This interpretation of savings as bad is certainly new in the working theory of capitalist economies; in classical economics, savings are a very good thing, since the market can direct them to future investments that will maintain economic growth. A rough parallel would be an inebriate claiming that he doesn't have a problem, it's the rest of the world that suffers from inadequate alcohol consumption syndrome.
But in business, the customer is right even when he's not, and the United States is now far and away China's biggest customer. For example, it is now estimated that up to 70% of Wal-Mart's inventory is of Chinese origin; a remarkable turnaround for a company that until this decade broadcast advertisements that trumpeted the red, white and blue all-American manufacture of its products. Wal-Mart's current trade with China alone, estimated at more than $25 billion a year, surpasses the GDP of the smallest 112 national economies of the world.
In letting the yuan appreciate, although maddeningly slowly, China is responding to demands for action from US officials, especially in Congress. Another demand is that China stop just letting its huge stash of foreign-currency reserves sit around earning interest. They should go out and buy American stuff, preferably goods and services, so that the trade balance can start to equalize.
But as the Greek gods warned, be very careful what you wish for.
Basically, it seems that many of the countries that lately have accumulated huge foreign-exchange reserves exporting to the United States are getting bored with just having their money sit around earning interest at US Treasury rates. China and the other big exporters, which until recently were seemingly happy at lending back to the US the dollars to continue to buy their stuff, now see the need to earn greater rates of return than the 5% that US Treasuries currently earn.
Many of them are facing demographic time-bombs consisting of their growing elderly populations needing eventual pension support, and, for all the glamour and glitz of today's Shanghai, going beyond China's big cities still reveals grinding rural poverty that the central government knows it must address.
Sovereign Wealth Funds, or SWFs, will act as super-hedge funds, in that they will look for opportunities all across the investment spectrum. China is in the process of setting up its own SWF, which reportedly will be funded with some $300 billion of reserves.
And that's $300 billion that will not make its way into the market for Treasury securities.
In March 24, 2006, Julian wrote an article that the US is living on borrowed time - and money. She introduced readers to the US Treasury's monthly TIC (Treasury International Capital) report, the data that enumerate just how much foreign capital the US is importing every month to finance its extravagant lifestyle. During much of 2005, the US was net-importing more than $100 billion of investment capital every month, but the bottom line net number is falling sharply. Last December, the US actually failed to attract any capital at all.
One TIC data set of particular interest to bond players is just how great the investment in US government securities by foreign governments is each month. These numbers are the core of the flows that constitute Bretton Woods 2, for they derive mostly from US dollar reserves held at foreign central banks.
They've been falling, too. From averaging more than $6 billion a month in 2006, foreign government purchases of US Treasury have fallen to average just over $1 billion a month for the first four months of 2007.
As the Daily Reckoning reported in an article in 2006, "In the 18th century, Britain was the largest economy of the Western world, London was the center of international trade and finance, the currency was convertible, and so sterling became the world's reserve currency. By the late 19th century, the United States had become the world's largest economy, a position solidified by Europe's repeated attempt at self-annihilation from the 1880s to the 1940s. By the 1960s, the dollar had usurped sterling and was the world's new reserve currency, with 60% of total central bank reserves being held in dollars, twice the level of sterling reserves.
"But time doesn't stop. By the mid-21st century, the United States will no longer be the world's largest economy. By then, China and India will have overtaken the United States, Western Europe and Japan, on purchasing power parity terms at least, which should represent where exchange rates are likely to be in the long run. Indeed, optimistic measures of sustainable growth in China and India suggest this will be the case in 20 years time. Ladies and gentlemen, within my lifetime, the dollar will start to lose its reserve currency status, not to the euro, but to the renminbi."
If you remember back to the beginning of this piece, I mentioned the former leading monetary funds and their duration as top dog. A closer look at their reign reveals that they all lasted around 100 years. The centennial for the dollar will occur in about 20 years time. If history is to repeat itself, that's when the renminbi or euro will officially surpass the US dollar as top dog.
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