Buckle your seatbelts, boys and girls

[Partha]

This don't look good.

Link

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc.
advertisement

Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers.

Together they hold $3,575bn of foreign reserves, over 65pc of the world's total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.

I offer you the link instead of the original Telegraph article because of the unpretty pictures that come with the blog post.

[Finglefinn]

They are doing this partly to quell the inflation they are experiencing. Just because the US dollar is dropping doesn't mean the sky is falling. The dollar goes up and down in cycles all the time. So what we are in a downward trend right now? It will go back up. It always does.

I agree that the total amount of foreign holdings of US treasuries is alarming, but what can they really do with it besides collect the interest? US treasuries are the best investments for a foreign bank or government in the entire world. If they decide to dump everything, they would crash every investment market in the world.

[Embar Angylwrath]

Agreed. All that money, if they pull it out of US funds, has to go somewhere. Its not like they can stash it under a bed. The same holds true for other, larger countries as well. As goes the US economy, so goes the world.

Fingle is right. They are doing this to dampen inflationary pressures within in their own economy.

[Partha]

They are doing this partly to quell the inflation they are experiencing. Just because the US dollar is dropping doesn't mean the sky is falling. The dollar goes up and down in cycles all the time. So what we are in a downward trend right now? It will go back up. It always does.

I agree that the total amount of foreign holdings of US treasuries is alarming, but what can they really do with it besides collect the interest? US treasuries are the best investments for a foreign bank or government in the entire world. If they decide to dump everything, they would crash every investment market in the world.

I'm not so worried about the dumping as much as I am what a further weakening of the dollar does to our trade. After all, there is WAY too much of what we consume produced elsewhere - that's fine as long as the dollar is strong. If it weakens, that means import prices go up at a time when consumers are feeling squeezed already.

Do I have to draw a picture?

[Embar Angylwrath]

A weaker dollar isn't necessarily bad. It makes American produced goods marginally less expensive than foreign goods. I would think that would make you sport wood... the thought of a resurgence of manufacturing jobs for the American working class.

[Ddrak]

The dollar goes up and down in cycles all the time. So what we are in a downward trend right now? It will go back up. It always does.

Garbage.

The dollar has been trending downward for the last decade compared to pretty much every first world currency. More and more trades are being made in Euros that used to be made in Dollars, and there's no indication that trend is about to stop. The dollar is worth about half what it was ten years ago, so that "investment" in US treasuries is really not that great at all - in fact, investing in US treasuries is a good way to *lose* money over the long term if you look at the recent history.

but what can they really do with it besides collect the interest?

Pick any other first world government. Invest in that. It's not like the US is the only nation on the planet capable of paying back its bonds, and having bonds in other currencies is honestly a better bet unless you've got other intentions.

As goes the US economy, so goes the world.

Not as much these days. Sharp moves destabilize the entire world, which is why no sane nation would dump US bonds, but a shifting of investments over time would be an interesting way of changing currency values. I don't think anyone is really interested in sinking the dollar further though, it's doing pretty well all by itself and slow movement is better for everyone.

Embar's right - a weaker dollar isn't all bad, but it does mean the long term loss of control over the world economy as other economies start to become worth more (ie EU and China). It's good for the national economy at the expense of world influence.

Dd

[superwalrus]

we want a weaker dollar the sky is not falling Partha, one of the many criticisms that foreign leaders have against Bush is that he has for the past 7 years purposefully weakened the dollar to help American businesses.

Walrus

[Partha]

A weaker dollar isn't necessarily bad. It makes American produced goods marginally less expensive than foreign goods. I would think that would make you sport wood... the thought of a resurgence of manufacturing jobs for the American working class.

Except, of course, there will not be such a resurgence. There might be a small uptick, but no resurgence - certainly not enough to cover what we've lost over the last 20-30 years. Ask honestly if any of the local manufacturers who moved jobs overseas are REALLY going to move them back into your area after just a few years. The answer is, of course, no.

A weaker dollar isn't bad if you already have money. A weaker dollar when you don't only makes things worse.

[Ddrak]

A weaker dollar isn't bad if you already have money. A weaker dollar when you don't only makes things worse.

I would say the opposite is true, at least in isolation. Devaluing the dollar reduces the value of people's savings. If you don't have savings then you don't lose. The difficulty only comes if a weaker dollar translates to inflationary pressure, which is probably going to happen in the current US economic situation with interest rates being reduced to increase market liquidity.

On the original topic - China has been very careful to say that it's not going to dump dollars. Like I said - the real killer for the world economy is uncertainty, not the performance of any single currency. If stuff happens it will be over the course of years, not weeks or months.

