Foreign U.S. Notes Rise to 80 Percent / "Reverse Marshallplan"

staggering number......Roach calls this some kind of "reverse Marshallplan".

noch fragen....Roach nennt das ganze passenderweise ne art "reverse Marshallplan"

There is a striking twist to the current globalization. Unlike the lobalization of the early 20th century when capital flowed from the rich countries of the developed world to the “settlement economies” such as Argentina, Australia, and Canada, the opposite is true today. In the current globalization, the incremental saving for the advanced economies of the developed world has been provided almost entirely by the transfer of capital from the poor countries of the developing world (including oil producers). The United States, with its massive current account deficit, is the major beneficiary of this “reverse Marshall Plan” – absorbing more than 70% of the world’s surplus saving over the past three year

For the moment, at least, financing the U.S. budget deficit may be getting less arduous as foreign investors now own a record 80 percent of the Treasury notes due in three to 10 years.

Not since the 19th century have foreigners held so much American debt, said Alan Taylor, a professor of economic history at the University of California, Davis. International investors own $672 billion of the $835.4 billion Treasuries due in three to 10 years,


While the Central Bank of China in Taipei and the Bank of Korea say they have had their fill of Treasuries, the 22 percent rise in U.S. dollar reserves led by Brazil and China during the past year makes Treasuries irresistible.

>especially when you look at all the currency losses making it one of the worst investments available.....plus it is getting even better when you read this "Taxpayers on the hook for $59 trillion" http://tinyurl.com/3yxcsm

>das gilt natürlich besonders wenn die ganzne währungsverlusteb mitberücksichtigt werden.....und erst recht bei 59 trillionen zukünftiger verbindlichkeiten (s.link oben)......

Yields on U.S. government bills, notes and bonds are higher than similar- maturity debt sold by Japan and the countries sharing the euro. That's partly why foreign holdings of U.S. securities have doubled since 2002.

``Those dollars need to go somewhere and the natural place to go to is Treasuries,'' said Charles Comiskey, the New York- based head of U.S. government bond trading at HSBC, Europe's largest bank by market value. ``They're not bought for fundamental reasons but for necessity.''....

>but how long can and will this this continue....?

>aber ob das immer weitergehen kann........?

American long-term interest rates would be about 1.5 percentage points higher without foreign capital flowing into the $4.4 trillion of outstanding Treasuries, according to a 2005 Federal Reserve study by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville. The U.S. Department of the Treasury says non-Americans hold at least 52 percent of all notes and bonds.

Lower Treasury yields help keep down borrowing costs for companies and U.S. home buyers. The yield on U.S. corporate bonds was 5.82 percent last week, compared with a 10-year average of 6.05 percent, according to data compiled by Merrill Lynch & Co. Rates on 30-year mortgages rose 16 basis points last week to 6.37 percent, down from 7.94 percent in May 1997 and the average 6.70 percent over the past decade, data from Freddie Mac, the government-chartered mortgage company, show. ....

Percentage of Deficit
The last time foreigners owned so much U.S. debt was in the mid-19th century, when state and corporate bonds for the construction of railroads, canals and highways were purchased by Europeans, said Taylor, the University of California professor. .....

>and now....consumption, houses, war, debt....but no investments!

>und heute...keine investments, nur neue schulden um den kaufrausch weiter auszuleben und masslos über die verhältnisse zu leben und kriege zu finanzieren.

Central banks, whose currency reserves swelled to $5.4 trillion this year, are buying Treasuries with dollars accumulated from exports of goods and oil to America. Foreigners owned less than 35 percent of Treasuries in 2000. Crude prices have tripled during the same period.

Central banks, including the People's Bank of China, have said they plan to increase investments in bonds other than Treasuries, adding to concerns that waning demand would push up U.S. market rates.

