Do US “officials” really think the dollar’s current value is a market rate?
IMF Article IV (think annual economic check-up) reports on the US usually make for pretty dull reading. But not always.
The IMF – drawing on its model for equilibrium real exchange rates – argued that the dollar is overvalued by between 10 and 30% in real terms. That seems right to me. The US has a large trade deficit. The dollar is still higher – in real terms – that it was in the first part of the 1990s. Sure, the dollar is weak against the euro, the pound, the Canadian dollar and the Australian dollar – but it is still substantially stronger than it was in the 1990s v most of the emerging world.
But apparently a few US officials took umbrage at the suggestion that the dollar was overvalued – and argued that if the dollar’s value is determined in the market, it, by definition, cannot be overvalued. The IMF reports (paragraph 18 on p. 13 of the document, which is on p. 15 of the .pdf)
“Officials were skeptical about the notion of overvaluation for a market-determined exchange rate like the dollar.”
My jaw dropped. I guess US officials believe China’s assertion that the RMB dollar is a market-determined exchange rate. Or that an unprecedented level of central bank intervention globally – emerging market central bank intervention almost certainly topped $1 trillion (annualized) in the last quarter, and likely was closer to $1.2 trillion — has no impact on the dollar.
At least to people like me, the argument that the dollar’s exchange rate – against all currencies, mind you, not just against the major currencies – is a market exchange rate simply isn’t credible. The US dollar’s value against most emerging currencies just isn’t determined in the market. Or rather it is determined in a market shaped by massive central bank intervention.
And with emerging market central banks on track to sell $200b of dollars for euros and pounds (and probably substantially more; $400b isn’t out of the question if global reserve growth comes it at close to $1.2 trillion) to keep their portfolios balanced, I suspect that they are exercising some influence over a range of other exchange rates as well.
US officials also argued that the IMF’s exchange rate model:
“failed to adequately factor in non-trade fundamentals such as capital flows.”
Alas, most of those capital flows — on a net basis — don’t come from the private sector. And I am not quite sure how the IMF’s model should take into account non-market fundamentals like large scale central bank financing of the US.
The US does attract substantial gross private capital inflows, but those inflows are needed to finance the United States own (growing) investment abroad: almost all of the net financing needed to cover the US current account deficit now comes from the official sector. The US data shows $150b ($600b annualized) in net official inflows in q1, and that likely understates the United States real dependence on central bank financing (see my House budget committee testimony). The IMF though doesn’t really explore the United States dependence on official financial flows either. Indeed, its long-term projections essentially forecast the problem away. That is one reason why I wasn’t all that impressed by the details of the IMF’s analysis of the US balance of payments.
The IMF — drawing on the TIC data – emphasized that private inflows now finance the bulk of the US current account deficit. It also implied that growing demand for corporate bonds reflects shifts in private demand for bonds. Maybe. But official demand for some kinds of corporate debt was rising (until recently) and it sure seems to me that the really big trend has been super-strong demand for Agency bonds (foreigners now hold a rising share of all Agencies). Indeed, the BEA’s revised data makes it clear that most Agency demand comes from central banks. (the graphs are on p. 12 of the IMF's report; p. 14 of the pdf)
Indeed, the BEA’s revised data – based on the Treasury survey – suggests a much higher level of official demand than the TIC data. Too bad the IMF didn’t look at that data. Or try to explain how US dependence on central bank inflows could be falling when the IMF’s own data shows a very strong increase in central bank reserve growth toward the end of 2006…
Moreover, the IMF’s global forecast (still) shows a rise in the surplus of the oil exporters, a fall in the surplus of emerging Asia and Japan and a stable US deficit (see Figure 8 on p. 37 of the document, p. 39 of the .pdf). This global forecast is no more credible than the US argument the dollar’s value is a market exchange rate: both Japan and emerging Asia’s surplus are surging this year. The IMF desperately needs to reduce the period between the production and the public dissemination of its reports – or at least update certain numbers and forecasts to fit known facts.
But the really big surprise comes in the IMF’s forecast for how the US will finance its deficit in 2007, and over time. Global reserve growth has picked up strongly. Just look at China and the other BRICs. But the IMF forecasts that central bank financing of the US will fall from around $450b in 2006 to $300b in 2007 – and then level off at around $200-250b over time. (See Table 5 on p. 48 of the document, p. 50 of the .pdf)
Who does the IMF expect to pick up the slack? The world’s banks. Net other investment inflows rise to around $500-600b (with most of the rise in 2007).
