Date: Sun, 5 Nov 2006 08:09:00 -0600
From: darkness39@yahoo.com
Newsgroups: misc.invest.financial-plan
Subject: Re: what to do if the dollar falls?
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jose.bailen@gmail.com wrote:
> The article makes no sense whatsoever. The U.S. economy is getting the
> savings of other countries like China or Japan because its economy is
> still the one of most efficient -if not the most- in the world, and the
> return of capital investment is higher than overseas. A higher rate of
> return of capital investment means that the U.S. can offer a better
> reward for Chinese or Japanese savings than what they can get at home.
> Incidentally, there are other two relatively large economies which run
> persistent current account deficits, U.K. and Spain. In the three cases
> -U.S., U.K., Spain- the economy grows faster than in other developed
> countries. That's why foreign capital gets into these three economies.
> On the contrary, countries like Japan, Germany or Switzerland run
> relatively large current account surpluses, in all these cases their
> economies performed poorly since the 1990s, the rate of return of
> capital is very low, and their citizens try to find better investment
> opportunities overseas.

I think you are slightly confusing cause and effect.

The UK and US (and Spain) are running consumer spending booms, backed
by rapid rises in house prices.

If an economy invests (including in houses) more than it saves, it runs
a current account deficit.

The only way for it to finance that is for foreigners to hold more of
their assets in that country's currency: which is achieved by offering
them a higher expected return.

Just to confuse the issue, many of the US' major bondholders (and
trading partners) specifically China, SE Asia and Japan, have a
national strategy of promoting export led growth: in the Chinese case,
by subsidising exports and not allowing the currency to appreciate
against the US dollar.

This exacerbates the effect.

Eventually, those current account deficits will close: there is not an
infinite world demand for US dollars.  Whether it does so gently or
violently is open to question (lots of examples of both out there)--
likely it will be achieved either by recession (eg a slump in the
housing market), depreciation of the dollar (or the pound), or a
combination of the above remains to be seen.

>
> > ======================================= MODERATOR'S COMMENT:
>  Posters to this thread are asked to remember that this is a financial planning newsgroup.

Just on that, I have a general caution about USD assets as a result
*however* I think US large cap (value tilted) have a relativelly high
exposure to foreign earnings, and are not expensive on other measures.