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.The import-ance of the second condition is that the status of the dollar probablydepends more on US policies than on what is happening in the eurozone,although there will always be the desire to diversify reserve holdings. The demand for US assets 199Obviously, given the magnitude of international reserve holdings, a lossof confidence in the value of the dollar could have major international con-sequences.Any sell-off of US Treasury bonds and other dollar securitieswould merely re-arrange their ownership but in the process would likelyraise US interest rates and could see a decline in the dollar s value.Foreigncentral banks are surely aware that a sell-off would merely precipitate theevent that a sale would be seeking to avoid, namely capital losses on theirdollar holdings, as they in effect turn the market against themselves.So farthe evidence suggests that this fact is not lost on them.China, for example,has diversified its reserve holdings away from dollars over the 2000 to 2004period.However it appears to have done so by purchasing larger amountsof securities dominated in other currencies rather than switching out ofcurrent holdings of dollar assets (Valderrama, 2005).Whether this gradualistic approach continues, or at some point foreigncentral banks decide to cut and run from the dollar, depends on a complexinterplay of international politics and economic forces.To a considerabledegree, the future of the dollar lies with America itself and its economicpolicies.Equally to a considerable degree it does not, and rests on trade-offs with other countries involving military power, trade and stability of theworld order.China quite clearly plays a major part in all of this, and it is toChina s relationship with the United States that we now turn.NOTES1.For example, in 2005 the respective current account deficits relative to GDP were Greece(7.75 per cent), Portugal (9 per cent) and Spain (7.5 per cent).2.See the Major Foreign Holders Table, published by the Treasury Department and avail-able at http://www.treas.gov/tic/mfhhis 01.txt.3.China, Hong Kong SAR, India, Indonesia, Republic of Korea, Malaysia, thePhilippines, Singapore, Taiwan POC and Thailand.4.Hence the man from Mars observation of Summers:If you were on Mars, and you had not seen planet Earth, but you had studied eco-nomics, and someone said there are these countries, there are these substantial numberof countries that are growing at 4, 5, 6, 8, 10 percent a year that are relatively poor,where several billion people live that have rapidly growing populations, and there arethese other countries that are rich, aging, growing at 2 percent a year, 3 percent a year,4 percent a year perhaps, with slowly growing populations, and you had been asked topredict which way the flow of capital would be taking place, it would not be verydifficult to figure out that the flow of capital would vary substantially from the rich,labor-short countries to the poor, labor-long, capital-short, rapidly growing countries.it is the central, global financial irony of our times.that the flow of capital isactually very substantially from poor countries to rich countries, and in particular itis from poor countries to the world s richest and most powerful nation.On a scalenever before contemplated or seen.(2006, p.4) 200 Untangling the US deficit5.McMorrow and Roeger (2003) predict that the EU and Japan will run surpluses for sometime, but expect the US to run ongoing deficits, reflecting growth differentials.Their pro-jection implies that, as a consequence of ageing, the bulk of cross-border claims willremain within the OECD region.6.As discussed in Chapter 3, the other explanation for the low level of long-term rates runsin terms of the lowering of the inflation risk premium, see Mehra (2006).7.Income disparities may reinforce this point.It has been calculated that the top 20 percent of income earners in the United States account for nearly 60 per cent of consump-tion, while the bottom 20 per cent spend just 3 per cent (The Economist, 18 November2006, p.77).8.The IMF defines official reserves as external assets that are readily available to and con-trolled by monetary authorities for direct financing of payments imbalances, for indi-rectly regulating the magnitudes of such imbalances through intervention in exchangemarkets to affect the currency exchange rate, and/or for other purposes. Total reservescomprise gold, foreign currency assets, reserve positions in the IMF and Special DrawingRights (SDRs) (IMF, 1993, p.97).9.There are also some possible disadvantages of having the dollar serve as internationalmoney.One drawback is the potential for fluctuations in demand, although it is not alto-gether clear that an enhanced demand will produce greater variability.A second is thecriminality associated with the use of the dollar for drug operations, money and taxlaundering, and international terrorism.The third is what Chinn and Frankel (2005) callthe burden of responsibility in that the Federal Reserve may need to take greateraccount of its actions on world markets than would otherwise be the case.Interest ratepolicy in the wake of the 1981 LDC debt crisis may be an example, similarly the LongTerm Capital Management fallout.However, the domestic charter of the Fed militatesagainst this being a major factor, except insofar as world events impact upon the USeconomy.10.Significant changes have already occurred in the international banking and bondmarkets.At the end of June 2006, 39 per cent of international bank loans were denom-inated in euros, compared with 41 per cent in dollars.In the international bond market,the euro has in fact since 2003 supplanted the dollar as the major currency of issue.Asat September 2006, using BIS data, nearly 50 per cent of the outstanding global stock ofinternational bonds and notes (i.e [ Pobierz całość w formacie PDF ]
