[Mb-civic] The Empire goes bankrupt?

[ean at sbcglobal.net]

http://www.washingtonpost.com/wp-dyn/articles/A43402-2004Oct18.html?sub=AR

Washington Post       Tuesday, October 19, 2004; Page E01

Bearish on Uncle Sam?

As foreign investment shows decline, economists keep watch

By Jonathan Weisman and Ben White

New York -- On Sept. 9, as it must frequently do, the U.S. government
turned to Wall Street to raise a little cash, and Paul Calvetti bet that
demand for $9 billion worth of long-term Treasury bonds would be "huge."

But at 1 p.m., as the auction opened and the numbers began streaming
across his flat-panel screens, the head of Treasury trading at Barclays
Capital Inc. slumped in his chair. Foreign investors, who had been
voraciously buying Treasury bonds, failed to show up. Bond prices cascaded
downward, interest rates rose, and in five minutes, Calvetti, 38, who
makes money by bidding on bonds at one price and hoping market demand lets
him quickly resell them at a profit, had lost $1.5 million.

"It's amazing," he gasped, after the Treasury Department announced that
Wall Street traders, not foreigners, had been left to buy virtually the
entire auction. "I don't think I've ever seen this before."

The most recent auction of 10-year Treasury notes may have been a fluke, a
momentary downturn in one aspect of the massive world market for U.S.
government and private-sector bonds, stocks and other securities -- a
market so large and diverse that it has long been the world's safe haven.
But a rash of new data, including Treasury Department figures released
yesterday showing a net sell-off by foreigners of U.S. bonds in August,
has stoked debate over whether overseas investors -- private individuals,
institutions and government central banks -- are growing dangerously
bearish on the U.S. economy.

It is a portentous issue. Foreign governments and individuals hold about
half of the $3.7 trillion in outstanding U.S. Treasury bonds, for example,
and the government has been heavily dependent on continued overseas bond
purchases to finance the roughly $1 billion a day it has to borrow to pay
its bills. Foreign lending and investment are also needed to finance the
country's roughly $50 billion monthly trade deficit, while foreign capital
has been a key prop to U.S. stock prices.

A turn in overseas attitudes toward the United States could ripple deeply
through the economy, depressing the market, raising interest rates and
pushing down the value of the dollar.

In August, foreign private investors actually sold $4.4 billion more in
Treasury bonds and notes than they bought that month, the Treasury
Department said yesterday -- the first time in a year that net foreign
purchases were negative. That followed a 20 percent decline in July that
shrunk net foreign purchases to $18.3 billion.

Bond purchases by foreign central banks also dropped sharply in July,
falling 76 percent, to $4.1 billion. A rebound in August brought them back
to $19.1 billion. The recovery was timely: Without it, the dollar may have
taken a serious hit, said Ashraf Laidi, chief currency analyst at MG
Financial Group in New York, who headlined yesterday's client newsletter,
"Foreign Central Banks Save Dollar From Disaster."

Foreign purchases of stocks are off as well, going from net purchases of
$9.7 billion in July to a net sell-off of $2.1 billion in August. Over the
past 12 months, private foreign investors have purchased a net of $17
billion in U.S. stocks, compared with $30 billion in the 12 months before
that.

Measuring the combined purchase of stocks, corporate bonds and government
debt, overall capital flows into the United States fell in August for the
sixth straight month.

Treasury officials said such data should not be overanalyzed. Net
purchases of U.S. government securities may have been low in August, at
$14 billion, for example. But foreigners still bought more than $807
billion in Treasury bonds, while selling $793 billion, in a month that is
usually a slow one in financial markets, said Treasury spokesman Tony
Fratto.

"These movements are taking place in a huge market," he said.

But the downward trend in capital coming to the United States is
nevertheless worrying, some economists argue, with particular implications
for U.S. government debt.

Foreign central banks and individuals rushed to finance U.S. government
budget deficits over the past three years, buying $19.2 billion in
Treasury bonds in 2001, $118 billion in 2002, and $279 billion in 2003.
Lending from foreign governments in particular exploded last year -- to
$109 billion, up from $7.1 billion in 2002.

The fear among economists is that those foreign lenders may grow concerned
that their portfolios are too swollen with dollar-denominated assets.

The Chinese -- whose Treasury holdings have tripled since 2000, to $172
billion -- have already begun buying more euro-denominated assets, said
Rebecca Patterson, a senior currency strategist at J.P. Morgan Chase & Co.

Earlier this year, both China and India diverted tens of billions of their
dollar holdings to domestic projects, with China pumping $45 billion into
its banks and India devoting $15 billion to infrastructure projects.

"China and India are no longer committed to open-ended dollar buying,"
Stephen S. Roach, chief economist at Morgan Stanley, warned clients
yesterday. "At the margin this shift is negative for the dollar and for
U.S. real interest rates."

As the big players begin to invest dollarsdomestically, the U.S.
government is becoming more dependent on smaller nations, like Singapore
and Korea, which may be quicker to sell off Treasurys and could demand
higher interest rates, said Sung Won Sohn, chief economic officer at Wells
Fargo Bank.

"The U.S. government will always be able to raise money -- well, at least
in the foreseeable future," he said. "The question is, what will you have
to pay and who will you get it from?"

The U.S. dependence on foreign capital concerns economists on both ends of
the political spectrum. In a speech this March, Lawrence H. Summers, a
Treasury secretary in the Clinton administration and now the president of
Harvard University, warned of "a kind of global balance of financial
terror," in which the economic well-being of the United States depends on
the actions of foreign governments.

"There is surely something off about the world's greatest power being the
world's greatest debtor," he said. "In order to finance prevailing levels
of consumption and investment, must the United States be as dependent as
it is on the discretionary acts of what are inevitably political entities
in other countries?"

Desmond Lachman, an international economist at the American Enterprise
Institute, writing for the conservative Web site Tech Central Station,
cautioned that foreign central banks "now have considerable ability to
disrupt U.S. financial markets by simply deciding to refrain from buying
further U.S. government paper."

Patterson said that is not likely, comparing the situation to "a Texas
standoff with two cowboys. . . . If Asia stops buying, the market will get
wind of it very quickly, and they will rush out the door. And Asia will be
hurt very badly."

To John Williamson, a senior fellow at the Institute for International
Economics, that is cold comfort. The Chinese and Japanese central banks
may maintain their huge reserves for defensive reasons, he said, but a
smaller player, like Brazil or Singapore, could try to unload its dollar
reserves, triggering a global sell-off. Like a mouse in a circus, even a
bit player could cause the elephants to stampede.

"It's absolutely true that it wouldn't be in the interest of the world to
do it, but any one country might think, 'I'll beat the crowd and diversify
first,' " he warned. "I think that's the more likely scenario."

***


-- 
You are currently on Mha Atma's Earth Action Network email list, option D 
(up to 3 emails/day).  To be removed, or to switch options (option A - 
1x/week, option B - 3/wk, option C - up to 1x/day, option D - up to 3x/day) 
please reply and let us know!  If someone forwarded you this email and you 
want to be on our list, send an email to ean at sbcglobal.net and tell us which 
option you'd like.



Action is the antidote to despair.  ----Joan Baez
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://www.islandlists.com/pipermail/mb-civic/attachments/20041021/c2e280ce/attachment.html