Andrew WhiteFirst up, “The rumours of the dollar’s death are much exaggerated” in the Financial Times, October 14th. There is an ongoing dialog in financial circles about the dollar, its value, and if the US (Fed, government) is worried about its change in status as the world’s reserve currency.
There are doomsday views that focus on how much short term debt is held by China (for example), and how much long term debt is held by China and other nations. The issue being that if the return (very low) is thought to be of much less value than expected, the holders of debt would sell (thus reducing the value of their holders further) such that interest rates in the US would have to shoot up in order to continue to fund the debt. As such, a tricky game is being played between the Fed and the holders of government debt.
On a positive note that are others that suggest that the US economy, the largest policy-homogenous economy in the worked (the EU could be larger, but they don’t organize themselves through one policy structure) is not likely to lose its reserve currency status due to its size and inertia, so there is virtually no desire by anyone to sell debt since it would “shoot oneself in the foot”. As such, the US is very liquid and able to keep printing money (issue debt) as needed.
The article introduces the “Triffin Dilmma”, after Rober Triffin, a Belgian-American economist who, in the 1960’s, who argued that a global monetary systems based on the dollar had a flaw: the increased liquidity that world sought would require current account deficits in the US. But, sooner or later, the overhang of monetary liabilities would undermine confidence in the key currency. This seems to have played out several times – and most noticeably with the collapse of the Bretton Woods system.
Second up, in the Economist , print edition October 3rd-9th, there was a special report on the World Economy, which I happened to cite at our recent MDM Summit. The special report is well worth reading to give you a quick overview of where we are, and what the problems are that will slow the recovery. But, one particular article caught my eye: From Ozzie to Ricky.
The name of the article refers to a TV sit-com in the US back in the 1960s that followed a family, headed by Ozzie and Harriet, that were “very happy” and also square. Christina Romer, chair of President Obama’s Council of Economic Advisors, in a speech in May asked whether America could grow without bubbles. “Yes we can” was her (predictable) conclusion. But it was telling that she had to reach back to the era of Ozzie and Harriet for her best examples. Throughout the 1950s, she pointed out, America experienced “healthy” growth and “sensible asset markets”. And from 1962 to 1967, as the show came to an end, America grew by an impressive 5% a year, with a balanced budget and modest trade surpluses.
The article then goes on to explore the relationship between US consumer savings ratio and spending over the next 50 years:
“By the early 1980s Americans had large amounts of equity locked away in their houses. In 1982 their property was worth 106% of GDP and their debts amounted to less than 50% of that sum. Two pieces of legislation, the Monetary Control act of 1980 and the Garn-St Germain act of 1982, unlocked this wealth. The new laws made it easier for households to refinance their mortgages and borrow against the value of their homes.
“What followed was a “borrowing shock of huge macroeconomic magnitude”, according to Jeffrey Campbell of the Federal Reserve Bank of Chicago and Zvi Hercowitz of Tel Aviv University. Shortly after the legislation was passed, household debt began to rise much faster than take-home pay. Ozzie Nelson’s youngest son, Rick, who pursued a career in country rock music after the show ended, was a trendsetter, sinking into debt in the early 1980s after an expensive divorce.”
The article explores several shocks that hit consumers that impacted savings and spend – and then presents a case for a natural trend for both. However, based on the massive run up in consumer debt, that characterizes the current economic climate, the article suggests:
“To restore their wealth to this long-run average, households would have to repay about $1.4 trillion of debt. At their present rate of saving, these balance-sheet repairs will not be finished until 2012.
There are some other scary pointers in the article, worth reviewing in detail:
“Consumption accounts for over 70% of American spending. Thus even if households do not go back to 1950s saving rates, their balance-sheet repairs will still weigh heavily on demand in the economy as a whole.
“Crudely put, therefore, American spending is about $760 billion short of the amount required to return the economy to full employment. Martin Feldstein of Harvard University, who makes a similar calculation, calls this shortfall a “black hole”. If no other source of spending takes over to fill the gap, then sales will stagnate, employment will fail to recover and household incomes will falter.
So can we assume that the government will fill the gap? There is an article on this too – so I would recommend the special report in its entirety.
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