Bubble or not, foreigners not ready to dump U.S. debt
While the U.S. government looks set to run a $1 trillion budget deficit, its main creditors in Asia probably won’t be in a position to shut off the lending spigot this year.
Investors of late have started worrying about a run on the dollar in 2009 if big buyers of U.S. public debt, such as China or Japan, balk at the massive spending and borrowing plans of the Obama administration to revive the U.S. economy.
But with most developed economies deep in recession, export-reliant China and Japan may have to boost their Treasury buying in the months ahead to stop their currencies from appreciating and their exports from getting too dear.
Japan may even make its first currency market intervention in five years by buying Treasuries to weaken a yen that rose to 89 per dollar on Monday, about 10 yen from its all-time high.
“The exporting economies are sucking wind,” said Charles Dumas, a former JPMorgan Chase economist who heads the research department at Lombard Street Research in London.
By controlling the value of their currencies against the dollar over the last decade, China and other emerging Asian countries ensured that their growth was dependent on U.S. consumption, leaving them vulnerable to a downturn.
Chinese exports have declined sharply since October and some economists expect them to fall at an annual rate of about 20 percent in coming months, an alarming prospect for the world’s most populous nation, which has made exports the cornerstone of its drive to create wealth and jobs payday loan.
The rest of the region is also struggling. Taiwan’s exports plunged a record 42 percent last month and Japan suffered a record annual decline in November.
Economists say the last thing these counties can afford to do is stop buying Treasuries, which would push their currencies up, accelerate job losses and deepen their economic slumps.
“What they should have done was cut loose from the dollar years ago and let exchange rates and domestic demand rise,” Dumas said. “They didn’t and now they are essentially in freefall.”
BLOWING BUBBLES
China’s bind is a lucky thing for the United States, which analysts expect to borrow some $2 trillion this year.
President-elect Barack Obama has said his planned economic stimulus alone is likely to cost nearly $800 billion and warned future annual budget deficits may hit $1 trillion.
This comes as U.S. bond yields hover near record lows, the result of a massive flight to safety by investors.
Many worry a Treasury bubble has formed, pumped up also by Federal Reserve plans to buy U.S. debt to cut longer-term rates after slashing short-term borrowing costs to nearly zero.
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