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BusinessWeek: How Long Can The U.S. Count On Foreign Funding?

In a speech in 2004, then Federal Reserve Chairman Alan Greenspan said: "It is difficult to imagine that we can continue indefinitely to borrow savings from abroad at a rate equivalent to 5% of U.S. gross domestic product." <...>

The question seemed especially urgent after the Treasury Dept.'s eye-opening report that net inflows of foreign capital into long-term U.S. securities fell to only $15.6 billion in December. It was the skimpiest monthly total in almost five years. <...>

THE SHARP FALLOFF in December capital inflows does not appear to presage any serious trouble, but a drop of that size bears watching in coming months. <...>

The December drop came as the U.S. continues to face a dearth of homegrown savings. That's pressure enough on the U.S. to draw in the capital it needs. But against this already shaky backdrop, two new trends are emerging that add even more weight on U.S. finance and the dollar.

First, there is increasing evidence that foreigners are diversifying their assets away from dollar-denominated securities toward other currencies. <...>

A second new threat is homegrown: Chances of outright protectionist measures, such as tariffs, appear to be rising. The new Democratic Congress shows signs it will be far more activist on issues affecting trade, especially with China and countries that manipulate their currencies to gain a competitive advantage. <...>

Any U.S. action that reduces Chinese imports, however, also will result in less foreign exchange for the Chinese to invest. That could make the Chinese less interested in the auctions of U.S. Treasury securities. China is second only to Japan as the largest holder of U.S. Treasury issues. <...>

The day of reckoning will be at the point when foreigners demand more for their money, either through a weaker dollar, higher interest rates, or both. On the way there, any more reports of waning interest in U.S. securities are likely to attract much more attention in the currency markets, to the detriment of the greenback.

Yes, but everything is cool as long this graph stays above the zero mark, right?

Or not?

Truth unfolds in time through a communal process.

by marco on Mon Feb 26th, 2007 at 01:49:55 AM EST
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