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Economics - Oct 5

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Dollar's double blow from Vietnam and Qatar

Ambrose Evans-Pritchard, Telegraph (UK)
Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc.
Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers.

Together they [the Asian powers] hold $3,575bn of foreign reserves, over 65pc of the world's total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.

The concern is that once one or two members of the region jump ship, it could set off a broader scramble. None of them want to be the last one left holding a devalued asset. Vietnam's central bank said this week that it would move "gradually" to a floating currency.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99pc to 40pc, switching into investments in China, Japan, and emerging Asia.

The move is intended to increase long-term returns for future generations, but it can easily be seen as a vote of no confidence in US economic management.
(4 October 2007)


Can a Plucky U.S. Economy Surmount $80 Oil?

Michael M. Grynbaum, New York Times
Oil prices, an economic scourge in decades past, have soared to record levels in recent years. But the fallout often seemed negligible: Americans kept spending; employment kept growing; factories, construction crews and retail stores stayed busy.

Now, however, the economy may be starting to sputter as damage from the weak housing market drags down growth. If payrolls drop significantly, will high-price crude oil begin to cause pain in a way that it hasn’t in nearly three decades?

Many economists do not think so, maintaining that if the United States entered a recession, the price of oil would quickly drop.

“The United States is the single largest oil-consuming nation in the world,” said Stephen P. A. Brown, director of energy economics at the Federal Reserve Bank of Dallas. “A slowdown here ought to bring the price of oil down.”

That view is by no means unanimous. The global economy has been growing rapidly, and oil consumption overseas keeps rising. A few economists say it is possible that even if the American economy weakens, demand abroad will be strong enough to keep oil prices high.
(5 October 2007)


Life and debt in suburbia

Stephen Gandel, Money Magazine
Like middle-class families everywhere, the Mendells, Steins and Wrights judged their own financial health by how they thought their neighbors were doing. How wrong they were.
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...Dave and Emily Mendell, who live a few doors from the Wrights, moved to town two years ago for the good public schools, but there's another reason they feel good about their life in this neighborhood. Here the Mendells' family income puts them above average. "We wouldn't feel comfortable in a place where most people made more than us," says Dave Mendell.

Who would? Assessing how the neighbors are doing financially and what that means about how we are doing is practically a national pastime. The guessing game starts off as harmless pillow talk and community pool chatter, an outgrowth of natural curiosity. Just how much money must Susie and Bob have to be able to afford that new kitchen, three cars and a family safari?

Then too, every homeowner has a vested interest in the financial well-being of his or her neighbors. Homeowner associations have long understood that nothing raises the value of a home more than an expanse of trim lawn and well-kept homes on either side.

But the finances of those around you affect more than just the perceived value of your property. They also, like it or not, help shape how much you spend and save and color your perceptions of your own financial well-being.

Robert Frank, an economist at Cornell University and author of Falling Behind, calls the desire to match what the neighbors spend, remodeling project for remodeling project, lavish party for lavish party, "luxury fever."

Not only can it prompt you to spend beyond your means, but it can also lead you to a false sense of how you are doing financially. Because when you see the guy down the block with so much more cool stuff than you have, you can't help but assume he is financially better off - even if the real truth is he just can't keep his credit card in his wallet.

Without pulling back the veil of polite secrecy that neighbors maintain about their financial status, it's hard to tell.
(5 October 2007)


The Finance Round-Up: October 5th 2007

ilargi, The Oil Drum: Canada
...at least 4 articles deserve our top spot. And there’s much more.
(5 October 2007)

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