Former Federal Reserve Chairman Alan Greenspan said the dollar's depreciation may reflect growing unwillingness among foreigners to buy U.S. debt.
``Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington today. The dollar's decline to its lowest since 1997 may be ``an indication America is approaching this limit.''
Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July.
While I have had more then my share of disagreements with Greenspan, that does not take away from the fact that he is a very smart economist. And frankly, he may have a really good point here.
Let's go back through some charts to see exactly what is going on.
Here is a chart from the St. Louis Federal Reserve of Total US debt.
First, let's remember that the "fiscally responsible" Republicans have added a ton of debt. Notice the big changes under Reagan and Bush II. (We have to remember it because the Republicans never want to).
Not all of this is held by the public -- some of it is "intra-governmental" meaning it is held by federal agencies. However, a little under $5 trillion is held by the public.
All of this debt has to go somewhere -- meaning someone has to buy this stuff when it goes on the market. So far, foreigners have been very generous in helping us out with this. Here is a chart from the St. Louis Federal Reserve of total foreign holdings of US debt.
However, the big foreign buyers of US debt aren't buying this debt like they use to. According to information from the Treasury Department, the five largest holders of US debt (Japan, China, UK, Oil Exporters and Brazil) owned a combined total of $1.224 trillion in August 2006 and $1.459 trillion in August 2007. That's an increase of $235 billion. And over that same time, the really big purchases came from the UK ($189.4 billion) and Brazil ($63.6 billion.) China only increased their holdings by $13 billion and Japan decreased their holdings by $37.9 billion. In other words, Asian Central Banks -- who use to be reliable purchasers of US debt just aren't that interested in buying anymore right now.
With the above information in mind, here is a chart of the US dollar over the last two years. Notice its value has been dropping over that time:
So -- why is the US dollar dropping? This is where Greenspan's comments come into play. Currency traders are obviously selling the dollar. While they have had ample reason to sell lately, the US economy wasn't slowing until the first quarter of this year -- hardly a reason to sell. One underlying reason may be a lack of confidence in the US' fiscal outlook and current situation. This would make sense, especially in light of the lack of interest from foreign central banks for US debt.
Now -- no one is going to come out and say they have lost confidence in the US' financial situation. Instead they will simple go on quietly selling dollars. And there is no guarantee that Greenspan's analysis is right. But given the above information it makes a great deal of sense.