What is Helping the Dollar Defy Gravity?
By Shlomo Maital
What in the world is helping the U.S. dollar defy gravity, keeping it from falling relative to other currencies? The U.S. economy’s recovery is weak, job creation is awful, President Obama is incompetent, the Congress is deadlocked, and America is turning inward, or returning to its traditional isolationism. Moreover, the Fed continues to print dollars (by buying $85 m. worth of Treasury bonds monthly). There is an enormous overhang of printed dollars out there.
China has lots its appetite for buying dollars. According to Floyd Norris (New York Times, Feb. 22-23/2014), China bought a net $48.5 b. worth of U.S.Treasury bonds last year. This is $20 b. less than in 2012. China now holds $1.27 trillion in Treasury bonds; together with Japan, this amounts to 42 per cent of the total $5.8 trillion in Treasuries held by all foreigners.
There is a great science fiction plot here. What if those foreign Treasury holders decided to spite the U.S. by dumping their dollar holdings? The dollar would crash, stock markets all over would drop, and an enormous crisis would result. Why would anyone do this? Well, America has plenty of ill-wishers out there. The fact is, the fate of the dollar, and the U.S. economy, is now in the hands of Chinese, Japanese and others, who hold vast amounts of U.S. assets.
By great good fortune, just as China is easing off its dollar purchases to support the dollar, Japan, under Abe and his “Abe-nomics”, has stepped up its buying. Japan bought a huge $71.3 b. in Treasuries in 2013, up from $53 b. in 2012. Japan is now the single largest purchaser of dollar assets. Of course, Japan does this to weaken the yen and help its exports. So far, it isn’t working too well.
It is significant that the American public, including the banks, slashed their holdings of U.S. treasuries. Clearly everyone knows that interest rates aren’t going down, they’re going up, which means Treasuries are going down, which means we should be selling them. Apparently, foreigners are more bullish about the dollar than Americans are. Not a good sign.
Right next to Norris’ column is an account of Fed discussions during the 2008 crisis. It is very disturbing. It shows how clueless the Fed Open Market committee was, especially after the Lehman bankruptcy, and how the Fed continued to worry about inflation, when the pressing problem was in fact deflation. It seems that not only are there no competent political leaders left in power, there are no competent economic and financial leaders either.