`Reaching a Limit'
Japan, the biggest foreign holder of Treasuries, with $612 billion, has reduced investments in U.S. government bonds this year, from $623 billion. The country doesn't plan to ``drastically'' cut U.S. assets, Vice Finance Minister Hideto Fujii said last week.

International investors ``can't keep buying safe, simple Treasuries forever,'' said HSBC's Dyer, who based his estimates on June 2006 Treasury data. Foreigners are ``reaching a limit.''

At the same time, Treasuries are becoming more attractive to foreign investors as yields on emerging market debt and non- investment grade corporate securities approach record lows compared with government bonds, said O'Donnell.

Speculative-grade corporate bonds yielded an average 2.44 percentage points more than Treasuries last week, matching the record low in 1997, according to Merrill Lynch & Co., which started collecting the data in 1986. The average yield premium on emerging market debt narrowed to 1.49 percentage points, the smallest since JPMorgan Chase & Co. began collecting such data in 1997.

Treasuries due in 10 years yield 48 basis points, or 0.48 percentage point, more than German 10-year bunds, down from 116 basis points a year ago. The U.S. notes yield 314 basis points more than Japanese 10-year bonds, little changed from 317 this time last year.

`Reasonably Priced Assets'
``In the grand scheme of global opportunities, Treasury rates near 5 percent may perversely be the most reasonably priced assets around,'' said O'Donnell.

Central bank efforts to diversify reflect the growth of reserves more than the desire to hold less U.S. debt. China's swelled in the first quarter by a record $136 billion to $1.2 trillion, prompting the government to set up a group to pursue other investments. China last week bought a $3 billion stake in Blackstone Group LP, the New York-based private-equity firm led by Stephen Schwarzman.

China more than doubled its holdings of Treasuries in the three years ended March 31 to $420 billion, according to U.S. government data. Members of the Organization of Petroleum Exporting Countries did the same, increasing their investments to $113 billion. Brazil now owns $70.6 billion of U.S. government debt, up fivefold since 2004.

Central banks used their growing reserves to purchase a net $284.5 billion of so-called agency debt sold by government- chartered companies Fannie Mae of Washington and Freddie Mac in McLean, Virginia last year. They bought a net $485.2 billion of corporate bonds.

here is the take from minyanville on this datapoint http://tinyurl.com/2cga9h

Peter Shiff on Bloomberg about China´s Stock Market

this interview was shot yesterday before the 7% plunge just after the Chinese announced the trading tax increase.... the interview is more about the yuan and how the $ is toast... nice rant...click on the headline to start the interview

dieses interview ist von gestern bevor der aktienmarkt 7% verloren hat und nachdem die chinesen die erhöhung der steuern bei aktiengeschäften angekündigt haben...es geht in dem interview mehr um den yuan und warum der us $ wohl weiter probleme haben wird....klickt bitte auf die überschrift um das interview zu starten

The global gusher / economist

really a home run and a must read! / pflichtlektüre!

Thailand's bungled attempt to stem capital inflows is just one symptom of the worldwide liquidity glut

WHEN Thailand's introduction of capital controls sent its stockmarket plunging a few days before Christmas, you could have been forgiven for thinking, “Here we go again”. It is almost ten years since the start of the Asian financial crisis, when capital flight on a huge scale caused financial markets and economies in the region to collapse. The problem that Thailand and other Asian countries face today, however, is the exact opposite:

how to stop capital flowing in.

Worldwide, an abundance of liquidity has lured investors into riskier assets (like this story about junk bonds) in search of higher returns. Though there is no agreement on how to measure liquidity, using the global supply of dollars as a proxy, The Economist estimates that in the past four years it has risen by an annual average of 18%, probably the fastest pace ever (see chart).( that is the answer! to almost all excess in almost all asset classes / die antwort auf alle excesse in den anlageklassen )

Last year it washed through emerging economies in record amounts, pushing up their currencies. Between the start of 2006 and mid-December the Thai baht rose by 16% against the dollar—more than most other currencies tracked by The Economist. When capital inflows accelerated in December, the Bank of Thailand panicked and slapped a tax on inward portfolio investment (similar to that used in Chile). After share prices fell by 15% in a day, the controls were hastily removed from equities. They remain on debt investments.

