Friday, May 9, 2008

SWF Mania

We have all heard this story various times already, but somehow this graph made it strike home visually (I guess I secretly continue to follow Wolfram in thinking that the eye is a pretty good general purpose pattern detector). It makes me wonder as well about the history of the collapse of the British empire -- when did the US start financing the queen, and wasn't that the end for her?

What's still not clear to me is how all of this plays out. Given that these reserves are in dollars, and that these exchange reserves are in the same ballpark as the $1B IMF estimates of US credit losses (coincidence?), I find the final comment of Brad Sester's post compelling:
Felix claimed not so long ago that the US was too big to fail. Certainly many emerging markets are doing their best to finance the US through its current troubles, and thus keep up demand for their oil and goods. But a part of me wonders if the rise in inflation in the Gulf and China and the difficulties both are facing trying to sterilize the rapid growth in the foreign assets is an indicator that there is a small risk that the US also might end up being a bit too large for the emerging world to save.
The US does indeed seem too big to fail at this point. But is China going to, effectively, repossess us? These of course were Buffett's comments several years ago, even though most everyone only paid them lip service. Does this mean that we're going to see a further collapse in the dollar and even higher world-wide commodity prices and inflation? Can the Chinese really frog march themselves to prosperity by financing America's consumerism? They seem to have the cash to re-capitalize the entire credit mess, and we could go on just like before. Somehow though, I just don't see politicians being smart enough to work themselves out of this mess, and that is what is required to correct the market imbalances. In this case, the market cannot re-equilibrate itself without a political solution, which is perhaps the scariest line of thinking of all.

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