Hi Steve, At 23:12 17/02/02 -0500, you wrote:
As we seem to be the only two FWers who have been foolish enough in the past few months to suggest that America's recession is likely to continue for a great deal longer than most commentators dare to say, I'd like to pick out two paragraphs from your posting: <<<< The $US is today like the Br. Pound was 50 years ago: the *standard* to which all else is compared. It might stay that way for a while longer, but it is a confidence game that can lose efficacy over time if the fundamentals erode. (like Enronitis) Huge national and corporate debt, & trade, budget and current account deficits have been funded by huge foreign capital inflows. This flow MUST continue, or the game stops and a run on the dollar starts. It is that crazy! I have around 10% in gold as insurance. I still have maybe 33% in US & Canadian dollars. The Australian and New Zealand dollars are undervalued in my opinion, so I have some along with some Br. Pounds and a few Asian currencies (not Yen). What else can a retiree do? . . . >>>> I wonder whether you've revised your holding in US dollars since reading the article on America's current-account deficit (growing since '91) in last week's Economist? You've probably read it, but I'll quote part of it here for the benefit of those FWers who worry about these things: <<<< . . . . Stephen Roach, chief economist at Morgan Stanley, forecasts that in 2003, the deficit could reach a record 6% of GDP. Not only would that be the biggest deficit run by a G7 economy in the past 30 years, it also implies that America would need to raise from abroad . . . $2 billion a day. [KH: Here I'll interpolate that a letter in this week's Economist says that the situation is actually a great deal worse because America also exports capital at about $2 billion a day, so the necessary capital inputs actually need to be of the order of $4 billion a day in order to balance its books.] America's net foreign liabilities now amount to almost $2.5 trillion, equivalent to 25% of GDP. Large current-account deficits cannot persist forever. If capital inflows dry up, the deficit has to shrink, either through a fall in the exchange rate, or through demand-crimping recession, or both. But when? A study by Caroline Freund, at the Federal Reserve, looked at 25 episodes in developed economies of large adjustments in the current account deficit. It found that deficits usually began to reverse when they exceeded 5% of GDP. Such adjustments were typically accompanied by a fall in the real exchange rate. According to Mr Roach, the US will breach the 5% limit by the end of this year. >>>> The article then goes on to consider two short-term scenarios. In one, a full-blown crisis in the Japanese financial system might cause them to repatriate large amounts of their US Treasury bonds (as happened in 1998). In fact, Japanese investors sold more foreign bonds last month than for four years past -- so this may be the beginning. In the other (more likely, according to the Economist), if confidence in Japan's banks continues to sink, Japanese savers will flee yen assets, pushing the dollar higher for the time being (and thus also increasing the US current-account deficit). This second possibility means that the first scenario is delayed somewhat but will be worse when it happens. If Europe were growing strongly then this might -- just might -- make up for the almost inevitable coming collapse in the Japanese banking system and straddle the period while they sort themselves out and and then help America to recover by giving it a good export market. It looks to me as though we're heading for a period of extreme exchange rate volatility during which a speculator would need the luck of the Devil or the wisdom of Solomon to ensure coming out on top at the end. I don't think even the largest hedge funds could afford to buy future options long enough ahead to insure themselves. I think atavism will prevail in the end and that gold will prove to be the best defence. Let me quote the second paragraph of your posting: <<<< It is highly unlikely in my opinion that the major currencies will return to a gold or silver standard. The Central Banks have been selling off some of their gold holdings during the past several years, which is a bit surprising in that gold is cheap compared to the past 25 year constant dollar average price. The money supplies have grown massively, and the price of gold might have to be set at US$5000/oz or more if any attempt was made to back all outstanding credits/tokens with it (currently US$300). >>>> I think the reason why central banks have been selling gold is because the developed economies have been altogether too confident that all the big booms and busts are things of the past and that they are fully in control. This is a sort of confidence engendered by the hazy, but lucky, mix of Keynesianism and Moneterism that has prevailed in the last few years. It's noteworthy that no central bank has gold gold in the last 18 months or so. They're not quite so cocky now! It seems to me that if the gold standard is resorted to (and this would seem the only thing left when exchange rate fatigue finally sets in) then it doesn't really matter what the price of gold will be in terms of national currencies. It still retains the confidence of an awful lot of people in the world despite all the dismissive words of economists since Nixon went off gold in '71. So long as there isn't the possibility of some immense new discovery of gold somewhere in the world -- and this seems unlikely, considering the state of geological knowledge today -- then gold could then regain its role as a stable pivot. Keith __________________________________________________________ �Writers used to write because they had something to say; now they write in order to discover if they have something to say.� John D. Barrow _________________________________________________ Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED] _________________________________________________
