Vigilant Investor

Americans, because of the nation’s wealth and power, are sometimes woefully uniformed about the rest of the world’s perceptions on issues. Largely that is because, as a the global leader for nearly one hundred years in both economic power and military power, it really has not had to consider anything different. Of course, unlike Europe - which has whole countries the size of U.S. states each having a unique culture and language — America never had to come to terms with the importance of learning other languages, cultures, etc. in order to engage in peaceful commerce, which of course, Europeans learned was a much better alternative to centuries of destructive wars.

But I digress. The point of this dispatch is to update our readers about comments from the Asian Development Bank (ADB) warning East Asian economies to be prepared for the possible collapse of the U.S. dollar in the face of the massive U.S. trade deficits and global interest rates rising. However, it is in the context noted in the paragraph above that we wish to discuss this new news.
“Any shock hitting the U.S. economy or the global market may change investors’ perceptions given the existing global current account imbalance,” said Masahiro Kawai, ADB’s head of regional economic integration. “Our suggestion to Asian countries is: do not take this continuous financing of the U.S. current account deficit as given. If something happens then East Asian economies have to be prepared.”

We would add, there must also exist a point where those same nations decide that buying the U.S. treasuries might not be the most attractive thing to do 1) with current interest rates being at 50 year lows, and 2) given the massive amount of dollar holdings they already have (see our March 29 entry and graph) when the U.S. also seems to be in a no win position for digging itself out of debt. After all, the U.S. is today a country with a runaway federal deficit, an aging population, and massive unfunded entitlement liabilities (Social Security, Medicare, etc.) being hidden off the official balance sheet (estimated at $3.5 trillion vs. the official reported $350 billion). That situation leaves it little choice but to inflate the dollar at an even faster pace than is has, which has hardly been slow in the last decade: M3, the broadest indicator of money supply has more than doubled since 1990 from about $4 trillion to over $10 trillion today, which will only press foreigners to hasten their search for diversification alternatives.

Yet most folks in the United States yawn at such discussions (and quickly turn the channel to American Idol), and could absolutely not care less what is being said about their currency in (obviously inferrior) Asian newspapers like The Hindu Times.

Yet, in the end, with the ownership of U.S debt largely becoming a foreign-held phenomenon, such indifference — and even self-righteousness, with its very expensive “world’s policeman” and “guardian of ‘acceptable’ democracy” policies — may well be downright reckless given the dependency the U.S. has on borrowing at interest rates that are well below the historic averages at a time when Americans and their governments are as cash-strapped as they have ever been since the country’s founding.

 

Yet it isn’t just the U.S. citizens who appear to be woefully unaware of the precarious nature of the situation. On the opposite side of the same troubled coin is the visage of a formal economic policy that holds consumption as the Holy Grail of economic growth, engaging in policies designed to disgorge and consume savings at home and abroad. (See our recent post on Fed Governor Ben Bernanke’s comments blaming a “global savings glut” for the U.S. deficit.) Americans have gladly fallen in line as requested (note chart above), and as such, they ought to be paying better attention to how the world views their currency, and consider the consequences should that change.
Stay Vigilant!

Trackback URI | Comments RSS