Monday :: Nov 29, 2004

Sound As A Dollar - You're Doomed

by pessimist

The weak dollar has caused a great deal of consternation around the world as the effects of this revaluation causes the rest of the world to adapt to the New Economic World Order - Texas-style. This is not especially a good thing, as the rest of the world - still stinging from the 'With us or against us' slap they took from George Weaselword Bu$h - will watch out for its own interests and the BFEE/PNAC Petroleum Pirate Posse be damned!

The danger of American economic calamity is a real one, as this article points out:

Three Ways to Judge the Dollar
November 28, 2004

How bad has the dollar's decline been?

Consider the broadest measure of the dollar's strength, the trade-weighted dollar index compiled by the Federal Reserve. On that basis, the dollar has dropped just 14 percent since July 2001. That decline has been smaller because China has kept its currency, the yuan, pegged to the dollar, offsetting the impact of other currencies' declines in the Fed's overall dollar index.

This means that if and when the Chinese loosen their dollar peg or let the yuan float freely, the dollar could have an enormous fall against the yuan. That would be enough to bring the dollar to its weakest level since it began trading freely in the early 1970's.

And the emptiness of the Bu$h blather about an economic boom will swallow all those 'moral values' like the meat-eating plant in The Little Shop Of Horrors devoured people.

We've quoted Stephen Roach before. What he proposes here is what SHOULD happen:

The dollar: When weakness is a strength
Stephen S. Roach The New York Times Saturday, November 27, 2004
(Stephen S. Roach is chief economist for Morgan Stanley.)

In recent days, the American currency has fallen against the euro, the yen and most other currencies around the world. The fall of the dollar is not a surprise. It is the logical outgrowth of an unbalanced world economy, and America's gaping current-account deficit - the difference between foreign trade and investment in the United States and American trade and investment abroad - is just the most visible manifestation of these imbalances.

While a decline in the dollar is not a cure-all for what ails the world, it should go a long way toward bringing about a sorely needed rebalancing. With a weaker dollar, economic and even political tensions among nations would be relieved, helping to promote more sustainable growth in the global economy.

Still, a debate persists as to the wisdom of allowing the dollar to decline. The Bush administration seems to have given its tacit assent, and Alan Greenspan, chairman of the Federal Reserve, is finally on board.

But outside the United States, where policy makers have long been vocal in their displeasure over America's deficits, officials are now objecting to America's cure. Europeans have referred to the dollar's recent decline as brutal. The Japanese have threatened to intervene again in foreign exchange markets. And Chinese officials have argued that global imbalances are 'made in America'.

In this blame game, it's always the other guy. Yet global imbalances are a shared responsibility.

American consumers have borrowed against the future by squandering their savings. The personal savings rate was just 0.2 percent of disposable personal income in September - down from 7.7 percent as recently as 1992. Moreover, large federal budget deficits mean the government's savings rate is negative.

Lacking in domestic savings, the United States must import foreign savings to finance the growth of its economy, and it runs huge current-account and trade deficits to attract such capital from overseas.

America's consumption binge has its mirror image in excess savings elsewhere in the world - especially in Asia and Europe. For now, America draws freely on this reservoir, absorbing about 80 percent of the world's surplus savings.

Just as the United States has moved production and labor offshore in recent years, it is now outsourcing its savings. This is a dangerous arrangement. The day could come when foreign investors demand better terms for financing America's spending spree (and savings shortfall).

That is the day the dollar will collapse, interest rates will soar and the stock market will plunge. In such a crisis, a U.S. recession would be a near certainty. And the rest of an America-centric world would be quick to follow.

The only way to avoid this unhappy future is for the world's major central banks to carefully manage a gradual but significant depreciation of the dollar over the next several years.

