whoa nelly! UFB The 70% solution
-g-
Asian Economy
Asia fills her boots: dollar reserves skyrocket
By John Berthelsen
At a time when the United States remains tightly
focused on its domestic economic problems and its
international military adventures of the past two
years, Asia has been quietly running up an absolutely
staggering surplus of US dollars.
By the end of 2003, according to JP Morgan Chase
economists in Hong Kong, the combined countries of
Asia are expected to hold an astonishing 70 percent of
the world's currency reserves. In the past decade,
they estimate, Asia has added US$1.2 trillion to its
US dollar reserves as it runs up whopping trade
surpluses with the rest of the world - principally the
United States, whose annual trade deficit is expected
to reach US$500 billion. Credit Lyonnais Securities
Asia (CLSA) in Hong Kong put the Asian reserves even
higher, at perhaps $1.5 trillion.
Is this a danger to the world economy? For many years,
America's strong-dollar policy served the world and
chiefly the United States very well. Their currencies
cheap against the US dollar, Asian manufacturers
profited by making relatively inexpensive exports and
selling them in the United States at a healthy profit.
In a kind cat-and-rat-farm analogy, in which the cats
eat the rats, are skinned for their fur, and then are
fed back to new rats, the Americans benefited by
getting cheap goods that kept their consumer-led
economy roaring. The financial communities benefited
from the repatriation of those profits as the funds
flowed back in a ceaseless waterfall into US stock
markets, treasury and corporate bonds, money-market
funds and other financial instruments.
But perpetual-motion machines don't work. The
monumental scale of Asia's dollar reserves and the
size of America's deficit are starting to make
economists and strategists nervous. Wayne Godley, an
economist at the Levy Economics Institute in New York,
writes: "If the balance of trade does not improve,
there is a danger that over a period of time the
United States will find itself in a 'debt trap', with
an accelerating deterioration both in its net
foreign-asset position and in its overall current
balance of payments (as net income paid abroad starts
to explode). Such a trap would call imperatively for
corrective action if it is not at some stage to
unravel chaotically."
It has been widely reported that the US must take in
about $1.3 billion a day - about $55 million an hour -
in foreign investment to finance its overseas debt. If
that river of money falters or dries up, the
difference must be made up by an inexorable fall in
the value of the US currency. Indeed, if it had
stopped already, the fall in the US stock markets
since equities began to lose their luster in 2000
would have been catastrophic.
Certainly, Asia has been on a buying spree in US
securities of all types. Despite a three-year economic
pause in the United States, Asians bought a record
$201 billion worth of long-term US paper in 2002. That
includes another record $97 billion in US government
securities. Asian central banks, with their enormous
overhangs of US dollars, are increasingly doing the
buying.
Over the past months, US Treasury Secretary John W
Snow has begun to try to talk the US dollar down. It
had fallen by more than 25 percent against the euro,
the Eurozone's common currency and the world's other
reserve legal tender, before increasingly optimistic
economic news and a rising stock market checked the
dollar's fall. Although it has since risen against the
euro by about 4 percent, many economists believe the
dollar's precarious position will cause the slide to
continue.
The currencies of Asia, however, have almost all
remained firmly tied to the dollar, either through
currency pegs, reserve boards or, as in the case of
Japan, as governments have bought dollars to keep
their currencies static and thus to preserve their
terms of trade.
Despite the US attempts to talk the dollar down, Asian
governments regard any negative changes in their trade
balances as inimical to their economies. While
supposedly loosening restrictions so that their
consumers can participate in a demand-led consumer
revolution, Asia in fact is more dependent on exports
today than at any time over the past two decades.
China, whose share of exports in total gross domestic
product (GDP) averaged 10.8 percent in 1985-89, now is
producing exports at 28.4 percent of GDP. South
Korea's exports were at 23 percent during the same
period and now are at 54 percent of GDP. Hong Kong,
then at 77.8 percent, is now at 153.5 percent of GDP.
These figures are being repeated across virtually
every economy in Asia. These exports continue to flow
into the United States despite a three-year economic
downturn that, if rationality were to prevail, should
have slowed consumer purchases. The US Federal
Reserve's easy-money policy and record cuts in
interest rates, however, have kept consumers buying at
a feverish pace, far too often on credit.