That would be a huge swing. Until now, the US deficit has been financed by foreign demand for US debt securities and central banks – not by the banking system. It doesn’t make much sense either.
The IMF’s forecast that the US current account deficit will stabilize in 2007 is a bit more credible. The IMF forecasts a $835b (6% of GDP) 2007 deficit, with a 0.4% of GDP improvement in the trade balance offsetting a 0.3% of GDP deterioration in the income deficit. I personally don’t expect as big an improvement in the US trade deficit – not with oil back at $70 – if the US avoids a severe slump in the second half of the year, and I wouldn’t be surprised by a bit larger deterioration in the income balance.
But the IMF’s forecast for 2007 is certainly within the realm of reason.
I had a far harder time figuring out the IMF’s long-term forecast for the US current account deficit. The IMF forecasts that the current account deficit will stabilize at around 6% of US GDP over time.
Fair enough. The key question is whether the assumptions that go into that forecast make sense.
The IMF projects that the trade and transfers deficit will fall from around 6% of US GDP in 2007 to around 5% in 2012 even as the US emerges from its 2007 growth slump. $20b (between 0.1 and 0.2% of GDP) of this improvement comes from a mysterious $20b improvement in the transfers balance in 2008.
The rest of the improvement comes from a fall in the trade deficit. To get that fall, the IMF forecast a major fall in US import growth. Between 2004 and 2006, real US GDP growth averaged about 3.5% and nominal import growth averaged 13% or so. Between 2009 and 2012, the IMF expects real US GDP growth to be around 3% but nominal import growth to under 5.5%. Hmmm.
That is a big change.
The assumptions that go into the income balance are also not totally clear. The income deficit is expected to deteriorate by 0.5% of GDP – from 0.3% of GDP deficit in 2007 to a 0.8% of GDP deficit in 2012. But if you sum up the current account deficits, US external debt should rise by around 30% of GDP, though summing up deficits over time with GDP rising obviously has some problems. A 5% interest rate on that net debt implies a 1.5% of GDP deterioration in the US income balance. The IMF’s more formal forecast (appendix table 1) implies a 20% of GDP deterioration in the US net foreign asset position, which suggest a 1% of GDP deterioration in the income balance.
Put a bit differently, the cumulative US current account deficit between 2008 and 2012 is around $4.7 trillion, which implies – at a 5% average interest rate – $235b in additional interest payments. But the IMF only forecasts a $85b deterioration in the US income balance.
I guess the IMF now believes in dark matter!
I personally think there is meaningful risk that the US income balance may deteriorate by more than implied by the interest payments on the sum of future US current account deficits. The average interest rate on the United States existing external debt is about 4.3%. The existing stock of interest bearing US external debt is around $10 trillion. A 0.7% increase in the average interest rate – to say 5% — implies an additional $70b in interest payments. And even if the long term fed funds rate is lower than the current rate, I would expect the average interest rate on the US external debt stock to rise over time. Corporate debt usually carries a premium over LIBOR – or over treasuries.
If the IMF believes that say rising dividend income on US FDI (dark matter) will offset rising interest rates on US external debt, it should say so. If the IMF believes that foreign direct investment in the US will continue to generate lower-than-treasury returns and that the average interest rate on US external liabilities will stay around 4.3%, it also should say so. They key assumptions need to be spelled out a bit more. Otherwise, it is hard to understand the basis for the IMF’s forecast on the income balance – and thus its forecast for “invisibles” and the overall US current account deficit.
I harp on this because I was surprised to see the IMF forecast the United States dependence on official financing away – and to, in effect, forecast most of the expected future deterioration in the US income balance away. Neither will help the IMF play a constructive role in the resolution of global imbalances.
In the past the IMF's forecasts for the US balance of payments didn't really matter. Now they do — the IMF has far more to add to the debate on imbalances than the debate on US entitlements.
Then again, if the US Treasury thinks the US current account deficit is financed by private capital inflows and the dollar’s value – including the dollar’s value v. the emerging world – is determined in the private market, there isn’t much the IMF can do.
China’s FX reserves: becoming politicized?
For the second time in a week, a senior member of a high level Chinese government think tank has been talking about China’s FX reserves. Although both individuals were discussing different aspects of the use of reserves, both their comments seemed to carry an underlying threat.
