Feb 26, 2005

Couple of Dollar Thoughts

I thought this story about S. Korean diversification was interesting.
A South Korean parliamentary committee passed a bill Friday that will allow the nation to use part of its massive foreign reserves for overseas investment.

The move is part of the country's long-term plans to diversify more than $200 billion of foreign reserves, Finance Ministry officials said.

Under the bill endorsed at the National Assembly committee on finance and economy, the government can use 10 percent of its foreign reserves for investment in stocks and real estate in foreign nations.
I have only seen this story from one source which I find a bit strange but if true it emphasizes that diversification refers to asset class rather than currency. That is a completely different ballgame from Tuesday's story though I imagine their actions will come somewhere in the middle. Reduced purchases of both U.S. debt and the dollar make sense. This asset diversification is what I referred to last week and will lead to higher U.S. interest rates but possibly a very positive medium-term reaction in other markets.

I also hopped in a thread on Macroblog about whether the adjustments made by foreign central banks will necessarily cause shocks. I tend to think at least some markets will experience sharp movements. U.S. interest rates and the dollar seem like likely candidates. Obviously the CBs will target gradual adjustments but it remains to be seen if markets will go along.


  1. The Credit Bubble
    Since a picture is worth a thousand words, let's look at two charts from Jesse's Charts The Credit Bubble is illustrated by these two charts showing that today total credit in the US is at the highest percentage of GDP ever. The second chart shows that it now takes over $4.50 of new credit to generate $1 of new GDP. Notice the effect of abandoning the Gold standard by Nixon in 1971! If it takes more and more credit creation to generate a $1 of GDP, we seem to be pretty far out on the limb. No credit creation, no growth in GDP

  2. Mike - The credit stats you point out could also be viewed as excess savings driving down investment returns. If foreign UST holdings fall and rates stay low then I guess we have a savings glut.

    I tend to agree with your interpretation but am trying to keep an open mind. Bill Gross included a graph of the domestic stock of UST bonds which I thinks sets up the current story best. How rates respond to changes in that graph will tell us a lot.