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Floyd Norris: A dollar cartel buys American bonds
International Herald Tribune Off the Charts Third-world countries used to complain that all their assets were owned by foreigners, sometimes viewed as exploitative first-world capitalists. That cry can still be heard occasionally in such places as Argentina, where the government is upset over foreign control of utilities, and the foreigners who own the utilities are upset over government controls that have destroyed the profitability of those companies. But when it comes to foreigners buying up assets in another country, the champion sellers these days are Americans. Greg Jensen, research director of Bridgewater Associates, an American money management and research firm, calculated this past week that if current trends continue, the last U.S. Treasury security held by an American will be sold to the People's Bank of China on Feb., 9, 2012.. Those trends will not continue that long, of course. But they have gone on a lot longer than many would have thought possible. Back in the mid-1980s, another time the dollar was under pressure in part because of soaring American trade deficits, about 16 percent of Treasury securities - not counting those held by the Federal Reserve and other parts of the U.S. government - were held by people or governments outside the United States. Now the figure is 52 percent. When it comes to debt issued by government related entities, like Fannie Mae, the figure has gone to 31 percent from 5 percent. Corporate bond holdings by foreigners went to 33 percent now from 15 percent then. The American asset class that has yet to draw that much foreign interest is corporate stocks. The current level of 13.6 percent is a record, but back in the mid-1980s overseas investors owned about 6 percent, a bigger share than they had of agency securities. All this is fun while it lasts for Americans, who get to buy whatever they want and then have the foreigners lend the money back. Much of the buying comes from Asian central banks, which buy dollars to keep their currencies from rising against the dollar and perhaps making their exports less competitive. In the long run, argues Warren Buffett, the chairman of Berkshire Hathaway, the omens are bad for Americans, who will see a lot of their productive capacity diverted to service all that overseas debt. That is, of course, just what the third world used to complain about. What is not clear is what will cause a change in the near future. So long as China and Japan, and to a lesser extent other Asian countries, want to keep buying dollars and investing the money in bonds, nothing will stop them. But those central banks can be seen as a cartel trying to keep the dollar high, and in that light they might face the same risk that all cartels eventually face: cheating members In this case, it is clearly to the advantage of the cartel to keep the dollar high. But each individual member might like to sell some of his dollar holdings without affecting the overall market. A recent spate of talk of diversification by central banks - meaning that they would buy more gold or euros or yen or pounds, rather than just dollars - could be a signal that members of the dollar cartel are at least starting to think about cheating. And, Jensen argues, "once a few of them start to cheat, it puts more pressure on the others."
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