Crisis Prevention

Bloomberg Reports:

Asian finance ministers will this week probably agree to pool part of the region's $2.7 trillion in foreign-exchange holdings to prevent a repeat of the crisis that depleted reserves ten years ago.

This is an interesting story. The first item that jumps out at you is the $2.7 trillion dollars of reserves that are held in Asia, and the majority of those are U.S. dollars.

The other item of importance is that I believe it's different this time. There's the argument that China and India and some of these other countries are overheating economically. This is fine. Here's where I stand. China is growing at this pace for good reasons. There problem lies in their stock market. I believe that they are in for a major correction, and a lot of folks will lose a lot of money. How that plays out in the rest of the economy will be interesting. China will eventually have to let the yuan float. They will need to stop importing U.S. inflation in order to have a sustainable economy.

That's not the biggest threat in my opinion. I believe that the largest threat to Asian growth is a collapsing USD. Here's the deal: China's economy may or may not be overheating. I've read great arguments on both sides, but it is indisputable that it is very hot and very fragile. A collapsing USD will have ripple effects world wide, but it will effect these 'hot' economies more then Europe per say.

I guarantee that when these Asian finance ministers meet in Kyoto this week, they will be discussing their vulnerability to a weak USD.