The inexplicably high relative value of the US dollar, in the context of a badly-managed domestic economy that is now in recession - prompts the question as to why the demand for this currency worldwide is so large. Who is actually purchasing the US Dollar and why?
Are foreigners denied other currency options under the weight of US dollar hegemony? Perhaps many of these foreigners are not 'foreign' at all but merely the international subsidiary branches of US corporations. A Hong Kong based economist Enzio von Pfeil makes the point that many politicians and trade theorists still apply "the thinking and measurement of trade balances that was developed 500 years ago in Italy." He says that this is innapropriate in a world now vastly changed and where giant Western multinational corporate conglomerates dominate cross-border international exchange.
A huge portion of international trade could be more accurately described as NON-MARKET/NON-TRADE. Intra-corporate 'trade' between branches of the same (mostly US) transnational corporations. “In North America trade associated with U.S. parent multinationals or their foreign affiliates accounted for 54 percent of U.S. exports of goods and 36 percent of imports. Forty percent of trade between the US and Canada in 1998 was intra-corporate. “Forty percent of the US-Europe trade is between parent firms and their affiliates, and in respect of Japan and Europe, it is 55 per cent; with regard to US-Japan trade, it is 80 %.”[2]
Enzio von Pfeil logically asks: “What is meant by "foreign ownership?...Are we talking about "pure" foreigners, or also about U.S. citizens as well as MNCs with overseas financial vehicles? He points to problems with the official Treasury records that detail the owners of US 'foreign' debt - "there appear to be no data available on how much U.S. Treasury debt is held by U.S. MNCs . What, he says, do U.S. MNCs do with at least a portion of all of that money they are making in their fabulously successful overseas operations? Optically, there is an extremely good "fit" Between the overseas investments of U.S. MNCs and "foreign" ownership of America's federal debt. This suggests that plenty of U.S. government debt is held legally by American MNCs in legitimate foreign tax havens.” [1]
International trade (and global intra-corporate transactions) is dominated by the use of a single currency - US dollars.
"...At present, approximately two thirds of world trade is conducted in dollars and two thirds of central banks' currency reserves are held in the American currency which remains the sole currency used by international institutions[3] The US provides the world - but mostly itself- with these dollars by buying goods (such as oil and other commodities), and services produced by US corporations in foreign countries. Since the US does not have a corresponding need for foreign currency, it sells far fewer goods and services in return...." [3]
Clearly, the privileged position of the US, in terms of its relative lack of need to earn foreign currencies, is a large contributer to an ongoing over-valuation of its currency. But the huge global shadow financial system must surely have an even greater impact.
When we look at trade deficits, rather than financial deficits, the UK and US do not fare well and these nationas are also the homes of the largest transnational corporations. Clearly the governments of these two countries have actively encouraged this paradigm of trade imbalance in the first instance. They have heavily subisided their corporations on an ongoing basis, given generous grants for them to extend their operations in other nations and their artificially high exchange rates have allowed these large MNCs to accumulate foreign productive assets relatively cheaply in other countries.[4] Essentially it is corporate imperialism by another name.
Finally, there's the third world debt crisis. One created by the deliberately lax lending policies of large US (and London) banks [5]. Euromarket 'cowboy' salesmen from Citibank and others pushed unaffordable loans onto the leaders of 'developing' nations and the consequent debt repayments have acted as a heavy tax on every household within their borders. A tax that had to be paid (again) in overvalued US dollars [6]. This debt, as such, has been used as an instrument of exploitation and control and its repayment continues to perpetuate and worsen global currency and trade imbalances.
[1] Trade myth five : foreigners finance America by Enzio von Pfeil, Hong Kong.
http://www.asiasentinel.com/index.php?option=com_content&task=view&id=1482&Itemid=469&limit=1&limitstart=1
Also see: http://k.daum.net/qna/view.html?qid=3gnR7
[2] It's NOT international trade. Don't be fooled. Brenda Rosser. Thursday, July 24, 2008
http://econospeak.blogspot.com/2008/07/its-not-international-trade-dont-be.html
[3] 'Petrodollar or Petroeuro? A new source of global conflict.' By Cóilín Nunan. Accessed on 8th August 2008. http://www.feasta.org/documents/review2/nunan.htm
[4] Now that these same corporations are caught in a recession with high levels of debt are we now seeing a taxpayer-funded bailout of these same multinational corporations?
[5] And those London banks also involved in Euromarket lending.
[6] Witness Paul Volker’s raising of US interest rates to usury levels in October 1979 to maintain US dollar hegemony when the currency came under attack the year before. The most alarming result was that much of the third world debt ‘sold’ by large US banks became permanently unpayable.
14 comments:
Foreign subsidiaries of US based MNCs generally hold small amounts of US debt. Brad Setser is the go to guy on this. Huge amounts now are held by foreign central banks, particularly in Asia.
"It’s interesting to note that the nations with the largest deficits - the US, UK and Germany - are also the homes of the largest transnational corporations."
