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Who will 'feed' the US?

(Xinhua)
Updated: 2009-04-01 11:38

Worries over dollar-denominated assets

"The immense 'US treasury bonds bubble' has not only badly weakened new demand among investors, but also put foreign investors in danger of seeing their dollar-denominated assets shrink in value," said Yu.

The US Treasury Department said the US government bonds held by foreign countries were down by $4.7 billion at the end of January from a month ago.

This is the first time for other countries to sell US treasury bonds since March 2007.

China's purchase of US treasury bonds decelerated. The country purchased $12.2 billion in treasury bonds in January, the smallest monthly increase since the second half of last year.

Capital is fleeing the US In January, foreign investors sold $43 billion of long-term US bonds, compared with an inflow of $34.7 billion into the country.

The US is facing a capital account deficit of $148.9 billion, if short-term bonds are included, as foreign governments and institutions became reluctant to buy more US bonds. The deficit compares to $609.9 billion in surplus for the whole of 2008.

Returns on US government bonds will be down by 2.69 percent in 2009, according to the Caijing Magazine, citing a treasury bonds index of Lehman Brothers. In 2008, returns on US government bonds were almost 14 percent.

China held US treasury bonds worth $740 billion by the end of January, about 7 percent of the total of US government bonds. In all, the country holds $1.2 trillion of dollar-denominated assets, including institutional bonds and equity investment as well.

Chinese Premier Wen Jiabao on March 13 expressed worries over the safety of these assets and called on the US to keep to its commitments and ensure the safety of such assets.

More than a week ago, however, US Federal Reserve chairman Ben Bernanke, dubbed "Helicopter Ben" for his speech about using a "helicopter drop" of money into the economy to fight deflation, actualized his threat to print more greenbacks.

He said on March 18 the Fed would purchase up to $300 billion of longer-term Treasury securities over the next six months, along with an additional $750 billion in mortgage-backed securities.

It is the first time since World War II that the Fed has bought long-term government bonds.

The Fed's decision to print more money to finance the purchase immediately led the greenback to fall against all other major currencies.

The San Francisco Business Times reported the Fed's printing press is financing about two thirds, or $5.5 trillion, of the $8.5 trillion of the US rescue money. The Fed needs no approval from the Congress to start the printing press.

Analysts said the Fed is left with no other option but to print, with the key interest rate staying at a record low of zero to 0.25 percent.

"The US is indeed capable of paying off its government bonds, but, what is the real value of bunches of dollars by the time the bonds are due," said Yang.

In a move to dispel concerns over the US extravagance in spending, the Obama administration said it aimed to halve the country's fiscal deficit to $533 billion in 2013. The goal is based, however, on optimistic estimation of a strong rebound in the US economy.

"People have every reason to doubt whether this could be possible," Yang said.

Over the next 10 years, the federal fiscal deficit is bound to swell as the government will have to address the structural problems of the US social insurance and medical insurance plans.

US economists believe that a ballooning deficit would be inevitable, regardless of the status of the US economy.

Finding a way out

China's central bank governor Zhou Xiaochuan last week suggested the creation of a super-sovereign reserve currency that is disconnected from individual nations and is able to remain stable in the long run, to avoid inherent deficiencies caused by using credit-based national currencies.

The repeated and escalating financial crisis since the collapse in 1971 of the Bretton Woods system showed the whole world may be paying more than what it gained from the current currency system, he wrote in an article.

As the world's reserve currency, about two thirds of the international trade and financial transactions are priced and settled in the US dollar.

At the core of the ongoing financial crisis that started in the US are the fundamental flaws of the US economic systems and the neo-liberal economic policies of US that led to tremendous trade deficit, fiscal deficit and personal credit deficit, Yu Zuyao said.

"It is not in the least a problem in US financial regulation," Yu said. "What is needed is to overhaul the US neo-liberalist system, reform the current international financial system and restore the world's economic order, otherwise, such crises will be repeated."

A currency is intended to serve the economy; however, Wall Street took the lead in creating a currency-focused economy that is parallel to the real economy.

The market value of US financial assets is $40 trillion to $50 trillion, but market capital has been indulged to operate in away that makes financial derivative products spiral up to more than $600 trillion in value, about 50 times the 2007 US GDP.

More than 97.5 percent of the world's capital in circulation is speculative capital and only 2.5 percent is enough to meet the demand of the real economy, said Yoko Kitazawa.

In the meantime, the US has long been a supreme power in the world.

The US-led developed countries are actually receiving $3.5 from developing countries for every dollar in aid that goes to the developing countries, Yoko Kitazawa said.

Paradoxically, as the world's largest debtor with more than 20 years of consecutive years of trade deficit, the US is witnessing, at the same time, a surplus in capital account and in capital inflows. This is a testimony to the unfairness in the international financial system and the global economic order.

"It's time to have the resolution to change it," Yang said. "It is what the financial and economic crisis has told us."

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