Business Week recently had an article that seemed to agree with Peter. I did not save the ref, but it was from the last few weeks.
Peter Dorman wrote: > Devine, James wrote: > >> 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? > > 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. > > 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. > >> >... 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. > > 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? > > >> >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 > -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]