- The Washington Times - Sunday, November 30, 2008

Amid the worst recession and financial crisis in a generation, the U.S. Treasury and the dollar lately have reasserted their status as safe havens in a world of storms.

The unique privilege this status confers is helping Americans in major ways to weather the hard times. Among other things, the Treasury is getting nearly interest-free loans to finance ballooning debts and deficits as investors flock to U.S. securities to escape stricken stock, commodity and credit markets around the world. That is enabling the Treasury to issue an unprecedented $1.5 trillion of debt this year — nearly three times its previous record — to finance ballooning federal deficits and rescue a faltering banking and financial system.

The rush into Treasury securities in the wake of the financial crisis that broke out in September suddenly lifted the dollar by as much as 30 percent against other major currencies like the euro and the British pound. Previously, the dollar had suffered a long, six-year decline that left Americans paying record high prices for imported goods from Italian olive oil to Saudi crude oil. The dollar’s revival now makes those imports cheaper, providing purchasing-power relief to consumers as they struggle to cope with job cuts and recession.

Rob Cox, analyst with Breakingviews.com, said the fear and panic set off by gigantic losses in global markets — which returned with a vengeance as the economic outlook darkened last week — makes investors hanker for the predictable and safe, if boring, returns provided by Treasuries.

“When investors take fright, they seek the comfort of safe securities like Treasury bonds,” he said.

The trend helps not only the Treasury as it scrambles to aid U.S. banks, but the Federal Reserve in its mission to resuscitate the U.S. economy and markets. The sudden strength of the dollar has been accompanied by a precipitous fall in oil and other commodity prices, which are denominated in dollars, easing the chief source of inflation that prevented the Fed from lowering interest rates this summer.

As foreign investors pour money into Treasury bonds, the dollar’s strength has surprised some pundits, who predicted that the financial crisis that began in the United States more than a year ago would prove to be the downfall of the dollar.

Fed Chairman Ben S. Bernanke said last week that the dollar’s rebound proved critics wrong and vindicated the safe-haven role of U.S. markets.

“The dollar remains the premier international currency,” he told the House Financial Services Committee. “We have seen a good bit of appreciation in the dollar recently during the crisis, precisely because there has been a lot of interest in the safe haven and liquidity of dollar markets.”

Dollar detractors have proliferated in recent years, from radical oil-exporting nations such as Iran and Venezuela that want to strike out against the United States by trading oil in euros rather than dollars, to Russia, which has promoted the euro as a reserve currency by investing substantial portions of its oil surpluses in the European currency.

Russian President Dmitry Medvedev made an argument for multiple reserve currencies at a meeting of the Group of 20 world leaders Nov. 15, making clear he intends to use Russia’s newfound oil wealth and growing economic power to argue against the dollar’s unique privileges.

“The creation of new financial centers and strong regional currencies could be a major factor for financial stability,” Mr. Medvedev said. “That was the case with the euro.”

Ironically, Russia’s own economy has been one of the worst hit by the worldwide recession that started this summer, causing a collapse in oil and other commodities. The dramatic plunge of premium crude prices to nearly a third of their record mid-July high above $147 a barrel dealt a crippling blow to Russia’s oil-driven economy. It has forced Russia to spend more than a fifth of its $500 billion in currency reserves to try to prop up failing banks and financial markets.

The financial debacle engulfing Russia, along with the deep recessions in Europe and Japan, served to lift the dollar’s prospects as it became clear to investors that the United States was hardly the only economy in trouble and was not even the hardest-hit.

The flood of money flowing into Treasuries as investors fled imploding stock and commodity markets elsewhere has driven the interest rates the U.S. Treasury pays on three- and six-month bills to as low as 0.02 percent on Nov. 21, bringing the average for the week down to 0.07 percent - both figures essentially zero. Last week, as a new round of panic engulfed markets, the yields on Treasuries of nearly every duration hit new lows. Two-year note yields fell below 1 percent for the first time, and the rates on five-year notes and Treasury’s bellwether 30-year bonds fell to record lows.

“Investors are saying, ‘Just give me security against losses. I don’t care about trying to make money in this environment. I want zero risk,’ ” said Paul Lennox, corporate treasurer at Custom House, a Canadian investment firm.

Mr. Lennox said that some foreign investors are perplexed about how the United States seems to benefit even when its own economy is “buckling” and its debts are burgeoning so fast as to present a risk that the government is overextending itself.

“The U.S. is probably the only country that could get away with this,” he said. “The banking sector is in tatters, government debt is going through the roof, but the dollar is soaring and government T-bills and T-bonds are in hot demand.”

The development shows that there’s still “a lot of faith” in the massive U.S. economy around the world, he said. “For all its recent woes, the U.S. dollar remains the world’s primary reserve currency, and investors want to hold it in uncertain times.”

The U.S. government, “for all its problems, has plenty of room to maneuver to deal with this banking and credit crisis,” Mr. Lennox said. “There are few options to U.S. government debt for risk-averse investors. It is by far the largest, most liquid market in the world. For large institutional investors, U.S. government debt is far safer than bank deposits, which are only insured for relatively small amounts. Foreign governments, holding trillions of dollars in foreign reserves, have little option but to reinvest their dollars in U.S. government debt if they want a risk-free asset.”

Peter Schiff, president of Euro Pacific Capital, warned, however, that investors should be careful about putting blind faith in the U.S. government.

“Any money that the world lends to America to finance more consumption will never be repaid,” he said. “We will simply blow through it, and be back, hat in hand, begging for more. As we painfully learned in the housing bust, lending people money that they cannot pay back makes no sense. This applies equally to foreign central banks lending to America as it does to commercial banks lending to homeowners.”



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