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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Chispas who wrote (52605)	6/19/2006 8:13:21 PM
From: regli	Read Replies (1) \| Respond to of 116555

The Mark of the Bust nytimes.com By MARTIN MAYER Published: June 14, 2006 WHAT may be the most important number in the American panoply of economic statistics appears every Thursday night as an appendix to the weekly statement of the condition of the Federal Reserve System. This generally ignored number - few, if any, newspapers cover its release - has the unusual virtue of accuracy, for it is a simple financial statement derived from an adding machine, not from a computer or a formula. What the number announces is the quantity of government and agency securities held "for foreign official and international accounts" - that is, for foreign central banks and finance ministries - by the federal reserve banks. It is important because over time it measures the demand for American assets by private enterprise in the world's creditor nations. It is important also because it is very large - last week, about $1.63 trillion. Three years ago, just before the invasion of Iraq, it was about $900 billion. The week George W. Bush took office, it was $693 billion. Our appetite for imported goods throws some $600 billion to $700 billion a year into the hands of foreign suppliers. The businesses that receive these dollars have two fundamental choices about what to do with them: spend or invest them in the United States, or convert them into their own local currency. Exporters to America who keep the dollars and use them for American purchases and investments create what economists call an autonomous flow of funds back to the United States, financing the American trade deficit with an American investment surplus. This produces the argument most closely associated with the new Federal Reserve chairman, Ben Bernanke (though Alan Greenspan believed it, too), that our trade deficit is caused by a surplus of savings that can't be profitably invested in the home countries of our trading partners. Financing for our trade deficit comes before - and actually causes - the deficit itself. If instead of investing their dollars in the United States, foreign exporters want to take the proceeds of their sales in their own currency, their central banks will in effect sell them that currency for their dollars. Back in the late 1960's, when Great Society deficits and the Vietnam War prompted the first serious sell-off of dollars (and forced the United States to abandon the gold standard because too many holders of dollars, led by President Charles de Gaulle of France, wanted gold), those central banks lent those dollars into the new Eurodollar market, where they traded somewhat separately from domestic dollars. This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates. Today, the Fed continues as custodian of the "foreign official holdings" of such government obligations. During the Clinton administration, the Fed agreed to invest in federally guaranteed housing securities for those foreign central banks that wanted a better yield on their dollar reserves than they would get from government bonds, and now more than half a trillion dollars of the total official holdings are invested in agency paper. Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger. If the price of our government securities dived, the foreign central banks would have to bear the loss. This would be a budget item for their governments, whose leaders would not like it at all. What we have to watch out for is a sudden and drastic increase in foreign official holdings. Rapid growth in this number in the late 1960's and 1970's forecast the recessions of the early 1970's and 1980's, and it could happen again. Recent large increases in foreign official holdings indicate that foreign private investors see fewer attractive places to put their money in the American economy. They could presage a significant fall in the price of American assets, stocks (witness the recent drops in American stock markets) and bonds and real estate and all, and a hard landing for a world economy still floating on the crest of cheap credit. Martin Mayer, a guest scholar at the Brookings Institution, is the author of "The Fate of the Dollar."

To: Chispas who wrote (52605)	6/19/2006 8:32:15 PM
From: regli	Read Replies (1) \| Respond to of 116555

First Quarter Current Account Deficit Improves but Will Rise in Second Quarter - U.S. Borrowing at an Alarming Rate globalpolitician.com Prof. Peter Morici - 6/18/2006 Friday, the Commerce Department reported the first quarter 2006 current account deficit was $208.7 billion, down from $223.1 billion in the fourth quarter of 2005. The current account is the broadest measure of the U.S. trade balance. In addition to trade in goods and services, it includes income received from U.S. investments abroad less payments to foreigners on their investments in the United States. Lower trade deficits for oil and with China accounted for about two-thirds of the improvement in the current account deficit. In the second quarter, the current account deficit will be driven higher by rising petroleum prices and surging imports of consumer goods from China and other Asia locations. In the first quarter, the current account deficit was 6.4 percent of GDP. With the recent increase in oil prices and slowing GDP growth, the current account deficit likely will approach 7 percent of GDP by the end of 2006. Anatomy of the Current Account Deficit The United States had a $1.9 billion surplus on payments of interest, dividends and other sources of foreign income, and a $17.2 billion surplus on trade in services. Together these were hardly enough to offset the massive $208 billion deficit on trade in goods. The balance of the deficit came from U.S. transfer payments to foreign individuals and governments. The deficit on petroleum products was $65.5 billion; this was a bit better than the fourth quarter deficit of $67.9 billion, because imports fell 2.5 percent and prices were virtually flat. With imports and prices surging, the petroleum deficit will increase in the second and third quarters. The American appetite for inexpensive imported automobiles and consumer goods was a huge factor driving the trade deficit higher. The deficit on motor vehicles and parts was $38.2 billion, as Ford and GM continue to push parts suppliers offshore and cede market share to Japanese and Korean companies offering better made and less expensive vehicles. Even when they assemble automobiles in the United States, Asian automakers import more parts than Ford and GM. The Wal-Mart effect was broadly apparent. The trade deficit with China was $49.3 billion. The dollar remains at least 40 percent overvalued against the Chinese yuan and other Asia currencies. China continues to peg against the dollar. Although China revalued the yuan from 8.28 to 8.11 in July, and announced it would adjust the currency to a basket of currencies, the yuan continues to track the dollar very closely. Currently it is trading at about 8.0 Other Asian governments conform their currency policies to China, lest they lose competitiveness in U.S. and European markets. To sustain undervalued currencies against the dollar, foreign government purchased $75.2 billion in U.S. securities. This created a 14 percent subsidy on exports to the United States. Financing the Deficit The current account deficit must be financed by a capital account surplus, either by foreigners investing in the U.S. economy or loaning Americans money. Some analysts argue that the deficit reflects U.S. economic strength, because foreigners find many promising investments here. The details of U.S. financing belie this argument. In the first quarter, U.S. investments abroad were $333.9 billion, while foreigners invested $491.5 billion in the United States. Of that latter total, only $33.3 billion or 6.8 percent was direct investment in U.S. productive assets. Most of the remaining capital inflows were foreign purchases of Treasury securities, corporate bonds, bank accounts, currency, and other paper assets. Essentially, Americans borrowed more than $400 to consume 6.4 percent more than they produced. Foreign governments loaned Americans $75 billion or 2.3 percent of GDP. That well exceeded net household borrowing to finance homes, cars, gasoline, and other consumer goods. The Chinese and other governments are essentially bankrolling the U.S. consumer. The cumulative effects of this borrowing are frightening. The total external debt now exceeds $5 trillion and will likely exceed $6 trillion by the end of 2006. That will come to about $20,000 for each American, and at 5 percent interest, $1000 per person. Prof. Peter Morici teaches at Robert H. Smith School of Business at University of Maryland.