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Biggest bubble in history is growing every day
5 Feb 2010, 0051 hrs , Bloomberg
Real estate, stocks, credit. China sure has its share of bubbles. Oddly, little attention is paid to the biggest one of all.
The reserve bubble is actually an Asia-wide phenomenon. And we should stop viewing this monetary arms race as a source of strength.
Here are three reasons why it’s fast becoming a bigger liability than policy makers say publicly.
One, it’s a massive and growing pyramid scheme.
The issue has reached new levels of absurdity with traders buzzing about crisis-plagued Greece seeking a Chinese bailout.
China is trapped in an arrangement of its own making. As China and other Asian nations buy more and more US treasuries, it becomes harder to unload them without causing huge capital losses. And so they keep adding to them. “This is a titanically large foreign-exchange trade,” says David Simmonds, London-based analyst at Royal Bank of Scotland Group. “It’s the biggest one history has ever seen and there’s nowhere for these reserves to go.”
China aims to diversify out of US treasuries into other assets and commodities. The question that governments are grappling with is which markets are deep enough to absorb China’s riches? Gold? Oil? Euro-area debt? The Madoff family’s next Ponzi scheme?
Like all pyramid schemes, there’s no easy end in sight and things could end badly. If the dollar collapses, panicked selling by central banks looking to limit losses would shake global markets more than the US credit crisis has.
Two, reserves are dead money.
The wisdom of currency stockpiling came from the chaos of 1997. Speculators sensed authorities in Thailand were sitting on few reserves, and they were right. Their attack on the Thai baht set the stage for an Asian meltdown. Governments spent the 2000s determined not to repeat the mistake.
Three, reserves add to overheating risks.
When policy makers buy dollars, they need to sell local currency, increasing its availability and boosting the money supply. Next they sell bonds to mop up excess money in economies. It’s an imprecise science that often leads to accelerating inflation. The strategy works out to be an expensive one.
The stakes are rising fast. The risks in Asia are skewed firmly in the direction of inflation.
Central banks face a difficult task. They must withdraw excess liquidity without devastating their economies and running afoul of politicians. Only now is Asia finding out how some of its economic-protection tactics are amplifying the challenge.
Asia has been holding down currencies to support exports for more than a decade. It’s silly to ignore the side effects of that strategy for the region’s economies.
Think about how Dubai shook the global economy, or how the mere hint that Chinese growth may dip below 8% inspires panic. These disappointments pale in comparison with the turbulence that may come from Asia’s biggest bubble popping.
.
5 Feb 2010, 0051 hrs , Bloomberg
Real estate, stocks, credit. China sure has its share of bubbles. Oddly, little attention is paid to the biggest one of all.
The reserve bubble is actually an Asia-wide phenomenon. And we should stop viewing this monetary arms race as a source of strength.
Here are three reasons why it’s fast becoming a bigger liability than policy makers say publicly.
One, it’s a massive and growing pyramid scheme.
The issue has reached new levels of absurdity with traders buzzing about crisis-plagued Greece seeking a Chinese bailout.
China is trapped in an arrangement of its own making. As China and other Asian nations buy more and more US treasuries, it becomes harder to unload them without causing huge capital losses. And so they keep adding to them. “This is a titanically large foreign-exchange trade,” says David Simmonds, London-based analyst at Royal Bank of Scotland Group. “It’s the biggest one history has ever seen and there’s nowhere for these reserves to go.”
China aims to diversify out of US treasuries into other assets and commodities. The question that governments are grappling with is which markets are deep enough to absorb China’s riches? Gold? Oil? Euro-area debt? The Madoff family’s next Ponzi scheme?
Like all pyramid schemes, there’s no easy end in sight and things could end badly. If the dollar collapses, panicked selling by central banks looking to limit losses would shake global markets more than the US credit crisis has.
Two, reserves are dead money.
The wisdom of currency stockpiling came from the chaos of 1997. Speculators sensed authorities in Thailand were sitting on few reserves, and they were right. Their attack on the Thai baht set the stage for an Asian meltdown. Governments spent the 2000s determined not to repeat the mistake.
Three, reserves add to overheating risks.
When policy makers buy dollars, they need to sell local currency, increasing its availability and boosting the money supply. Next they sell bonds to mop up excess money in economies. It’s an imprecise science that often leads to accelerating inflation. The strategy works out to be an expensive one.
The stakes are rising fast. The risks in Asia are skewed firmly in the direction of inflation.
Central banks face a difficult task. They must withdraw excess liquidity without devastating their economies and running afoul of politicians. Only now is Asia finding out how some of its economic-protection tactics are amplifying the challenge.
Asia has been holding down currencies to support exports for more than a decade. It’s silly to ignore the side effects of that strategy for the region’s economies.
Think about how Dubai shook the global economy, or how the mere hint that Chinese growth may dip below 8% inspires panic. These disappointments pale in comparison with the turbulence that may come from Asia’s biggest bubble popping.
.
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