Dd

[Embar Angylwrath]

A weaker dollar isn't necessarily bad. It makes American produced goods marginally less expensive than foreign goods. I would think that would make you sport wood... the thought of a resurgence of manufacturing jobs for the American working class.

Except, of course, there will not be such a resurgence. There might be a small uptick, but no resurgence - certainly not enough to cover what we've lost over the last 20-30 years. Ask honestly if any of the local manufacturers who moved jobs overseas are REALLY going to move them back into your area after just a few years. The answer is, of course, no.

A weaker dollar isn't bad if you already have money. A weaker dollar when you don't only makes things worse.

In a consumer economy, you can't have a strong currency AND economic conditions which favor holding manufacturing jobs here. Liquid markets just don't work that way. So you're talking about shit you obviously know little about, or you're just bitter. Probably both.

If you want to reverse the trade deficit, or adjust it where Americans are buying less from other countries and more American produced goods, you have to make the price of those goods comparable to the price of foreign-made goods. (And tehn there's a quality issue, but we'll leave that alone for now). There are only a few ways to make the price comparable. Be more efficient, and spend less to make the goods, or, have a devalued dollar, and make the cost comparatively less against other currencies.

We've done pretty well at the first. Americans are pretty damned efficient when it comes to producing more goods per hour worked. But it isn't enough, obviously. The dollar, relative to other currencies, has to adjust downward.

Its a two-edged sword, really. A coninued devaluation of the dollar WILL result in more more jobs here. Simple high school economics on that one. But the real kicker is the money that fuels the stock market. As other countires' economies heat up, that money will chase the hot growth. That leads to a slowdown here in the US, which further devalues the dollar, and starts to impart recessionary pressures in the economy. Personally, I don't think inflationary pressures are the bigger concern. They can be controlled by the Fed. However, the trick the Fed will face is tightening the money supply, without adding to recessionary pressures. If you make the money so hard to get that no one can spend, well, welcome to recession-land.

Inflation = too much money to spend
Recession = Not enough money to spend

[Finglefinn]

And the Fed just two weeks ago loosened the money supply by reducing the Federal Funds rate by 50 basis points. Obviously, they felt that inflation is not an issue at the moment. Making credit more available usually allows business to expand, hire more and therefore grow the economy. We'll see.

[Partha]

In a consumer economy, you can't have a strong currency AND economic conditions which favor holding manufacturing jobs here.

I'll posit that postwar America proves you wrong.

[Ddrak]

Obviously, they felt that inflation is not an issue at the moment.

I dunno about that. I think they just saw an impending capital crunch (or more importantly a *perceived* capital crunch) that was having investors pull liquidity from the market as far more damaging in the long term than inflation. Sadly, recession and inflation are not quite as mutually exclusive as Embar's implied.

Dd

[Embar Angylwrath]

In a consumer economy, you can't have a strong currency AND economic conditions which favor holding manufacturing jobs here.

I'll posit that postwar America proves you wrong.

It actually proves me right.

I'm assuming you're talking about post WW2.

The US economy was still recovering from the market crash in '29. In the late 30s, the US economy began to get started again, in part because Europe was buying American goods to help supply themselves during the war. Once America actually committed men and material to the war, the economy started to really get going. It would have stalled though, had not Europe needed so much assistance post-war. Since Europe was rebuilding itself, America became the largest functioning economy in the world. Not so much because we were better, but because our infrastructure hadn't been ripped up like Europe's. Germany was in a shambles, Britain was digging out from the rubble. Basic supplies like grain had to be flown in to West Germany to feed people. Almost every western country involved in the war became a debtor to the US.

So before the war, we had a weak dollar, and a sluggish ecomony. After the war, we had both a strong currency and a strong economy, but it was an isolated circumstance totally irrellevant to today, where there are several functioning economies the US has to compete with.

In short, after the war, we were a functioning economic monopoly. Its totally different today.

[Embar Angylwrath]

Obviously, they felt that inflation is not an issue at the moment.

I dunno about that. I think they just saw an impending capital crunch (or more importantly a *perceived* capital crunch) that was having investors pull liquidity from the market as far more damaging in the long term than inflation. Sadly, recession and inflation are not quite as mutually exclusive as Embar's implied.

Dd

I dont mean to imply recession and inflation are mutually exclusive. Although they are the result of different economic pressures, those pressures can be applied simultaneously, resulting in both inflation AND recession. (Doesn't happen very often, but when economies collapse, you see it. Bread going for $1/loaf, then $2 the next day, then $3 - inflation -, but no money supply to buy the bread, no matter what the cost - recession -)