An Asian bond could save us from the dollar

10:11p ET Monday, October 6, 2008

Dear Friend of GATA and Gold:

If the U.S. dollar seems strong, former Thai Prime Minister Thaksin Shinawatra notes in today's Financial Times, it is strong only at the suffrance of Asian central banks, which are piling up billions of them via U.S. government debt instruments. So Shinawatra proposes using those dollars to create a collective Asian government bond that would become a form of money and investment in Asia.

Shinawatra calls these Asian bonds "external dollars," an acknowledgement that these dollars can't ever come home without devastating the U.S. economy and greatly losing their value to their current holders. This also seems to be a suggestion that Asia should stop buying U.S. debt and start using its export earnings to improve the living standards of its own people -- which also seems to be a suggestion that Asia should tell the United States to straighten itself out.

What a concept!

Shinawatra's essay is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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An Asia Bond Could Save Us from the Dollar

By Thaksin Shinawatra
Financial Times, London
Monday, October 6, 2008

http://www.ft.com/cms/s/0/035db374-93aa-11dd-9a63-0000779fd18c.html

Asia has an opportunity to save itself, and the world economy, from the crushing excesses of Wall Street. China and Japan, with other Asian countries holding substantial surplus reserves, should act now to create an Asia bond to contain the fallout from a weak dollar.

I hope my US friends will not see this as an ungrateful act of abandoning a ship in trouble. On the contrary, my plan will keep the ship in service, as it is repaired. This is the best way for countries that have benefited from the American century to repay their debt.

The prosperity in Asia -- created by US investment and trade -- has spawned problems for the US. East Asia's current account surpluses have averaged $400 billion over the past decade, while the US current account deficit runs at an annual average of $800 billion. Asian countries, other than Japan, accumulated the surpluses largely by supplying cheap goods and services to the US. They can no longer rely on this one major market given that America's ability to sustain consumer spending is severely curtailed. Having parked most of their surpluses in the currency that was most convertible -- the dollar -- Asian countries face the prospect of losing as much as the country that issued the currency.

Most of Asia's sovereign surpluses are in US dollar-denominated equity and notes and Treasury bills. Is there a way to protect the value of these as the US economy finds its feet? Asia's reserves could be turned into Asia bonds that, without losing their value, could be used to stimulate investment and trade in Asia.

An Asia bond would not be a self-centred zero-sum game. It could offer an opportunity for wealth creation across the world. Three billion Asians want their governments to invest their hard-earned surpluses in tangible productive capacity that they can see rather than playing with paper investments, such as esoteric derivatives.

The bond will be denominated in, shall we say, global dollars or "globars" (if you like the allusion to the shiny metal bars that were once the universal standard currency). The International Monetary Fund could play a consultative or managerial role in maintaining the value of this global or offshore dollar while the national currency of the US settles down to a level that suits its economic needs.

What happens if the new US administration is not farsighted enough to agree to a separate standard for external dollars? Asian governments could still issue these bonds incrementally as they accumulate new surpluses. China, Japan, Korea, Singapore, and Thailand could agree to pool some of their reserves in a certain ratio into a basket of currencies to issue a bond. The return on this bond will be the same or higher than those on US Treasury bills as the issuers of the bond have a better ability to pay than the US government.

The dilemma for investors is judging political risks in Asia. The Taliban will continue in Afghanistan and Pakistan but these countries' role in issuing and managing the Asia bond will be nominal. Another poison gas explosion in the Japanese underground will not undermine Japan's capacity to honour its commitments. Risk is relative. I would rather bet on China's authorities -- who ignored the prediction offered 18 months ago by Hank Paulson, the US Treasury secretary, that they risked trillions of dollars in lost economic potential unless they freed their capital markets. That seems wiser than praying to God that the US soon finds a credible model of economic growth and for regulation of financial institutions.

To those familiar with bond markets, this may not seem a revolutionary proposal. It is not. A number of Asian governments issue bonds in their own currencies. Their quality and performance vary. Asian bond returns, taken in conjunction with their volatility, compare unfavourably with their US Treasury counterparts, market by market. However, an aggregate of Asian bonds gives a more positive picture. Part of the problem is the historical perception, perpetuated by rating agencies, that Asian countries are all borrowers, just as the US has become. Now some of these countries are there to lend. It is time they reaped the premium that is theirs as lenders. The value of their loans will be better protected if they take collective decisions.

Their collective bond could be traded in Tokyo, Singapore and Hong Kong. This bond would contribute to the development of a healthy capital market in the region that can remain stable while the US works its way through its financial crises. The greatest benefit would be that Asia's surpluses will be recycled into productive assets in Asia.

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The writer is the former prime minister of Thailand.

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