Robin Koerner is co-founder/president Watching America.Its a fascinating web page showing what most of the world thinks of America (primarily through their media).
They not only link to, but also translate much of the foreign media.
This is a rather fascinating subject, with implications for both the equity and fixed income markets. Our debt — government bonds — are so widely held by other country’s
central banks and foreign private investors — its simply foolhardy to
ignore their concerns.
We don’t have to kowtow to foreign bond holders — but ignoring/grossly offending them kinda seems like a poor long-term financial strategy.
I recall a NYT article from last year, where a senior Morgan Stanley analyst had just returned from an overseas trip. He was highly agitated over the decaying global opinion of the U.S. In the past, we may have not have been loved, but the nation was at least respected. Now, he saw disdain and outright hostility towards the country as well as its corporate products. His bigget fear: a backlash leading to a boycott of "Brand America." One possible negative scenario was reduced global sales, adding to the balance of trade deficit, reducing corporate revenues and — potentially — dramatically weakened profits.
The uglier (but less likely) worst case scenario is a coordinated dumping of US bonds and dollars. A dollar crash and US credit collapse then follows. This is not particularly likely, given our economic inter-relationship with Japan and China, but it is still ugly to think about.
Discover What the World Thinks About U.S.
Barry – Fabulous link, thanks! I’ve been following your analysis of China’s moves to secure resources with great interest. Please, keep it coming. I agree that a coordinated attack on the dollar is unlikely — too many people have too much money tied up in US bonds and other securities. At the same time, why would China buy bonds now, when such purchases are, in effect, financing an American foreign policy that is decidedly against their interest? What is the likelihood of, say, China, and perhaps others, simply refusing to buy any more bonds and standing pat with what they have? Too risky? Could even this collapse the dollar, and the world economy with it? If not, what might the effects be on US and global economies markets?
they wont dump our bonds because they hate us. they will dump our bonds if they look like they will lose value. and the longer we continue pumping them out into the world at a rate of 500 billion a year (about 2 billion ever business day) the more likely that is to happen. particularly since the 500 billion figure is but one point on a trend that is still heading the wrong way. pesky things, supply and demand. as our supply gets ever larger, the foreigners have to eat ever more at each sitting. sooner or later this will end either because we slow down our deficits (fat chance with bush proposing budgets and the republicans passing them in congress) or because their demand can no longer keep up with the growing flows.
my solution? get out of dollar assets and into other currencies. i am not the only one to have figured this one out.
The Chinese central bank won’t dump dollars because internal stability is more important than “return”. Internal stability for the foreseeable future means employment growth in manufacturing centers, which depends on exports, which means keeping the renminbi stable versus the dollar, which means buying dollars for renminbi which means (deep breath) holding Treasuries.
Japan’s central bank has been doing much the same, but they do not have that inexorable equation, and are more of a question. Still, given the country’s economic history, I see it as improbable that they will get off their parallel merry-go-round for the yen-dollar.
Steve is, of course, right that eventually some of this dollar/bond buying will have to be unwound. The longer the current unstable equilibrium lasts, the more severe the eventual adjustment is likely to be. Smart folks whom you should read on the subject are dollar-crash theorists Roubini-Setser and soft-landing modelmakers Blanchard-Giavazzi-Sa. See http://www.stern.nyu.edu/globalmacro/BW2-Unraveling-Roubini-Setser.pdf for the former and http://papers.nber.org/papers/w11137 for the latter.
WCW – Thanks for the pointers. Good stuff, there. I especially like having models to play with, as in Blanchard, et al. I agree with you that the internal stability is likely more important than return for the Chinese CB, and would suggest that there are other factors more important as well. American and Chinese valuations are difficult to reconcile, e.g., what’s Taiwan worth, what’s the value of sovereignty, etc. Are there alternative strategies, from China’s perspective, that would allow China to maintain internal stability, pursue assimilation of Taiwan, and economic prosperity that might involve putting the squeeze on the US economy and ambitions? As Steve rightly points out, they won’t dump bonds because anyone hates anyone, but I’m curious to what extent the Chinese, or other, might seek, and are able, to manipulate dollar valuations to advance objectives beyond a simple rate of return on the stuff they now hold.