Tuesday, December 12, 2006

Cato: As Usual On the Button, This Time About Foreign-Held US Assets; But They Miss One Important Detail

Cato is one of my favorite think tanks, next to AIER (the American Institute for Economic Research.) (Unabashed Side-Note Plug: AIER is the only subscription and small donor supported, therefore truly non-partisan, and hence 100% scientifically motivated economic think tank in the world, I believe [until proven otherwise], even though it's an obscure one, given that unadulterated science is not often the stuff of headlines. But I'm digressing again.)

e_c_harwood
[Thanks to aier.org for the photo of its founder, E.C. Harwood]

Cato's William A. Niskanen has written a piece on foreign investment in the US, how it has increased from 19% in 1994 to 52% in 2005, and how it "has had broadly beneficial effects on the U.S. economy, so we should clearly welcome the willingness of foreign central banks to invest in U.S. debt."

This is true. If foreigners and their central banks had not been willing to so invest, says Professor Niskanen citing stats in a paper from the National Bureau of Economic Research's Francis and Veronica Warnock of the University of Virginia, "the interest rate on 10-year treasury bonds would have been nearly one percentage point higher."

At the same time, Professor Niskanen admits that "[i]t's true that large foreign ownership of U.S. debt increases our vulnerability to decisions by other governments. If, for whatever reason, they decide to stop buying U.S. debt, we risk a run on the dollar, an increase in interest rates, inflation, a decline in real domestic investment and a probable recession."

And heaven knows those reasons are not rare these days, especially in view of the dollar's weakness -- a point Cato doesn't address here, for an unknown reason.

His remedy is for the US to fight this imbalance on two fronts: the overblown federal budget deficit, and the US population's allergy to saving. He says he wouldn't raise taxes, which would simply lead to even less saving; so he prefers to reduce federal spending. He says no more about the US distaste for saving, so from his omission we can assume that he thinks reduction of the budget deficit is the way to go.

What he forgets is this:

ORDINARY US SAVINGS RATES FROM AROUND 2004 TO EARLY 2006 WERE BELOW INFLATION.

Now even I, a savings-inclined human if there ever was one, am loathe to sink even so much as $1,000 into a savings account or CD that would cost me money rather than reward me for my abstention of consumption. I'd rather buy a solid, non-depreciating flat screen monitor instead.

To go one step further, I ask why were savings rates so low?

BECAUSE THE DARNED FED, AND OTHER CENTRAL BANKS, WERE ISSUING TOO MUCH CREDIT BETWEEN 2003 AND 2005.

This seems so obvious to me, that I can only conclude I must be nuts -- either that, or it is the monetarily powerful who have lost their marbles. They prefer to run the risk of causing the collapse of the dollar (it's already lost about 40% of its value -- how much does it have to lose to be called a "collapse?"); or, they just figure they can hang onto the dollar's "tallest-midget" status to keep our collective US head just in front of the competition.

That's no way to manage a currency, is it? Strangle the little fish by robbing them of their incentive to save, while feeding the frenetic speculative frenzy of the hedge fund sharks? If you ask me, it's criminal behavior on the part of the world's central bankers (until proven otherwise to my "nutty" sense of logic.)

2 Comments:

Anonymous Dave Iverson said...

I can only conclude I must be nuts -- either that, or it is the monetarily powerful who have lost their marbles.

Or is it that the monetarily powerful dare not tell the truth? Here's how Galbraith reflected on that in The Great Crash 1929:

"But there were also some who saw, however dimly, that a wild speculation was in progress and the something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action."

2:09 PM  
Anonymous Dave Iverson said...

Katy,

I aired you're 8 points of a "monstrous money-making machine" from your 11/25/06 Prudent Bear article at my site yesterday: http://forestpolicy.typepad.com/economics/2006/12/the_simple_anal.html

Commenter Michael Fuhrman offered up criticisms, beginning at point 4. If you wish to counter his arguments, or better still can get Doug Noland to do so, please visit my site and do it. Thanks dave.

9:24 PM  

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