[OPE-L:5365] Re: Re: Re: Re: Re: Re: the bursting bubble and the U.S. working class

From: Rakesh Narpat Bhandari (rakeshb@Stanford.EDU)
Date: Thu Apr 19 2001 - 16:26:05 EDT

what an interesting web site. Thanks much for the tip. will be 
perusing it for some time.  Who is Marshall Auerbach?
just noticed this guest column on the site:


The US dollar is not as vulnerable as it may appear

The key to understanding how this can happen is to consider how 
little information the flow of funds accounts provides about the true 
ownership of assets and liabilities. As far as the US external 
capital account is concerned, hedge funds based in the Caribbean are 
overseas investors. The activities of overseas branches of US 
commercial banks are also considered to be foreign transactions. 
Also, London, and Zurich are clearing-houses for all manner of 
nominee accounts and anonymous trusts. Around two-thirds of all US 
bonds recorded as UK-owned belong to UK entities representing 
non-residents. To fear that foreign investors will one day abstain 
from fresh investment in US financial assets, leaving the current 
account deficit uncovered and the US dollar prone, is to suppose that 
foreigners are the sole instigators of these external financial flows 
in the first place. It is quite likely that a substantial proportion 
of these external flow-demands for US corporate bonds and equities 
are, in fact, US-originated. US residents' subscriptions to leveraged 
hedge funds reappear as foreign investment in US securities. US 
commercial banks' overseas branches borrow in euros locally to invest 
the proceeds in US bonds, playing the yield curve.

Thinking in these terms, a collapse of the US dollar versus the euro 
appears much less likely. It may still occur, but more plausibly in 
the context of cancelled credit lines and forced asset disposals. The 
obvious example is the slump in the US dollar against the yen in 1998 
as the hedge funds lost their credit lines from Japanese banks and 
were compelled to unwind their carry trades.

Beneath the surface, the values of the dollar, the yen and the euro 
have been eroded simultaneously by the over-extension of credit. The 
latent losses in the credit system, emanating from non-performing 
loans and defaulting bonds, represent a charge against the value of 
the currency, as surely as if the edges of the notes and coins had 
been trimmed away. There has been a reduction in the quality of 
credit rather than an increase in the quantity of money (net of 
write-offs). The search is on for a valid yardstick, a measure of 
monetary value that has not been (and cannot be) distorted by central 
banks' firefighting and wrecking tactics.

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