My suspicion is that the private inflow of investment has not kept up with the US need for half a trillion a year. Certainly not in equities, and perhaps also not in debt assets, due to possible exchange rate risk. The dollar is indeed the world's liquidity, but its days (OK, years) are certainly numbered, and sensible investors would want to avoid too much exposure. As I recall, there was also a year during the early 80s when foreign CB's stepped in to cover for the reluctance of private wealth-holders. I'm guessing that 2002 will also turn out to be such a year, but I could be wrong.RE: [PEN-L:32288] Re: economics on pen-l Peter D writes:>...
I'm wondering whether foreign central banks are already financing the
US current account deficit, in light of the weakness in US financial
markets. <don't you think that it's foreign financiers that are doing so, rather than central banks? they're buying up US assets, allowing the US to run a current account deficit. If the CBs are doing anything, it's accumulating dollars and dollar-denominated short-term assets because they are useful reserves (since the dollar acts as world money). Do you think that the CBs play a big role?
As to why the CB's would do this, you could take your pick from (1) it's not in anyone's interest to have the dollar crash and bring down the global economy with it, (2) they are protecting the private positions in the dollar taken by their own nationals in particular, (3) they are supporting the US as a bastion of free-market rectitude, and (4) they are supporting an overvalued dollar to sustain their own export surpluses.
The strength of the dollar depends entirely on the willingness of the rest of the world to accumulate them at the rate of one-half trillion a year. Private wealth-holders will do so based on expectations of risk (exchange rate and liquidity) and rate of return. Public dollar repositories (CB's) will do so for either economic (including liquidity) or political reasons. It seems to me that the Bushies cannot afford to alienate the interests that govern CB decision-making. The current military power buildup may be seen as a basis for supporting the dollar (an implicit quid pro quo if you will), or it may be seen as reckless and overly unilateral. How would you analyze the effect of US militarism on the willingness of CB's to accumulate dollars?
>... If so, what implications, if any, does this have for global
political economy? How can we explain Bushite unitaleralism and
in-your-face hegemony in light of the increasing fragility of the US
external position?<the role of the dollar as world money is based on the power of the US. Bushite hegemonism seems just one way to maintain and extend that power, centering on the military side. The Clintonoids put greater emphasis on the financial/economic side of US power along with trying to encourage consent among the governed, don't you think? But these are variations on a theme.
>Moreover, if we assume that serious money is now international
(international portfolios and their mirror-image, international
ownership of corporations, financial institutions and tradeable funds),
how do we think about the constraints, if any, on US economic policy?
(It doesn't look like we have vehicles for domestic constraints at the
moment.) Or is US policy really reflective of a global consensus among
the rich?<maybe a consensus, but one that reflects US power.
It's quite possible that the value of the dollar is currently too high given the level of US power. But we can't know for sure.
Jim
