The Rising Demand For Dollars

by Colin Gustafson
Fri, 15 Feb 2008 at 10:08 AM

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Robust demand for dollars among foreign central banks could exacerbate the nation's trade deficit and stymie economic growth, economist blogger Yves Smith warns.

His admonition comes a day after fellow blogger Brad Setser hailed recent evidence of a growth in the dollar holdings of foreign central banks, a development that could allay fears about shortfalls in the foreign purchase of American securities (RGE Monitor).

Both bloggers note that large overseas dollar reserves help prevent the currencies of emerging economies, like China or the Persian Gulf states, from appreciating against the low-valued American dollar.

"Central bank demand for dollars has not waned," Mr. Setser writes. "The scale of the increase in emerging market government assets right now is truly mindblowing."

But yesterday, Mr. Smith questioned whether the apparent growth in foreign dollar reserves was really such a positive sign (Naked Capitalism).

"Is this such a cause for cheer?" he asks. "While it's better not to have a train wreck, the resumption of the global imbalances pattern supports a US pattern of complacency about its trade deficit and low savings rate."

STOCK PERFORMANCE AND PRESIDENTIAL PROSPECTS

Linking trends in the stock market to changes in the presidential nominating contest may make for lively talk-show palaver.

But when it comes to actually showing a correlation, the proof—or lack thereof—is in the data, notes blogger Paul Kedrosky.

Mr. Kedrosky writes (Infectious Greed) that he was intrigued by a recent news segment in which a guest suggested that health care stocks would perform better now that Senator Clinton was no longer the presumptive Democratic nominee. Noting that Mrs. Clinton "has a reputation for wanting to make a... potentially profit-limiting change" to the health care market, Mr. Kedrosky decided to test this theory. He created a scatter diagram comparing prediction data of the likelihood of a Clinton nomination to health care stocks.

Did the theory hold up?

Not really: "Based on the scatter diagram," he writes, "you have to work awfully hard to make the Hillary health care 'put' argument.

"It doesn't get better if you get marginally more analytical and throw a linear regression at the problem. ... You might try a logit regression, with a categorical dependent variable and a stratified independent variable, but you know what? I don't have the time or interest."

For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.

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