We highlighted the comments from Xia Bin, the head of financial research at the Development Research Centre (a cabinet level think tank), just over a week ago. As one of the more influential figures in China on currency related matters, his comments on the potential use of FX reserves as a “bargaining chip in talks” were certainly noteworthy. Given that Secretary Paulson was on his way to Beijing at that point, it is not too hard to imagine which talks he was referring to. In light of this, it was also interesting to read the article in today’s China Daily written by He Fan, a researcher with the Chinese Academy of Social Sciences. Given that the Academy reports directly into State Council and is seen as the government’s premier think-tank, any public comments from one of its senior members must be taken seriously…
Given that one advisor is recommending that the government use its currency holdings as a bargaining chip in “talks” (presumably with the US) and the other is warning that a dramatic appreciation in the CNY could force the PBOC to start selling USDs, it is easy to believe that China’s FX reserves are becoming politicized. How the Chinese government will react to this advice remains to be seen. It will also be interesting to see how the US Treasury’s critics in Congress will treat these latest comments from advisors to Beijing.
Quantifying the Exorbitant Privilege
U.S. Current account deficits of nearly 7% of GDP are not likely to be sustained. However, the U.S. net international investment position has stabilized in recent years - and has even declined as a share of GDP - notwithstanding these deficits. Although no single measure of the value of the exorbitant privilege is exact, the comparison of the growing U.S. current account deficit with a concurrently stable U.S. net international investment position in recent years confirms that the privilege does indeed exist and is substantial.
Maybe this is why the U.S. shouldn’t have been so sanguine about China’s accumulation of dollar reserves:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml
Brad, I think we know from a variety of sources, including commenters on this site, that the UST is well down the depth chart in its trained staff positions, even worse than during Snow’s time. That leaves it to the political hacks to make idiotic “party line” comments like this, even to the IMF. Ashamed to say that it’s my government.
sometimes the political hacks can be more than the match for the best of the staff — Summers, Lipton, Geithner were all political appointees in the clinton era, but wouldn’t be on the bench in many places. and much as I and my other former treasury colleagues (toloui’s pimco is ex treasury) might like to think that we were absolutely essential, i suspect that there is still more than enough talent inside the treasury to realize that the us depends on official flows, big time. look at lowery’s sovereign wealth funds speech, for example. that is what makes these kinds of statements all the more galling.
Refocus the Fund
The effectiveness of the IMF has declined at a time of global change, write Mohamed El-Erian and Michael Spence, notwithstanding Dominique Strauss-Kahn’s solid qualifications for the job, Europe’s replacement may face an issue of legitimacy even before he assumes the position…
Brad,
I am a 100% with you. It is ridiculous that the US administration continues its crusade of convincing the world (and itself) that the CA deficit is financed by private sources, and it is very sad that the International Organisations uncritically join that chorus. The reason may not even be that they do not have the guts. In all likelihood those at the top - who neither crunch data nor read blogs - believe the US melody. As a result, for those at the bottom (who may crunch numbers or read blogs) there is little to be gained by telling the opposite story, given that it - though with highest likelihood true - hinges on some guesstimates and is difficult and complicated to back up with hard data. Yes, incentives do also apply to bureaucracies.
Apart from that, I have never understood why the US administration is so excited about the deficit being financed by private sources (other than blind ideology). To me, private financing simply would mean that the risk of an abrupt reversal - and hence the often cited dollar hard landing - would become a lot more likely. Official financing may not be fancy, but then central banks are unlikely to panic-sell large amount of dollar assets.
“…Galbraith would probably proclaim “I told you so” today as China’s economy morphs into a giant corporation… ‘The New Industrial State’ wasn’t about China, but the U.S. and the Soviet Union. Yet recent moves in Beijing to invest massive government funds overseas, and the extent to which the U.S. and Chinese economies are linked, were foretold by Galbraith…” http://www.bloomberg.com/apps/news?pid=20601039&sid=aOQQEvELoOUo&refer=home
“China threatens ‘nuclear option’ of dollar sales
By Ambrose Evans-Pritchard
Last Updated: 6:00pm BST 07/08/2007
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml
Telegraph is a bit hyperventilating - but still interesting news.
“Oleg Deripaska… has acquired a stake in General Motors of just under 5%… worth more than $900m at Tuesday’s share price, is said to be a personal investment… [He] acquired the shares last year. “…It’s a strategic investment on his part and unrelated to Basic Element [Mr Deripaska's holding company].”…” http://www.ft.com/cms/s/b315cad6-4522-11dc-82f5-0000779fd2ac.html
“Roman Abramovich… has transferred the ownership of some of his £60m property portfolio in London and Sussex from offshore companies into his own name, triggering speculation about the reasons for the change… Suggestions that he has transferred the ownership of his properties in order to apply for British citizenship are “wrong”, says the Telegraph, “because he has just signed up for a new five-year term as governor of Chukotka and foreign nationality is a bar to being a governor in Russia”…”
http://ftalphaville.ft.com/blog/2007/08/07/6385/so-what-is-abramovich-up-to/
Brad, I agree, but I don’t think the likelihood of UST minions contradicting their political bosses is unrelated to their prospective ability to find a good job elsewhere. There might also be more distance between the career staff and the politicals than there was back then–when the politicals actually made sense and cared about facts.
