At 08:37 25/05/01 -0400, you wrote:
(AC)
>Maybe there is even more to worry about.....
>
>=======================================================
(Guardian Weekly)
>Finance / US dollar bubble about to burst /
>The overvalued greenback cannot defy gravity for ever, warns Larry Elliott
>
>Apart from John Prescott's bit of argy-bargy, not a lot happened in the the
>UK election last week. Labour will win by a country mile because real
>incomes are rising, public spending is increasing, and the Tories cannot
>come up with a credible answer when asked how they would pay for their huge
>tax cuts.
True enough that Labour will win hands down -- unless there is an even
larger abstention from voting on 7 June than is presently envisaged.
Nonsense that the Tories could not shave 8 billion out of a total State
spend of 400 billion. (I am no supporter of the Tories, incidentally.)
But, otherwise, I thought that Larry Elliot's article was a fair summary of
the dilemmas facing the world's big trading blocs -- US, Japan and Europe
-- on which, of course, the future development of the rest of the world
depends ijn the next decade or two.
It seems to me that there's no hope for immediate recovery in the European
Union with its surfeit of labour legislation, and even less hope for
recovery of the financial system in Japan with its bankrupt banking system.
In practice, all depends on the US$ but, while there is still scope for
speculation as between the euro the yen and the dollar, we are going to
continue seeing wild gyrations between them.
But little bit by little bit I am becoming increasingly convinced that we
will see the emergence of a single universal currency. Whether this will
come about via some new grouping of large companies starting an
asset-backed bank (probably e-money via the Internet), or the sole survivor
of the continuing contest between the official currencies I don't know.
Either way, there will be immense benefits to all countries, businesses and
organisations.
As some FWers will know I have been a critic of official currencies because
they are not backed by value and can thus be be manipulated by governments
and currency speculators. However, the criticism largely falls if there is
a single official currency because its value would be self-correcting via
the interest rate. I say "largely" because printed banknotes can still be
forged (as the US$ is in vast quantities) and then laundered.
Keith H
>At some point it may be worth returning to British domestic politics, but
>for the time being let's turn our attention to something that presents a
>rather more difficult intellectual challenge: explaining what is going on
>with the United States economy.
>
>The fact is that last week's really important events - and events that may
>impinge on Britain before too long - took place on the other side of the
>Atlantic. On Tuesday the Federal Reserve cut interest rates by 50 basis
>points for the fifth time in as many months, expressing concern about the
>health of the US corporate sector where investment spending is falling
>rapidly and stocks are run down in an attempt to boost profitability.
>
>On Friday the US trade figures were released, showing an increase in the
>deficit from $26.86bn in February to $31.17bn in March. Put another way,
>that's $1bn a day.
>
>Now, call me old-fashioned if you like, but I was always told that running a
>trade deficit of this size was a sign of economic weakness, and would result
>in a depreciation of the currency in order to make imports dearer and
>exports cheaper. Apparently not. According to the Reuters news wire, dealers
>on Wall Street see the increase in the trade deficit as rattling good news
>because it shows that the cuts in interest rates are stimulating consumer
>demand.
>
>"While the trade report suggested the economy was weaker than earlier
>thought at the start of the year, economists said it augured better times
>ahead, with the import number indicating that consumers have not been scared
>into snapping their pocketbooks shut."
>
>So, because the trade figures were so "good", the dollar rose against the
>euro on the foreign exchanges, making life for the US corporate sector even
>more difficult. Dell, the world's biggest producer of computers warned that
>earnings in the second quarter were likely to disappoint, and no wonder.
>
>Don't worry if you're baffled by this, because a lot of clever people in the
>world of economics are baffled by it as well. "The rise in the dollar since
>February has been puzzling", the Bank of England said in its inflation
>report last week, "as it has been associated with falls in US growth
>forecasts and short-term interest rate expectations relative to some of its
>major trading partners". Loose translation: all our models say the dollar
>should be falling like a stone but for some reason it is going up.
>
>The International Monetary Fund cannot explain it either. It devoted a
>special section in last month's world economic outlook (WEO) to the factors
>driving the weakness of the euro and the strength of the dollar,
> which it said seemed "to defy explanations from conventional exchange rate
>models". Conventional exchange rate models treat the value of a currency as
>just another price that will fluctuate in order to bring a market into
>equilibrium.
>
>If you are running a big trade deficit, the price of your currency will
>fall; if you are running a trade surplus it will rise. Economics text books
>say that this is what happens under floating exchange rate regimes, out in
>the real world the big three currencies - the dollar, the euro and the yen -
>are grotesquely misaligned.
