| |
Asia fills
her boots: dollar reserves
skyrocket
By John Berthelsen
At a time when the United States remains tightly
focused on its domestic economic problems and its
international military adventures of the past two years,
Asia has been quietly running up an absolutely
staggering surplus of US dollars.
By the end of
2003, according to JP Morgan Chase economists in Hong
Kong, the combined countries of Asia are expected to
hold an astonishing 70 percent of the world's currency
reserves. In the past decade, they estimate, Asia has
added US$1.2 trillion to its US dollar reserves as it
runs up whopping trade surpluses with the rest of the
world - principally the United States, whose annual
trade deficit is expected to reach US$500 billion.
Credit Lyonnais Securities Asia (CLSA) in Hong Kong put
the Asian reserves even higher, at perhaps $1.5
trillion.
Is this a danger to the world economy?
For many years, America's strong-dollar policy served
the world and chiefly the United States very well. Their
currencies cheap against the US dollar, Asian
manufacturers profited by making relatively inexpensive
exports and selling them in the United States at a
healthy profit. In a kind cat-and-rat-farm analogy, in
which the cats eat the rats, are skinned for their fur,
and then are fed back to new rats, the Americans
benefited by getting cheap goods that kept their
consumer-led economy roaring. The financial communities
benefited from the repatriation of those profits as the
funds flowed back in a ceaseless waterfall into US stock
markets, treasury and corporate bonds, money-market
funds and other financial instruments.
But
perpetual-motion machines don't work. The monumental
scale of Asia's dollar reserves and the size of
America's deficit are starting to make economists and
strategists nervous. Wayne Godley, an economist at the
Levy Economics Institute in New York, writes: "If the
balance of trade does not improve, there is a danger
that over a period of time the United States will find
itself in a 'debt trap', with an accelerating
deterioration both in its net foreign-asset position and
in its overall current balance of payments (as net
income paid abroad starts to explode). Such a trap would
call imperatively for corrective action if it is not at
some stage to unravel chaotically."
It has been
widely reported that the US must take in about $1.3
billion a day - about $55 million an hour - in foreign
investment to finance its overseas debt. If that river
of money falters or dries up, the difference must be
made up by an inexorable fall in the value of the US
currency. Indeed, if it had stopped already, the fall in
the US stock markets since equities began to lose their
luster in 2000 would have been catastrophic.
Certainly, Asia has been on a buying spree in US
securities of all types. Despite a three-year economic
pause in the United States, Asians bought a record $201
billion worth of long-term US paper in 2002. That
includes another record $97 billion in US government
securities. Asian central banks, with their enormous
overhangs of US dollars, are increasingly doing the
buying.
Over the past months, US Treasury
Secretary John W Snow has begun to try to talk the US
dollar down. It had fallen by more than 25 percent
against the euro, the Eurozone's common currency and the
world's other reserve legal tender, before increasingly
optimistic economic news and a rising stock market
checked the dollar's fall. Although it has since risen
against the euro by about 4 percent, many economists
believe the dollar's precarious position will cause the
slide to continue.
The currencies of Asia,
however, have almost all remained firmly tied to the
dollar, either through currency pegs, reserve boards or,
as in the case of Japan, as governments have bought
dollars to keep their currencies static and thus to
preserve their terms of trade.
Despite the US
attempts to talk the dollar down, Asian governments
regard any negative changes in their trade balances as
inimical to their economies. While supposedly loosening
restrictions so that their consumers can participate in
a demand-led consumer revolution, Asia in fact is more
dependent on exports today than at any time over the
past two decades.
China, whose share of exports
in total gross domestic product (GDP) averaged 10.8
percent in 1985-89, now is producing exports at 28.4
percent of GDP. South Korea's exports were at 23 percent
during the same period and now are at 54 percent of GDP.
Hong Kong, then at 77.8 percent, is now at 153.5 percent
of GDP. These figures are being repeated across
virtually every economy in Asia. These exports continue
to flow into the United States despite a three-year
economic downturn that, if rationality were to prevail,
should have slowed consumer purchases. The US Federal
Reserve's easy-money policy and record cuts in interest
rates, however, have kept consumers buying at a feverish
pace, far too often on credit.