George's 'Booming' Economy Goes Bust

First, there would be a gradual rise in U.S. interest rates - compensating foreign investors for financing the biggest debtor in the world. That would suppress growth in those sectors of the American economy that are most sensitive to interest rates, like housing, consumer durables like cars and appliances, and business capital spending. The result: a higher domestic savings rate and a reduced need for foreign capital - a classic current-account adjustment.

Second, when the dollar falls, other currencies rise. So far, the euro has borne a disproportionate share of the change. That puts increased pressure on Asian nations - including China - to share in the adjustment by allowing their currencies to strengthen. Most currencies in Asia are now rising, but the yuan has remained conspicuously unmoved.

Third, as the currencies of Asia and Europe strengthen, their exports will become less attractive to American consumers. This will force Asia and Europe to work to stimulate domestic demand to compensate - resulting in a reduction of both excess savings and current-account surpluses. This is easier said than done, especially since it may require painful structural reforms, like a loosening of domestic labor markets, to unshackle internal demand.

Fourth, a weaker dollar might defuse global trade tensions. Dollar depreciation will support American exports, and higher interest rates should slow domestic demand and reduce imports. That means the U.S. trade deficit should narrow - tempering protectionist risks. And with Asian countries allowing their currencies to fluctuate, Europe gets some relief and may be less tempted to resort to protectionist remedies.

What's certain is that a lopsided world needs to be put back into balance. The dollar is the world's most widely used currency, but its fall affects more than just foreign-exchange rates. A weakening dollar is an encouraging sign that the world's relative price structure - essentially the value of one economy versus another - is becoming more sensible. If the world can manage the dollar's decline wisely, there is more reason for hope than despair.

But for this to happen, there would have to be a universal agreement that this action was necessary enough to work in concert. This following article presents a different picture - one of 'every currency for itself':

The euro zone looks east

The focus of global currency movements has shifted from Washington and the dollar to the relationship between the euro and East Asian currencies. Two crucial trends have emerged.

The first is Europe's belated recognition that the relationship of the euro to Asian currencies is as important as its position vis-à-vis the U.S. dollar. European companies have more to lose from the euro's strength against Asian currencies than against the dollar. Asian companies, and particularly Japanese and South Korean ones, compete more directly with their European than with their American counterparts. Other strong currencies such as the Australian and Canadian dollars have been commodity-price driven, so the strain of global currency and trade adjustment has been falling largely on Europe.

Fortunately for Europe, the second trend is that some in Asia have woken up to fact that a strong currency is not necessarily a bad thing. Indeed some voices now accept it not just as inevitable but as positively beneficial for economies long overdependent on export volume. The leader in this has not been Japan, as one might hope, but South Korea, where a weak currency was causing a return of inflation and doing nothing to stimulate feeble consumer demand. To general surprise, a country long associated with mercantilist trade and currency policies has seen the light and allowed its currency to rise. In two months the won has gained 9 percent against the dollar and 4 percent against the yen. Asia traded its way out of the 1997 financial crisis default through devaluation and a surge in exports, especially to the United States. Now it is time to reverse the process.

The key to further currency movement is probably China. It is a guessing game whether Beijing will allow the yuan to rise - which would likely set off another round of rises for the yen, the won and other Asian currencies - or whether it will wait until market forces and covert diplomatic pressure have driven the yen and other currencies up another 15 percent or so, at which point the inflationary cost to China of not following the currencies of its leading import suppliers would be high.

Meanwhile Europeans have reason to suspect that Asian central banks had been major players in driving up the euro while resisting appreciation themselves. A crucial but little noticed paradox of the past two years has been that the strength of the euro has coincided with a sharp fall in euro-zone foreign reserves. This suggests that Asian central banks had not just been shifting reserves into euros but had been covertly buying euro-zone bonds through commercial banks. Meanwhile, lower euro reserves limit Europe's ability to undertake some covert intervention of its own to force up Asian currencies.

