In the Long Run, the Dollar Is Dead

John Maynard Keynes is infamously quoted: "In the long run, we’re all dead…". The latest report for U.S. treasury international capital flows reveals a significant drop in foreign demand for Long-Term U.S. securities and makes one wonder if Keynes’ words are not applicable to the U.S. Dollar.

In October 2008, foreign investors purchased a net $1.5bn of long-term U.S. securities vs. $65.4bn in September 2008. With the exception of treasuries which saw net buys of $34.7bn, foreigners dumped long-term securities as follows: -$50.2bn in agencies; -$1.3bn in corporate bonds; and -$6.1bn in equities.

However, a friend in need is a friend indeed and propping up treasuries were our two most loyal and biggest buyers, i.e. China and Japan. China increased $60bn+ at $652.9bn to surpass Japan for a second consecutive month. Japan increased $12bn at $585.5bn.

Not surprising, short-term net inflows surged $286.3bn in October 2008. This flight to safety trade induced by market deleveraging explains why T-bill holdings increased at $150bn.

Foreign investor appetite for U.S. debt is telling two different stories. For the short-term, investors regard the U.S. as a haven of safety while the big picture reveals an emerging trend to back off the long bond.

If forced to bet, the long run and ahead of the investor curve is where investors should prefer to be, because in the long run, the dollar is dead until reincarnated by more common sense fiscal policy.

Disclosures: U.S. Dollar Bearish Fund (UDN) and Gold Trust (GLD) since 10-29-2008

Comments

[Robert Nabloid:]

Thanks to Keynes, I'm sure the dollar will die sooner rather than later.

China is only buying because it needs us to continue to build their economy. If they didn't have to try and prop us up, they would stop in a heart beat. They won't always be there to prop us up...

But hey, show me any fiat currency that lives forever. Especially when fools manipulate it.

2008 Dec 16 04:00 AM

[Sunnsea:]

40% of our so-called "trade with China" is simply American companies having their products made in China and shipped back here duty free. If we can stop this reduction in the standard of living of the US worker, then we can come out of this alright. Obama will need to institute tariff schedules that will stop this. This is the principal reason for the erosion of our incomes and ultimately the roots of the sub-prime mess, Japan is another story all together. This is an advanced industrial economy that makes, markets its own products. However, many US auto companies have components such as engines made in Japan. Even with high per hour rates and other costs, Japan is still competitive. How is this possible? Does anyone know enouigh to even ask them the right question? Why haven't US manufacturers pushed to have a single-payer health care system and get health care off their backs? OR are they so ideologically driven they can't bear the thought that a government health care program would actually be cheaper for everyone? The dollar, the yen and the Euro should be merged into a single-currency which would bring all the major industrial countries into alignment. Think of the millions that would be saved just in transaction fees and costs under a single-currency. After this is all over, Americans are going to have to learn how to produce and market products in America that can be exported world-wide with a cachet that makes them appealing. Then we will be on the road to real recovery.

2008 Dec 16 10:04 AM

[bruno12:]

which reminds me, in the long run we are all dead

2008 Dec 16 10:15 AM

[Asbytec:]

I am hoping this financial beating we are taking will usher in some common sense fiscal and monetary policy. Dare I hope? I dare not hope Wall street will police itself.

2008 Dec 16 10:40 AM

[sheridan:]

The reduction in long term debt purchases sure hasn't been reflected in yields- even with the Dollar cratering. Can you say "Bernanke Bid"
The idea of Fed's standing bid in the market to flatten the yield curve has to be the only thing propping up the long end of the market. Even George Soros and Jim Rogers are shaking their heads.

2008 Dec 16 04:42 PM

[LCACM:]

Sunnsea: You have correctly pointed out that the lack of tariffs is causing the current financial crisis in the US. Introduction of tariifs will create jobs in the US and lead to a healthy recovery instead of the low interest rate bubble we are likely to have, under the current policies.
However, your suggestion of combining the Euro, Yen and the USD will lead to a loss of sovereignity for all 3 countries, creating far more problems than it solves. For example, the current meltdown has been magnified due to the interlinking of world economies due to the WTO accords. Free Trade rules have made all the world economies to move in lock step. This interlocking of economies, has allowed a small US housing/loan problem to gain critical mass and mushroom into a World Class economic meltdown. Engineers always strive to keep Engineering structures compartmentalized, so that a crack in one component does not propagate to the rest of the structure. A similar approach, of insulating world economies from each other, needs to be explored to prevent future meltdowns.

2008 Dec 17 09:11 AM