[OPE] Russian perspective - Prof. Gilman on USD issues

"Until now, the rest of the world needed to purchase almost $2 billion of U.S. treasuries on a net basis every working day. What about more than $4 billion though? And with lower commodity and oil prices, the excess savings will be lower. Moreover, in the case of Russia, especially with higher interest rates, savings could be efficiently deployed to finance truly huge domestic investment needs. In any case, there is now a preference to develop further the local market and the use of the ruble so as to be less vulnerable to contagion the next time a hegemonic financial power destabilizes global markets. So, the U.S. Treasury will face the unpalatable option of selling its bonds at much lower prices (another bubble waiting to burst) with much higher yields to entice the rest of the world to fork over that $4 billion to $5 billion each day -- but then it's back to the problem that U.S. households and companies would face sharply higher interest rates in the midst of a recession -- or the dollar must drop to make U.S. assets attractive to foreigners." http://www.themoscowtimes.com/article/1028/42/371518.htm

Elsewhere he argues: "If it were not for its "reserve currency" status, the value of the U.S. dollar would presumably have collapsed by now." http://eng.globalaffairs.ru/numbers/20/1131.html I think there is some truth in that, although the USD is unlikely to collapse, merely lose part of its previous value. Gilman's theory of the effect of dollar hegemony on inflationary pressures in emerging markets is as follows:

"....in order to maintain their pegs to the dollar, foreign central banks have been forced to print their own currencies to buy all the dollars accumulated by their exporters. This has resulted in upward pressure on consumer prices in their respective nations, with annual increases now reaching alarming rates. Bernanke's message of benign neglect means U.S. exported inflation will likely increase even further in the years ahead, exacerbating the inflation pressures for those nations now supporting the dollar." http://eng.globalaffairs.ru/numbers/23/1194.html

But presumably currency inflation (or "monetization") is not the only factor at work in CPI inflation. Gilman's suggestion is, that after the recent rush to invest in USD-denominated securities has subsided, and the economic news worsens, the exchange rate of the USD will drop again.

J.

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Received on Fri Nov 7 11:14:23 2008