"So long as
America continues to secure easy funding, there is no
pressure on policymakers in Washington to do anything
other than run super-easy policies to try to keep their
own consumer credit cycle going," says Christopher Wood,
global emerging-markets equities strategist for CLSA
Hong Kong. "Like any profligate debtor, market
discipline will only be imposed on America when foreign
investors demand an interest-rate premium for owning
dollars."
Wood tends to grow apocalyptic. "The
current trend can continue for a while," he writes in
his 110-page first-half 2003 overview of the world
economy, published last month. "But the longer American
excesses are financed, the more inevitable will be the
ultimate collapse of the US paper-dollar standard that
has been in place ever since Richard Nixon broke with
Bretton Woods by ending the dollar's link with gold in
1971. The result will be a massive devaluation against
gold of Asia's hoard of dollar-exchange reserves."
Japan's foreign reserves currently total $496
billion, followed by China at $310 billion and Taiwan at
US$170 billion, according to figures compiled in April
by the Hong Kong Monetary Authority. Hong Kong, with 7.5
million people, has reserves of $114 billion, nearly
seven times the total money in circulation in the
territory. Other Asian treasuries are similarly bulging
with dollars.
In answer to statements by
Treasury Secretary Snow that the country should let its
currency float upward, China's central bank governor,
Zhou Xiaochuan, said at the end of June that he sees no
possibility that the yuan, which trades in a narrow band
at about 8.28 to the dollar, would be revalued upward.
Nor is there a possibility that it will rise against the
currencies of any of its other major trading partners.
China intends to eat everybody's lunch.
Confronting the prospect of additional
economically difficult integration into the World Trade
Organization, and faced with the task of creating tens
of millions of jobs for its sacked
state-owned-enterprise workers, China's leaders believe
it is crucial to keep growth above 8 percent. Severe
acute respiratory syndrome (SARS) took half a point off
growth in March through June. President Hu Jintao and
Prime Minister Wen Jiabao have demanded, under a policy
statement called "Double Victory", that growth continue
at the maximum possible rate. There is not the slightest
intention to help the United States cure its
trade-balance problem by either making US exports to
China more attractive or raising the price of exports to
the US.
Likewise, Japan, vainly attempting for
the 13th year to export its way out of its economic
quagmire, is keeping the yen within a range near 115 to
the US dollar. Since the beginning of the year, the Bank
of Japan is believed to have bought as much as $60
billion in US securities - $30 billion in March alone -
to keep the yen where it is. Its purchases have been
increasing at a record pace.
Asia does not have
to follow this path, Christopher Wood of CLSA says.
"Asian central banks could abandon their mercantilist
policies. They could let their currencies rise, which is
what would happen given Asia's high savings rates if
market forces were allowed to prevail. This would in
turn boost Asia's consumer demand cycle. This is also
what should be happening from a theoretical standpoint,
as satiated American consumers have already borrowed a
lot and need to rebuild their balance sheets."
Then, turning truly apocalyptic, Wood predicts
that by the end of the decade there will no longer be a
possibility that the world's central banks can control
the situation, and there will be a truly massive
devaluation of the US dollar. "The view here is that the
US dollar will have disintegrated by the end of this
decade. By then, the target price of gold bullion is
US$3,400 an ounce." That is roughly 10 times gold's
current level. If that were to happen, Asia's holders of
dollars would be forced to start selling them or see
their own reserves collapse. If they start to sell them,
the price of America's paper will fall even faster.
That is truly apocalypse now, or in 2010. Is it
possible? The policymakers in the administration of
President George W Bush in Washington are far more
sanguine. They regard economists, often said to be the
only field in which two individuals have shared the
Nobel Prize for saying exactly the opposite things, to
be basically irrelevant, and presumably by extension
strategists. The administration, facing an election in a
year and a half, and the Federal Reserve intend to keep
the party going if they can.
(Copyright 2003
Asia Times Online Co, Ltd. All rights reserved. Please
contact
content@atimes.com for
information on our sales and syndication
policies.)
|
| |
|
|
 |
|