This clumsy flip-flop has severely undermined the credibility of Thailand's economic policymakers. Yet the drastic measures highlight the seriousness of a dilemma faced elsewhere in Asia: how to curb domestic liquidity when foreign capital is flooding in. Thailand could have allowed the baht to rise further, but it had already gained against all other Asian currencies last year, raising concerns about exporters' competitiveness.

Some economists ( i´m sure they were directly from wall street!..... / bin mir sicher das diese direkt von der wall street kamen...)argue that Thailand should simply have cut interest rates to stem capital inflows, making bonds less attractive to foreign investors. But this is to misunderstand the nature of the problem. David Carbon, an economist at DBS, a Singapore bank, argues that the baht's strength is not the real issue, because Thailand's exports have continued to grow strongly. Instead, the Bank of Thailand is more worried about excessive domestic liquidity. Lower interest rates would simply add to the problem, generating higher credit growth, inflation and asset prices. Similarly, central-bank intervention to hold the baht down by buying dollars would also boost the money supply.

Moreover, as Brad Setser of Roubini Global Economics points out, Asian central banks are having to buy dollars not just because of their current-account surpluses, but also because foreign investors are moving money into the region. If the dollar subsequently falls, the central bank may make a loss on its reserves (i´n not sure that this argument is the reason behind some interventions / bin mir nicht sicher ob dieses argument zugkräftig ist), but the country's exporters gain. However, though Asian countries may be happy to subsidise their exporters they are not so keen to offer the same subsidy to foreign banks, pension funds or hedge funds.

Capital controls are a way around what economists call the “impossible trinity”: an economy cannot simultaneously control domestic liquidity, manage its exchange rate and have an open capital account. Only two of the three are possible. .....

Other Asian countries are also looking for ways to discourage foreign capital inflows. In December South Korea raised reserve requirements on foreign-currency debt to make it harder for banks to borrow from abroad. China has kept its restrictions on portfolio capital inflows, helping it to hold down its exchange rate. This, however, is squeezing the competitiveness of other Asian economies. Many economists reckon that a rise in the yuan would do little to reduce America's trade deficit, but it would certainly help to take pressure off other Asian exporters—and assist in curbing the gush of global liquidity.

The deluge of spare cash has two main sources.

First, average real interest rates in the developed world are still below their long-term average. Second, America's huge current-account deficit and the consequent build-up of foreign-exchange reserves by countries with external surpluses has also pumped vast quantities of dollars into the financial system. A large chunk of Asia's reserves and oil exporters' petrodollars have been used to buy American Treasury securities, thereby reducing bond yields. In turn, low bond-market returns have encouraged bigger inflows into higher yielding emerging-market bonds, equities and property, especially in Asia. Liquidity has been further boosted by the use of derivatives, and by carry trades(borrowing in currencies with low interest rates, such as yen, to buy higher-yielding currencies).

The spread on emerging-market bond yields over American Treasury bonds fell to another record low last week. Share prices in emerging economies have risen by 243% on average from their trough in 2003. That still leaves the average price/earnings ratio below its historical average and less than that in developed countries, so for most markets it is premature to talk about bubbles. But if asset prices continue to climb at their recent pace, central bankers will become increasingly nervous.

The petrodollar peg......or why all the talk about china?

good stuff from the economist! / klasse!

