Wednesday, August 26, 2009

Deficits, Dollars and Storage

The Wall Street Journal has an article today on the growing deficit and the possibilities of inflation that it will cause. If the Dollar's value drops I would expect that the US cost of obtaining storage components from Asia will at some point begin to rise.

This portion of the article frames the issue well:
In a new twist to an old refrain among economists, who have long worried about the effects of growing U.S. debt, they say that the huge liabilities the U.S. is taking on to dig its way out of crisis could ultimately undermine faith in the dollar.

"There has been a lot of disappointment with the way the U.S. credit crisis was handled," says Claire Dissaux, managing director of global economics and strategy for Millennium Global Investments Ltd., a London investment firm specializing in currencies. "The dollar's loss of influence is a steady and long-term trend."

On Tuesday, the Obama administration added fuel to concerns about the dollar, saying the U.S. will run a cumulative budget deficit of $9 trillion over the next 10 years, $2 trillion more than it had previously projected.

"That's going to be negative for the dollar," says Adam Boyton, a currency analyst at Deutsche Bank AG in New York. President Barack Obama also reappointed Federal Reserve Chairman Ben Bernanke, whose efforts to rescue the economy have won praise, but have also entailed pumping large amounts of freshly created dollars into the financial system.

And this part of the article shows that there still is a diversity of opinion about what will happen because of the deficits.

Mr. Buffett, for example, worries that U.S. policy makers will fail to move decisively to curtail the nation's ballooning net debt, expected by some to rise to more than 75% of annual economic output by 2013. Instead, policy makers might tolerate higher inflation, which makes existing debts more manageable but would hurt the U.S.'s creditors, including China and Japan. In this scenario, investors would demand much higher interest when lending to the U.S. government, raising its borrowing costs and making further budget deficits harder to finance at a time when an aging population will sharply boost the costs of social security and government-sponsored health care.

Investors are also growing more comfortable with the idea of emerging economies like China, Russia and Brazil playing a bigger role in shaping international finance. Some analysts, including Pimco portfolio manager Curtis Mewbourne, say emerging economies have a unique opportunity to use the crisis to reduce their reliance on the U.S. dollar., which tends to account for the lion's share of their foreign-exchange reserves.

"Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure," Mr. Mewbourne wrote in a recent note.

Earlier this year, China's central-bank governor called for moving toward a "super-sovereign" reserve currency, one not belonging to any particular country. Analysts generally see such an option as unrealistic, since the U.S. wouldn't want to give up its status as the main currency in which the world's central banks hold their reserves, and any new reserve currency would require a deep and developed market where it could be traded.

There aren't yet many signs that investors are leaving the dollar. China and Japan, the biggest foreign creditors to the U.S., loaded up on longer-term Treasury debt in June, according to the latest Treasury data. China, for example, bought $26.6 billion in notes and bonds, its biggest monthly buying on record.

"The Treasury rally suggests the U.S. is facing neither an inflationary explosion nor a crisis of confidence," analysts at French bank BNP Paribas SA said in a recent note.

If the costs of US business borrowing increases because of the competition for funds, I would expect there to be an increase in belt tightening in IT budgets which eat up a lot of Capital Expenses. Many IT businesses view the US as their primary marketplace and charge a premium for goods shipped overseas to Asia, Australia and Europe. But if those markets start to grow faster than US markets for High Technology, perhaps overseas prices might fall faster than the inflation discounted dollars would justify by themselves.

Our international business continues to grow nicely, and exports might grow for us if the dollar's value declines relative to Euros and Asian currencies.

Business remains interesting.

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