Big Train
12-14-2004, 08:06 PM
Mutual dependence
Commentary: Asian economies, OPEC need a healthy U.S.
By Dr. Irwin Kellner, CBS MarketWatch
Last Update: 10:52 AM ET Dec. 14, 2004__
HEMPSTEAD, N.Y. (CBS.MW) -- Like OPEC, the Asian countries are discovering that they need us as much as we need them.
Don't worry that our trade deficit is too large. See related story. Don't worry that OPEC will cut production so much that oil prices will skyrocket. And don't worry that the Asian countries will stop recycling their surplus dollars back into U.S. Treasuries.
Know why? Because these and other countries that we import from have so much of their money invested in the United States, they stand to suffer as much as we would if they were to do anything that would knock our economy off balance.
Thirty years ago, after the first round of oil price increases, the oil producing countries found themselves with more dollars than they could use, so they recycled these "petrodollars," as they were called, back into the U.S.
They bought stocks and bonds, made major investments in a number of companies and purchased lots of real estate as well. As a result, these Middle Eastern oil producing countries soon discovered that they needed us as much as we needed them.
These trends have continued to this day. We buy their oil, they invest our dollars back in the U.S.
Through the first nine months of this year alone, these Middle Eastern countries have added some $15 billion of U.S. securities to their portfolios. When you include the other major oil exporting countries such as Russia, Mexico and Venezuela, the total jumps to $50 billion.
Clearly, just from an investment standpoint alone these oil exporting countries now have a big stake in the smooth functioning of our economy. They also have become dependent on us to buy their product on an ongoing basis, sending almost one-fifth of their oil production to our shores.
Needless to say, the Asian countries need us even more. They send nearly one-fourth of their exports to the U.S. today, receiving even more dollars in return.
These dollars, are, in turn, are also recycled back to the U.S. In the 1980s the big trend was to buy real estate. Today, investors from these countries tend to purchase mainly Treasuries.
To show you where this leads to, more than half the assets of the major Asian countries (China, Japan, Korea, Hong Kong and Thailand) are now invested in U.S. Treasuries.
Plainly, if the Asian countries stop buying Treasuries, their prices will fall, lowering the value of their existing holdings. The resulting rise in interest rates will also make it tougher for these countries to sell their surplus production to U.S. citizens.
And if we don't buy their surplus output, they will have to slow production and lay off workers, thus hurting their economies.
From another perspective, the shrinking dollar is also a boon to high-end retailers, tourist destinations, and commercial real estate, here in the U.S. This is because, to holders of euros, yen and other countries against which the dollar has fallen, everything here is on sale.
A good example of one hand washing the other.
Dr. Irwin Kellner is chief economist of CBS MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist of North Fork Bank.
Commentary: Asian economies, OPEC need a healthy U.S.
By Dr. Irwin Kellner, CBS MarketWatch
Last Update: 10:52 AM ET Dec. 14, 2004__
HEMPSTEAD, N.Y. (CBS.MW) -- Like OPEC, the Asian countries are discovering that they need us as much as we need them.
Don't worry that our trade deficit is too large. See related story. Don't worry that OPEC will cut production so much that oil prices will skyrocket. And don't worry that the Asian countries will stop recycling their surplus dollars back into U.S. Treasuries.
Know why? Because these and other countries that we import from have so much of their money invested in the United States, they stand to suffer as much as we would if they were to do anything that would knock our economy off balance.
Thirty years ago, after the first round of oil price increases, the oil producing countries found themselves with more dollars than they could use, so they recycled these "petrodollars," as they were called, back into the U.S.
They bought stocks and bonds, made major investments in a number of companies and purchased lots of real estate as well. As a result, these Middle Eastern oil producing countries soon discovered that they needed us as much as we needed them.
These trends have continued to this day. We buy their oil, they invest our dollars back in the U.S.
Through the first nine months of this year alone, these Middle Eastern countries have added some $15 billion of U.S. securities to their portfolios. When you include the other major oil exporting countries such as Russia, Mexico and Venezuela, the total jumps to $50 billion.
Clearly, just from an investment standpoint alone these oil exporting countries now have a big stake in the smooth functioning of our economy. They also have become dependent on us to buy their product on an ongoing basis, sending almost one-fifth of their oil production to our shores.
Needless to say, the Asian countries need us even more. They send nearly one-fourth of their exports to the U.S. today, receiving even more dollars in return.
These dollars, are, in turn, are also recycled back to the U.S. In the 1980s the big trend was to buy real estate. Today, investors from these countries tend to purchase mainly Treasuries.
To show you where this leads to, more than half the assets of the major Asian countries (China, Japan, Korea, Hong Kong and Thailand) are now invested in U.S. Treasuries.
Plainly, if the Asian countries stop buying Treasuries, their prices will fall, lowering the value of their existing holdings. The resulting rise in interest rates will also make it tougher for these countries to sell their surplus production to U.S. citizens.
And if we don't buy their surplus output, they will have to slow production and lay off workers, thus hurting their economies.
From another perspective, the shrinking dollar is also a boon to high-end retailers, tourist destinations, and commercial real estate, here in the U.S. This is because, to holders of euros, yen and other countries against which the dollar has fallen, everything here is on sale.
A good example of one hand washing the other.
Dr. Irwin Kellner is chief economist of CBS MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist of North Fork Bank.