Bush Policies Frighten Asian Central Banks

NY Times: “Talk in Japan Shakes Dollar and Treasuries,” by Jonathan Fuerbringer, March 11, 2005.

Quite apart from their blatant IN-justice and promotion of IN-equality in the United States, Bush economic policies are also setting up the US economy for a HUGE fall.

The reasons are too complex to be detailed here – altho we have done so at length in both the 1989–2000 lectures in Political Economy, as well as in the Millenniium Crisis series –

but the key reason is that – despite his “tough guy” rhetoric, which is about as believable as his piloting a jet onto the “Mission Accomplished” aircraft carrier –

Bush is systematically undercutting the political / military framework of structural bonds among the US / Europe / Japan that serve as the underpinning of the US-centered integrated world political economy.

Most Americans, of course, seem happily ignorant of the looming collapse of their domestic economy …

But people overseas – most notably, but hardly restricted to, central bankers in Asia, Europe and the Middle East – are QUITE aware of this likelihood …

which is why they are starting to make noises about getting rid of their HUGE reserves of US dollars, and getting Euros instead …

You will see below how nervous this makes US policymakers when it is RUMORED to be done by Asian central banks …

Just imagine what would happen if / when the dollar begins to decline so precipitously that OPEC and other oil-rich countries begin refusing to accept dollars for their oil –

US dollars having been the ONLY currency accepted in the world oil trade since the beginning of the 20th century –

and insist on Euros instead – a looming reality that will only WORSEN the strain on a collapsing dollar … and in so doing completely undercut the foundations of domestic economic prosperity in the US …

But Bush has “values,” there was an election in Iraq – despite the on-going collapse of the country’s political arrangements – and the corporations are fat and happy with the Bush tax cuts … until, as happened with W’s previous pal Kenny Boy Lay and Enron, the whole manipulated house of cards falls apart,

and millions of Americans will face an economic crisis unparalleled since the Great Depression … at which point, they will then have the chance to watch their “privatized” Social Security accounts flush down the drain …

[T]he volatile reactions in the markets underscore that the dollar, already under pressure from the drag of the United States’ record current-account deficit, has another issue that could weigh on it in the future.

“There is a heightened sensitivity to anything that smacks of reserve reallocation,” said Robert Sinche, global head of currency strategy at Bank of America.

Indeed, the comments from the [Japanese] prime minister, Junichiro Koizumi, came less than a month after reports, later denied, that the central bank of South Korea was planning to move some of its reserve holdings out of dollars and into other currencies. Even after the denial, those reports roiled the currency markets, and the dollar fell 1.5 percent against the euro and 1.4 percent against the yen on Feb. 22. …

The suggestion of diversification from dollars has put the focus on the role of Asian central banks in the performance of the dollar and Treasury securities.

China, Japan, Hong Kong, South Korea and Taiwan together hold 56 percent of the Treasury securities owned by foreigners. Many of those securities are held by their central banks. So any significant shift of their reserves out of dollars could spell trouble for both the American currency and the bond market. …

Another emerging issue is what happens when China, which is being pressured by the United States and other countries to allow its currency to trade freely, moves away from pegging the yuan to the dollar.

To maintain the present peg, China has to sell yuan for dollars as the American currency weakens, building up huge dollar reserves, most of which are invested in Treasuries. Other Asian countries, including Japan and South Korea, have done the same so that their currencies stay competitive with the yuan.

Many analysts expect a small move toward delinking in the next 12 months that would allow for an increase of 3 percent to 5 percent in the value of the yuan. This could mean that China and other Asian countries would have less need to build up dollar reserves and, therefore, less need to invest in United States Treasury securities.

If this led to lower dollar reserves and a decline in central bank investments in the Treasury market, some analysts argue that the impact on the American market would depend on how attractive it would be at that time to invest in the United States.

So if economic conditions in the US are PERFECT – steady growth, low inflation, low jobless rate – then perhaps we can escape with relatively little damage …

But IF – as seems more likely – conditions are anything LESS THAN perfect – not just Asian central bankers, but ALL holders of US debt and securities, are going to be far from enthusiastic about keeping their reserve currency and other investments in dollars that are fast losing their value …

The important thing, tho, is that the American airwaves will be free from the sort of revolting indecency that Janet Jackson revealed during the Patriots’ victory over the Carolina Panthers … THAT’S why a “moral” man like George Bush needs to be President …