Since 1961, The Wall Street Journal has printed as its editorial on the day before Thanksgiving a "chronicle of those memorable circumstances of the year 1620, as recorded by Nathaniel Morton, keeper of the records of Plymouth Colony." Because the editor of The Journal is my role model (and because I've got nothing else in this holiday-shortened week), I have decided to start a Thanksgiving-eve tradition with Positive Economic Commentary. The day before Thanksgiving, I will "run" the (updated) missive I wrote on November 26, 2003, the day before Thanksgiving last year. I suspect that my tradition will not run as long as The Journal's, for a number of reasons, one of which is that by Thanksgiving 2006, or perhaps even by Thanksgiving 2005, the story theme will have changed radically. Just as frictions eventually developed between the Pilgrims and their Native-American friends, I suspect that financial-market frictions will be developing between Americans and our foreign friends.
As I prepare for this year's Thanksgiving celebration (more accurately, as my wife prepares, bless her heart), I am struck by a parallel with the first Thanksgiving celebrated in this great land of ours. You recall the story of how Native Americans, who lived near the Plymouth Colony, came to be invited to the first Thanksgiving feast, don't you? The Pilgrims were paying the Native Americans a debt of gratitude for helping them survive their first year in the New Land. In other words, the Pilgrims got by with a lot of help from their new-found friends. Similarly, this Thanksgiving, we are getting by with a lot of help from our new-found friends - not Native Americans, but native Chinese and native Japanese. How so? By their central banks' recycling of the dollars we send abroad in payment for our imported goods and services. These dollars are recycled into U.S. government and agency securities held in custody accounts for them at the New York Fed. In the 52 weeks ended November 17(November 19, 2003), these custody holdings averaged $1.199 trillion ($918.1 billion). This is up $280.4 billion ($150.8 billion) from the average of foreign central bank holdings of U.S. securities in the 52 weeks ended November 19, 2003 (November 20, 2002). This $280.4 billion increase in the 52-week average of foreign central bank holdings of U.S. securities represents about 42% of the estimated $660 billion 2004 current account deficit. This is up from about 28% in 2003 and 13% in 2002.
This rise in foreign central bank financing of the U.S. current account deficit implies that the appetite for dollar-denominated assets on the part of private global investors is diminishing at current market prices. If it were not for the fact that foreign central banks have become the buyers of last resort for dollar-denominated assets, the greenback would have fallen even more in value versus other currencies than it has, U.S. prices for goods and services would be higher than they are, and U.S. long-term interest rates would be higher than they are. If it were not for the "kindness" of foreign central banks, we would be sitting down tomorrow to a smaller feast in a smaller house, having arrived at Grandma's house in smaller car. So, just as the original Plymouth Pilgrims gave thanks to their "foreign" friends, the Native Americans, for their help in producing a bountiful first harvest, tomorrow we should give thanks to our foreign friends, central banks, in financing at very favorable terms the importation of a bountiful foreign-produced "harvest."
The foreign suckers who produced this bountiful harvest for us, however, should be cursing their central banks. All they are getting in return for their hard work is more paper - that is, yuan and yen, which are reducing the value of the yuan and yen they had accumulated before. I guess that's why we celebrate Thanksgiving and they don't!