Whatever has happened in the recent past, it is crucial that Europe and East Asia establish a currency modus vivendi. Without it, the global adjustment needed to bring the U.S. deficit down to sustainable levels will be accompanied by some very nasty trade frictions between Europe and Asia.

This friction is magnified by the power of the 800-pound dragon:

Global forex volatility underscores China's growing economic muscle

Foreign exchange markets felt the impact of China's growing economic muscle this week when a report claiming the country's central bank had sold US Treasuries helped push the euro to all-time highs, underscoring market sensitivity about a possible yuan revaluation. "Undoubtedly it was a major cause of the dollars selling across the board," said Callum Henderson, head of forex operations at Standard Chartered bank in Singapore.

While there is little indication China, the second largest buyer of US Treasuries after Japan, has gone bone cold on US dollar assets, analysts said the evidence points to a diminished appetite for the greenback. "Net net, they are still buying, but you could say that they are more bearish on dollar assets," said James Malcolm, currency strategist with Deutsche Bank in Singapore.

"It shows the volatility of the markets right now and how very beared up the markets are on the dollar," Henderson said.

Adding fuel to the fire, Friday's volatility came ahead of an upcoming meeting in Beijing, where authorities are expected to review and hash out monetary policy for 2005. Speculation has been so rife for an imminent yuan adjustment that some investors were betting Beijing would widen the tightly controlled currency at the China Financial Forum in southern Hainan province Sunday.

For over a decade the yuan has been pegged in a narrow band of around 8.28 dollar, a level that China's major trading partners claim gives the growing economic powerhouse an upper hand in trade. Beijing has repeatedly rejected US arguments the peg is making Chinese exports cheaper and other countries' exports to the mainland more expensive. Nonetheless China has promised to reform its forex regime as part of the groundwork leading to eventual full-convertibility. "We will continue to push forward the reform on the yuan exchange rate, while maintaining overall stability in our economy," Chinese President Hu Jintao was quoted as telling US President George W. Bush at the Asia-Pacific Economic Cooperation (APEC) forum in Chile last week.

For one Beijing has gradually been loosening controls on its capital account, allowing for more money to flow out of the country to relieve mounting pressure on the yuan spurred by the boom in the world's fastest growing major economy. China has also been supporting the yuan at its current level through massive buying of US dollar assets, especially Treasuries.

China, like other Asian countries, has helped finance America's current account deficit (currently running in excess of five percent of gross domestic product). But the enormous costs of running such a large imbalance of payments worries investors, who fear financing US spending could become untenable and possibly even lead to massive default.

Hedging Their Holdings

Even Russian authorities are considering switching more of their foreign currency reserves from dollars into euros, a move thought likely to be mirrored by other central banks. China's central bankers have also discussed the need to diversify their holdings as US Treasuries have constituted the bulk of the mainland's foreign exchange holdings.

A financial specialist in Beijing said China has been stepping up its purchases of euros, Swiss francs and gold. "This is indeed the case," said an informed financial specialist. "This is related to the weakness in the dollar."

At the same time as China's economy continues to surge, its fixed yuan shifts the burden of export and import adjustments onto free floating currencies, particularly the euro and yen. As such Brussels and Tokyo are likely to more vociferously join the growing chorus urging Beijing to loosen its currency now rather than later, analysts said.

The effects on the US economy aren't going to factor in to the foreign currency exchange equation when the domestic value is at stake. Self-interest will - by necessity - be the rule. George can just like it:

Comment: Time for China to float

China is being pressured to halt its interventions to prop up the US dollar in world currency markets, with opponents emphasizing how much harm the policy is causing to other countries. But China’s authorities might respond more favorably to an argument that points out how China’s own economic health might benefit from abandoning the current exchange-rate policy, which pegs the yuan to the dollar.

Such an argument is not difficult to make. China is currently pursuing a contradictory set of policies that paradoxically undermines its own economy while propping up America’s by accommodating pump-priming by the Federal Reserve.