America should worry more about fixed exchange rates in the Gulf than the gently rising Chinese yuan http://www.economist.com/finance/displaystory.cfm?story_id=8380713

AMERICAN politicians and businessmen view China's undervalued exchange rate and its huge current-account surplus as the main cause of America's vast deficit. Thus next week a high-powered delegation led by Henry Paulson, America's treasury secretary, will fly to Beijing to persuade China to take measures to reduce its surplus. But are they heading to the right place? At the global level, the biggest counterpart to America's deficit is the combined surpluses of the oil-exporting emerging economies. They are expected to run a total current-account surplus of some $500 billion this year, dwarfing China's likely surplus of $200 billion

Counting only the Middle East oil exporters, the surplus has surged from $30 billion in 2002 to an estimated $280 billion this year. One reason why this gets much less attention than the smaller $160 billion increase in China is that only a fraction of it has gone into official reserves, which are publicly reported. Most of it is stashed in government oil-stabilisation or investment funds, such as the Abu Dhabi Investment Authority, which are much more secretive than the People's Bank of China—but which probably hold just as many dollar assets.

One big difference is that China is now allowing the yuan to rise against the dollar. The exchange rate is up by an annual rate of almost 7% since September. In contrast, the six members of the Gulf Co-operation Council, or GCC (Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Oman and Qatar), which account for virtually all of the Middle East's surplus, still peg their currencies firmly to the dollar. This is partly in preparation for the GCC's plan to adopt a single currency by 2010. But the bizarre result is that over the past four years of soaring oil prices, their real trade-weighted exchange rates have fallen.




The Gulf economies are running an average current-account surplus of 30% of their GDP, well in excess of China's surplus of 8%. Oil exporters cannot spend their windfall overnight and it makes sense for them to run a surplus when oil prices rise, as a buffer for when oil prices fall. Even so, one can have too much of a good thing.





It might be best for the Gulf states as well as the world economy if they abandoned their dollar pegs and shifted to some sort of currency basket. A more flexible exchange-rate regime would allow them to regain control of their monetary policies and so cool down their overheating economies. By pegging their exchange rates to the dollar, they have had to adopt America's monetary policy, leaving real interest rates too low (often negative) for such fast-growing economies. Credit is growing too rapidly, inflation is rising and the prices of assets, especially property in places such as Dubai, have exploded. http://immobilienblasen.blogspot.com/2006/09/dubai.html#links




Official price indices almost certainly understate inflation. According to government figures, prices are rising in the UAE at an annual rate of 7%, but independent estimates put it at 15%. The dollar's slide against other major currencies is pushing up the price of imported goods. Only 10% of the GCC's imports come from America (compared with one-third each from Europe and Asia), so from a trade-weighted point of view, the dollar peg makes no sense.

In theory, a higher oil price should imply a rise in oil exporters' real exchange rates; and it is better if this occurs through a rise in the nominal rate rather than higher inflation..... pegging to the dollar has not always been a boon to the economies as a whole. When the dollar strengthened in the late 1990s, non-oil industries were squeezed at the same time that the price of crude was sliding. This is another reason why pegging to a trade-weighted basket would make much more sense.

Oiling the world's wheels
Brad Setser, an economist at Roubini Global Economics, a research firm, argues that the dollar pegs of the Gulf states are also preventing some necessary rebalancing in the world economy. ....

.... A trade-weighted basket, in which the euro had a large weight, would help to stabilise the real exchange rate of the GCC countries and so protect their competitiveness. It still would not ensure that oil exporters' currencies moved correctly in line with the oil price, however.

Some economists have therefore suggested that oil exporters should link their currencies in some way to the oil price. Currencies would rise when oil prices are high and fall when prices were weak. This would help to boost countries' external purchasing power and hence their imports when oil prices boom. It would also help to smooth the local currency value of oil revenues and hence government income, helping to avoid big deficits in bad times and huge surpluses in good times.....

However, a rise in petro-currencies would not be a cure by itself for America's deficit (nor, for that matter, is a dearer Chinese yuan). The main solution to global rebalancing is for America to save more and for surplus countries, including both the oil exporters and China, to spend more. A rise in oil exporters' currencies could play a part in that.