The puzzling thing is that for whoever composed that report, the closest “US official” would have been Lundsager, someone you might have overlapped with at UST, who presumably would not have said such a silly thing.
Amazing that members of Congress may have to learn the hard way that debtors don’t push creditors around at will. It would be a very marvelous lesson for American arrogance to have the Chinese dump dollars and cause a deep recession, perhaps worse, in the USA. Shock and awe is a two way street, America needs to learn that and learn it good.
China’s message to the U.S. is, “If you don’t allow us to continue to accumulate dollar reserves (and gain more power over you) we will sell our dollar reserves and destroy your economy.”
If there is a lesson to be learned, it would be the foolishness of free trade.
I think the IMF probably meant senior US officials — and probably someone more senior than Lundsager.
And I agree with a lot of what bureaucrat said, tho I do wonder if there is a limit to the willingness of official actors to absorb dollars. So far though deficits financed by the official sector have been a lot more stable than deficits financed by the private sector. that irony though would be a bit too far from Bush administration (or most conservative commentators) ideology to really ever make into doctrine.
incidentally, i don’t understand what the imf has to gain from downplaying official financing of the US — or why the IMF didn’t spend a bit more time developing a credible forecast for the US balance of payments (trust me — if you fill in the gaps with other investment net, you are really just fudging the financing numbers — and the low-ball forecast on the income balance warrants at least a bit of explanation).
you don’t even really have to rely on “some guesstimate” that are “complicated to back up with hard data” any more — the BEA data revisions dramatically upped official flows to the US (and those revisions are based on the us treasury survey, which is a hard data point), and if you look at recorded chinese inflows since last June it is clear that either:
a) China has already stopped buying US assets, despite he fan’s assertions or
b) the US data isn’t picking up all Chinese inflows.
there are hard parts that require guestimates (what fraction of the inflows through europe are really from the oil exporters, whether directly or through their external fund managers), but there is no need for the IMF to rely on the TIC data after the early survey reports came out in March …
and there is also no reason for the IMF not to have put more effort in their forecast for the US external deficit. By all appearances, they spent a lot of time looking at long-run fiscal issues (where the imf’s opinion isn’t all that relevant) and very little time on the US BoP, where the IMF could make a difference with good analysis. I don’t get it.
(full disclosure: I spent a year and four months at the fund — and do not consider myself anti-fund in the slightest. when they do good work, they often do really good work. and most people who work on macro data in the markets relies on their numbers and data in various ways — the IMF would be a lot harder to replace than some think. my disappointment comes because i think the IMF can and should do a much better job looking at these kinds of issues)
The Economist (presumably reflecting economic orthodoxy and not American conservative ideology) wrote back in June about how the dollar was undervalued against almost every currency, possibly excluding the yen.
http://www.economist.com/finance/economicsfocus/PrinterFriendly.cfm?story_id=9366051
This is a good case study of how the press gets Chinese statements wrong. Someone says something, someone else adds a bit of drama and repeats it, someone else adds a bit of drama and repeats it, and before you know it, it looks nothing like the orginal statement.
The fact of the matter is that Chinese economists say all sorts of things, and there is a lot of discussion in Chinese economic circles about what to do. There is no reason to take any of the people mentioned (who aren’t by the way political heavy weights) with any more indicative of Chinese policy than a random statement of an American economist on US policy.
(But, but, these are *official statements* from *government think tanks*. Well, that is where some arcane knowledge about Chinese bureaucracy comes in. If the government really wanted to hint something, it would have come up through Xinhua.)
the economist also — for reasons that are something of a mystery since they do not seem flow directly from either economics orthodoxy or conservative orthodoxy — concluded that $500b of PBoC intervention didn’t indicate that the RMB was undervalued …
the dollar is on the weak side relative to its historic ranges v. most other g-10 currencies (the yen is an important exception, as it is even weaker than the dollar), which is the source of the economists argument that the $ is now undervalued. it flows from most behaviorial equilibrium exchange rate models.