Four-flushing Against A Royal Flush

China and Hong Kong are the largest net purchasers of US Treasury securities. Otherwise, Treasury bond yields would be far higher, thwarting monetary expansion by the Fed.

Back in China, the dollar peg has led to large and growing foreign-exchange reserves, which are fueling domestic inflationary pressures and causing public-sector debt to balloon. This is because official capital controls oblige exporters to deposit hard currencies with the People’s Bank of China in exchange for freshly printed yuan (usually as bank deposits) or government debt. Both arrangements will eventually become untenable, because they will generate either an intolerable rate of inflation or an unsustainable burden of public-sector debt.

These are high prices for China to pay to maintain its current policies, including the pegged exchange rate. There is a great deal of volatility in foreign-exchange markets across the globe, mainly owing to the weakening of the dollar. As such, China and other countries are holding a depreciating asset that should be managed to serve domestic interests rather than those of the US.

Meanwhile, the dollar’s falling value reflects the fact that the Fed is pumping more money into the system than are most of its trading partners. So, the dollar will continue to weaken until the rate of increase in new money into the US economy no longer exceeds that of domestic economic growth and corresponds to the pace of monetary expansion followed by central banks in the rest of the world.

China’s effort to hold down the value of the yuan vis-à-vis the dollar is thus a costly and pointless policy. By delaying a decision to float the yuan, the authorities are merely contributing to greater instability in the Chinese economy.

The pressure has produced results:

Chinese whispers frighten currency markets
Last updated: November 27 2004 02:00

The dollar fell to new lows yesterday on rumours that China might shift some of its currency reserves away from the greenback, highlighting the dollar-related jitters in financial markets. The fragility in currency and bond markets has centred on fears that Asian central banks might dump US assets to avoid large losses as the dollar's value falls. The markets' nerves were highlighted by yesterday's investor reaction to a report, later retracted, that China's central bank was offloading US Treasury bonds.

The dollar dropped sharply after China Business News quoted Yu Yongding, a central bank committee member and a respected professor of economics, as saying China had cut its holdings of US government debt.

On bond markets the yield on the benchmark 10-year US Treasury note was trading at 4.24 per cent, up from 4.2 per cent at Wednesday's close. It was the fifth week in a row that the yield on US Treasuries had risen.

What this means in 'Mer'can is that the purchase price of the bonds has fallen, which causes the yield [think interest], always a fixed amount, to become a larger percentage of the purchase price, thus an 'increase'. This is an idication of a lack of confidence in the dollar via US government debt financing.

The dollar started the week at $1.3059 and has declined in every trading day since as traders took fright at signs that Asian investors might become more reluctant to fund the US current account deficit.

* The deputy governor for monetary policy at Indonesia's central bank said Jakarta might reduce its reserves of dollar assets if the currency fell further.

* The first deputy chairman of the Russian central bank said it might increase the proportion of its reserves held in euros.

Investors have taken the comments as a signal that the Chinese and Japanese central banks might also be reconsidering their asset holdings. If either began to shift into European or Asian assets, the dollar would plunge and interest rates on US government debt would rise sharply, damping US growth prospects. For now, China and Japan have an incentive to retain US assets because doing so holds down their currencies and maintains exports. But many economists say the situation is not sustainable in the long term.

Just a note here: as this movement develops, at some point OPEC will announce that the pricing of oil will be in Euros - they won't have any choice. That day is hastened by the conditions presented in this article:

U.S. Treasuries Fall for a Fifth Week; Foreign Demand May Wane
Nov. 27 (Bloomberg)

The benchmark 10-year U.S. Treasury note fell for a fifth week, its longest losing streak since May, on concern foreign investors' demand for U.S. government bonds is waning. Comments by Federal Reserve Chairman Alan Greenspan in Frankfurt on Nov. 19, suggesting foreign holders of U.S. assets may shift some investments to other currencies, triggered the selling.

