A dear reader:
“To the average American, nothing much has changed in the financial world…
“According to ‘Business News’ on PBS, everything is actually OK – there is nothing to worry about. In fact, during the middle of 2008, all problems will be solved. But when will the Chinese ever dump their US treasury debts?”
A good question: when will the Asians get tired of funding America’s US$800 billion annual current account deficit? Of course, we don’t know the answer. By the evidence, they should have already done so.
But the Asians bought US dollar investments for two reasons:
First, because they were safe. They were a good garage in which to park their ‘surplus savings.’ They thought they wouldn’t have to worry about them.
Secondly, they put them in dollars in order to hold the dollar up. As long as the dollar stayed up, Americans could continue to buy beaucoup de stuff from Asian suppliers.
Now, both those reasons are beginning to look a little “so 2006”. The dollar is going down anyway…and their US dollar investments no longer look so safe. Plus, Asians are becoming more confident about their own prospects. Their own financial instruments are becoming more sophisticated. The rate of return on Asian investments is much higher, of course, but Asians are also beginning to see that they can safely invest in their own economies, their own companies, and their own financial instruments.
When will they dump US dollar financial instruments? Sooner or later is our answer.
Markets and Money