Since when does Germany have a large deficit?
Barkley, thanks for the lead. I found his article 'The worse the US does, the better the dollar does' at
http://blogs.cfr.org/setser/2008/10/04/the-worse-the-us-does-the-better-the-dollar-does/
tonight.
I notice that he refers to (i) 'the shadow banking system' but does not explore its nature or size. (ii) "global deleveraging is a major current source of support for the dollar." (iii) the upward pressure on the dollar that has probably occurred because US banking institutions have scaled back their overseas lending and (iv) FX carry trades using the US dollar.
But he doesn't mention the amount of debt that US MNCs hold in US dollars or the level of holdings US MNCs have in US Treasuries.
I'll keep looking.
Reason,
Thanks for the correction. I have updated the 'article' (rush job, unfortunately) to omit any reference to Germany and to clarify my line of argument.
"The inexplicably high relative value of the US dollar, in the context of a badly-managed domestic economy that is now in recession - prompts the question as to why the demand for this currency worldwide is so large."
The U.S. dollar's value was on the weak side up to August of this year. So I'm not sure whether you are trying to explain why the dollar has gone up since (in particular, against the European currencies), or whether you think that even at 1.60 vs the euro, the dollar was too strong? The reasons you state in your post applied equally well in August as they would now; so it would seem logically you are claiming that the dollar was also too strong then - a claim with which the Europeans would strongly disagree.
If it's the former - you are looking for reasons for the strengthening since August -, then the most common reason cited by the market is "repatriation of funds". Other reasons are, it might seem ironically, in fact precisely due to the arrival of the American recesssion. In a recessionary America, oil demand is down, so oil prices are down, so the American balance-of-payments improves, so the dollar strengthens. Equally, European exporters were afraid of dollar weakening, so hedged their forex risk for expected future sales to the U.S. But with the coming recession, those expected future sales had to be cut, in some case sharply, and much of that forex hedging had to be unwound - buying dollars, selling European currencies - which again forced the dollar higher.
'a' said: "so it would seem logically you are claiming that the dollar was also too strong then - a claim with which the Europeans would strongly disagree.
Many Australians would observe that the dollar has been too strong consistently for decades. Most nations appear to be at the mercy of either the Petro-Euro or Petro-Dollar.
Quoting Henry CK Liu in 2002, the US enjoys
"68 percent of global currency reserves, up from 51 percent a decade ago. Yet in 2000, the US share of global exports (US$781.1 billon out of a world total of $6.2 trillion) was only 12.3 percent and its share of global imports ($1.257 trillion out of a world total of $6.65 trillion) was 18.9 percent....The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. "
Dollar Hegemony, by Henry CK Liu, 11th April 2002. http://henryckliu.com/page2.html
By Henry C K Liu
(Originally published as [US Dollar Hegemony has to go] in AToL on April 11. 2002)
How long will this situation be acceptable to the rest of the world?
'a': the most common reason cited by the market is "repatriation of funds..
US corporate dollars flowing back into the US from 'the periphery'. This supports my thesis that much of US 'foreign' debt is actually US corporate in nature.
Thanks for your feedback and related information. I'll have closer look at the data.
Brenda,
That was written in 2002. Since then the euro has risen as a share of foreign exchange reserves. Also, there is this curious business that the way those dollars are acquired are by those countries selling more to the US than the US buys from them, our large current account deficit, which leads the US to borrow from the foreigners. The data you are supplying does not at all support your argument, just the opposite.
Barkley
Yes, I agree that the Euro (since 2000-2002) has risen as a share of foreign exchange reserves.
Also, there is this curious business that the way those dollars are acquired are by those countries selling more to the US than the US buys from them, our large current account deficit, which leads the US to borrow from the foreigners.
The point I was trying to make in this particular blog was that much of the trade that is recorded to be between the US and other nations may actually be between subsidiaries and parent companies of US corporations.
when the US Treasury stats say China has purchased so many billion dollars of US Treasuries what does that mean? Does it mean that the Chinese government has purchased them? Or is it private individuals in China? Or is it US corporations in China and others? Does the figure include all of these.
I don't know. It's a question I'm seeking the answer to.
"Private debt inflows have been a consistent source of financing and are currently the largest source of capital inflows into the US.....“the rate of return earned on US investment abroad substantially exceeds that earned by foreigners on their investments in the US. While the causes of this cannot be fully explained, this very favourable outcome for the US…”
US CAPITAL FLOWS1
This article was prepared by Natasha Cassidy and Guy Debelle of International Department. It is based on information as of 10 November 2004.
www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_nov04/bu_1104_2.pdf
Sitting in an airport lounge about to fly across the Pacific to give a plenary address in Taiwan.
Brenda,
The Chinese central bank has been buying lots of US Treasuries to help keep the dollar up and the yuan/rmb down, so that US citizens will continue to buy Chinese exports. It is that simple.