`Diminished Appetite'

"Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said at the European Banking Congress in Frankfurt. "International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit."

The current account is a measure of trade, services, tourism and investments. The shortfall was a record $166.2 billion in the second quarter. Foreigners, who finance the gap by investing in U.S. assets, held $1.85 trillion of the $3.8 trillion in marketable U.S. Treasury securities outstanding in September, according to Treasury figures.

Why is this guy always at the front of major negative changes in the US economic picture? It makes one wonder whose side he's on! He was the one who inspired the recessions at the end of Clinton's term with his comments, he was the one who manipulated the economy so that George Worthle$$ Bu$h'$ 'economic boom' didn't pop like an over-inflated balloon, and now he's the one directing an assault on the dollar in the world markets???

"Greenspan's comments on foreign demand were strong enough to discourage most bond investors," said Christopher Sullivan, chief investment officer in New York at the United Nations Federal Credit Union, with $2 billion in fixed-income assets. "It would be very risky to be on the wrong side of this trade when even the Fed is alerting the market about a possible slowdown in purchases of Treasuries."

The proscecution rests.

Dollar's Effect

"These rumors are leading to tremendous movements in the yields," said Kornelius Purps, a fixed-income strategist in Munich at HVB Group, Germany's second-largest bank by assets. "Speculation that the dollar is going to weaken further means Treasuries are going to weaken further. This takes out all the other fundamental issues of rate hikes, steady growth."

And the fabled Bu$h Recovery goes with it. Only then will the wannbe Emperor of the World be seen to be naked.

Foreign Holdings

Declines in Treasury notes will accelerate as the dollar falls against the euro, Frederic Pretet, a Paris-based economist at Calyon wrote in a research note on Nov. 26.

China may relax the yuan's decade-old peg to the dollar by April 1 as the government attempts to slow inflation and cool economic growth, analysts at Bank of America Corp. and Merrill Lynch & Co. said. The currency is currently pegged at about 8.3 per dollar.

Watch for a major 'correction' in the markets that week.

Any Treasury sales are "just another sign of potential preparation in China for a currency regime change," said Dariusz Kowalczyk, a senior investment strategist in Hong Kong at CFC Securities Ltd. "It makes sense for them to peg the yuan against the basket of currencies that reflects foreign trade."

`Curve-Steeping' Trades

The Treasury yield curve `steepens' when price declines in longer-dated Treasuries, such as 10-year notes, outpace moves in shorter-dated securities, such as two-year notes. Henry Willmore, an economist in New York at Barclays Capital, a primary dealer, on Nov. 24 raised his forecast for the two-year Treasury note's yield to 4.8 percent at the end of 2005, a level unseen since February 2001. Two-year yields now are a few basis points above 3 percent.

Ten-year notes rose during Asian trading on Friday also on speculation the Bank of Japan would buy them to help slow the yen's gain against the dollar. Finance Minister Sadakazu Tanigaki said at a regular press conference today Japan will take `timely and decisive action' to counter rapid moves in the yen. The central bank typically buys Treasuries with the dollars it purchases, which helped drive 10-year note yields to the year's low in March. Japan sold 32.9 trillion yen ($321 billion) to buy dollars in the fiscal year ended March 31.

Sly As A Fox

The Japanese bankers are no dummies! Why should they buy decreasing value with a relatively stable currency when they can use George's inflated petrodollars to achieve the same result?

Should Japan sell yen and buy dollars `it is likely they will buy Treasuries with the money,' said Ryohei Muramatsu, manager of the currency and treasury group in Tokyo at Commerzbank AG, Germany's third-largest bank by assets.

Russian Shift

Speculation China may be reducing its Treasury holdings followed comments by Russian central bank's First Deputy Chairman Alexei Ulyukayev, who told reporters in Moscow on Nov. 23 it may increase the amount of euros in its reserves. Central bank Deputy Chairman Konstantin Korishchenko said yesterday Russia will reduce its dollar purchases next year as it shifts to targeting the ruble's value against a basket of currencies instead of the dollar.

