by MrBill » Tue 31 Jul 2007, 06:03:50
$this->bbcode_second_pass_quote('pogoliamo', 'C')ube, current developments show that all these countries actually made a wrong choice in hoarding dollars.
You are using their mistake and wrong decision as an argument
for the case you are making why dollar holds value better then
other assets of currencies.
The answer to your question is - Because they were wrong!
Do not underestimate what legacy means in the financial world,
the trend of diversification away from USD is intact, but it
would take time, years, decades. You cant just buy some stuff
with your trillion in the weekend...
You are witnessing it! But you are denying it. By reflex!
The CB's are in similar situation, but it is changing!
Brad Setser's RGE Monitor is always a good read. Here he refers to the consequences of diversifying away from US bonds by Asian exporters (and sovereign funds like OPEC oil producers)
$this->bbcode_second_pass_quote('', 'T')he FT and Lex also recognize that the US cannot realistically expect China to finance the US current account deficit by building up an undiversified portfolio that contains only the lowest-yielding of US assets forever. Lex:
“In the short-term, it was all too tempting. The savings of Asian and oil-exporting countries have helped to fuel the current boom. Their purchases of Western government bonds have funded the external deficits created by profligate consumers and lower real interest rates, boosting asset prices. But now the long-term consequences of the bargain are becoming clear. … . Governments are moving from lending to the West to owning chunks of it.”
Nicely put. But purchasing companies raises a lot more concerns than purchasing bonds. There clearly is a policy debate brewing over how the US and Europe should respond to the rise of sovereign wealth funds.
Source:
The shift toward sovereign wealth funds: the policy debateHowever, I think you are missing the point that deficits always get funded somehow no matter in what currency they are denominated.
Let me qualify that. Yes, you can have debt defaults. And yes, you can force creditors to take a haircut by unilaterally writing down the face value of the debt.
But in general CURRENT ACCOUNT DEFICITS = SURPLUSES and TRADE SURPLUSES = DEFICITS the holes being plugged by the BALANCE OF PAYMENTS between nations.
If you adopt a flexible currency regime of floating exchange rates then trade imbalances would right themselves over-time. Expensive imports cut back consumption, while a cheaper currency stimulates exports.
If you adopt a single currency you do not have a balance of payment problem, but you can still have trade surpluses and deficits.
Within countries this is why some areas of the country become economically depressed while others experience asset price inflation. However, eventually when prices get cheap enough firms move in and set-up lower cost production. There can be significant time lags of course.
However, if you adopt a pegged currency pair then you can have both trade and current account imbalances when one or another currency is fundamentally under-valued vis a vie its competitor. This is because trade occurs because one currency is artificially under-valued and not due to comparative advantages, and there is no market mechanism to correct this situation.
What makes a good transaction currency like deep, liquid markets as a place to store value until you need it are needed to effect commercial transactions. Obviously, persistant budget and trade deficits as well as large unfunded liabilities are undermining the US dollar's role as a long-term store of wealth. That does not mean it is not still a good transaction currency if it is more liquid than other currencies. Especially currencies that are pegged, non-convertible or subject to capital controls.
But what these state wealth management agencies are doing also makes little sense either. They are just shifting the burden from the central bank buying low yielding US treasuries at knock-down interest rates, that encourage deficit spending and a dearth of personal saving, to the state agency that can go about buying stakes in public companies. On one hand they take currency and interest rate risk. On the other hand they accept market risk. China's stake in Blackstone is already worth $500 million less than what they paid for it two months ago.
Are central banks or their agents better value investors than collective markets? I doubt it, but lets take this to its natural conclusion.
Persistant deficits from price signals that are not reaching producers or consumers because of currency manipulation mean that the trade deficits will never close. So these state agencies will have to go on buying more and more stakes in foreign companies with their sterlized foreign exchange reserves, while mindlessly printing domestic currency to offset that sterilization. That will keep stoking their own domestic inflation and finding its way into over-priced assets like real-estate, while stock markets elsewhere become over-valued because state agencies continue to buy foreign shares.
I hope you can see where this is headed? You end up with expensive shares trading at 50 times earnings. Which is the same as expensive bonds that yield less than inflation. It don't make sense.
UPDATE: global capital looking for a home...
$this->bbcode_second_pass_quote('', ' ') Capital Controls
When APEC finance ministers last met in Hanoi in September,
they warned that global capital imbalances may hurt developing
economies. The Institute of International Finance in Washington
estimates investment in emerging markets will reach $469 billion
this year, bringing the total to almost $1.5 trillion since 2005,
twice as much as in the prior three years.
In December, the Bank of Thailand tried to impose capital
controls to stem a flood of money that had driven gains in the baht
that were hurting the nation's exporters. The measures backfired,
driving the benchmark SET Index down 15 percent in one day.
In June, New Zealand's central bank sold the nation's currency,
known as the kiwi, for the first time in 22 years to cool gains
that drove it to the highest level since 1985. It traded at 77 U.S.
cents at 1:40 today in Wellington.
South Korea's Deputy Finance Minister Kim Sung Jin said last
week his government was ready to take action to ease the won from
the strongest level in a decade.
Currencies Fall
``The amount of international capital looking for places to
invest is noticeably larger than a few years ago,'' said Malcolm
Cook, program director for Asia and the Pacific at the Lowy
Institute in Sydney. ``How do you deal with huge inflows, when
other interests are for the free movement of capital?''
The past week's currency drops may help alleviate some concern.
The Indonesian rupiah yesterday fell to near the weakest in five
months and the Malaysian ringgit and South Korean won slipped to
their lowest in July. New Zealand's dollar has lost 5.2 percent
against the U.S. currency since July 24.
The moves in credit, currency and stock markets ``could be
seen as a return to normality'' said Shane Oliver, chief economist
at AMP Capital Investors in Sydney. ``If it continued to deepen,
finance ministers might be concerned about systemic risk, but at
this stage they'll be fairly relaxed.''
U.S. Treasury Secretary Paulson described the widening of
credit spreads and drop in stocks as a ``wake-up call'' to
investors on July 27.
Because the trade deficit is the product of an under-valued currency in the first place. If allowed to correct you would close the trade deficit on its own. Whether or not OPEC or non-OPEC oil producers or Asian central banks and their wealth management agencies buy stocks, bonds or property is quite besides the point. They are still stoking-up the value of foreign markets, while starving their own domestic capital markets of needed investment. Which is why returns on foreign investment outside of the USA (and the EU) are consistantly higher than returns in the USA (or the EU).
And when these state agencies get tired of buying USD denominated assets and start to buy euros instead they just shift those trade distorting policies from the US dollar to the eurozone thereby hurting European manufacturers and exporters.
I hope I am making myself clear? You close trade and current account deficits as well as equalize your balance of payments between nations by reducing budget deficits and paying off debt as well as allowing your under-priced currency to appreciate against your competitor's thereby making imports less expensive while your exports lose their competitiveness.
You do not close those global imbalances by changing the transaction currency for trade in good and services. Not for oil and not for any other export whether it is priced in dollars, dinars or donuts. Doh!
