Dollar Dump: Central Banks Shun US Assets
Mon Jan 24, 2005 at 01:22:21 AM PDT
My
Financial Times arrived with the headline
US assets shunned by central bankers. It reports a survey of 65 central bankers controlling $1,700 billion in assets revealing they now deem the Eurozone as attractive for investment as the United States. A huge change in attitudes has occured, and no amount of US sabre rattling will restore US dominance.
This is the news many of us have dreaded since the dollar accelerated its decline in October 2004. [Ealier Dollar Dump diaries here and here.] As central banks and other significant investors in global asset markets shift away from US assets, severe implications for the US will become reality:
- difficulty for Bush in financing his ballooning deficit,
- a possible collapse in the traded value of the dollar,
- higher dollar interest rates in order to attract international lenders,
- compromising of the dollar's reserve currency status, and
- slower growth in the US economy given that most consumers, corporations and governments in the United States are dependent on debt financing.
Update [2005-1-24 16:25:26 by LondonYank]: Fed patience is
wearing thin.
Alan Greenspan warned in November that foreign governments would not finance the US current account deficit indefinitely. This mild warning may now be viewed as too little, too late.
These central banks financed 83 percent of the US federal deficit in 2003 (the most recent year statistics are available). In 2004 the proportion of OPEC assets held in dollars fell from 75 percent to 61.5 percent. Bank of Thailand announced it was reweighting from 80 percent US assets toward 50 percent. More central bankers have acted quietly, hoping to reweight before the dollar's slide becomes too pronounced and the risks too great. The tipping point is getting nearer, as evidenced by today's survey.
The United States trade deficit has ballooned to 6 percent of the US economy - more than $600 billion. (America buys 6 percent more than it generates.) The record federal current account deficit stands in excess of $650 billion for 2004, and is expected to exceed this in 2005 despite Bush's promises. (The federal government is the world's biggest borrower and relies heavily on the generosity of its lenders for its habits.) Too much of the US economy is wasted on prisons, war and security rather than investment in productive industries which can benefit from exporting. Disasterous trade figures despite the falling dollar reinforce pessimism that the US can export its way to prosperity. (America doesn't produce anything much anyone else wants to buy anymore.)
As America becomes "just another country" in a more prosperous world of stronger nations, economic dislocation will be matched by social dislocation at home. Some factions will favor violence to preserve American dominance and access to resources, perhaps accelerating action against soft targets like Cuba and Venezuela already on the neo-con drawing board and reinforcing hard-liners behind the Iraqi occupation and Iranian destabilisation program. Domestically, rising unemployment almost always leads to increases in hate crimes, racial violence, eroding of women's place in the workforce, and religious intolerance as anger is deflected to minorities and foreigners.
As in earlier diaries, best practical advice remains:
- pay off all your debts now (except fixed rate mortgages), even if it means cutting back hard on expenditure;
- consider the security of your current or prospective job carefully, particularly if you are planning career changes;
- diversify investments into a portfolio with exposure to international upside gains (although the entire world will likely be adversely affected by a collapse in US growth);
- be wary of purchasing property at the top of what may be a housing bubble (many areas of the US have had unsustainable above-inflation house price appreciation in recent years);
- consider getting a smaller car or car/truck with a diesel engine (twice the miles per gallon, longer engine lifespan and low maintenance).
