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Monday, September 08, 2003

The Triple Deficit from an Asian Perspective

You don't have to be a Hyman Minsky or a Wynne Godley to realise that the US 'triple deficit' is a pretty big structural problem with no obvious solution in sight. By triple deficit I mean: the Federal Government one, the Trade Deficit, and the growing private indebtedness (as % of GDP). This could have a solution if there was some 'winning sector' the US could exploit to pay down the debt as we move upstream. But this is where the 'services leak' the US economy has just sprung must come as such bad news, and now there is only the retirement of the baby boomers to look forward to. You don't have to be Minsky or Godley to do the sums here: it seems some market participants have been playing with their own used envelopes too. Of course, this isn't for tomorrow. But things are happening much faster than I imagined. (Remember the accelaration principle).

Economists fear that Asian investors, who are the largest foreign owners of US Treasuries, may cut their holdings of US government debt, withdrawing a key source of financing for America's large current account deficit. The worries have been fuelled by recent sharp falls in the price of US government debt. Weakness in the US Treasury market could make Asian investors "less willing" buyers of debt securities, said Marcel Kasumovich, head of G10 foreign exchange strategy at Merrill Lynch. He said there had already been a "noticeable shift" downwards in the amount of debt issued by mortgage financiers Freddie Mac and Fannie Mae being bought by foreign investors. Asian investors have piled into the US Treasury markets in recent years, helping to push Treasury prices high and interest rates low. China, Japan, South Korea and Hong Kong owned a combined total of about $696bn in Treasuries at the end of June, up from $512bn in December 2001, according to data from the US Treasury. Asian countries use the income they receive from exporting goods to the US to buy American assets, which helps keep their currencies weak compared with the dollar. This helps keep the price of Asian goods down in the US.

But in recent months, as investors have become more optimistic about an economic recovery, they have begun to sell Treasury debt, sending government bond prices down. Political pressure on Asian governments to alter their exchange rates could also prompt selling. The US Treasury would like Beijing to abandon its fixed currency regime because it is concerned that China is keeping its currency low to support exports. However, if China and other Asian countries were to allow their currencies to strengthen against the US dollar, they would have less need to own US assets. "It could mean Asia pulls out of US markets," said Ethan Harris, chief US economist at Lehman Brothers. If Asian countries were to reduce their holdings of American assets heavily, they would remove a key source of finance for US investment spending.
Source: Financial Times

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