The Associated Press sounds the worry alarm about the deficit, and about foreign countries propping up our dollar:
U.S. Foreign Money Addiction Means Trouble
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By ELLEN SIMON AP Business Writer
December 10,2005 NEW YORK --
...At our current rate of trade and budget deficits, foreigners need to purchase $2 billion in dollar-denominated assets each day just to keep the dollar stable, said Axel Merk, who manages $60 million at Merk Investments and runs the Merk Hard Currency Fund.
"I guess everyone wants to keep this game going," Ibbotson said. But if one of the countries we're most dependent on drops out, it could be "like a bank run."
David Wyss, chief economist at Standard & Poor's, is also concerned. "If this money stopped coming, the dollar would take a dive and U.S. bond yields would have to come up. That would constrain capital spending and housing and slow down the U.S. economy."
Why did foreign investors' interest in the U.S. intensify?
For one thing, investors can get a better return on U.S. bonds than they can in their home countries. Yields in the United States have been near 4.5 percent, while yields on Euro bonds are closer to 3.2 percent and yields on Japanese bonds are near 1.5 percent.
Second, our massive trade deficit has sent tens of billions of dollars abroad, as imports increased while exports declined, which has helped foreign business owners sock away plenty of dollars. And our budget deficit means the federal government keeps issuing more debt.
Then, there's our personal savings rate, which has been hovering near zero.
"We need the money because we're not saving any," Wyss said. "We need it from anyone who has a spare yen to lend us."
The gush of foreign money "is critical to keeping the U.S. dollar from collapsing, because we have a large trade deficit," said Daniel Katzive, foreign exchange strategist at UBS. "If the deficit wasn't financed, the dollar would fall until it reached a level where U.S. assets were more attractive to foreign investors."It's simple accounting, he said: Cashflow in must equal cashflow out. "If it doesn't, you have a big adjustment until you reach equilibrium."
The bit about "If this money stopped coming, the dollar would take a dive and U.S. bond yields would have to come up. That would constrain capital spending and housing and slow down the U.S. economy" should sound familiar to anyone who's paid attention to what I've been saying for the last few years: that following a Chinese withdrawal from the US bond market, the dollar would fall, then bond rates would rise, and the housing market would suffer, and hence, the economy, which depends quite a bit on housing prices. I always feel that I'm crying in the wilderness, but it's nice to hear an echo from an authority once in a while.