"We had Russia, and then this report on China, creating a chorus of countries dumping dollar assets," said Tokyo-based Yusuke Fujisawa at Dai-Ichi Kangyo Asset Management, which invests the equivalent of $17 billion. "The dollar's weakness is diminishing appetite for U.S. debt as people look more into the risk of holding dollar assets.

You're goin' down, George. The only problem is you are taking us with you.


Indonesia may reduce dollars and U.S. notes in its foreign-exchange reserves should the currency continue to drop, Aslim Tadjuddin, deputy governor for monetary policy at the central bank, said in an interview in Jakarta. Indonesia had the equivalent of $35.4 billion of net foreign-exchange reserves on Nov. 12, comprising dollars, the euro, yen and other currencies, according to Tadjuddin, who didn't provide specific details.

'FEED Me, Seymore Bu$h!'

The U.S. needs to attract about $1.8 billion in capital a day to compensate for its current-account deficit and maintain the dollar's value, according to Bloomberg calculations. The deficit, the widest measure of trade, grew to a record $166.2 billion in the second quarter.

The Fed's holdings of Treasuries for foreign central banks and international accounts rose to a record $1.06 trillion in the week ended Nov. 17, according to figures from the bank. The U.S. had $3.8 trillion in marketable securities outstanding at the end of September.

That's how deeply in debt the US Federal Government is to the foreign bankers. Balance that against where we would have been - roughly $5 trillion in the black - had Clinton's policies been continued following the Gore electoral victory. America would have really been prosperous instead of merely appearing to be so. We could have owned the foreign banks instead of them owning us. On an economic basis, we could have regained the status the United States enjoyed at the end of World War II, that of being the world's dominant economic power. The US would then have been in a much better position to fund things like alternative energy production to abate the growing demand for foreign oil and thus reduce the 'need' for the BFEE/PNAC Petroleum Pirate Posse. There wouldn't have been any misadventures involving US troops roaming about the Hindu Kush looking for someone who isn't where we say he is (he's really safe in Saudi Arabia where we can't touch him). We could have instead spent that money reviving the space industry - something which greatly benefitted the US economy back in the 1960s - by pursuing this:

Moon gas may bail out energy-sapped earth

A potential gas source found on the moon’s surface could hold the key to meeting future energy demands as the earth’s fossil fuels dry up in the coming decades, scientists said on Friday.

Mineral samples from the moon contained abundant quantities of Helium 3, a variant of the gas used in lasers and refrigerators as well as to blow up balloons. "When compared to the earth, the moon has a tremendous amount of Helium 3," said Lawrence Taylor, a director of the US Planetary Geosciences Institute, Department of Earth and Planetary Sciences. "When Helium 3 combines with deuterium (an isotope of hydrogen), the fusion proceeds at a very high temperature and it can produce awesome amounts of energy," Taylor said.

Helium 3 is deposited on the lunar surface by solar winds and would have to be extracted from moon soil and rocks. Some 200 million tonnes of lunar soil would produce one tonne of helium, only 10 kilos of helium are available on earth. "Just 25 tonnes of helium, which can be transported on a space shuttle, is enough to provide electricity for the US for one year," said Taylor, who is in Udaipur to attend a global conference on moon exploration.

Think of the profit that would generate! If the technology were to be developed, and then sold and supplied by a revitalized NASA, would that not do more FOR the US economy than all of the 'tax relief' of Bu$hCo has done TO it?

This nation has to get back to being a producer of something besides international strife over a diminishing resource. We need to return to being the world leader in the process of making the future happen now.

But as long as The United States is held hostage by a bunch of 19th century Texas oilmen, whose greed surpasses all reason, this will never happen.

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pessimist :: 6:25 AM :: Comments (11) :: Digg It!