Expert View: Don't pick on America, blame the financial flashmob

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The Independent Online

Hard as it may be for many Europeans to accept, not everything can be blamed on America. In fact, I would go so far as to say that the US is more passive than active in the economic imbalances we hear so much about.

Hard as it may be for many Europeans to accept, not everything can be blamed on America. In fact, I would go so far as to say that the US is more passive than active in the economic imbalances we hear so much about.

Instead of thinking of America as the driving force of the world economy, and concluding that its deficits are a problem, it is more relevant to see the US as a passive recipient of huge amounts of the rest of the world's savings - so that its surpluses are the real problem. In fact, American manufacturers could complain that, because foreigners are forcing a capital account surplus on the US, then the balancing item of the current account deficit is that money is spent on overseas goods and services at the expense of domestic producers.

The flood of capital into the US fixed-income markets is but the latest representation of this wall of restless money, which has spent much of the past decade wandering the financial markets looking for a home. Rather like a group of teenagers trying to find a party, it doesn't tend to stay very long and leaves the relevant market in a worse state than it found it.

In that sense, it is perhaps similar to another turn-of-the-century phenomenon, the flashmob - a term for performance art projects involving large groups of people. Mobilised by email, a mob suddenly turns up in a public place, performs according to some loose instructions, and then melts away as quickly as it formed.

The main source of the capital is Asia, originally Japan, and its size has grown dramatically as the rest of the region moved from being a net importer of capital to a net exporter in response to the original flashmob in the Asian markets of 1997-98.

In true conspiracy style, we can track the flashmob from Asia, to the Nasdaq in 1999 and into bonds in 2000. Over the past two years it has been in equities, real estate and commodities. But all the while it has been buying US fixed interest.

The apparently insatiable overseas demand for American fixed-income products continues unabated and is unlikely to be deterred by the sell-off in US bonds over the past few weeks. In effect, it reflects the impact of the huge savings influx from Asia and Europe, which is being driven by a mix of regulation and a desire for yield. Europeans need to buy bonds to meet the liability matching rules imposed on their savings institutions, which say that any bond is less risky than any equity. The Japanese, meanwhile, need to get a return on low-risk savings greater than the 1 per cent they have had for the past decade. America is the only market that yields enough and has enough liquidity.

The US is not entirely innocent, however. In reality, it is the bank to the world, taking low-risk, low-return deposits and recycling them. The growth of the US financial sector has been in direct response to its role as agent in positioning the financial flashmobs. Meanwhile, the role of the Federal Reserve in ensuring that there is sufficient liquidity has in practice allowed those same financial institutions to piggy-back on the flows of capital using borrowed money.

So where will the mob go next? We have seen hot money move into small stocks, currencies or commodities, but these are the financial-sector mini-mobs, and their time is running out as the Fed tightens its policy. The real mob has a problem in that it has got so large that there is no longer a market big enough and liquid enough to absorb it without being distorted almost immediately. So it looks to be stuck in the US fixed-income markets. This will keep real interest rates low for some time yet.

Mark Tinker is a director of Execution Stockbrokers: mark.tinker@executionlimited.com

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