(the big mac index also suggests the $ may be undevalued — but is also suggests the rmb is really undervalued and the economist doesn’t seem to particularly like that conclusion).
analysis that focuses on the dollar’s historical trading range v the majors through tends to ignore large trade deficits while the imf’s analysis doesn’t. put differently, the historical norms for the $ over the past 20 years are consistent with ongoing expansion of the trade deficit, so the economists fair value estimates of the dollar imply an ongoing increase in the us deficit. and with the trade and transfers deficit at 6.4% of GDP in 06, any growth would push the deficit up to truly high levels …
the imf’s model by contrast focuses much less on the dollar’s trading range over the past twenty years and much more on what kind of depreciation would be needed to reverse the trend increase in the us trade deficit and thus stabilize the US net foreign asset position over time. that may be the wrong analytical framework, but it is one that makes sense to me.
Brad,
agree that there is data out there to do a proper backed up job now (though probably at the time of writing of the Article 4 this was still harder - here the timelag problem comes in). Just tried to give what to me is the most likely explanation of why things came out the way they did.
Anonymous, on the “chinese nuclear option”: it’s highly interesting that they have started talking about it. But then the whole doctrine of nuclear deterrence was that the possibility of mutual destruction would make sure that it would not happen(and China would presumably suffer as much if not more if the US and world economy crashed big time - for a start look at ridiculous stock market valuations in China, their export dependent growth, etc). So to me these noises are just cheap talk. This said, if financial markets are really nervous, this kind of nationalistic boasting could still have unintended consequences.
US officials are probably changing their tune because they realise that less intervention means higher bond yields and hence mortgage rates, and in recent weeks the US housing and credit markets have looked increasingly vulnerable to such developments.
Top U.S. economists, including Nobel-laurates, warn Congress against anti-China protectionist measures
http://english.people.com.cn/90001/90778/6230156.html
“chinese nuclear option” - just before the Olympics? whether it may be used as a means for both governments to deflect (global) anger over a possible, substantial worsening of problems of their own doing (i.e. subprime etc. in US, overheating related problems in China), as if China were able to carry through on such a threat, wouldn’t it unleash a backlash on a global scale and put this type of statement into question: “…Stock markets should welcome these new Chinese investors…” http://www.ft.com/cms/s/6849c1f6-454a-11dc-82f5-0000779fd2ac.html
I added the Pesek and Deripaska / Abramovich links as an attempt to introduce some consideration of other significant players and factors, as this did not seem to be a post about China (perhaps I misunderstood), and to add to possible questions about what “official(s)” (and perhaps ‘private’ and ‘market’) really means.
Speaking of ‘undervalued’, whether some reference to Japan/yen may be appropriate: “…The $200 million of property-related holdings that may contain subprime loans are more than double Shinsei’s first- quarter net income after one-time gains. The disclosure underscores the risks Japanese lenders face boosting revenue amid lackluster lending and low interest rates at home…” http://www.bloomberg.com/apps/news?pid=20601080&sid=anVzInyi9hAw&refer=asia
and as Twofish has mentioned, as measures for the yuan (and other currencies) are also questionable: “…By that measure, the ruble remains the world’s second-most undervalued major currency, behind only the Chinese yuan… the ruble would be even more valuable today if not for the Russian central bank intervening…” http://www.nytimes.com/2007/08/08/business/worldbusiness/08ruble.html?_r=1&ref=business&oref=slogin
to ask if market moving changes in the indexes of the foreign exchange value of the USD may be underway: “At the end of 1998, the staff of the Federal Reserve Board introduced a new set of indexes of the foreign exchange value of the U.S. dollar. The staff made the changeover, from indexes that had been used since the late 1970s, for two reasons…” - ‘Indexes of the foreign exchange value of the dollar’, Federal Reserve Bulletin, 2005 http://findarticles.com/p/articles/mi_m4126/is_1_91/ai_n14837580/pg_1
How do you respond to Treasury’s points that interest rate differentials and long dated option volatilities don’t indicate risks of excessive dollar depreciation?
From WSJ:
” In June 1998, U.S. Treasury officials made a plea to China that they would be reminded of repeatedly in the following years. Thailand had devalued its currency in 1997, touching off a crisis in the region that led other countries to devalue and in some cases default on foreign debt. The yen was sliding. Chinese officials, who pegged their currency to the U.S. dollar, “let it be known…that if things kept going this way they’d have no choice but to devalue,” recalls Ted Truman, a Treasury official at the time. The U.S., fearing such a move would trigger another round of devaluations, urged the Chinese to hold their peg, and praised them when they did so.
