The US Dollar is in a bubble – By W Joseph Stroupe
With regard to whether Chinese advisors and experts think the US government is creating a dangerous and unstable Treasuries bubble, note this statement:
“Buying US government bonds amid an economic downturn, [a purchase] that is not based on the sound performance of the US economy itself, indicates a huge bubble,” said Zuo Xiaolei, chief economist of China Galaxy Securities. [italics added]
Chinese officials express mounting alarm at the likely negative near-to-medium term effects upon the dollar, and upon their huge reserves, of the spend-spend-spend policy emanating from Washington:
The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. “It might be two or three years before the huge deficit leads to serious inflation.” Analysts noted that if the stimulus plan didn’t accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.
Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth. Such developments would be more catastrophic than the global financial crisis, according to Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, the chief economic planning body in China.
A weaker US dollar would hurt that currency’s international status, he said, which would “not be in the interests of the United States and other countries and would exacerbate the crisis.” Said Zuo: “US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US Treasuries to a proper size.”
In a strong hint that China’s central bank won’t be adding to its holdings of Treasuries at anywhere near the rate it did in 2008, that it may already have clandestinely achieved more diversification out of the dollar than is widely known, and may well find ways to further decrease its holdings without explicitly telegraphing its moves, note this statement:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added.]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. “Whether China is to purchase, and to buy how much of the US government bonds, will be decided according to China’s need,” Fang said. “We will make judgment based on the principle of ensuring safety and the value of the reserves,” Fang said.
The foregoing quotes beg the following questions:
· What about the widely held view, which is even at times recited by Chinese central bank officials themselves, that says China has no choice but to maintain its holdings of Treasuries and to keep buying more, lest any significant slowdown in its rate of purchases risk triggering a global dollar panic?
· Is that view correct, or does China’s central bank actually have other viable options, as Luo Ping and other officials insist that it does?
· What might those other options be, are they really viable, and what might happen to the dollar if China’s central bank began to exercise its professed “other options”?
· What kind of scenario might prompt China’s central bank to attempt to do so?
· Could its enactment of “other options” be carried out in a way that would be difficult to trace, so that China would avoid triggering a dollar panic while it steadily reduced its exposure to the dollar over the coming months?
Continues– Complete Article here: http://www.atimes.com/atimes/China_Business/KC17Cb03.html
