodollar recycling for background.
$this->bbcode_second_pass_quote('', 'T')hat is still a rather condensed version of Nouriel's argument. I certainly wouldn't rule it the scenario he describes. But at least so far, there isn't much evidence the US consumer is cutting back. And I have been very struck by one thing that Nouriel doesn't put a lot of emphasis on. Call it the oil savings glut.
There is no doubt that the spare savings of the world's oil exporters - savings in excess of their investment - is now enormous. And with oil at $70, it will only get bigger.
And there is no doubt that the United States' need to borrow savings is enormous. And it too is getting bigger.
I suspect one of the reasons why oil didn't exert more of a drag on the world economy is that the US had - by that time - entered into a cycle of expansion fueled by a surge in residential investment and rising consumption spurred by consumers' ability to borrow against rising home values.
The oil exporters spare savings stepped into the breach left by the reduction in the pace of Asian central bank intervention. Non-Chinese Asian central bank intervention that is. China is a special case: its current account surplus grew even as its oil import bill grew.
By holding US real interest rates down, the oil exporters reinforced a process that got started with the Fed cut rates, and got further fuel from Asia's unwillingness to allow their currencies to appreciate against the dollar from 2002 on.
There is a certain lovely symmetry:
The countries with the highest propensity to save - China and the oil exporters - financed the country with the highest propensity to borrow in order to spend.
Everything worked out.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