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.The import-ance of the second condition is that the status of the dollar probablydepends more on US policies than on what is happening in the eurozone,although there will always be the desire to diversify reserve holdings. The demand for US assets 199Obviously, given the magnitude of international reserve holdings, a lossof confidence in the value of the dollar could have major international con-sequences.Any sell-off of US Treasury bonds and other dollar securitieswould merely re-arrange their ownership but in the process would likelyraise US interest rates and could see a decline in the dollar s value.Foreigncentral banks are surely aware that a sell-off would merely precipitate theevent that a sale would be seeking to avoid, namely capital losses on theirdollar holdings, as they in effect turn the market against themselves.So farthe evidence suggests that this fact is not lost on them.China, for example,has diversified its reserve holdings away from dollars over the 2000 to 2004period.However it appears to have done so by purchasing larger amountsof securities dominated in other currencies rather than switching out ofcurrent holdings of dollar assets (Valderrama, 2005).Whether this gradualistic approach continues, or at some point foreigncentral banks decide to cut and run from the dollar, depends on a complexinterplay of international politics and economic forces.To a considerabledegree, the future of the dollar lies with America itself and its economicpolicies.Equally to a considerable degree it does not, and rests on trade-offs with other countries involving military power, trade and stability of theworld order.China quite clearly plays a major part in all of this, and it is toChina s relationship with the United States that we now turn.NOTES1.For example, in 2005 the respective current account deficits relative to GDP were Greece(7.75 per cent), Portugal (9 per cent) and Spain (7.5 per cent).2.See the Major Foreign Holders Table, published by the Treasury Department and avail-able at http://www.treas.gov/tic/mfhhis 01.txt.3.China, Hong Kong SAR, India, Indonesia, Republic of Korea, Malaysia, thePhilippines, Singapore, Taiwan POC and Thailand.4.Hence the man from Mars observation of Summers:If you were on Mars, and you had not seen planet Earth, but you had studied eco-nomics, and someone said there are these countries, there are these substantial numberof countries that are growing at 4, 5, 6, 8, 10 percent a year that are relatively poor,where several billion people live that have rapidly growing populations, and there arethese other countries that are rich, aging, growing at 2 percent a year, 3 percent a year,4 percent a year perhaps, with slowly growing populations, and you had been asked topredict which way the flow of capital would be taking place, it would not be verydifficult to figure out that the flow of capital would vary substantially from the rich,labor-short countries to the poor, labor-long, capital-short, rapidly growing countries.it is the central, global financial irony of our times.that the flow of capital isactually very substantially from poor countries to rich countries, and in particular itis from poor countries to the world s richest and most powerful nation.On a scalenever before contemplated or seen.(2006, p.4) 200 Untangling the US deficit5.McMorrow and Roeger (2003) predict that the EU and Japan will run surpluses for sometime, but expect the US to run ongoing deficits, reflecting growth differentials.Their pro-jection implies that, as a consequence of ageing, the bulk of cross-border claims willremain within the OECD region.6.As discussed in Chapter 3, the other explanation for the low level of long-term rates runsin terms of the lowering of the inflation risk premium, see Mehra (2006).7.Income disparities may reinforce this point.It has been calculated that the top 20 percent of income earners in the United States account for nearly 60 per cent of consump-tion, while the bottom 20 per cent spend just 3 per cent (The Economist, 18 November2006, p.77).8.The IMF defines official reserves as external assets that are readily available to and con-trolled by monetary authorities for direct financing of payments imbalances, for indi-rectly regulating the magnitudes of such imbalances through intervention in exchangemarkets to affect the currency exchange rate, and/or for other purposes. Total reservescomprise gold, foreign currency assets, reserve positions in the IMF and Special DrawingRights (SDRs) (IMF, 1993, p.97).9.There are also some possible disadvantages of having the dollar serve as internationalmoney.One drawback is the potential for fluctuations in demand, although it is not alto-gether clear that an enhanced demand will produce greater variability.A second is thecriminality associated with the use of the dollar for drug operations, money and taxlaundering, and international terrorism.The third is what Chinn and Frankel (2005) callthe burden of responsibility in that the Federal Reserve may need to take greateraccount of its actions on world markets than would otherwise be the case.Interest ratepolicy in the wake of the 1981 LDC debt crisis may be an example, similarly the LongTerm Capital Management fallout.However, the domestic charter of the Fed militatesagainst this being a major factor, except insofar as world events impact upon the USeconomy.10.Significant changes have already occurred in the international banking and bondmarkets.At the end of June 2006, 39 per cent of international bank loans were denom-inated in euros, compared with 41 per cent in dollars.In the international bond market,the euro has in fact since 2003 supplanted the dollar as the major currency of issue.Asat September 2006, using BIS data, nearly 50 per cent of the outstanding global stock ofinternational bonds and notes (i.e [ Pobierz całość w formacie PDF ]