Post by Catdaddy on Aug 27, 2007 19:51:12 GMT -5
Who Is Selling Our Dollars?
MoneyNews.com
Financial Intelligence
with Dave Browne
The New York Times last week had a most interesting editorial, “Dollars for Sale.”
It is not often that we find ourselves in agreement with the NYT, but things can change!
Our readers know that we have long warned of the risk of a run on our dollar and that it would have serious political and financial effects. Take a look at this Financial Intelligence Report for advice on how to protect your investments — and profit — from a dollar slide. Go here now.
To date, most observers have blamed foreigners for the desertion of our greenback.
We have long pointed to the staggering depreciation of our dollar against the euro — of some 40 percent over the past five years as central banks have sought to diversify into the not-so-secure euro.
The NYT article recognizes the importance of these foreign dollar sales by central bankers. But it points to an often overlooked major seller — us Americans!
The NYT reports on a study done by Stephen Jen, a currency economist at Morgan Stanley.
Jen notes that, “since 2003, American mutual funds have increased their allocation of overseas equities from 15 percent to 22.5 percent, a pace he describes as gradual but determined.”
This increase of some 50 percent is not surprising as we, amongst others, have long said that investors should look to overseas investments as their economies experience explosive growth and outperform our own.
However, the NYT reports that Mr. Jen also points out most importantly that, “If America’s other big institutional investors, such as pensions and insurance companies, have invested elsewhere at the same pace, he calculates that the outflow of dollars would now amount to $1.16 trillion …”
This staggering figure is $0.16 trillion MORE than the estimated $1 trillion of U.S. dollars in China’s total foreign exchange accounts.
This important observation may be read by some as diluting the potential threat of China using a threat to off-load its pile of U.S. dollars as a financial so-called, “nuclear option.”
We urge caution over this sanguine view.
Institutional investors are largely bound both by investment return and by market liquidity.
Neither of these two key investment factors lends itself to rapid change.
China’s reserves, on the other hand, are bound essentially by politics, not by investment return.
Politics are amenable to rapid change, particularly if the rapidity of the change can, in itself, created added disruption that would help either to threaten or to achieve a political objective.
China is estimated to have over $1 trillion dollars in relatively liquid form. These assets are held not under an investment mandate but under a political one.
Therefore, China “could” unload all its dollar assets in a figurative instant, if its immediate aim was not to “protect” its investment, but to “use” its dollar holdings either to threaten or to “create/enhance” market turmoil, to achieve a political aim.
We believe that Stephen Jen’s study is of more than passing interest. However, it does not fully detract from the risk to America of being so heavily in “hoc” to our potentially most aggressive, economic, political and even military competitor.
We as a country simply must restore our economy by living more truly according to the, “Good old American values” of Individual Freedom and Free Enterprise, with a benign, not overpowering role for government.
It will take considerable political statesmanship and civic tolerance for us to accept the adjustments necessary to achieve either greatly increased national productivity or to adjust to a severe decline in our standard of living.
MoneyNews.com
Financial Intelligence
with Dave Browne
The New York Times last week had a most interesting editorial, “Dollars for Sale.”
It is not often that we find ourselves in agreement with the NYT, but things can change!
Our readers know that we have long warned of the risk of a run on our dollar and that it would have serious political and financial effects. Take a look at this Financial Intelligence Report for advice on how to protect your investments — and profit — from a dollar slide. Go here now.
To date, most observers have blamed foreigners for the desertion of our greenback.
We have long pointed to the staggering depreciation of our dollar against the euro — of some 40 percent over the past five years as central banks have sought to diversify into the not-so-secure euro.
The NYT article recognizes the importance of these foreign dollar sales by central bankers. But it points to an often overlooked major seller — us Americans!
The NYT reports on a study done by Stephen Jen, a currency economist at Morgan Stanley.
Jen notes that, “since 2003, American mutual funds have increased their allocation of overseas equities from 15 percent to 22.5 percent, a pace he describes as gradual but determined.”
This increase of some 50 percent is not surprising as we, amongst others, have long said that investors should look to overseas investments as their economies experience explosive growth and outperform our own.
However, the NYT reports that Mr. Jen also points out most importantly that, “If America’s other big institutional investors, such as pensions and insurance companies, have invested elsewhere at the same pace, he calculates that the outflow of dollars would now amount to $1.16 trillion …”
This staggering figure is $0.16 trillion MORE than the estimated $1 trillion of U.S. dollars in China’s total foreign exchange accounts.
This important observation may be read by some as diluting the potential threat of China using a threat to off-load its pile of U.S. dollars as a financial so-called, “nuclear option.”
We urge caution over this sanguine view.
Institutional investors are largely bound both by investment return and by market liquidity.
Neither of these two key investment factors lends itself to rapid change.
China’s reserves, on the other hand, are bound essentially by politics, not by investment return.
Politics are amenable to rapid change, particularly if the rapidity of the change can, in itself, created added disruption that would help either to threaten or to achieve a political objective.
China is estimated to have over $1 trillion dollars in relatively liquid form. These assets are held not under an investment mandate but under a political one.
Therefore, China “could” unload all its dollar assets in a figurative instant, if its immediate aim was not to “protect” its investment, but to “use” its dollar holdings either to threaten or to “create/enhance” market turmoil, to achieve a political aim.
We believe that Stephen Jen’s study is of more than passing interest. However, it does not fully detract from the risk to America of being so heavily in “hoc” to our potentially most aggressive, economic, political and even military competitor.
We as a country simply must restore our economy by living more truly according to the, “Good old American values” of Individual Freedom and Free Enterprise, with a benign, not overpowering role for government.
It will take considerable political statesmanship and civic tolerance for us to accept the adjustments necessary to achieve either greatly increased national productivity or to adjust to a severe decline in our standard of living.
