Brought over from the French thread Juggling the Dollar Blowout http://www.translatorscafe.com/cafe/MegaBBS/thread-view.asp?threadid=3751&messageid=49354#49354

Not quite off topic:

Dollar at mercy of central banks
By Chris Giles, Economics Editor
Published: January 24 2005

During the past few years the US has become dependent, not so much on millions of investors around the globe but on a few individuals in a few of the world's central banks.

In 2003, the most recent year with full international statistics, central banks financed 83 per cent of the US current account deficit, with Asian central banks accounting for 86 per cent of flows.

A similar picture is emerging for 2004. Despite a good start to the year, when the private sector was a large net purchaser of dollar assets, central banks came to the rescue again. The People's Bank of China has let it be known that China increased dollar reserves by $207bn (€159bn) in 2004, financing nearly a third of the US current account deficit, estimated at $650bn.

Self-interest has supported much of this flow of cash. The US has lapped up cheap finance to fund its unquenchable appetite to spend. Asian governments have until now been keen to oblige, in order to keep their currencies from appreciating. But all investors have their limits and they may start worrying about their degree of exposure.

If new official flows to the US were to be curtailed, the dollar would plunge, creating a huge hole in the accounts of central banks holding dollars.

"The risk exposure for Asian central banks is already great," concluded Matthew Higgins and Thomas Klitgaard of the Federal Reserve Bank of New York in a recent paper.

In November, Alan Greenspan, US Federal Reserve chairman, suggested foreign investors would reach a limit in their desire to finance the US current account deficit and diversify into other currencies or demand higher US interest rates, "elevating the cost of financing" the deficit and "rendering it increasingly less tenable".

Until recently there had been little evidence to back up these fears but this has begun to change. Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent to 61.5 per cent in the past three years.

The Bank of Thailand said this month it was considering reducing the proportion of its $50bn reserves held in dollars from 80 per cent to 50 per cent. Russian officials have made similar noises.

A detailed survey out today suggests that central banks are increasingly moving official reserves out of the dollar and into the euro.

Asian central banks are unlikely to pull the plug on dollar assets altogether. But they may be close to ending their willingness to provide cheap financing for an ever increasing US current account deficit. http://news.ft.com/cms/s/bd52ee06-6dad-11d9-ae0d-00000e2511c8.html

Three of the most important prices in the world economy are set by means other than markets. At the weekend, OPEC declared itself happy with the price of oil. On Wednesday, the Federal Reserve will probably raise American interest rates. And on Friday, the G7 will declare itself unhappy with the price of the dollar.

http://www.economist.com/agenda/displaystory.cfm?story_id=3620794

"The China price." They are the three scariest words in U.S. industry. In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials. Makers of apparel, footware, electric appliances, and plastics products, which have been shutting U.S. factories for decades, know well the futility of trying to match the China price. It has been a big factor in the loss of 2.7 million manufacturing jobs since 2000. Meanwhile, America's deficit with China keeps soaring to new records. It is likely to pass $150 billion this year. (...)

More innovation. Better goods. Lower prices. Newer plants. America will surely continue to benefit from China's expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? It's the question U.S. workers, execs, and policymakers urgently need to ask. http://www.businessweek.com/magazine/content/04_49/b3911401.htm

A foot in both camps:

http://www.euobserver.com/?sid=9&aid=18548

EUOBSERVER / BRUSSELS - Brussels has launched a pan-European anti-smoking campaign of 72 million euro. At the same time, the EU gives out about a billion euro in subsidies for tobacco producers every year.

Statistics show that around 650,000 EU citizens die in relation to smoking annually, while EU member states pay about 100 billion euro per year in tobacco-related health care costs.

From Foreign Affairs, March/April 2005

Summary: The United States' current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon.

David H. Levey recently retired after 19 years as Managing Director of Moody's Sovereign Ratings Service. Stuart S. Brown is Professor of Economics and International Relations in the Moynihan Institute of Global Affairs at Syracuse University's Maxwell School of Citizenship and Public Affairs.

http://www.foreignaffairs.org/20050301facomment84201/david-h-levey-stuart-s-brown/the-overstretch-myth.html

For relative median employee earnings in Europe in February 2005 go to http://www.fedee.com/payineurope.shtml

The richest country (Denmark) pays 61x the median pay of the poorest country (Moldova), yet:

03.03.2005 By Lucia Kubosova

The gap in salaries across Europe is narrowing, as the richest states adapt to global competition and the poorest Europeans enjoy a rapid pay rise due to economic growth and inward investments in their countries.

The revelations come as part of the study "Pay in Europe 2005", published on Wednesday (2 March) by the Federation of European Employers (FedEE).

