NY Times, November 27, 2004
Foreign Interest Appears to Flag as Dollar Falls
By EDMUND L. ANDREWS
WASHINGTON, Nov. 26 - Investors and market analysts are increasingly
worried that the last big source of support for the American
dollar -
heavy buying by foreign central banks - is fading.
The anxiety was on full display Friday, when the dollar abruptly
slid to
a record low against the euro after a report suggesting that the
Chinese
central bank might start to reduce its holdings in the American
currency.
Though Chinese officials later denied the report, and the dollar
recovered, analysts say the broader trend is that foreign
governments
are becoming less willing to finance the growing debt of the United
States government.
On Tuesday, a top official with the Russian central bank said his
government had become worried about the sinking value of the dollar
and
might switch some foreign reserves to euros.
A day later, India's central bank hinted that it was worried about
the
same issue and might shift some reserves into other currencies.
Japan and China, which together have amassed nearly $900 billion in
United States Treasury securities, have both slowed their buying
sharply
from the frenetic pace in February and March.
full: http://www.nytimes.com/2004/11/27/business/27dollar.html
===
In yesterday's NY Times, Morgan Bank economist tried to put a
positive
spin on this:
NY Times, November 26, 2004
OP-ED CONTRIBUTOR
When Weakness Is a Strength
By STEPHEN S. ROACH
Suddenly all eyes are on a weakening dollar. In recent days, the
American currency has fallen against the euro, the yen and most
other
currencies around the world. The renminbi is a notable exception;
China
has kept its currency firmly pegged to the dollar for a decade.
The fall of the dollar is not a surprise. It is the logical
outgrowth of
an unbalanced world economy, and America's gaping current account
deficit - the difference between foreign trade and investment in the
United States and American trade and investment abroad - is just the
most visible manifestation of these imbalances. The deficit ran at a
record annual rate of $665 billion, or 5.7 percent of gross domestic
product, in the second quarter of 2004.
While a decline in the dollar is not a cure-all for what ails the
world,
it should go a long way toward bringing about a sorely needed
rebalancing. With a weaker dollar, economic and even political
tensions
among nations would be relieved, helping to promote more sustainable
growth in the global economy.
full: http://www.nytimes.com/2004/11/26/opinion/26roach.html
===
However, the 11/23 Boston Herald reported Roach as predicting
"Armageddon". Could he be hedging his bets?
Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
Stephen Roach, the chief economist at investment banking giant
Morgan
Stanley, has a public reputation for being bearish.
But you should hear what he's saying in private.
Roach met select groups of fund managers downtown last week,
including a group at Fidelity.
His prediction: America has no better than a 10 percent chance
of
avoiding economic ``armageddon.''
Press were not allowed into the meetings. But the Herald has
obtained a copy of Roach's presentation. A stunned source who was at
one
meeting said, ``it struck me how extreme he was - much more, it
seemed
to me, than in public.''
Roach sees a 30 percent chance of a slump soon and a 60 percent
chance that ``we'll muddle through for a while and delay the
eventual
armageddon.''
The chance we'll get through OK: one in 10. Maybe.
In a nutshell, Roach's argument is that America's record trade
deficit means the dollar will keep falling. To keep foreigners
buying
T-bills and prevent a resulting rise in inflation, Federal Reserve
Chairman Alan Greenspan will be forced to raise interest rates
further
and faster than he wants.
The result: U.S. consumers, who are in debt up to their
eyeballs,
will get pounded.
Less a case of ``Armageddon,'' maybe, than of a ``Perfect
Storm.''
Roach marshalled alarming facts to support his argument.
To finance its current account deficit with the rest of the
world,
he said, America has to import $2.6 billion in cash. Every working
day.
That is an amazing 80 percent of the entire world's net
savings.
Sustainable? Hardly.
Meanwhile, he notes that household debt is at record levels.
Twenty years ago the total debt of U.S. households was equal to
half the size of the economy.
Today the figure is 85 percent.
Nearly half of new mortgage borrowing is at flexible interest
rates, leaving borrowers much more vulnerable to rate hikes.
Americans are already spending a record share of disposable
income
paying their interest bills. And interest rates haven't even risen
much yet.
You don't have to ask a Wall Street economist to know this, of
course. Watch people wielding their credit cards this Christmas.
Roach's analysis isn't entirely new. But recent events give it
extra force.
The dollar is hitting fresh lows against currencies from the
yen
to the euro.
Its parachute failed to open over the weekend, when a meeting
of
the world's top finance ministers produced no promise of concerted
intervention.
It has farther to fall, especially against Asian currencies,
analysts agree.
The Fed chairman was drawn to warn on the dollar, and interest
rates, on Friday.
Roach could not be reached for comment yesterday. A source who
heard the presentation concluded that a ``spectacular wave of
bankruptcies'' is possible.
Smart people downtown agree with much of the analysis. It is
undeniable that America is living in a ``debt bubble'' of record
proportions.
But they argue there may be an alternative scenario to Roach's.
Greenspan might instead deliberately allow the dollar to slump and
inflation to rise, whittling away at the value of today's consumer
debts
in real terms.
Inflation of 7 percent a year halves ``real'' values in a
decade.
It may be the only way out of the trap.
Higher interest rates, or higher inflation: Either way, the
biggest losers will be long-term lenders at fixed interest rates.
You wouldn't want to hold 30-year Treasuries, which today yield
just 4.83 percent.
--
Marxism list: www.marxmail.org