But times changed. As recessions and depressed currencies held down imports and goosed exports in other Asian countries, the countries ran trade surpluses that replenished foreign-exchange reserves. Determined never to be so tied to the onerous conditions of the International Monetary Fund, they have kept those policies in place. Thai reserves, effectively exhausted in 1997, now stand at $73 billion.
Long after the crisis passed, China’s economic fundamentals suggested its currency should rise against the dollar. China let it rise only slowly, continuing to juice exports and produce trade surpluses that pushed China’s foreign-exchange reserves above $1 trillion. When the U.S. pressed China to let its currency float, China reminded the U.S. of the fixed exchange rate’s stabilizing role in 1998. China put much of its cash — part of what Mr. Bernanke has called a “global saving glut” — into U.S. Treasurys, helping hold down long-term U.S. interest rates. Chinese government entities also recently poured $3 billion into U.S. private-equity firm Blackstone. “
I fully concur with RebelEconomist that US officials are probably changing their tune because they realise that forcing a major Chinese yuan revaluation means higher bond yields and hence mortgage rates, and in recent weeks the US housing and credit markets have looked increasingly vulnerable to such developments. Moreover, the IMF which is de facto controlled by the US Treasury, parrots the US political-economic policy of the month. In the US government, new economic theories are devised to match the everyday political reality by the K Street lobbyists.
re: long-dated options, my answer would be that the markets expect central banks to continue to finance the us. Until the past few months, I think — i really should check — volatility in the treasury market had been falling (or at least low and stable), which made selling protection v big moves a way to make a bit of extra money, while also reducing demand for insurance v. big moves. there are even rumors that some central banks were selling such protection.
the markets clearly never bought the 04 setser/ roubini argument that central banks were stuffed with us assets and would slow their pace of accumulation, and so far the market has been right and setser/ roubini wrong …
one final point: the economist petition against tariffs was organized by the club for growth, an organization that never met a tax on the wealthy that it didn’t want to cut …
guest: the meaning of official and private in this context is clear — it references the balance of payments data, and in the BoP data, official means foreign central banks and sovereign wealth funds (and, less relevant for the Us, the IMF). your bigger point here eludes me — there is some blurring of the lines (sovereign wealth funds handing over funds to external managers), but we have discussed this earlier. the owner of Chelsea is not considered an official actor — and if the UAE sheiks decamped with their fortune to a tax haven and turned the government of their countries over to someone else while retaining a big chunk of the oil wealth, they too would be considered “private”. you have raised this in the past though and i don’t see where it goes.
I would be interested in hearing in reactions to my critique of the IMF’s long-term BoP forecast for the US.
Agreed–US dollar is still “overvalued” in relation to several Middle East oiler’s pegged currencies and, due to prolonged open market intervention, Asian currencies. (Japanese yen is probably the most undervalued currency but thanks to the irksome, distortionary carry trade.)
If left to “market forces,” the dollar goes down like a Led Zeppelin; i.e., GBP/USD, EUR/USD, AUD/USD, etc. Little green depreciation machines are for financial masochists, period. If it were up to me, FX dealers should post this sign:
Geopolitical Warning: Holding dollars is hazardous to your health. We are not responsible for the dollar’s built-in “haircut” feature.
Hold dollars and it’s a little off the top, a little of the side; pretty soon you’re as broke as flat broke as that famous beggar Uncle Sam!
@Bureaucrat:
(China would presumably suffer as much if not more if the US and world economy crashed big time - for a start look at ridiculous stock market valuations in China, their export dependent growth, etc).
yes but this is based on the old claim that “US is the economical locomotive of the world” (propagated by the US gov’t) and that the rest of the world can not deal without them.
If China would decouple yuan from the USD, the yuan would appreciate. This would increase the purchasing power of the people in the Most Important Market for the Chinese manufacturers: the Chinese themselves. China would thus become more of their own locomotive.
Besides EU is already selling their luxury products in China; with a population of 1000000000+, China can easily have 10000+ people with high personal worth. With a booming yuan the trade between EU and China could increase, regardless of the situation in the US.
One additional factor that would help the Chinese economy in a decoupling is that commodities like oil would still be priced in USD. They would thus become less of a burden for the economy.
Addendum to my post above: an appreciation of purchasing power is exactly what is currently happening in Russia with the ruble. See:
http://www.latimes.com/business/la-fi-wallstreet8aug08,1,1555788.story?coll=la-headlines-business&ctrack=2&cset=true
This is basically what would happen with the yuan if they decoupled.