>
>The IMF has looked at all the possible explanations for the strength of the
>dollar against the euro and concluded that the likeliest cause is the flow
>of hot money out of Europe and into the US, encouraged by the perception
>that America offers better prospects for growth and profits. This is amply
>borne out by the data. Net portfolio flows into US assets, according to the
>IMF, have increased from $25bn a year in the early 1990s to $500bn a year in
>2000. What's more, the composition of these flows has changed over time,
>with foreign investors spurning the safety of US treasury bonds in favour of
>equities, where net flows have risen twelvefold over the past decade.
>
>So, let's recap. Here we have an economy that is running a current account
>deficit of 4% a year. It is one that has an overvalued currency and one
>where the corporate sector is showing all the classic signs of distress:
>falling profitability, cutting investment and laying off staff. It is an
>economy dependent on constant flows of hot money but which also gives
>investors the absolute right to leave with their money whenever they want.
>
>Faced with a similar set of circumstances in Thailand, dealers could not get
>out fast enough. The US is not Thai land, and the dollar is not the baht.
>Even so, you would be forgiven for wondering whether all the really smart
>people are working in the City these days rather than in the civil service,
>the media or education. Nick Parsons, currency strategist for Commerzbank
>and a man who understands the psychology of markets as well as anybody, says
>there are two rational explanations and one irrational one.
>
>The two rational ones are; first, that whatever the problems of the US
>economy it has a central bank that is proactive. Unlike the European Central
>Bank, which appears to delight in stuffing the markets, the Fed has done
>what dealers have expected; cut often and cut big. There is something in
>this. The ECB has the William Hague problem: it lacks credibility.
>
> Second, while Europe may have stronger growth than the US this year, it
>will still be affected by a slowdown on the other side of the Atlantic.
>Germany is already struggling as a result of a one-size-fits-all monetary
>policy and will struggle even more as exports to the US dry up.
>
>And the irrational explanation? Simple: the only reward for being right six
>months before everybody else is a P45 dismissal notice, so the safe bet is
>to do what everybody else does.
>
>It doesn't take a genius to deduce that this is a situation fraught with
>danger. The dollar has appreciated by 65% against the euro over the past six
>years, well in excess of any conceivable improvement in US productivity
>relative to Europe, and at some point will fall. If it were to fall slowly
>and steadily there would be a gradual readjustment, but the chances of this
>happening recede with every week that the currency remains absurdly high.
>The bubble in the dollar will eventually become as obvious as the bubble in
>hi-tech shares, and the market reaction will be the equivalent of someone
>shouting "fire" in a crowded cinema.
>
>The IMF is aware of the dangers. In the WEO it said that there must be "a
>proportion of the euro area outflows that would be repatriated if returns
>abroad turn out to be disappointing". Another way of putting it would be
>that the dollar is an accident waiting to happen. It is already the case
>that the number of financial crises in the modern post-1973 era has been
>double that of the Bretton Woods and pre-great war gold standard eras, and
>before many months are out the world's finance ministries could have another
>really big one on their hands.
>
>Or rather two, for as figures for the UK show - a record $11bn trade deficit
>for the first quarter was reported on Tuesday - sterling is also defying
>gravity against the euro. There is trouble ahead.
>
>The Guardian Weekly 24-5-2001, page 12
>
>-----Original Message-----
>From: Ed Goertzen [mailto:[EMAIL PROTECTED]]
>Sent: Thursday, May 24, 2001 4:46 PM
>To: [EMAIL PROTECTED]; [EMAIL PROTECTED]
>Cc: Ed Weick; Geoff Egan; John Sharkey; Keith Hudson; Magic Circ Op Rep
>Ens; Robert E. Bowd; Cordell, Arthur: ECOM; [EMAIL PROTECTED]
>Subject: "Downturn, Deflation Haunt Japan, IMF Finds"
>
>
>Hi All:
>
>This is being sent to several E-friends that have indicated an interest in
>the difference between bank credit money and government fiat money and the
>consequences.
>
>The news item below could be an indication of what awaits the rest of the
>deverloped world as the international monetary system continues to implode.
>
>Hi All:
>The news item below, followed by a page from Galbraith's book "money"
>indicates the extent of the systemic monetary problems of Japan.
>
>The solution, that is to print currency and use it to bail out the debt
>plagued Japanese private mega banks, with their assets that have lost their
>collateral, may become the solution followed by other countries as the
>worlds money systems fail.
>
>Unless that is accompanied by a rapid increase in the cash reserves that
>the private banks must hold, it cannot but invite rampant inflation.
>
>For the past decade, Japanese banks have postponed the inevitable by
>extending new credit to those corporations that were failing. The process
>was one of "rolling over" the non performing loans for increased amounts at
>ever lower interest rates to keep them theoretically solvent. The phrase,
>"economically sound but financially bankrupt", springs to mind.