Barkley it really is not that simple.
http://www.treas.gov/tic/mfh.txt
Major Foreign Holders of Treasury Securities
It was only this September that saw China pass Japan as the leading holder of Treasuries but even then is holding the same percentage y/o/y right at 20%. ($585 bn/$2860 bn).
In contrast the UK, which includes Channel Island tax shelters saw a massive increase from $120 bn to $338 bn, 'Carib Banking Centers' up from $99 bn to $188, and we may well wonder if it is really citizens of Luxembourg who brought their shares of Treasuries up from $58 bn to $91 bn in a single year. If we take these three countries/entities together we get a total holding of $617 bn or more than China. Moreover those holdings are up from a total of $278 bn in Sept 2007. Whether we are talking in relative or absolute terms it seems that the biggest group of buyers are discrete (hm, secret) off shore banking entities. You don't know what share of these assets are owned by Americans or American based MNCs but I would suspect quite a bit.
China clearly has been holding its own here but I don't see any short term evidence that they are agressively sucking up Treasuries. Nor are we seeing much action from other major exporters to the US. Hong Kong (to some extent a proxy for China) upped their holdings modestly ($53 bn to $60) while Taiwan and Korea actually had their holdings drop.
On the flip side Russia and Norway more than doubled their holdings this year while 'Oil Exporters' increased theirs by 32%.
In sum I have a hard time seeing the whole picture being as simple as the CCB keeping the yuan/rmb down in that 80% of the demand for new Treasuries seems to be coming from areas outside East Asia.
You guys are to close to this and all wrapped around the axles of the FOREX. The reality of depression is that dollars are the best place to be and you may as well collect some interest on those dollars by buying T-Bills. What else will you do? Maybe you can use the dollars to start a fire. The US exports guns, fear, and greenhouse gases. Nobody wants that stuff.
The talk show hosts on the left and the right are all babbling about government saving money and being responsible. Barack Obama is talking about cutting unnecessary spending, And the stupidity continues in all ways and on all days.
Government should be blowing money into the bottom of the economy and we still aren't going to see it. The best way to tax money is to print some more of it and give it to people who will use it even if they ab-use it. At the same time the grown-up government should be taxing the bads like petroleum consumption. coal fired electricity, and even natural gas to a lesser extent. And until the American government takes that demand side path while taxing bads the depression will deepen and the dollar will rise against gold, oil, and other currencies. It is called Republican heaven. It is a depression as the rich have total control over everything, including the Democratic government.
Why do you guys make economics so difficult? It ain't. If the Congress does not bail out the auto industry then the Dow Jones willl dip to 3000 before January. The Union concessions are bad for the real economy regardless.
If no one can afford to buy a car then it should be obvious that we have too much production and not enough consumption. Any sort of "supply side" "trickle down" supposed solutions are not worth spit. Print money, give it to the people on the bottom and tax pollutants and economic rent to get rid of the excess money. Why is this so difficult for so called "economists"?
Seems to me that only by devaluing money can depression be averted. That only happens when you put the created money in at the bottom. Bailing out the banks is just causing more depression.
"Seems to me that only by devaluing money can depression be averted. That only happens when you put the created money in at the bottom....
Another way to 'devalue money' is to get 'the bottom' to become producers instead of passive consumers of transnational corporate products.
I expect that those in power will resist the taxation of pollutants whenever it threatens the paradigm of an integrated global economy (run for nothing but profit) and made up of today's giant corporations.
I have just posted the following at Angry Bear on the discussion about this posting. There appears to be some confusion about the the point of this short article:
"The essential points I was trying to raise in my Econospeak blog entry were:
(i) US Treasury data refers to 'nations' that purchase US treasuries. That is, the reader gets a simple message such as 'China purchased $xx worth of US treasuries in September 2008.'
However, no definition of 'China' (for instance) is provided. That means that US Treasury figures are likely to be giving the reading public an entirely false picture of US debt liabilities.
China's economy consists in large part of a number of big US transnational firms (also US financial firms I'd expect) that trade with their parent companies in the US and probably also purchase US treasuries in the US. These same US firms act also as 'conglomerates' meaning that they co-own and often manage each other and also trade closely with one another.
(ii) It is no longer appropriate to discuss international trade and debt balances purely in terms of 'nations'. The fact is that US transnational corporations dominate world trade and finance. They also overshadow many national economies in size. When these large firms also act as conglomerates their significance to the world economy may dwarf that of the United States itself.
I understand that this confusion of identity between the global corporation/s and individual nations is encouraged by the text of free trade agreements. Clauses within them (eg NAFTA) ensure that the trade of a US subsidiary in a foreign nation with that of its parent is to be officially regarded as trade between two distinct nations. [I'm writing away from my home computer so can't readily dig up the exact text and references.]
I believe we have arrived at the 'new world order' that successive US Presidents and their administrations have aspired to now for the last 4 or 5 decades. The world economy is now closely integrated and managed to maximise profits (and avoid losses) for the global corporation. "
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