“If left to “market forces,” the dollar goes down like a Led Zeppelin; i.e., GBP/USD, EUR/USD, AUD/USD, etc…”
“…I believe that there is a good chance that global risk appetite will recover sooner rather than later. In fact, we may be establishing the trough of this latest sell-off in good-quality risky assets. If I am right, then USD/JPY, EUR/USD, GBP/USD, EUR/JPY, AUD/USD and NZD/USD should all head higher again, reversing a significant portion of the corrections we’ve seen in the past two weeks…” http://www.morganstanley.com/views/gef/archive/2007/20070803-Fri.html#anchor5328
Since economic orthodoxy is vehemently against tariffs and the yuan has a ‘crawling peg’ with the dollar (which the U.S. can’t change the value of), economic orthodoxy would say the correct exchange rate is whatever China says it should be.
They just consider it a market with a small number of sovereign participants.
“…The [yuan] may advance 6.2 percent over the next 12 months, according to the implied forward rate of 7.1295 as of 5:46 p.m. in Shanghai from 7.1495 yesterday. “There may be some speculation that China’s trade surplus and reserves were still big in July,” said Zhao Qingming, an analyst at China Construction Bank Corp…” http://www.bloomberg.com/apps/news?pid=20601083&sid=awcNmfJIecSE&refer=currency
“India’s central bank will “more aggressively” cap rupee gains after a rally to a nine-year high curbed export earnings, said N.S. Paramsivam, head of treasury at Essar Group, which owns oil, steel and shipping businesses…” http://www.bloomberg.com/apps/news?pid=20601083&sid=aF3vTpu4IM6I&refer=currency
re:”…GBP/USD…should all head higher again…” (?)
“…Not only does the U.K. face its own subprime crisis, it could be far worse than in the U.S…” http://www.bloomberg.com/apps/news?pid=20601039&sid=axWmsMHJDjiQ&refer=home
re: “Sharma sees the franc falling to 1.65 per euro and 1.21 per dollar by the end of September…” http://www.bloomberg.com/apps/news?pid=20601083&sid=aV16GFJCIdWc&refer=currency
In the last two decades China has been rapidly integrated into the global economy. On the basis of US Dollar hegemony, with the US Dollar reserve currency used for 85 percent of international trade transactions, China has joined Japan as a primary supporter of Bretton Woods 2 monetary regime. Chinese official dollar reserves of $1.2 trillion exceed the $880 billion Japan reported. But when the vast dollar holdings of Japan’s private sector banks and companies are added to that official figure, it becomes clear that Japan continues to play the central role it has for 25 years now in supporting the global value of the dollar and by extension, US global hegemony.
Since Japan’s surrender at the end of World War III, the Japanese state-driven Industrial system has sublimated all other national goals into single-minded devotion to economic growth and acquiescence in the US-Japan military alliance. The aim was to build an industrial superpower under American military protection and within a stable dollar-centered global financial framework; the Japanese elite did not concern themselves with the long-term sustainability of either. Now with the entrance of China as a rival economic superpower, the situation is vastly more complicated.
Whatever the Chinese leadership may think about the United States, they can have no illusions that the dollars they have accumulated can ever be redeemed for anything close to their current nominal values. The Chinese also hope that, if and when the US Dollar global financial regime unravels, China will have an economy sufficiently developed to permit the yuan to takes its place among the world’s major currencies without the need for external backing that the country’s dollar reserves currently provide. That will allow it to deal with the collapse in American purchasing power when the US is finally forced to live within its means.
“yes but this is based on the old claim that “US is the economical locomotive of the world” (propagated by the US gov’t) and that the rest of the world can not deal without them.”
Yes, it’s all just a myth. Everything superlative written about the U.S. and its importance economically is clearly, in some schools of thought, a myth “propagated by the US” itself.
Seriously - you seriously believe this? You honestly believe China could “crash” the dollar and not inflict easily as much damage on itself?
I’d take a bet of almost any size with anyone foolish enough to play it that if China “dumps” dollars, the U.S. would hurt in the short term but come out ahead in the medium-to-long term versus its current situation.
In the meantime, I’ll be waiting for the sound explanation as to why China hasn’t already taken these steps if they would be such a win-win for them, and if even the armchair economists around here can see the folly of coming near the dollar with a ten-foot pole.
seriously, the ‘china nuclear option’ sounds alarmingly like an official who may be literally scared to death and looking for a distraction or scapegoat for escalating domestic problems he can’t control, and/or someone who isn’t getting and needs some of that American PR expertise which the Chinese government is allegedly buying. If Twofish says the Chinese system is *much* worse than the US, there has to be a great deal of merit in his perspective.
