If one looked at the recently released US Treasury International Capital (TIC) data for June 2010, there is no sign that the world’s appetite for the US dollar has gone down markedly. World’s holding of US treasury securities has gone up from $3.46 trillion in June 2009 to little over $4 trillion—an increase of around $550 billion.
Of course, foreign central banks collectively have become more restrained in their acquisition of US treasurys. Their holdings have gone up “only” by $71 billion. Much has been made out of the entry against China showing a reduction from $916 billion to $844 billion over the last 12 months. That can be misleading. At the same time, holding of US Treasurys by the UK has jumped fourfold from $90.8 billion to $362.2 billion.
It is not as though the UK has suddenly decided to accumulate dollar reserves. It could simply mean that UK domiciled banks have bought US treasurys. The true beneficial owner could be someone else. China (or, for that matter any other central bank) could be buying through UK banks. Further, it is possible that China could have swapped treasurys for other US securities.
Year-to-date, China has purchased cumulatively $26.5 billion of all US domestic long-term securities (net). This comes on top of the $99 billion worth of securities purchased last year. China has slowed down (this data might yet be revised) in its purchase of US securities but by no means it has abandoned acquiring US assets. So it is premature to indulge one’s conspiracy theories.
Insights that are more interesting are available when we glean the overall TIC report for June 2010 that includes both private and official sectors and other securities. The private sector has turned a big net buyer of US securities. In the 12 months through June 2010, the private sector acquired net $268 billion worth of US securities (short- and long-term). These purchases have been made throughout the year rather than in May when the euro zone was in turmoil though there was somewhat higher interest in the dollar in May. So it was not just the fear of European structural crisis that drove investors into the US dollar.
In 2009, private investors, as opposed to sovereign wealth funds and central banks, were net sellers when global risk appetite improved and in 2008, they were big buyers of US dollar. That they have turned buyers of US dollar securities again this year should serve as a warning signal for stock markets. The relative resilience of the US stock market this year does not appear warranted, based on the investor appetite for US dollar.
This perceived “safe-haven” demand for the US dollar also emboldens policy recommendations in favour of looser monetary and fiscal policy. But, as Rogoff and Reinhart in their recent note in VoxEU.org (Debt and growth revisited, 11 August) observe, historical data over two centuries provide no particular basis for US exceptionalism, given that its public debt to gross domestic product (GDP) ratio is around 117% of GDP. More debt beyond a point is anti-growth and the US has crossed that point, if history is any guide. This is also consistent with what Raghuram Rajan has been writing lately. The US needs more structural changes than stimulus to haul itself off stagnant growth.
The appetite for dollar assets from the private sector is also blocking the much-needed dollar weakness from the US point of view. Even with lacklustre growth, US’ trade deficit has shot up this year. If growth accelerates, deficit could yet become larger than the appetite for dollar assets that would also doubtless rise with improving growth. Thus, the conditions that perpetuated the global savings and spending imbalance up to 2007 would return. That played no small role in precipitating the global financial crisis. The US needs to manufacture to export and it needs a weaker dollar along with declining real wages to restore manufacturing competitiveness.
The continued faith in the dollar is thus not only precluding the adjustment of global imbalances but also appears misplaced when interest rates in the country are low, its stocks overpriced and when questions abound over its true sustainable growth rate in the face of still-massive private and public sector debt.
If anything, the need for the dollar to weaken further might prompt the Federal Reserve to bring forward the next round of quantitative easing. The recent jump in the jobless claims to the psychological level of 500,000 and the contraction in the manufacturing index for the Philadelphia Federal Reserve region must have stirred if not shaken the institution.
That the US finds its economy under the spell of renewed slowdown in the face of an upward revision to the German growth estimate by the German Bundesbank for the year 2010 from 1.9% to 3.0% is another reason, if needed, for the dollar to weaken and the euro to strengthen.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk