Monday, February 14, 2011

Egypt and Exorbitant Privilege

Interesting article on how Mubarak spent his last days in office:
Hosni Mubarak used the 18 days it took for protesters to topple him to shift his vast wealth into untraceable accounts overseas, Western intelligence sources have said. The former Egyptian president is accused of amassing a fortune of more than £3 billion - although some suggest it could be as much as £40 billion - during his 30 years in power. It is claimed his wealth was tied up in foreign banks, investments, bullion and properties in London, New York, Paris and Beverly Hills. In the knowledge his downfall was imminent, Mr Mubarak is understood to have attempted to place his assets out of reach of potential investigators.

On Friday night Swiss authorities announced they were freezing any assets Mubarak and his family may hold in the country's banks while pressure was growing for the UK to do the same. Mr Mubarak has strong connections to London and it is thought many millions of pounds are stashed in the UK.

But a senior Western intelligence source claimed that Mubarak had begun moving his fortune in recent weeks. "We're aware of some urgent conversations within the Mubarak family about how to save these assets," said the source, "And we think their financial advisers have moved some of the money around. If he had real money in Zurich, it may be gone by now."
Interesting, of course, as a reminder of what it means, practically, to be "our son of a bitch." But also interesting, if you're an economist, for the light it throws on another exorbitant privilege -- that of the dollar.

This is the empirically well-established fact that US assets abroad consistently earn higher returns than foreign assets in the US. This differential is an important pillar of the continued (and, for my money, likely to continue for some time) role of the dollar as a reserve currency: Even large US current account deficits don't lead to cumulating interest payments abroad. But why foreign investors in the US get such comparatively low returns -- in one year in the late '90s the total return on foreign assets in the US was actually negative -- remains a bit of a mystery.

Seems to me the Mubarak story points toward (part of) the answer. I have no idea how realistic the higher figure for his fortune is, but it's a big number -- roughly equivalent to a year's worth of Egyptian imports. [1] And of course Mubarak presumably isn't the only Egyptian whose bank balance might not go over well in Tahrir Square. For these "foreign investors", the chance of holding onto their assets when the people they were stolen from ask for them back, has got to be a major component of expected return. And by and large, that means keeping them in forms denominated in dollars. Along with central banks reserves, I reckon this is going to be a substantial portion of net demand for US assets that is relatively insensitive to yield. Enough to explain a significant part of the lower return on foreigners' assets here? I don't know. Could be. But the bigger point is, reserve currency is a political status. I haven't read Barry Eichengreen's new book yet -- it's in the pile on my desk -- but hopefully the Mubaraks of the world will get a central role in his story.

[1] It would be better to compare it to the country's total stock of foreign assets, but I don't know where to find that number for Egypt.

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