Its authors refer to the case of Denmark and Romania. "While in 2001, hourly pay in Denmark was 39 times greater than in Romania, but by February 1st this year the gap had narrowed to just 22 times. The reason for this is that during the period 2001-5, hourly pay in Denmark has risen by only 18%, whilst in Romania it has risen by 115%".

Among the reasons behind a general trend towards a narrowing pay gap in Europe, the report mentions that there is a more coherent labour market in the EU countries due to greater mobility.

Also, Western European countries have reduced their labour costs in the face of global competition, while poorer states in the east have enjoyed significant investment and economic growth, leading to pay rises for their citizens.

The paper also mentions the declining power of trade unions as one of the reasons for the decreasing gap.

* * *

Child poverty on the rise in rich nations

The report by UNICEF, released on 1 March, shows that the proportion of children living in poverty has risen in 17 of the 24 industrialised countries examined.

The report defines child poverty as children living in households with an income below 50 percent of the national median.

The figures show that of the EU countries surveyed, only France, Greece and the UK showed a reduction in child poverty.

In Poland, Luxembourg and the Czech Republic, by contrast, the child poverty rate rose by 4.3 percent, 4.2 percent and 4.1 percent respectively.

EU countries with the highest child poverty rates are Italy with 16.6% of children living in poverty; Ireland with 15.7 percent and Portugual with 15.6%.

At the other end of the poverty scale, nordic countries do the best. Denmark tops the league with 2.4 percent followed by Finland with a 2.8 percent child poverty rate. http://www.euobserver.com/?sid=9&aid=18562

Warren Buffett, one of the world's most successful investors, has launched his most withering attack to date on the US trade deficit, describing Americans as "rich spending junkies" who could turn into a nation of "sharecroppers".

Mr Buffett said in the last 10 years foreign powers and their citizens had accrued about $3 trillion worth of US debt and assets such as equities and real estate. At current rates, he predicted that in another 10 years' time the net ownership of the US by outsiders would amount to $11 trillion.

http://www.guardian.co.uk/usa/story/0,12271,1432051,00.html

President Bush's nomination of Paul Wolfowitz to lead the World Bank has garnered much controversy. Yet, Wolfowitz could hardly do more damage than the outgoing bank president, Jim Wolfensohn. His personal failings and misguided policies have muddled the bank's mission and highlighted the hypocrisy of its rich shareholder nations.

By Stephen Fidler: http://www.foreignpolicy.com/Ning/archive/archive/126/fidler.pdf

GUESS who's paying for America's spending binge - for the ballooning credit card bills, the scramble for homes, the country's gaping budgetary hole? Poor countries have become the financiers of the United States, fueling one of the most extravagant consumption drives in world history.

From 1996 to 2004, the American current account deficit - which includes the trade deficit as well as net interest and dividend payments - grew to $666 billion from $120 billion, swelling the nation's demand for foreign financing by $546 billion.

The cash has come mostly from what the International Monetary Fund defines as emerging markets or developing countries - nations that have piled up mountains of cash even though most of their citizens are poor. High on the list is China, whose per-capita gross domestic product of $1,300 last year was a thirtieth that of the United States. Others are Russia, where G.D.P. per head was $4,100, and India, where it barely topped $600.

The current accounts of developing countries swung from a deficit of $88 billion in 1996 to a surplus of $336 billion last year - a $424 billion change that has covered some four-fifths of the increase in the deficit of the United States.

This pattern troubles some policy makers in the United States. In speeches in March and April, Ben S. Bernanke, the Federal Reserve governor nominated by President Bush to be chief economic adviser, argued that a main reason for America's swelling external deficit is "the very substantial shift in the current accounts of developing and emerging-market nations, a shift that has transformed these countries from net borrowers on international capital markets to large net lenders."

The poor-country money, Mr. Bernanke said, pushed the current account of the United States deeper into the red. As the money arrived, it first lifted stock prices, encouraging both consumption and investment. When stocks tanked, it moved to the bond market, fueling the housing boom and yet more spending.

There's nothing inherently wrong with taking money from poor places - it's not as if the United States is stealing it. Developing countries are providing the funds willingly.

But it is rather odd. Conventional economic thought suggests that funds should flow the other way. Capital-rich industrial nations like the United States, where workers already have a large stock of capital goods to work with - like high-tech factories and advanced information technology networks - should be sending money to places rich in labor but with a meager capital stock.

Developing countries, of course, use this money to grow out of poverty, investing in their own factories and schools. And precisely because capital is scarce and labor abundant, money invested in these countries should achieve a higher return.

"For the developing world to be lending large sums on net to the mature industrial economies is quite undesirable as a long-run proposition," Mr. Bernanke said.

So what's going on? http://www.nytimes.com/2005/06/05/business/yourmoney/05view.html?ex=1118203200&en=da6d1498f8231d55&ei=5070