Remember these names. Toshihiko Fukui. Zhou Xiaochuan. Perng Fai-Nan. Park Seung. Joseph Yam. And Yaga Venugopal Reddy. They are the central bank governors of Japan, China, Taiwan, South Korea, Hong Kong and India respectively. They are also arguably more important for US monetary policy than Alan Greenspan, the Federal Reserve chairman, or his successor who will take on the role next year.
The "anti-American" Financial Times has an ultimately scathing indictment of US economic policy under Bush and Greenspan:
if the mere hint that South Korea might stop buying US dollar assets can move edgy markets more than Mr Greenspan's most trenchant comments to date on US deficits, it signifies how far the balance of power in the global economy has changed.
The statistics tell the story. The US must attract roughly $2bn (£1bn) capital a day to finance its current account deficit. This has to come either from private investors or foreign governments. If not, the dollar would fall. In the past two years, the reliance on official purchases of US assets from Asian central banks has been enormous, and Asian central bank foreign exchange reserves have swelled.
Japan's official exchange reserves now exceed $800bn; China holds more than $600bn; Taiwan and South Korea each holds more than $200bn; and Hong Kong and India are not far behind.
(...)
A further indication of the US reliance on foreign governments can be seen in holdings of US government bonds. The US Bond Market Association estimates that foreigners held 46.8 per cent of US treasuries in 2004 compared with only 20 per cent in 1990.
So why should we pay so much attention to the six leading central bank governors in Asia? Quite simply because if any one of them decided to diversify his country's exchange reserves aggressively out of dollars, the kind of currency market jitters we saw this week would pale into insignificance. Furthermore, if Asian central banks merely decide to follow South Korea in ceasing to buy new US assets, economists estimate that the interest rate on long-dated treasuries could rise by 0.4 to 2 percentage points.
If you've read my previous stories on the topic, or LondonYank's DollarDump series, or yesterday's recommended diary by philinmaine, you've read it all before, and you possibly still hope, deep down that "this is only us disgruntled lefties engaging in wishful thinking and hoping that bad economic news will damn Bush's horrible administration". Nope, it's all too real:
At present these banks have a strong incentive not to rock the boat. Any significant revaluation of an Asian currency against the dollar would blow a huge hole in their public finances because they hold hundreds of billions of dollars worth of foreign exchange reserves.
The situation is not sustainable. It resembles a giant pyramid selling scheme. The US current account deficit is unlikely to shrink in the next few years so, unless foreign private investors have a change of heart, Asian central banks will have to keep buying dollar-based assets to prevent their currencies rising and avoid the consequent capital losses on their reserves.
As their exposure rises, the incentive to seek an exit will also grow. Quietly and slowly, the medium-sized Asian central banks are likely to try to diversify their portfolios of foreign exchange reserves to limit their potential liabilities. But even China will have a point when it is no longer willing to offer cheap loans to the US. After this, all bets would be off. If a crisis ensued it would be a disaster for Asia, which would suffer huge capital losses and possibly an uncontrolled appreciation of local currencies. The US would suffer higher interest rates and possibly a sharp slowdown in growth as cheap finance dried up and the US consumer began to save again. And Europe would not escape, as it is too dependent on the rapid growth of the US and Asian economies.
I've been harping on this in recent weeks, and apologise for putting up yet another (actually two) diary on this, but as you can see, the serious 'big boys' are worrying about it more and more and the Financial Times put it better than I could.
It's simple
US consumers (including the federal government) are living above their means. Either you slow down, or reality, imposed by Asian central bankers, will force you to do that, but it is likely to be a lot nastier.