I've posted here occasionally, and regularly another
private discussion board that the US is approaching a tipping point for an Argentina style currency collapse.
Currently, the dollar is at $1.2621:Euro. This is approaching the record low reached in the middle of February of $1.2848:Euro.
Now, we have foreign investors running away from US Treasury notes for the FIRST TIME EVER!!
Bond Sales Feed Worries (requires a login, use uid=wally@trashmail.net PW=wally from
http://www.bugmenot.com)
Tuesday, October 19, 2004 By Jonathan Weisman and Ben White The Washington Post
NEW YORK . On Sept. 9, as it must frequently do, the U.S. government turned to Wall Street to raise a little cash, and Paul Calvetti bet that demand for $9 billion worth of long-term Treasury bonds would be "huge."
But at 1 p.m., as the auction opened and the numbers began streaming across his flat-panel screens, the head of Treasury trading at Barclays Capital Inc. slumped in his chair. Foreign investors, who had been voraciously buying Treasury bonds, failed to show up. Bond prices cascaded downward, interest rates rose, and in five minutes, Calvetti, 38, who makes money by bidding on bonds at one price and hoping market demand lets him quickly resell them at a profit, had lost $1.5 million.
"It's amazing," he gasped, after the Treasury Department announced that Wall Street traders, not foreigners, had been left to buy virtually the entire auction. "I don"t think I.ve ever seen this before."
The most recent auction of 10-year Treasury notes may have been a fluke, a momentary downturn in one aspect of the massive world market for U.S. government and private-sector bonds, stocks and other securities . a market so large and diverse that it has long been the world.s safe haven. But a rash of new data, including Treasury Department figures released Monday showing a net sell-off by foreigners of U.S. bonds in August, has stoked debate over whether overseas investors . private individuals, institutions and government central banks . are growingly dangerously bearish on the U.S. economy.
It is a portentous issue. Foreign governments and individuals hold about half of the $3.7 trillion in outstanding U.S. Treasury bonds, for example, and the government has been heavily dependent on continued overseas bond purchases to finance the roughly $1 billion a day it has to borrow to pay its bills. Foreign lending and investment are also needed to finance the country.s roughly $50 billion monthly trade deficit, while foreign capital has been a key prop to U.S. stock prices.
A turn in overseas attitudes toward the United States could ripple deeply through the economy, depressing the market, raising interest rates and pushing down the value of the dollar.
Also, it would cause interest rates to skyrocket, because the additional interest would be necessary to attract foreign investment.
It could drive down home prices by 10-20%, popping the equity bubble.
Foreign central banks and individuals rushed to finance U.S. government budget deficits over the past three years, buying $19.2 billion in Treasury bonds in 2001, $118 billion in 2002, and $279 billion in 2003. Lending from foreign governments in particular exploded last year . to $109 billion, up from $7.1 billion in 2002.
The fear among economists is that those foreign lenders may grow concerned that their portfolios are too swollen with dollar-denominated assets.
This is complicated by the emergence of the Euro as an alternate reserve currency.
The Chinese . whose Treasury holdings have tripled since 2000, to $172 billion . have already begun buying more Euro-denominated assets, said Rebecca Patterson, a senior currency strategist at J.P. Morgan Chase & Co.
...
"The U.S. government will always be able to raise money, -- well, at least in the foreseeable future", he said,"The question is, what will you have to pay and who will you get it from?."
...
Desmond Lachman, an international economist at the American Enterprise Institute, writing for the conservative Web site Tech Central Station, cautioned that foreign central banks "now have considerable ability to disrupt U.S. financial markets by simply deciding to refrain from buying further U.S. government paper." (emphasis mine)
...
To John Williamson, a senior fellow at the Institute for International Economics, that is cold comfort. The Chinese and Japanese central banks may maintain their huge reserves for defensive reasons, he said, but a smaller player, like Brazil or Singapore, could try to unload its dollar reserves, triggering a global sell-off. Like a mouse in a circus, even a bit player could cause the elephants to stampede.
"It's absolutely true that it wouldn't be in the interest of the world to do it, but any one country might think, I'll beat the crowd and diversify first," he warned. "I think that.s the more likely scenario."
Here's the scenario.
- Dollar starts sliding precipitously, so foreign investors in US debt require a greater return to offset their increased risk.
- Interest rates spike.
- Housing prices slide, drying up the home equity lines of credit that have fueled out economy.
- People start losing their homes, as the economy contracts, and they cannot find a buyer for their homes.
It's the Argentina crisis, though the US is in a better position because all of its debts are dollar denominated.