From
the BBC this morning:
The dollar has hit a further record low against the euro in Asian trade, after reports that China was cutting back its purchases of US Treasury bonds. The dollar slumped to a record low against the euro, at 1.3315 euros.
My Financial Times on Monday morning led with a front page story China tells spendthrift US to put its own house in order. Li Ruogu, Deputy Governor of the Bank of China, was pelucidly clear telling the US to shape up:
"China's custom is that we never blame others for our own problem. For the past 26 years, we never put pressure or problems on to the world. The US has the reverse attitude, whenever they have a problem, they blame others."
Central bankers are famed for their reticence, but this was forthright and to the point. Clearly the gloves were coming off - officially.
Professor Charles Bean, Chief Economist at the Bank of England, further depressed sentiment, saying yesterday that international investors are unlikely to keep buying U.S. assets indefinitely, resulting in a "possibly substantial" drop in the dollar.
Speculation that the Chinese are reducing their exposure to the dollar and to US Treasuries marks a very significant turn in the market. On Friday, the Shanghai-based China Business News reported, "China has already begun reducing U.S. dollar assets in forex reserves," quoting Yu Yongding, a researcher who is also a member of the central bank's monetary policy committee. The quote is now disputed, but there is no absolute denial from the central bank.
Bloomberg this afternoon says,
Yu, a Chinese monetary policy committee member, denied making the statement about reducing holdings of Treasuries. Yu said the report was "distorted," in a statement on the Web site of the Institute of World Economics and Policies of the Chinese Academy of Social Sciences, where he is a director.
China, the second-largest foreign holder of U.S. government debt, reduced its holdings of U.S. Treasuries, China Business News said. The country's central bank declined to comment on the report. China's holdings of Treasuries rose to a record $174.4 billion at the end of September, according to the Treasury Department.
I was amazed and a little worried at the response to my
Dollar Dump Accelerates diary a week ago, if only because the fears expressed were so personal. In my career I tend to look at what happens in the economy and in my own finances as separate, keeping a professional perspective. The reaction to the falling dollar in the Kossack community, by contrast, has focused on how it will affect each of us as individuals with a variety of investments, debts, plans and aspirations at risk.
So, here's some further advice, for what it's worth:
- Don't panic. The dollar is falling, but it's been falling for most of the last 30 years if you take the long view. This is a natural consequence of the rest of the world getting more prosperous. No one will be impoverished overnight by the dollar's decline, although some sectors are more exposed than others.
- Think hard about costs before shifting your investments around. There are costs every time you switch investments: brokerage fees, fees on mutual funds, etc. Think hard and take advice before acting to make sure you minimise the fees you pay as these represent lost capital.
- Be very wary of new and untried investment companies offering tempting products playing on your fears (e.g., gold and foreign exchange investments particularly). Bush sold himself with fear, and we know how powerful but misleading that proved to be! "If it seems too good to be true, it probably is." I do not recommend web-based banks or investment companies, prefering an established brand with bricks and mortar and a reputation to uphold. There are gold-linked and foreign exchange-linked funds offered by established players too.
- If you have substantial credit card debt, retrench now before rates rise. Cut expenditure and start paying it off. You may wish to consider refinancing your mortgage to pay off your credit cards, fixing the interest rate on your debts. If you do this, cut up the cards. There is no point in making it easy for yourself to increase debt going into a credit squeeze.
- Inflation is good for fixed-rate debtors, allowing them to pay off expensive loans with cheaper dollars later. Most people with a mortgage will benefit from inflation in the longer term as the value of their house will eventually rise (after a short but sharp property market correction) and most salaries will keep pace with inflation. As a result, the proportion of your income going to paying off the mortgage will fall over time as inflation eats away at the real cost of the mortgage.