Economist Stefen Roach warns of a near term crash of US assets.
The current account and trade deficit of the US are funded through foreign private savers and Asian central banks who buy US assets. There is an imbalance, when foreign savers increasingly pay for US consumption and an adjustment is needed.
“All the classic symptoms of a US current-account adjustment are now evident. At the same time, the stewards of globalization — the IMF, the BIS, the OECD, and even the Federal Reserve — are now all on the same page in sounding the alarm.
Politics could correct a big part of the imbalances, but tax increases and spending reductions are unpopular with the elecotrate, so this will not happen. The only way Roach sees the correction to be done is by a drop in US asset values, stocks, bonds and the balloned housing market.
When will this happen?
Roach sees signs that hint to the next few months. Each month an additional 86 billion dollars of foreign money gets invested in US assets. The ´official´ share of this money inflow – the buying of US bonds by foreign central banks – has increased from its long term share of 14% to 36%. The share of private foreign buyers of US assets is decreasing. Private foreign investors seam to find better value elsewhere and for now the central banks of Japan and China step in and buy US$ assets do keep their currency from rising and their exports and job numbers from falling.
The last time such an increase of official buying of US assets happened was 1987. Then the “venting” of the imbalances was done between October 13 and October 20, 1987 when the Dow Jones dropped by one third from 2,500 to 1,600. The equivalent now is a drop in the Dow Jones from 10,100 today to 6,400 next Tuesday. As the imbalances are bigger now than 1987, the drop may be well beyond this. Such a “venting” could escalate:
Jens O. Parsson:
Dying of Money: Lessons of the Great German & American Inflations
Until 1922 and the very brink of collapse, Germans and especially foreign investors were absorbing marks in huge quantities. Only the international reputation of the Reichsmark, the faith that an economic giant like Germany could not fail, made this possible. The storage factor caused by the investors willingness to save marks kept the marks from being dumped immediately into the markets, and thereby for a long while held prices in check. The precise moment when the inflation turned sharply upward, toward its vertical climb, was undoubtedly timed by no event, but by the dawning psychological awareness of the German and foreign investor that Germany was not going to back its money. With that, the rush to get out of the mark was on. Like a damn bursting, the seas of marks flooded into the markets and drove prices beyond all bounds. The German government strove mightily to outflood the sea. The sea of marks which had been stored up by Germans and especially by trusting foreigners flooded forth and fought to buy into other investments, foreign currencies, tangible goods, almost anything but marks.