As ‘DC’ doesn’t treat his own posts seriously, it is astonishing that anyone else would.
Guest,
For the record, I never posted ‘china nuclear option’ non-sense. And I do take my posts seriously.
Anyone who places their fortune at risk based on Ambrose Evans-Pritchard and the Torygraph should instead invest in a brain transplant.
On a more serious note, is it fair to say that Hank Paulsen’s tell for when he’s lying is that he stammers? Watching an interview with Maria Bartiromo on CNBC, he seemed to transition from almost incomprehensible when saying that the US economy is in great shape to fluent and easy when he was saying that the housing sector has problems.
Bill Clinton at 2004 Democratic National Convention:
“We can’t enforce our trade laws against our bankers! I mean, c’mon!”
This problem has been obvious for a long, long time. We sure could use a few more political leaders with as much intuitive grasp of the situation as Bill Clinton had.
re: “the meaning of official and private” (and perhaps ’state’ or ‘foreign’) - some of their investments have to be more ‘private’ than others, but actions and asset allocations of the world’s super rich must somehow influence, and be influenced by, their respective ‘home’ governments, especially when those governments are not exactly democratic. And as they seem to continue accumulating and diversifying their wealth, interesting to watch them evolve, presumably not only with their ‘own’ governments, but those of other nations which hold portions of, or manage, their wealth - or wish to do so.
“…Forbes pinned down a record 946 billionaires. There were 178 newcomers, including 19 Russians, 14 Indians, 13 Chinese and 10 Spaniards, as well as the first billionaires from Cyprus, Oman, Romania and Serbia. Ingenuity, not industry, is the common characteristic… The billionaires’ combined net worth climbed by £457 billion to £2 trillion…” http://uk.biz.yahoo.com/billionaires2007article.html
Guest — ok, you have raised the issue. but i would want to see clear evidence of how the asset allocations of rich russians influence the BoR (and vice versa) before going further. spell out your theory and see if you can find the supporting evidence. i am not sure it works” warren buffet is rich, and he isn’t a fan of the dollar — but i am not sure that had any systematic impact on the allocation of us reserve assets!
in this case, though, the argument you are making doesn’t seem very relevant to the topic of my post — which focused on the fact that the imf underestimated what are “official” inflows by any assessment.
re: “foreign demand for US debt securities” - maybe now they can invest in their own market now.
“…China’s corporate bond market has been little more than a sideshow… But a new measure being considered by the China Securities Regulatory Commission (CSRC) could give the corporate bond market a much-needed boost. Details of the new regulations are being reviewed by the State Council and are expected to be released soon…” http://businessweek.com/globalbiz/content/aug2007/gb2007088_786762.htm
re: “warren buffet is rich, and he isn’t a fan of the dollar” - just starting with the American billionaires, if you know exactly how the sum total of Buffet’s wealth is allocated, please do tell. But I’d imagine quite a bit of it is in USD, and he isn’t exactly threatening to leave the country, or sell the USD assets we know about.
guest — this is a blog about central banks, sov. wealth funds and the balance of payments data, not us or foreign billionaires. i only know what is in the press about buffet’s investment strategy. Chinese billionaires have always been able to invest in china (tis the foreigners who face restrictions); russian billionaire also can invest in russia. you don’t need corp. bonds to keep savings at home — all the available bop data suggests net private capital inflows into Russia and China, whether foreigners moving in or residents (including wealthy ones) bringing funds back home.
so the rules of this blog dictate that it’s only ok to mention Buffet et al. when ‘the media’ (and you) quote him as saying (wasn’t that a few years ago?) that he’s shorting the dollar - and to this day, that means, or you are asking us to believe that “he isn’t a fan of the dollar”. What is your definition of ‘private’ flows Brad - and the market, and market rate, looking at the title of this post. Are you saying that your central banking world doesn’t need to concern itself with the market and private actors? What is your argument Brad?
@Guest on 2007-08-08 13:33:15:
In the meantime, I’ll be waiting for the sound explanation as to why China hasn’t already taken these steps if they would be such a win-win for them
The response to Bureaucrat was not about whether it was reasonable to expect China to carry out their threats or not. It was about whether “China would presumably suffer as much if not more” as the US in such a scenario. My take is that they would suffer far less than the debt-laden US economy.