and therefore the US will have no difficulty financing its trade deficit? So claims an article in BCA, a service which has tended to be right on such matters over the 50 or so years of its existence.http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20040819.GIF
The more I think about that BCA article, the less convincing do I find its main conclusion. OK, foreigners are holding vast amounts of US dollars. There are many things they can do with those dollars, e.g. 1. Continue to hold them 2. Buy other currencies to hold 3. Buy precious metals 4. Buy consumer goods 5. Buy capital goods 6. Buy debt 7. Buy equities 8. Buy real estate Possibilities 1 and 2 do nothing to alleviate the US current account deficit or help the US economy in any way. The other possibilities help us, or might help us, only if the foreign buying is from or in the US. If much of the buying is from countries other than the US, then a necessary intermediate step is to sell US dollars for other currencies. That is almost certain to put downward pressure on the exchange value of the US dollar. I haven't thought through all the possible ramifications of all those dollars saved up by foreigners, but I do think that the eventual consequences are not necessarily good for the US. The 'eurodollar' glut of the 1960s and 1970s certainly was not good for us.
USA growing international debts with growing deficits via American consumers might be saving the nations of the East plus OPEC nations from major inflation---- as long as global domestic turmoil and geopolitical risks can be continued----- hmmm,lemee get this straight----- reelect GB and save China and Arabia---- and maybe even Venezuela. ain't economics great.... and continued geopolitical risks....http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20040819.GIF Petrodollars And Rising Global Savings09:41:00, August 19, 2004The rapid accumulation of petrodollars has become a new source of global savings.High and rising oil prices have generated ballooning export revenues in oil exporting nations. However, escalating domestic turmoil and geopolitical risks in the major oil producing countries have prevented both consumer and business spending from taking off in these economies. The result is surging external surpluses. Overall, petrodollars have become another major source of global savings. Together with the rising current account surpluses in Asia, petrodollars will ensure that there is no shortage of global savings. Importantly, U.S. domestic demand is the only escape route to absorb global savings excesses. Bottom line: Global savings are plentiful and the U.S. should not have a problem financing its large current account deficit.
US dollars have often been held by foreigners because they were more stable than their own currencies, and they were often invested in US assets as now. However, the flow of dollars back into US assets is now emanating mostly from foreign central banks, not from individuals. If the Japan and China CBs stopped getting rid of their surplus dollars this way, and bought euro bonds for instance, things would change. The danger is that these decisions are in the hands of a small handful of people, rather than a huge group of various investors overseas. Just one more instability factor for the economy and the dollar. Nomads in Afghanistan used to use silver dollars as their currency of choice (smart nomads), and perhaps still do if there are any nomads left. There must be dozens of situations in which foreigners currently find it to their advantage to use dollars for various purposes, many of them illegal, but the advantages of paper dollars all pretty much evaporate if they continue to lose value over time. For this reason it will not be good if dollar depreciation does not continue to be "measured". But you could say this about any currency today. There are many other countries though whose currencies are just as flaky as ours, and they are all fiat now. I am beginning to develop a tangible desire for some gold coins in the basement, but according to Arnold at the convention tonight, those like me who do not have confidence in the future are "economic girly-men" Maybe he's right. Good luck, Ed.
Nomads in Afghanistan used to use silver dollars as their currency of choice (smart nomads), and perhaps still do if there are any nomads left.-and-I am beginning to develop a tangible desire for some gold coins in the basement,..Good post Ed;Just for giggles I thought I'd direct your attention to a post on the Foolish Collective board a couple of weeks ago. I was curious about some of the facts as mentioned here.http://boards.fool.com/Message.asp?mid=21178645I just recently picked up and read "The History of Money: From Sandstone to Cyberspace" by Jack Weatherford.I decided to order this book and I'm only about 1/2 the way through it, but I whole heartedly agree with Author: yttire, it is a fascinating read! Good stuff.Cheers;~hildy
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