Re: Federal Budget Deficit Expected to Reach Over $300 Billion Next

["Gary Santos" <evs@xxxxxxxxxxx>]

> Yes, but those who do that expose themselves to two problems:
> 1) the prospect of their own currencies coming under attack due to
> insufficient dollar reserves
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I don't get it. It seems to me a trader out of Singapore who buys oil and
sells oil transacts then turns around to a bank like Citibank to sell the
dollars for Euro transacts outside his native country's reserves. Put
another way, that portion of the US trade account deficit that found itself
in US treasuries and is now, let us assume, exiting to go to his native
currency only serves to increase his Central Bank's dollar reserves contra
an increase CB domestic liabilities. If, on the other hand, involved is a
producing country such as Iraq, the selling transaction only serves to
increase, say, Euro reserves less the forex fee.

It seems to me that the only way there will be a dollar insufficiency in the
end is if investor attitudes continue along the present dollar hegemony
lines, i.e. the US dollar provides the safest haven for savings. Put another
way, if we set aside the notion of savings, the amount of dollar reserves
that one should have is proportional to that amount of goods one expects to
buy from the US. If I go beyong this amount placed in dollars, it is because
the issue of where to park savings comes into play. Given the present day
situation, it is quite possible for dollars to be sold for Euro (i.e. absorb
the forex costs of conversion) instead of buying money market or bonds
denominated in US dollars. I would think that there are too much dollar
reserves -- over and beyond that amount to support purchases from the US
economy. In fact, it is quite the opposite. The US is a net importer.


> 2) in order to buy anything denominated in dollars, which is most anything
including much German and Japanese products, let alone basic commodities,
the other currencies would first have to be converted to dollars.  The buyer
using non-dollar currencies may think he is using non-dollars but the
non-dollar price actually includes foreign exchange cost.<
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Okay, let's take the case where the trader only has local currency to begin
with. He buys dollars from his bank, his bank not having dollars also buys
from the central bank, thus, decreasing dollar reserves. BUT, he sells the
oil for dollars, remits it to his local banking system, exchanges it back
and local currency levels are restored with extra dollars (the profit) in
the system.



> As to net savings ouside of a nation's border, there is no alternative to
dollar assets in the international markets.  Investors in non-dollar market
calculated their market value in dollars. It is a simple fact. It used to be
tied to gold through the dollar gold standard set up by Bretton Woods, but
not since 1971.  Now its just tied to the fiat dollar.>
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I would think one always has the choice as to what currency to net save as
Warren said. The issue here is capital flows and the choice as to where to
park savings. Of course, the US consumer has nothing else to pay with except
the US dollar and the whole world wants to sell to him. This is probably one
reason why there are so much dollars around. But, we've gotten to the point
where one asks what will be done with all of these dollars? And, this is why
current account deficits at a certain point become unsustainable even for
the US.

Going back to the issue raised, that oil is denominated in dollars is
irrelevant today to the the US dollar depreciating. The US dollar hegemony
is not based entirely on trade, I would think. It is now to be based on a
perception that has to do with savings.

Later on, perhaps, if the US population and demand resumes its upward path,
capital should flow back to this country with low savings. The balance
should change then.

My two cents worth.