Monday, February 28, 2005

Happy Monday!

I know it's a happy monday because I'm taking the day off for the second monday in a row. I mean, I felt a little sick this morning, and I only come to work if I'm bringing my A-game, which is pretty much every other day. It's not easy bringing it day in and day out, and even a consistently productive worker bee like myself needs a day off. Even if it's after a weekend. Oh well.

Anyway, on to the "news you can use". Or not. News you can cry about is more like it. Brad Setser has a great post on geopolitics and oil. Just as important as his post, however, was the fact that it directed me to several other posts which were interesting (I hadn't really been reading much on Thursday or Friday). And they're all from mainstream sources, so your friends won't call you a blog-reading extremist, but rather a conformist sheep.

The first is Friedman's column in the NYTimes, which is about the dollar and how the falling dollar actually affects people:
The dollar is falling! The dollar is falling! But the Bush team has basically told the world that unless the markets make the falling dollar into a full-blown New York Stock Exchange crisis and trade war, it is not going to raise taxes, cut spending or reduce oil consumption in ways that could really shrink our budget and trade deficits and reverse the dollar's slide.

This administration is content to let the dollar fall and bet that the global markets will glide the greenback lower in an "orderly" manner.

Right. Ever talk to someone who trades currencies? "Orderly" is not always in the playbook. I make no predictions, but this could start to get very "disorderly." As a former Clinton Commerce Department official, David Rothkopf, notes, despite all the talk about Social Security, many Americans are not really depending on it alone for their retirement. What many Americans are counting on is having their homes retain and increase their value. And what's been fueling the home-building boom and bubble has been low interest rates for a long time. If you see a continuing slide of the dollar - some analysts believe it needs to fall another 20 percent before it stabilizes - you could see a substantial, and painful, rise in interest rates.

"Given the number of people who have refinanced their homes with floating-rate mortgages, the falling dollar is a kind of sword of Damocles, getting closer and closer to their heads," Mr. Rothkopf said. "And with any kind of sudden market disruption - caused by anything from a terror attack to signs that a big country has gotten queasy about buying dollars - the bubble could burst in a very unpleasant way."

Why is that sword getting closer? Because global markets are realizing that we have two major vulnerabilities that this administration doesn't want to address: We are importing too much oil, so the dollar's strength is being sapped as oil prices continue to rise. And we are importing too much capital, because we are saving too little and spending too much, as both a society and a government.
The second article was an opinion piece written in the Times. It's a little dated, but then again, do most people know that Korea threatened to buy less of our currency? And does anyone know the effect that it had?
The dollar has been on a downward trajectory for three years, thanks in part to the Bush administration's decision to try to use a cheap dollar to shrink the nation's enormous trade deficit. (A weak dollar makes exports cheaper and imports costlier, a combination that theoretically should narrow the trade gap.) To be truly effective, however, a weak dollar must be combined with a lower federal budget deficit - or even a budget surplus, something the administration clearly hasn't delivered. So predictably, the weak-dollar ploy hasn't worked. The United States' trade deficit has mushroomed to record levels, as has the United States' need to borrow from abroad - some $2 billion a day - just to balance its books.

Enter South Korea. On Monday, its central bank reported that it intended to diversify into other currencies and away from dollar-based assets. And why not? It holds about $69 billion in United States Treasury securities, or 4 percent of the total foreign Treasury holdings. Such dollar-based investments lose value as the dollar weakens, leading to losses that any cautious banker would want to avoid. But as the Korean comment ping-ponged around the world, all hell broke loose, with currency traders selling dollars for fear that the central banks of Japan and China, which hold immense dollar reserves - a combined $900 billion, or 46 percent of foreign Treasury holdings - might follow suit.

That would be the United States' worst economic nightmare. If it appeared that the flow of investment from abroad was not enough to cover the nation's gargantuan deficits, interest rates would rise sharply, the dollar would plunge further, and the economy would stall. A fiscal crisis would result.
The last article is from the washington post (you have registered with all these sites already, right? if you haven't...well, why are you reading this?). It's the last article I'll post on this topic (today), I swear. Anyway, the main point of the last article is how much of this foreign capital which comes into this country is actually inflating our housing bubble, not being invested in productive capital, like factories and other job creation:
Therein lies a serious worry for many economists: As the deficit mounts, so does America's overall indebtedness to foreigners, which now totals about $3 trillion. That would be less troubling if the money streaming in from overseas were helping to finance a boom in productive assets such as factories and machinery.

But to the contrary, economic data show historic highs in the proportion of U.S. spending on consumption and housing. Not only is the United States piling up debt, it is doing so while consuming at record levels.


"There's always the question when you look at a current account deficit -- is it a sign of strength, because capital is pouring into your country, or is it a sign of concern?" Lawrence H. Summers, Snow's predecessor during the Clinton administration, told a panel at the World Economic Forum in Davos, Switzerland, last month. "If you look behind the 6 percent of GDP deficit, there's a lot to make you worry," because foreign money "is financing consumption, not investment" in plants and equipment.
Again, thanks to Brad Setser, one of my favorite blogging economists, for the info.

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