>
>Regards
>Ed G
>
>
>Toronto Star, 2001/05/23
>"Downturn, Deflation Haunt Japan, IMF Finds"
>"Tokyo urged to ease monetary policy, fix banks"
>
>TOKYO (Reuters) - Japan needs to ease monetary policy further and resolve
>its banking sector problems to achieve a durable economic recovery, a
>seniour IMF official said yesterday.
>The moves are necessary because the country is facing downside risks to
>growth and deep-rooted deflation, said Charles Collyns, senior adviser at
>the International Monetary Fund's Asia and Pacific department. Collyns
>said at the end of a two-week fact-finding mission that the IMF welcomed
>the radically new quantitative policy framework set by the Bank of Japan in
>March.
>"However, deflationary forces remain entrenched, and in the mission's view,
>it will be important not to delay using the scope provided in the new
>framework for additional monetary easing," Collyns, who led ihe IMF team,
>said in a prepared statement.
>In remarks to reporters, he said he had some sympathy for the central
>bank's view that with the monetary-policy instruments at its disposal, it
>cannot commit itself to a positive inflation target because it could not be
>sure of hitting it.
>Collyns said the Bank of Japan could be more aggressive.
>For example, setting a time limit to ending deflation would send a strong
>signal to financial markets of its determination.
>He said the bank should also increase its target for current account
>deposits parked at the central bank from 5 trillion yen or $63 billion
>(Canadian), stepping up its purchases of Japanese government bonds if need
>be to hit the goal.
>In March, the bank switched from an interest-rate target and settled
>instead on current account deposits - a small fraction of the monetary base
>- as its main operational target.
>By providing more liquidity than financial institutions need to keep on
>deposit at the bank to meet their reserve requirements, the policy has
>pushed money market rates down to zero.
>But some economists argue that the Bank of Japan needs to pump even more
>cash into the banking system to reverse a pernicious two-year trend of
>falling prices.
>Collyns said there would be no durable recovery in the world's
>second-largest economy, which has suffered stop and-go growth for a decade,
>without a final resolution of banks bad-loan problems and an overhaul of
>struggling corporations.
>"The high level of popular support that the new government currently enjoys
>provides it with a real window of opportunity to make headway in tackling
>this challenging agenda," he said.
>Economics Minister Heizo Takenaka said yesterday that corporate and
>financial restructuring, a priority for new Prime Minister Junichiro
>Koizumi, could cost several hundred thousand jobs.
>To cushion the blow, Collyns called on Japan to strengthen its social
>safety net, enhance labour mobility and promote regulatory reforms to
>create new investment and job opportunities.
>He also urged the govemment financial services agency to "act proactively
>to address problems that may emerge in weaker banks.
>-30-
>
>THE PRICE
>
>The banks, needless to say, privided the money that financed the
>speculation that in each case preceded the crash. Those buying land,
>commodities or railroad stocks came to the banks for loans. As the
>resulting notes and deposits went into circulation, they paid for the
>speculative purchases of yet others. It helped that the banks were small
>and local and thus could believe what the speculators believed, be caught
>up in the same euphoric conviction that values would go up for ever. The
>banking system, as it operatedin the last centuury and after, was well
>designed to expand the money supply as speculation required.
>
>Banks and money also contributed to the ensuing crash. A further constant
>of all the panics was that banks failed. In the earlier panics the
>will-o'-the-wisp enterprises of the swamps and crossroads disappeared as,
>in some cases, their creators knew they would. Later in the century the
>casualties continued, and still most heavily among the smaller state banks.
> In the panic year of 1873 and in 1874, ninety-eight banks suspended, as
>compared with twenty-nine in the two preceding years. In 1892, there were
>eighty-three suspensions and 496 in the panic year following, In 1907 and
>1908, 246 banks fell. After 1920, the real slaughter began, and, after
>1929, it approached euthanasia. In the four years beginning in 1930, more
>than 9000 banks and bankers bit the dust."
>
>A bank failure is not an ordinary business misadventure. As Professor
>Friedman has pointed out "it has not one but two adverse effects on
>economic activity: Owners lose their capital and depositors their deposits,
>and both therewith lose their ability to purchase things. But failure (or
>for that matter the fear of failure) also means a shrinkage in the money
>supply. No mystery attaches to this. A healthy bank is making loans and,
>in consequence, creating deposits that, in turn, are money. A bank that
>fears failure is contracting its loans, and therewith its deposits. And one
>that has failed is liquidating its loans, and its frozen deposits are no
>longer money. The liquidation also draws on the reserves, loans, and
>deposits and thus the money supply of other banks.
>J.K Galbraith, "Money" 1995: 113
>
>
>
>
>
>
>
>
___________________________________________________________________
Keith Hudson, General Editor, Calus <http://www.calus.org>
6 Upper Camden Place, Bath BA1 5HX, England
Tel: +44 1225 312622; Fax: +44 1225 447727;
mailto:[EMAIL PROTECTED]
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