Two grim assessments for the future of the dollar.
The first is from James Pethokoukis at Reuters (if you aren’t reading this guy’s posts then start to do so):
Great, great stuff from the great Andy Busch of BMO Capital Markets:
“According to the US Treasury, the two largest holders of U.S. debt are China with $768 billion and Japan with $687 billion. Brazil owns $126.6 billion and Russia owns $138.4 billion. Without question, markets were nervous over the actions by these players during the last auction period by the US government. While it may seem that they are going to continue to buy US dollars and buy US debt, they are telling the world they are actively seeking alternatives.
There may not be many alternatives now, but over long enough time frames there will be. More importantly, the BRICs are telling the world they want to find ways out of investing in a country that is fiscally irresponsible and unlikely (healthcare) to change their spending habits any time soon. Eventually, they will find a way.”
The second is from the legendary Paul Samuelson:
Up until now, China has been willing to hold her recycled resources in the form of lowest-yield U.S. Treasury bills. That’s still good news. But almost certainly it cannot and will not last.
Some day — maybe even soon — China will turn pessimistic on the U.S. dollar.
That means lethal troubles for the future U.S. economy.
When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.
Why then? They do this primarily because that is a way that can prolong their export-led growth.
I am not alone in this paranoid future balance-of-payment fear.
Warren Buffett, for one, has turned protectionist. Alas, protectionism may well soon become more maligned.
President Obama struggles to support free trade. But as a canny centrist president, he will be very pressed to compromise.
And he will be under new chronic pressures. His experts should right now be making plans for America to become subordinate to China where world economic leadership is concerned.
Those views are about as pessimistic as one is likely to find. They are not alone, as others are ringing the same bell. I’m sure both men are well aware of the perils of long-term forecasting and would probably, if pressed, concede that their views rest on the assumption that the U.S. pretty much continues down its present road.
Fortunately or unfortunately, history rarely unfolds so neatly. It is entirely possible that the country may swear off its wastrel ways and put its economic house in order. It’s also possible that America’s singular strength — the ability of its people to innovate and reinvent their economy — hasn’t been lost and we’ll see a renaissance along the lines of the tech revolution.
The world is also a dangerously unpredictable place. There is no guarantee that what seemed secure and predictable today will not be reduced to rubble tomorrow. No country is now or likely to be in the near future better able to protect its interests and its citizens than the U.S. The inevitable catastrophe is likely to leave the country standing while others are brought to their knees.
I don’t dispute the opinions that the dollar is heading for rough sledding or that it could indeed be knocked off its perch. I don’t take that eventuality as a given. There are just too many things — good and bad — that can happen in the meantime.