Tuesday, July 7, 2009

Glut of $4.5 Trillion Will Haunt Obama’s Dollar: William Pesek

July 6 (Bloomberg) -- It’s not a job Barack Obama signed up for, but it’s his nonetheless: Bond salesman-in-chief.

Such is the lot of a U.S. president overseeing an historic increase in debt issuance. Cartoonists are busily churning out depictions of Obama, who partly nationalized automakers, standing on a car lot hawking Detroit’s clunkers. It’s time to begin picturing Obama shilling bonds few may soon want.

His best customers? Asians, of course. Asia already holds about $4.5 trillion of currency reserves, most of them denominated in U.S. dollars. It’s a product of Asia’s “savings glut,” of which the cash-strapped U.S. remains a major beneficiary. That is, if Asians don’t pull the plug.

The trouble is that the U.S. seems to be taking Asia’s money for granted. That’s a grave mistake for a White House that needs to offload record amounts of debt to fund a $787 billion stimulus package -- not to mention spending plans yet to be announced. Assuming Asia’s perpetual devotion is a mistake.

It’s no coincidence that China is pushing for a new international currency at a time when it wants to diversify its almost $2 trillion of reserves. Such mutterings from Venezuela are one thing. They’re quite another coming from the biggest foreign holder of Treasuries, with about $764 billion.

“It would be important for the U.S. not to take its position for granted,” World Bank President Robert Zoellick said last week. “My guess is what you will see over time, just as the euro has developed over time, you may have some other currencies develop as an alternative.”

Prime Time

Not that the yuan is ready for prime time. Besides, say analysts like Marc Chandler of Brown Brothers Harriman & Co. in New York, China’s desire for the yuan to become a global invoicing currency doesn’t outweigh its need to maintain control and help exporters. Ultimately, China’s ambitions are hemmed in by the realities of a currency that still isn’t convertible.

China speaks out of both sides of its mouth on the issue. One day, a top official says China wants an alternative to the dollar. The next, someone like Vice Foreign Minister He Yafei tells reporters that “we hope that as the main reserve currency the U.S. dollar will be stable” and that he’s “not aware” of China pushing to put the subject on the agenda of the Group of Eight’s agenda this week.

The other BRICs nations -- the acronym refers to Brazil, Russia, India and China -- all have made noises about the dollar’s stability. Some more than others, of course, yet their concerns have been well reported.

Replacing the Dollar

Replacing the dollar as a long-term goal is fine. Doing it while the global financial system the dollar anchors is in tatters is ill-advised. Not surprisingly, folks in Washington are worried about a sudden move against the currency.

It hardly seems a coincidence that while Managing Director Dominique Strauss-Kahn has called China’s yuan “substantially undervalued,” the International Monetary Fund has toned down criticism over the disconnect from economic fundamentals. The softer rhetoric removes a sticking point between China and the IMF, as Asia’s second-largest economy seeks a larger role at the lender and the fund tries to increase China’s contributions.

Could the quid pro quo be that China avoid pulling the rug out from under the dollar? It’s possible. Still, Obama and Treasury Secretary Timothy Geithner shouldn’t assume Asia’s continued support. Not with the Federal Reserve holding interest rates near zero and untold waves of fresh debt flowing into uncertain markets. Rumblings about the U.S. losing its triple AAA credit rating have further raised the stakes.

Blame All Around

Granted, Asia deserves some of the blame here. Over the past decade, the region was the site of a currency-reserve arms race. While the clear winner in this game of monetary one- upmanship is China, economies like Taiwan and South Korea are holding more dollars than they would like.

It’s become the world’s biggest Ponzi scheme, really. The dollar isn’t crashing because those invested in it are propping it up and adding to their holdings. After all, the magnitude of Asia’s foreign-exchange holdings means it can’t dump the dollar without shooting its economies in the foot.

Asia should indeed be plotting how to reduce its dollar holdings. Those trillions of dollars would be better used in Asia to pay for better roads, bridges, airports and power grids and improved education and health care.

Until then, the U.S. needs to reassure Asians they won’t suffer massive losses on their dollar holdings. It can start by circulating a credible exit strategy from today’s massive stimulus efforts.

The White House also needs to convince Asia that devaluing the dollar at some point to boost U.S. exports isn’t on the table. Obama and Geithner should plan to increase financial diplomacy efforts, traveling to Asia often.

Asia has a $4.5 trillion dollar decision to make, and it’s up to the U.S. to help the region make the right one. Taking Asia’s money for granted would be a disastrous way to go.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net