Minyan Mailbag: Asian Central Banks
Something to watch is the net interest component of the trade deficit.
Would an increasingly weaker U.S. economy promote diversification of Asian central banks away from U.S. treasuries, and if not, what could be the trigger? What would be the first clue market-wise that would indicate faltering Asian demand? If we begin to see weaker and weaker economic numbers coming out domestically while bonds fail to rally, would that be a sign that foreign interest is waning? Or is this a faulty expectation (e.g., foreign CB selling would have minimal impact in the face of a weakening economy and lower rates forthcoming)?
Thanks in advance,
I believe we are seeing on the margin, as I have stated in the past, an attempt by Asian central banks to diversify their reserves out of the dollar. We are seeing it in the rising short term rates in the U.S.: the Fed is being forced to raise these rates in order to continue to attract that capital (persuade foreign investors/central banks to continue to purchase U.S. bonds).
A Minyan commented yesterday on a scenario where China would "pull the ripcord" with no warning in an attempt to destroy the U.S. economy. I honestly don't know how the Chinese are thinking about this, whether they are that subversive or not. But I certainly do not trust them and admonish our policy makers for putting us in such a position regardless of the probabilities of such an occurrence. I think a scenario that is just as bad that I described in "Pin Prick" could occur as well.
Something to watch is the net interest component of the trade deficit. When the U.S. begins paying out interest on our debt significantly over and above the interest we receive from foreign investment, Asian central banks may begin to believe that financing consumption in the U.S. is no longer in their best interest as the cumulative debt begins to work against the effect. This so far has not occurred only because foreigners earn only a paltry sum in interest on the vast debt they own, while the U.S. enjoys high capital returns (risky) in investments in foreign markets. This difference will slowly grow as debt accumulates or quickly expands if our foreign investments begin to actually lose money, such as the Japanese market going down.
It is very evident that it is all tied together in one vicious cycle where risk is very high.
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