Freedom Lawyers of America

The bastards always find a way; don't they. You have to hand it to 'em; they
have the whole world scrambling. But this constant intervention just
continues to delay the inevatable economic collapse, which I deem is
necessary to build a new, better structure--one based on free market and
free enterprise and not State Capitalism.




Sent: Wednesday, January 14, 2004 11:59 AM
Subject: Dollar's woes proving bizarre bonanza for US debt


> http://www.forbes.com/markets/economy/newswire/2004/01/14/rtr1210632.html
>
> NEW YORK, Jan 13 (Reuters) - The dollar's decline is proving, somewhat
> bizarrely, to be a boon for Treasuries as central bank intervention funds
> find a home in the bosom of U.S. debt markets.
>
> On Thursday the Federal Reserve is expected to report that its holdings of
> U.S. Treasury and agency debt for foreign central banks hit a record high
> this week.
>
> In fact, the weekly rise in the Fed's custody holdings could itself be one
> of the largest on record since the Bank of Japan is understood to have
> bought a massive $38 billion last week through intervention against the
yen.
>
> Analysts assume much of that money will end up parked in U.S. Treasuries,
> and thus be held by the Fed.
>
> So great is this tide of funds that a dynamic has built in the Treasury
> market where weakness in the dollar leads to expectations of
> intervention-related buying of bonds and to downward pressure on U.S. bond
> yields.
>
> "The unprecedented scale of the intervention has grossly distorted
> traditional correlations between the dollar, bond yields and equities,"
> argues Alan Ruskin, chief economist at 4CAST. He even equates the trend as
> equal, in all but name, with the great Plaza and Louvre currency accords
of
> the 1980s.
>
> This flood of money, analysts suggest, is a major reason why market
> interest rates have stayed so subdued in recent months despite a startling
> acceleration in economic growth.
>
> It is a perverse dynamic since the market had initially feared a slide in
> the dollar would hurt Treasuries, partly through the risk of higher
> inflation, but mainly as the threat of currency losses would scare away
> overseas investors.
>
> But while capital flows data shows foreign private investors have indeed
> shied away, their governments are more concerned with preventing an
> export-damaging rise in their currencies.
>
> Just last year foreign central bank holdings of Treasuries ballooned by
> $172 billion to a record $862 billion -- meaning they funded almost half
of
> the United States's $375 billion budget deficit last year.
>
> Most of this growth is linked to currency intervention by Asian countries,
> notably Japan and China. Japan's foreign exchange reserves rose $187
> billion in the year while China's expanded by $117 billion.
>
> "This is by far the fastest reserve accumulation in history and it serves
> no useful purpose other than as a support to the dollar," notes Ethan
> Harris, chief U.S. economist at Lehman Brothers. Neither does it seem
> likely to end anytime soon.
>
> China remains committed to its currency peg with the dollar, which makes
> intervention against the yuan virtually automatic.
>
> The Japanese meanwhile, have just arranged for the Ministry of Finance to
> borrow up to 10 trillion yen from the BOJ in order to fund yet more
> yen-selling intervention. The first five trillion yen of that reportedly
> changed hands today.
>
> IT'S NOT SOMETHING WE TALK ABOUT
>
> While the importance of foreign central banks in funding the United
> States's twin deficits is abundantly clear, it is rarely mentioned by
> anyone in power.
>
> Treasury Secretary John Snow last week claimed the budget deficit was
> eminently manageable, while only a day ago Federal Reserve Chairman Alan
> Greenspan saw no problem in funding the current account shortfall.
>
> Neither mentioned the contribution of foreign governments.
>
> The White House stance is understandable since the flow of foreign money
is
> making it easier to argue that budget deficits do not push up interest
> rates, and so justify past tax cuts.
>
> But the Fed also has reason to be thankful.
>
> The central bank caused a stir in markets last year by suggesting that, if
> deflation became a real danger, it might respond by buying long-term
> Treasuries directly and driving yields lower.
>
> In the end, officials decided the proposal had too many dangers of its own
> and it fell from favor. But, the Fed seems to have no problem with foreign
> governments buying Treasuries.
>
> "One of the great ironies of the latest events, is that for all the debate
> about the implications of the Fed buying Treasuries to suppress bond
> yields, it is foreign central banks, notably the BOJ, that is doing the
job
> for them," said 4CAST's Ruskin.
>