Weak dollar may fuel bubbles
TEXT OF INTERVIEW
Kai Ryssdal: The dollar actually held steady against the euro today. Nice, but not in keeping with the greenback's recent performance. In the past eight months the dollar's lost almost a fifth of its value against a basket of other currencies.
You know, a weak currency can work for you or against you, depending on where you sit. But given the way the dollar has been trading, and the fact it can be borrowed for practically nothing, thanks to low interest rates here, the foreign exchange market is at the heart of what could be the next big bubble. Marketplace's Scott Tong joins us from Shanghai. Hey, Scott.
SCOTT TONG: Hey, Kai. How are you?
Ryssdal: I'm all right, listen, so we've been talking a little bit about bubbles on the broadcast the last couple of weeks, and we were curious to what you are experiencing over there.
TONG: Well, it does feel like the zero gravity chamber here in greater China, that property prices cannot fall here. I mean you hear it all the time in the taxis, wherever, and in Chinese they say, it can never fall. In Hong Kong last month, one apartment went for a world record price of $64 million. So yes, it's 6,000 square feet. Yes, it has a ballroom, and an outdoor pool, and a view of the harbor. But per square foot, it's $11 grand. That's more than any London flat or New York apartment ever. So if you look in emerging markets in general in the world, you have people worrying. People at the world bank, top Chinese bank regulators, brand-name economists are all voicing some angst that these prices are too high. And one big thing they cite is the weak U.S. dollar as a reason.
Ryssdal: Connect the dots here for me, would you? It's this thing, this mechanism called the carry trade, right?
TONG: Well, yeah, and basically here is how it works. Let's say you, Kai, you go to your local bank in Los Angeles and you borrow some money, basically for free, right? Half of 1 percent. And you take all those cheap dollars and you go off shore, covert them to say, to New Zealand money, you stick it there for a year, and the Kiwibank gives you 4.5 percent interest, Indonesian banks will give you 7 percent, Brazil will give you 10 percent. And since there are a whole lot of U.S. dollars to borrow, that is a lot of low-cost leverage for investors, hedge funds, whatever, to buy something exciting overseas and all of these oversea asset prices are up.
Ryssdal: A lot of U.S. dollars to borrow because the Treasury needs to sell a whole bunch of Treasury bills to finance its debt, yes?
TONG: Well, there are a whole lot of bonds out there to buy, but even before all this there were just a whole lot of U.S. dollars available for anyone on the planet to access. You know how they say when the U.S. sneezes, the world catches a cold. Well, this is kind of the opposite, when the U.S. takes economic steroids, the rest of the world pumps up.
Ryssdal: All right, Scott, but riddle me this: What happens if the dollar goes up?
TONG: Then we listen for the sound of bubbles popping around the world. Say global investors start to freak out, the recession gets worse, or there's geopolitical unrest somewhere, and then they scurry to the world's financial bomb shelter. The safe haven is the U.S. dollar. So people buy U.S. dollars, it goes up. And New Zealand dollars suddenly go down in value. And suddenly all those great New Zealand investments become kind of worthless. Then you have to bring those dollars back to the states and pay back your banker. So you sell, and then I sell, and then my brother sells. And then we have the bad-case scenario. The fear is there's this coordinated crash in asset prices around the world. And it could all go south, it could all go south if the dollar doesn't behave the way we all think it will.
Ryssdal: All right, well that's the doom and gloom. Any sunshine and light?
TONG: The sunshine, people say listen stock and property prices in these emerging markets are up for a real good reason. Because the economies there are doing well. They're sound. So it's not just a bunch of currency speculators throwing their money in and ready to take it out. It's long-term investments in these high-growth places, and that certainly could be. But I tell you, Kai, at least a couple of countries are hedging against that. Brazil last month said you know all that foreign money rushing into Brazil, you're not so welcome anymore; we're going to tax you. And Taiwan just said, just keep out period. Foreigners are banned from parking their money in our banks. Because these countries they've been burned before. They remember the 97 Asian financial crisis. A lot of them crashed the last couple of years with the global crisis. And currency risk is what this is all about. Most Americans don't ever think about currency risk. But here if you go down on the street, and ask the random Chinese person what the exchange rate is to the dollar or to the euro, they know.
Ryssdal: That's amazing. Scott Tong in Shanghai for us. Thank you, Scott.
TONG: All right, Kai, thank you.