America is now poised on the edge of deep trouble. President Bush is very quiet now. Gone is the triumphalism of his Inaugural Speech at the beginning of his second term. Because Bush is nowhere near as intelligent and perceptive as an American President ought to be, then Vice-president Cheney has taken Bush to the edge of a precipice.
Bush faces disaster on any one of four separate fronts:
1. The American economy is trembling on the edge of a recession. The house-price bubble is due to collapse (sustained now only by 40% of second-home buyers from the rich), consumerism is faltering (with credit card debts never higher), long-term unemployment is growing, average wages are falling (despite longer working weeks -- and hence the "higher productivity" of the US with respect to Europe) and the budget deficit is now on the same track as Japan and most of Western Europe;
2. The world trembles on the edge of a dollar slide due to America's increasing trade deficit and the increasing lack of confidence by central banks. See the Financial Times items below;
3. China refuses to do what Japan did 30 years ago by increasing the value of its currency with respect to the dollar -- to Japan's great economic disadvantage (from which it has never recovered). An upwards revaluation of the renminbi would only hurt China's consumers and would be of only marginal benefit to America's yawning trade deficit. While the US Congress threatens protectionist reprisals (which would only hurt the ordinary American consumer with higher prices), the Chinese offer a higher volume of high-tech imports from America which would help to restore America's trade deficit. See the China View item below;
4. The Downing Street memo of July 2002 now reveals that Bush and Blair invented spurious reasons why they should invade Iraq. This will now start working its way through the hitherto supine American media and then to the consciousness of the American public who will start to turn viciously against Bush. Meanwhile, the civil war in Iraq goes into higher gear with more Wahhabi suicide bombers entering Iraq from Saudi Arabia. Bush is desperate for the Iraqi transitional government to incorporate Sunni hard-liners and is putting pressure on it. The best that Bush can do to defuse potential American domestic anger over the invasion of Iraq will be to leave Iraq ignominiously.
Keith Hudson
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FEARS FOR DOLLAR AS CENTRAL BANKS SELL US ASSETS
Christopher Swann in Washington and Richard Beales in New York
The world's central banks were net sellers of US assets in March for the first time since September 2002, according to figures that may hint that the recent rebound in the dollar will be temporary.
Central banks sold a net $14.4bn in US assets during the month, the largest sale since August 1998, the US Treasury revealed. Asian central banks, however, continued to accumulate reserves, with their stockpiles rising by about $30bn over the month.
For those central banks that are not managing their currencies, there may well be a feeling that the dollar is not a great bet,said Adam Cole, currency strategist at RBC Capital Markets
Economists says these sales may be a sign that central bank officials fear the dollar downtrend will at some point resume. The most conspicuous sale was by the Central Bank of Norway, which sold $17bn of US Treasuries.
Private-sector inflows into the US remained robust in March at $74.5bn, only slightly down from $79.4bn in February.
It does seem that when private sector investors are willing to buy dollars, the central banks are happy for any excuse to offload part of the mountain of dollars they have accumulated,said David Bloom, currency strategist at HSBC.
Demand for US Treasuries was boosted by $28bn of net purchases from the Caribbean region, the highest level in at least four years. Analysts associate banking centres in the Caribbean with hedge funds.
Some analysts suggest that hedge fund buying of US government bonds in recent months may be associated with unwinding failed bets in which the funds were short on Treasuries while owning riskier, higher-yielding debt.
Among the central banks, reserve accumulation has been particularly aggressive in Asia, where many of the banks have been anxious to prevent a rise in their currencies from choking off export growth.
The US dollar fell by about 30 per cent against floating currencies from its peak in February 2002 until the end of last year. But since then it has bounced back just over 5 per cent.
Many currency strategists believe the dollar downtrend will resume. The cyclical picture for the US still looks very good for the dollar,said Ray Attrill, director of US research at 4Cast, an economic consultancy. But there are no convincing signs that the current account deficit is getting better and this should eventually weigh the dollar down again.
Although the US trade deficit narrowed in March from $60.6bn to $55bn, most economists believe this was due to a shortlived slowdown in US demand and the timing of the Chinese new year. Last year the current account deficit was $666bn, or 6 per cent of gross domestic product.
Financial Times -- 17 May 2005
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CHINA NEVER YIELDS TO OUTSIDE PRESSURE ON YUAN
Beijing -- Reform of the RMB [Renminbi (Yuan)] exchange rate system is matter of China's sovereignty and any pressure and speculative exploitation of the issue or any attempt to turn the economic issue into a political one will not be conducive to resolving it, Chinese Premier Wen Jiabao said during his meeting with guests from the US Chamber of Commerce Monday.
Wen said as long as conditions are ripe, the Chinese government "will take the initiative to advance the reform of the exchange rate system without any pressure from outside the country."
"If conditions are not available, the Chinese government will never hastily take any action, regardless of how great the pressure from outside is," Wen said.
Local analysts said the statement of the Chinese leader is a response to the United States' recent stepping up of pressure on China to change the exchange rate of RMB. They expressed the belief that Wen's remarks will smash the recently heated speculations about revaluation of the Chinese currency.
During his meeting with the American guests, Wen made clear the basic stance of his government on the reform of the exchange rate system of the Chinese currency. He emphasized China has to proceed from its specific condition when advancing the reform of the RMB exchange rate. He said it is essential to take into consideration such factors as the macro-economic environment, the ability of Chinese companies to withstand the impact of changes in exchange rates, the progress of financial sector reform and the impact on international trade.
In the mean time, Wen underscored that reform of the RMB exchange rate system has to take into consideration its impact on neighboring countries, regions and global finance and economy.
As a big country, China has to proceed from the practical needs within the country while changing its exchange rates, said Li Yang, director of the Finance Institute under the Chinese Academy of Social Sciences.
Li said China must not repeat the lesson of Japan, noting that Japan increased the value of the Yen under pressure from the United States and incurred serious negative impact on its economy in the 1980s.
The US Senate passed a bill in April to demand that China let the RMB appreciate in six months. Otherwise, the U.S. will probably impose punitive tariffs on imported goods from China, according to the bill.
Since then, speculations have spread that pressure from the United States will compel China to revalue its currency soon. The rumors ran increasingly rampant over the past few weeks. Some time earlier, a trifle move in the foreign exchange market of China led to predictions that RMB would appreciate around May 1. After the rumors proved to be fake, more speculations arose, saying that China will increase the value of its currency as it launches inter-bank foreign exchange purchase business on the coming Wednesday.
However, Governor of China's central bank Zhou Xiaochuan clearly cited this new rumor as groundless last Friday.
Li Yang attributed the stronger US pressure on the RMB issue to the presumption by some Americans that a revaluation of the Chinese currency will help scale back the gaping trade deficit of the United States.
The growing US trade and budget deficits are the outcome of the structural problems in the US economy, Li said. The United States should look inside rather than outside to seek resolutions to the problems so as to restore balance to its current accounts.
Since the US trade deficit with China has become an issue of common concern between the two nations, the two sides are showing a readiness to step up dialogue and consultation on the issue. In March, Chinese State Councilor Wu Yi told US Secretary of State Condoleezza Rice that China is ready to join efforts with the United States to expand US hi-tech exports to China so as to realize balance of trade between the two countries.
China View -- 17 May 2005
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Keith Hudson, Bath, England, <www.evolutionary-economics.org>
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