"So long as America continues to secure easy funding,
there is no pressure on policymakers in Washington to
do anything other than run super-easy policies to try
to keep their own consumer credit cycle going," says
Christopher Wood, global emerging-markets equities
strategist for CLSA Hong Kong. "Like any profligate
debtor, market discipline will only be imposed on
America when foreign investors demand an interest-rate
premium for owning dollars."
Wood tends to grow apocalyptic. "The current trend can
continue for a while," he writes in his 110-page
first-half 2003 overview of the world economy,
published last month. "But the longer American
excesses are financed, the more inevitable will be the
ultimate collapse of the US paper-dollar standard that
has been in place ever since Richard Nixon broke with
Bretton Woods by ending the dollar's link with gold in
1971. The result will be a massive devaluation against
gold of Asia's hoard of dollar-exchange reserves."
Japan's foreign reserves currently total $496 billion,
followed by China at $310 billion and Taiwan at US$170
billion, according to figures compiled in April by the
Hong Kong Monetary Authority. Hong Kong, with 7.5
million people, has reserves of $114 billion, nearly
seven times the total money in circulation in the
territory. Other Asian treasuries are similarly
bulging with dollars.
In answer to statements by Treasury Secretary Snow
that the country should let its currency float upward,
China's central bank governor, Zhou Xiaochuan, said at
the end of June that he sees no possibility that the
yuan, which trades in a narrow band at about 8.28 to
the dollar, would be revalued upward. Nor is there a
possibility that it will rise against the currencies
of any of its other major trading partners. China
intends to eat everybody's lunch.
Confronting the prospect of additional economically
difficult integration into the World Trade
Organization, and faced with the task of creating tens
of millions of jobs for its sacked
state-owned-enterprise workers, China's leaders
believe it is crucial to keep growth above 8 percent.
Severe acute respiratory syndrome (SARS) took half a
point off growth in March through June. President Hu
Jintao and Prime Minister Wen Jiabao have demanded,
under a policy statement called "Double Victory", that
growth continue at the maximum possible rate. There is
not the slightest intention to help the United States
cure its trade-balance problem by either making US
exports to China more attractive or raising the price
of exports to the US.
Likewise, Japan, vainly attempting for the 13th year
to export its way out of its economic quagmire, is
keeping the yen within a range near 115 to the US
dollar. Since the beginning of the year, the Bank of
Japan is believed to have bought as much as $60
billion in US securities - $30 billion in March alone
- to keep the yen where it is. Its purchases have been
increasing at a record pace.
Asia does not have to follow this path, Christopher
Wood of CLSA says. "Asian central banks could abandon
their mercantilist policies. They could let their
currencies rise, which is what would happen given
Asia's high savings rates if market forces were
allowed to prevail. This would in turn boost Asia's
consumer demand cycle. This is also what should be
happening from a theoretical standpoint, as satiated
American consumers have already borrowed a lot and
need to rebuild their balance sheets."
Then, turning truly apocalyptic, Wood predicts that by
the end of the decade there will no longer be a
possibility that the world's central banks can control
the situation, and there will be a truly massive
devaluation of the US dollar. "The view here is that
the US dollar will have disintegrated by the end of
this decade. By then, the target price of gold bullion
is US$3,400 an ounce." That is roughly 10 times gold's
current level. If that were to happen, Asia's holders
of dollars would be forced to start selling them or
see their own reserves collapse. If they start to sell
them, the price of America's paper will fall even
faster.
That is truly apocalypse now, or in 2010. Is it
possible? The policymakers in the administration of
President George W Bush in Washington are far more
sanguine. They regard economists, often said to be the
only field in which two individuals have shared the
Nobel Prize for saying exactly the opposite things, to
be basically irrelevant, and presumably by extension
strategists. The administration, facing an election in
a year and a half, and the Federal Reserve intend to
keep the party going if they can.
(Copyright 2003 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
=====
"For every complex problem, there is a simple, easy to understand, incorrect answer." (Physiologist Albert Szent-Gyorgyi) |
