December 11, 2005

Popular Issue: US Foreign Money Addiction Means Trouble

Lets face it, the theme of this Blog is a bit esoteric, that is, concern about the role of excessive commercial power in the World. My reading and web peruzing is almost exclusively "News." However, knowing that pop culture plays a role in what makes the World turn, I clicked on the Yahoo "Most Popular" link today; a first for me.

The most popular issues were listed:

Miss Iceland is a Surprize Winner of Miss World
Pioneering Comedian Richard Pryor Dies
US Foreign Money Addiction Means Trouble

Article Link

Actually, when ranked by "most e-mailed" the US Foreign Money Addiction article was #2.

OK, so it is 7:30 am (EST) on a Sunday, and only the sick'o business-minded are awake yet. Just wait until the rest of the nation wakes up and starts e-mailing articles to their friends. We'll check back in and see what happens to the ranking.

7:30am (EST) "US Foreign Money Addiction" article is #2
9:00am "US Foreign Money Addiction" article is #1
5:30pm "US Foreign Money Addiction" article is no longer in the top 10, however.... #2 is "Pope: Christmas is Polluted by Consumerism"

According to the AP article on foreign money addiction, featured by Yahoo, "At our current rate of trade and budget deficits, foreigners need to purchase $2 billion in dollar-denominated assets each day just to keep the dollar stable." (Source: Axel Merk).

"Over half the national debt is now financed by foreigners, according to Roger Ibbotson, chairman of the financial consulting firm Ibbotson Associates in Chicago and a professor at Yale School of Management." If one of the foreign entitities that buys US bonds to finance our debt stopped buying those bonds, Ibbotson says it could be like a "run on the bank."

David Wyss, chief economist at Standard & Poor's, is also concerned. "If this money stopped coming, the dollar would take a dive and U.S. bond yields would have to come up. That would constrain capital spending and housing and slow down the U.S. economy."

"We need the money because we're not saving any," Wyss said. "We need it from anyone who has a spare yen to lend us."

The gush of foreign money "is critical to keeping the U.S. dollar from collapsing, because we have a large trade deficit," said Daniel Katzive, foreign exchange strategist at UBS. "If the deficit wasn't financed, the dollar would fall until it reached a level where U.S. assets were more attractive to foreign investors."

It's simple accounting, he said: Cashflow in must equal cashflow out. "If it doesn't, you have a big adjustment until you reach equilibrium."

Normally, Wyss said, foreign investors would be reluctant to stake so much on the Treasury market because they would be worried that a decline in the dollar would erode their returns. But, in recent years, the Japanese and Chinese central banks have intervened to keep the dollar high.

"Central banks have trained investors that there's not much risk there," he said. "That scares me."

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