Greenspan Humbled By Asia's Central Bankers

Posted in Asia | 03-Mar-05 | Author: William Pesek| Source: Bloomberg

United States Federal Reserve Chairman Alan Greenspan

March 2 (Bloomberg) -- Asia's economies are rolling the dice with an enterprise that may alter the complexion of the global financial system, affecting powerful central bankers like Alan Greenspan on the other side of the world.

It's called ``The Asian Bellagio Group,'' a name that is borrowed from the European Bellagio Group, a gathering of academics started in the 1960s. Asia's group includes officials from Japan, China, South Korea and Southeast Asian nations who met in Bangkok last week to discuss the dollar's slide.

The group is a formidable crowd, considering it holds well over $1.1 trillion of U.S. Treasuries. In fact, if Federal Reserve Chairman Greenspan is wondering why his recent rate increases aren't working out as planned, he need only look to the East.

Greenspan recently referred to a ``conundrum,'' whereby U.S. Treasury yields fell in the face of rising official rates. Yet trends here explain why: Asia's vast purchases of U.S. Treasuries, which reduce U.S. yields, are rendering the mighty Fed impotent in its efforts to cool the economy.

These days, markets react more to rumors about Asian central banks selling U.S. debt than what Greenspan says about the economy. One could argue that his comments about low yields were the bond market's ``irrational exuberance'' moment. In December 1996, Greenspan's concerns about overvalued stocks caused shockwaves. Not so when he mentioned low debt yields.

Korea's About-Face

Yet when Korea, the world's fourth-biggest holder of reserves, last week suggested it might diversify into other currencies, markets plunged. When the Bank of Korea said it would hold onto its dollars, markets returned to normal, satisfied that the mighty U.S. had again prevailed over compliant Asian economies.

Nothing could be further from the truth. Korea's about-face merely shows the bind Asian officials are in. They risk a big hit to public finances by publicly selling a currency that has lost 34 percent versus the euro in the three years through 2004. Their economies also become less competitive as currencies rise against the dollar and the Chinese yuan, which is pegged to the dollar.

Undermining the dollar isn't in Asia's interest in the short run. In the longer run, though, it's absolutely in Asia's best interest to keep its savings at home. The capital could be tapped to retool economies and improve education, infrastructure and health care. It also would be on hand to help economies in crisis.

Full Circle

That was the impetus behind the ``Asian Monetary Fund'' proposed in 1997. The idea was quickly quashed by the U.S., which feared it would reduce the influence of the International Monetary Fund. Since that would have meant less clout for the U.S. in Asia, then-Treasury Secretaries Robert Rubin and Lawrence Summers wouldn't hear of it.

Well, the idea has come full circle. Asia is getting fed up with its reliance on the dollar. Besides, economies here are becoming more and more exposed to Chinese demand, and less so to those of U.S. consumers. Leaders here also have misgivings about their lack of clout in western circles. And so, Asia now seems ready to create such an institution to serve its interests.

What does that mean for Greenspan? For now, Asia's central banks are making the Fed's life difficult as it tries to slow U.S. growth. Yet there are two ways in which Asia's efforts at monetary cooperation could complicate things even more for the Fed.

One, massive sales by monetary authorities here could cause chaos in the U.S. economy as the dollar plunges and Treasury yields surge. Two, Asian cooperation could keep the current global system in place, hampering the Fed's efforts to cap U.S. inflation.

Asia Standing Up

It's increasingly dawning on Asian consumers that their governments are funding the U.S.'s way of life. Capital flowing from East to West reduces incentives for the U.S. to tackle its worsening current account and budget deficits.

The previously symbiotic relationship between the U.S. and Asia is looking more like unhealthy and unsustainable co- dependence. Asia feeds its addiction to export-led growth by feeding the U.S.'s addiction to importing capital to finance its economy, and vice versa. Now, Asian leaders are concerned they are getting the short end of the arrangement, and they should be.

While last week's meeting of the Asian Bellagio Group didn't mark a coordinated effort to abandon the dollar, it may prove to be a watershed event for a region looking to stand alone. If there's going to be a concerted effort to dump the dollar, it may be made within the context of this grouping.

Asia has never been good at cooperation. When was the last time there was a newsworthy accomplishment by the 10-member Association of Southeast Asian Nations (ASEAN) or the 21-member Asia-Pacific Economic Cooperation (APEC) forum? The political and technical issues involved in a collective currency policy means it may be a long way off.

Yet the effort is getting under way. It may accelerate as Asian central banks realize they're fighting a losing battle in their efforts to halt the dollar's slide. The catch, of course, is avoiding a full-blown dollar crisis, something that's no more in Greenspan's interest than Asia's.

To contact the writer of this column: William Pesek Jr. reachable through the Tokyo newsroom at [email protected]