They Only Want Dollars
It seems that the U.S. government is still trusted by the rest of the world to stand by its obligations. As this global shutdown proceeds, money is leaving other currencies and finding shelter in T-bills. In 2007 there was $928 billion private money invested in emerging countries. It has dropped to $165 billion this year, according to the Institute of International Finance. China is buying huge amounts, still. The averaged exchange value of the of the greenback is up 13% over the last 12 months.
It's not the same story for corporate stocks and bonds. Foreign investment in US properties is plunging, from a high of almost $800 billion in 2008 to less than $200 billion now. US purchases of foreign stocks and bonds dropped from $300+ billion to negative territory. So the story the loose-money cowboys and stock acolytes tell, about how government IOUs are meaningless, is dead wrong. It is their commercial properties, the supposed sounder investment for our retirement, that are exposed as not in the same league as the promises made by the popular government of world's richest nation.
The bad news gets worse for the exporting countries that depended on our buying their inexpensive clothes and electronics. Free-trade devotees tried to bolster their religious worship of this doctrine by pointing at the way it helped lift developing countries' standard of living. Whether we owe that to them is one thing, but it shows that depending on selling to others is not the same is having a healthy economy. It is more like a trade equivalent of immigrant labor sending money home to Mexico. It's a money swap, not true economics.
The exporting countries did not really outperform our own manufacturing and agriculture, or our labor force. They only underpriced us, because their currencies were weak. And now the meaning of those weak currencies is being shown---when things get scary, the dollar is as good as gold. Actually, it's much better, more fungible, weighs less to carry, and earns interest. Funds that might be helping the populations of those countries are shrinking in value, and actual capital is leaving for safe haven in the US.
So let's not hear any more blarney (using polite language) about the risk of trusting our futures to dollar-based US promises. The whole world isn't crazy, and they are putting their money in the US Treasury. That's quite a vote of confidence in the American People, although not in American corporations and investment houses. The latter have been shown to be as injudicious as any other windfall-chasing speculators, and the businesses shown to be not the wise and farsighted innovators they would like to seem. If the Ayn Rand acolytes believe in the philosophy represented by that statue of the Dollar in her apartment, that same dollar has shown them where Value is to be found.
Kind of ending up on a positive note this morning Tom, and it is always good to hear from our world traveler.
So basically, there is something of worth, something of value still remaining in our country.
March 9, 2009 10:01 AM | Reply | Permalink
Of course there is. His name is Tom Wright. (grin)
Great post.
March 9, 2009 10:54 AM | Reply | Permalink
You bet TomW is of value and so are you.
March 9, 2009 11:02 AM | Reply | Permalink
Couldn't be because the USD is the world's reserve currency -- could it?
March 9, 2009 9:50 PM | Reply | Permalink
The point, exactly.
March 9, 2009 11:49 PM | Reply | Permalink
Obviously the "market" has spoken - for the US treasury and against the US financial "best and brightest" who think the bonuses should come to them - for driving the economy off a cliff!
Thank you for your analysis, Tom!
March 9, 2009 1:41 PM | Reply | Permalink
I am remiss in sourcing, could edit but I'll just post a link to the NYT article that inspired this:
http://www.nytimes.com/2009/03/09/business/09dollar.html?_r=1&hp
March 9, 2009 1:47 PM | Reply | Permalink
Due to the US having run a roughly $500 billion/year trade deficit for over a decade, there are trillions of dollars in foreign hands that have to be invested.
The holders of dollars no longer trust the creditworthiness of Eurodollar or US financial, corporate, or asset backed securities and derivatives. So they are investing in Treasuries and not directly in US real estate and corporations. Instead, the Treasury will have to run up its debt and then lend to US businesses via the new programs that are being put into place. In effect, the full faith and credit of the US Government (and its power to tax) is replacing the Credit Default Swaps that formerly guaranteed the US' dodgy debt.
March 9, 2009 2:15 PM | Reply | Permalink
You need someone more well-versed in this than me, Tom, but this isn't quite right. (Check Setser's site out, he writes on this a lot. Sorry I don't have time to hunt down his latest.) From what I understand, it isn't that the whole world has confidence in Treasuries. A massive percentage of those inflows are not from foreign private investors, but from foreign Central Banks. Which means it is part of the global, politically-driven, set of actions to salvage things. (There is also an awful lot of US-controlled money that has been brought back home & parked - though it can travel under a lot of different names.)
So there is no general international vote of confidence. It's more that it may be prudent to park some money in the pockets of the biggest kid on the block. It's good the American people have confidence in the American people. Most of us outside share that confidence. But in things financial and economic, whether private companies or the more public side - run by the Bernanke's, Geithner's and Summers's of the world - make no mistake. There is no widespread international confidence in those people or their policies.
March 9, 2009 3:45 PM | Reply | Permalink
The NYT article I read has graphics that refer to "foreign holdings in US Treasuries" without breaking it apart into private/central, but in any case that curve is a steady upward. They do break out China, a steady upward at a lower rate than the total.
But the article did pretty much agree that is to a large degree institutional, with central banks buying the T-bills. To the extent that those countries' governments are the functional representatives of their people, the sentiment is still that dollars beat the rest.
The holding of Treasuries by all foreign sources "rose by $456 billion in 2008", (from the article). That's rather less than the vanished wealth reported, and less than the bailout to date, but it ain't nuttin'. And it is interestingly opposite to the worries of folks like Mr. Seaton, that investors would leave US Treasuries.
March 9, 2009 5:32 PM | Reply | Permalink