from Follow the Money

Greenspan talks down the RMB and the riyal …

December 11, 2006

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The maestro (former maestro?) probably didn't intent to talk the dollar down …   so much as state an obvious reality.   Bloomberg

``The dollar will continue to drift downward until there is a change in the U.S.current-account balance,'' Greenspan said today by satellite fromWashington to a business conference in Tel Aviv. ``It's imprudent to hold everything in one currency.'' 

Those who read the Fed’s technical papers know that the Fed has long argued that dollar adjustment will be a part of the process of external adjustment; the only real question is what interest rate path will accompany the dollar’s fall.  Greenspan’s argument all your (financial) eggs shouldn't be in one currency basket also doesn’t seem all that different from something he said in late 2004.  

In November, 2004, Greenspan caused a small tremor in the dollar when he said: 

“Continued financing even of today's current account deficits as a percentage of GDP doubtless will, at some future point, increase shares of dollar claims in investor portfolios to levels that imply an unacceptable amount of concentration risk.  This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the U.S. current account deficit and rendering it increasingly less tenable. If a net importing country finds financing for its net deficit too expensive, that country will, of necessity, import less.  … It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point."

On the other hand,  Greenspan also often argued that financial globalization allows more persistent divergence between savings and investment than was possible in the past.  He always liked to frame the debate over the current account as a tug of war between rising concentration of foreign portfolios in dollar assets and the greater dispersion between national savings and investment made possible by financial globalization.

What Greenspan never seemed to recognize, at least in my view, is that central banks and oil funds in the emerging world – not private investors – provide the bulk of the financing that has allowed the US to invest far more than it saves. 

One of the ironies of the current world is that when the dollar goes down, the Chinese RMB and the Saudi riyal also go down.   And while the US has a big current account deficit, China and Saudi Arabia do not.   

A fall in the RMB that leads China’s trade surplus to increase even more – it is now over $20b a month, and Chinese monthly exports once again grew at a 30% y/y pace --  would increase China’s capacity to finance the US.   But that hardly seems like the best way for the global economy to adjust. 

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