Dollar Hegemony

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

See also:
US dollar hegemony has got to go
By Henry C K Liu
http://www.atimes.com/global-econ/DD11Dj01.html

The case for an Asian Monetary Fund
By Henry C K Liu
http://www.atimes.com/atimes/Asian_Economy/DG12Dk01.html

U.S. Debt In Asia Has Its Costs
http://www.newsday.com/business


Charles V. Zehren

May 25, 2003

As British economist John Maynard Keynes observed, if you owe the bank
100 pounds, you're the one with the problem. But if you owe a million
pounds, the bank's the one with the problem. So it goes with Asia and
the United States.

In recent decades, Asian central banks and investors have lent trillions
of U.S. dollars to the U.S. government and American corporations to
finance everything from federal deficits to mergers and acquisitions. As
a result, the Asian countries, which form the wheelhouse of the global
economic machine, now have "the problem."

They're fed up with "dollar hegemony" or having to keep high dollar
reserves to pay their debts and protect their currencies. Consequently,
they're poised to issue "cross-border" debt instruments in their own
currencies, essentially putting the rest of the world on notice that
they no longer consider the United States as the sole safe haven for
storing the considerable fruits of their financial success.

While it may sound innocuous, the possibility of such a move represents
nothing less than a "massive hammer poised above the U.S. economy,"
warns Arun Motianey, the Citigroup Private Bank's director of investment
research.

An even weaker U.S. dollar, higher interest rates, and lower stock and
bond prices could eventually result, affecting Americans who pay federal
taxes, buy imported goods or have their retirement savings tied up in a
401(k).

The key player is ASEAN+3, the 36-year-old Association of Southeast
Asian Nations, which represents Indonesia, Malaysia, Philippines,
Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam, along
with the big three - Japan, China and South Korea. A critical date comes
June 30 when the organization is expected to telegraph its members'
intention to begin issuing cross-border debt in the "Chiang Mai
Initiative" report to the Asian Development Bank board of governors in
Manila.

It's anticipated the plan will call for Asian central bankers to reduce
the dollar holdings in their reserves and greatly increase how much they
hold in each others' currencies, elevating them to "reserve status."
Once this is done, Asian debtors will find securities issued in their
own currencies more marketable with deep-pockets Asian investors and
their fellow central bankers. By eschewing the dollar and buying each
others' debt in their own currencies, the Asian countries would be
scaling back on the amount of excess wealth they invest in the United
States. And that wealth has been considerable.

Japan and China pack most of ASEAN+3's international economic punch. But
as a group, Motianey estimates, the 13 countries - which export a lot
and import a little - account for 95 percent of the world's surplus
"current accounts" - or the difference between imports and exports. The
Asian countries then send about four-fifths of those savings to the
United States and wind up holding about 90 percent of all the reserves
in U.S. dollars worldwide.

"America's success at attracting foreign capital may be a pyrrhic
victory," Motianey said. "The U.S. may live to rue the day that it has
such a huge portion of its debt held by foreigners," he said, putting
the figure at 30 to 40 percent.

Given the dominance of the dollar, the U.S. government and American
corporations have been able to count on the Asian countries paying up to
buy their debt as U.S. imports rise in proportion to exports. But
ASEAN+3, favoring its debt over U.S. debt, could erode the status of the
dollar as the dominant global reserve currency. That could reduce demand
for U.S. government and commercial debt, forcing the United States to
pay more to borrow money to finance growing federal deficits, worsening
the nation's fiscal situation.

As borrowing costs mount, the president and Congress would have a tougher
time keeping a lid on taxes, the Fed would face more of a challenge
maintaining low interest rates, and the private sector would see the gap
widen between what it spends and what it earns.

With Asian central bankers and investors demanding fewer dollars, the value
of the dollar would fall, helping U.S. exporters, but hurting the ability of
U.S. consumers to buy cheap imports. Resulting strength in Asian capital
markets could also result in what Motianey calls "collateral damage," by
stemming demand for U.S. equities and fixed income instruments by Asian
investors, weakening U.S. prices.

ASEAN+3 is no monolith. But Motianey and others say the members generally
believe Asian countries should expand their options and take steps toward
limiting their dollar exposure. There's something that can be said, too, for
investing in instruments issued by culturally and economically familiar
countries instead of the United States. And for foreign investors, Sept. 11
and the war on terror has lessened the attractiveness of this nation as a
place to invest compared to other parts of the world.

The Fed also estimates nonresidents hold about $3 trillion in U.S. credit
market instruments, with most of the dollar-related currency risk getting
passed on not to the U.S. debtors, but to the Asian creditors. "No other
net- debtor economy has the luxury of doing this," Motianey said. "As a
result, all of the risk of the weak U.S. dollar hits unhedged creditors
disproportionately." The members of the ASEAN+3 are bearing the brunt of the
dollar's recent fall.

But ASEAN+3's decision to rely more on their members' own currencies is not
so much "us vs. them," as an imbalance that economic forces will correct,
Motianey said. "ASEAN+3 is not looking to punish America or clip its wings.
It has a problem. And their solution is to say 'maybe we should not be
holding that much in dollars.'"

Spinning out the scenario to a logical conclusion has Motianey mulling the
possibility that an Asian monetary union could in the "medium to long term"
create its own Euro-type currency, an ACU or Asian Currency Unit.

Reducing the dollar's status as the paramount reserve currency could then
eventual force the United States into a "major debt workout," Motianey said.
And one day the U.S. government may actually find itself issuing Treasury
bonds not in dollars, but in Asian currencies, like the yen.

"Either way, near or long term, there's likely to be restraints on the
dollar's appeal and attractiveness, and that could eventually mean that U.S.
entities will have to curb their appetite for living beyond their means,"
Motianey said. "It will no longer be so easy to borrow from the future."

Copyright © 2003, Newsday, Inc.