Yes, now it’s official. We can now worry about global imbalances because they have come to the attention of the Wall Street Journal, the same paper that, for instance, told its readers about the quant hedge fund meltdown of last August a month late, in September.
But the Journal may have set a new record in getting to a story that is now so well known that it can barely qualify as news, namely, its page two offering today, “Capital Flow From Emerging Nations To U.S. Poses Some Risks.” The piece is written as if it is seeking to introduce the topic to readers, and manages to avoid using the phrase, “global imbalances”. Some representative paragraphs:
The U.S. has long depended on the kindness of strangers to finance its import bill. These days, those strangers are likely to be in China, Brazil, Mexico or some other emerging nation.
The U.S. has to import, on net, almost $2 billion in capital a day to cover its enormous trade gap. Of the $920 billion that foreigners pumped into U.S. stocks, bonds and government securities last year, $361 billion — a stunning 39% — came from emerging-market nations, according to calculations by Bank of America, using Treasury Department data.
Gee! We have to sell a lot of assets to foreigners to cover our very big trade deficit! Who’d have thunk it?
Back to the Journal:
“It’s a historical anomaly that, in the last five or six years, even more money has been flowing from poor to rich than rich to poor,” says Barry Eichengreen, an economist at the University of California at Berkeley….
The trend has been building since the Asian crisis of the late 1990s. Back then, the Thais, Koreans and others got into trouble because they ran low on foreign-currency reserves and couldn’t cover their foreign-currency debts. The Asians learned their lesson and began stockpiling foreign currencies to protect themselves from a run on the bank.
The accumulation accelerated in 2002. As the U.S. dollar began to weaken, governments in South Korea, China, Taiwan and Japan decided to buy up dollars to keep their own currencies in line with the greenback. Last year, officials in Brazil, India, Malaysia and other emerging-market nations intervened in markets to avoid currency appreciation that they thought would hurt their companies and economies. This year, it’s mostly China and the Persian Gulf oil powers that are awash in dollars and looking for places to invest them. In April alone, China’s reserves grew by $75 billion.
Well, the Journal at a least acknowledges this has been going on for a while. However, it would have helped if it had underscored how alarming a one-month, $75 billion reserve increase for China is.
The Journal again:
The U.S. needs the money and shouldn’t shun it, of course. But there are several reasons to be concerned about what’s going on.
President Bush’s administration has long argued that foreigners park their money in the U.S. because of the attractive returns here. But new research by Massachusetts Institute of Technology economist Kristin Forbes, a former Bush adviser, finds that from 2002 to 2006, as the dollar slid, foreigners earned an average annual return of 4.3% on their U.S. investments, while Americans earned 11.2% on their investments overseas. Ms. Forbes concludes that it’s not the profits that attract foreign money to the U.S., it’s the sophistication of U.S. capital markets.
Of course, the implication is that foreigners would run scared if they lost confidence in the transparency and fairness of Wall Street. And, these days, the Chinese could be forgiven if two words spring to mind when they think about U.S. financial markets: subprime mortgages.
This is so incomplete as to be misleading. As Brad Setser has repeatedly written, foreign purchases of US assets of late (since roughly August of last year) have come almost exclusively from central banks and sovereign wealth funds, not private sector players. Although it is reasonable to question as to how long they will accept FX losses on dollar denominated holdings, they place domestic considerations far ahead of their returns on their foreign currency reserves.
Now I am being a bit unfair. When I typed “global imbalances” into the WSJ’s search field, I did find five other stories, and since the phrase “global imbalances” seems a bit racy, as its utter absence from the article above attests, perhaps there were other mentions of the phenomenon. However, one mention comes in the description of the CV of Olive Blanchard, the new chief economist at the IMF; one was a mention-in-passing in an op-ed on foreign direct investment; another drive-by reference came in a piece on international financial regulator proposals: an opinion piece by David Roche that ran only in the European edition was somewhat alarmist:
The credit crisis is not about subprime mortgages, but about correcting the global liquidity explosion. The credit bubble is mirror and means of financing global imbalances. If the credit machinery that allowed the imbalances to burgeon is dead, so are the imbalances. But this implies a far longer and more painful workout than the markets currently anticipate.
We also recall a somewhat-too-sanguine op-ed last year by Michael Spence and Mohamed El-Erian that focused squarely on the topic.
So why the comparative neglect of a topic that some consider to be the dead body in the room as far as our financial woes are concerned? Perhaps it’s because the editorial board of the Journal has deemed it to be inconsequential, as this April offering suggests (emphasis ours):
For years the G-7 countries have welcomed a falling greenback as they fretted about the U.S. trade deficit and the non-problem of “global imbalances.” The Bush Treasury has been as guilty as anyone, pushing China to revalue the yuan and hoping that a falling dollar would get U.S. manufacturers off its back.
If you read this economically incoherent editorial, an impending dollar slide has nothing to do with those pesky global imbalances or yawning US trade deficit (even more bizarrely, the article acknowledges foreign bank purchases of Treasuries only in the context of China trying to slow the appreciation of the yuan, conveniently omitting that it has gone from a hard to a dirty peg).
And the answer to the weak dollar, I kid you not, is for the Fed to stop easing (to make sure this “too little, too late measure doesn’t hurt the vaunted financial sector, the WSJ calls on the central bank to continue to use its “various discount-window facilities to address bank liquidity problems”) and to help growth with……a tax cut!